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# The Ethical and Social Responsibilities of Entrepreneurs
## Corporate Social Responsibility and Social Entrepreneurship
### Learning Objectives
By the end of this section, you will be able to:
1. Define and describe corporate social responsibility (CSR) and social entrepreneurship
2. Identify types of social entrepreneurship ventures, and the key values accompanying them
To understand the role of a socially responsible entrepreneur, it is important to first look at the major tenets of corporate social responsibility (CSR) and the underlying reason why this concept was conceived. Few directives in business can override the core mission of maximizing shareholder wealth, and today, that particularly means increasing quarterly profits. Such an intense focus on one variable over a short time (i.e., a short-term perspective) leads to a short-sighted view of what constitutes business success.
Measuring true profitability, however, requires taking a long-term perspective. We cannot accurately measure success within a quarter of a year; a longer time is often required for a product or service to find its market and gain traction against competitors, or for the effects of a new business policy to be felt. Satisfying consumers’ demands, going green, being socially responsible, and acting above and beyond the basic requirements all take time and money. However, the extra cost and effort will result in profits in the long run. If we measure success from this longer perspective, we are more likely to understand the positive effect ethical behavior has on all who are associated with a business.
### Corporate Social Responsibility (CSR)
If you truly appreciate the positions of your various stakeholders, you will be well on your way to understanding the concept of corporate social responsibility (CSR). CSR is the practice by which a business views itself within a broader context: as a member of society with certain implicit social obligations and environmental considerations and issues. As previously stated, there is a distinct difference between legal compliance and ethical responsibility, and the law does not fully address all ethical dilemmas that businesses face. CSR ensures that a company is engaging in sound ethical practices and policies in accordance with the company’s culture and mission, above and beyond any mandatory legal standards. A business that practices CSR cannot have maximizing shareholder wealth as its sole purpose, because this goal would necessarily infringe on the rights of other stakeholders in the broader society. For instance, a mining company that disregards its CSR may infringe on the right of its local community to clean air and water if it pursues only profit. In contrast, CSR places all stakeholders within a broader contextual framework.
An additional perspective of CSR is that ethical business leaders opt to do good at the same time that they do well. This is a simplistic summation, but it speaks to how CSR plays out within any corporate setting. The idea is that a corporation is entitled to make money, but it should not only make money. It should also be a good civic neighbor and commit itself to the general prospering of society as a whole. It ought to make the communities of which it is part better at the same time that it pursues legitimate profit goals. These ends are not mutually exclusive, and it is possible—indeed, praiseworthy—to strive for both. When a company approaches business in this fashion, it is engaging in a commitment to CSR.
An interesting example of an entrepreneurial company that is committed to CSR is the New Belgium Brewing Company (NBBC), maker of Fat Tire Beer, among other brands. The NBBC is 100 percent employee owned, which makes this company different from the more traditional corporation in which investors own the company rather than the employees. This type of company with employee ownership means that the workers benefit directly from the profits generated by their efforts for the company, a sort of democratized capitalism. The NBBC is focused on sustainability. It has a brewery in Fort Collins, CO, where the brewery produces almost 20 percent of its own electricity—a large percentage for a commercial factory—through solar panels and wastewater. It makes a corporate commitment to contribute to causes related to sustainability, for example, to bicycle-related organizations supplying people with green personal transportation options. According to the company’s director of CSR, the NBBC considers social and environmental well-being to be a high priority of the company.Clodagh O’Brien. “16 Brands Doing Corporate Social Responsibility Successfully.”
From a historical perspective, the development of CSR has been somewhat like a rollercoaster ride, characterized by low points with extreme ethical failures (see ) followed by high points in which corporate conduct improved, largely as a result of statutory laws and/or agency regulations enacted in response to failures. After such scandals, we also saw a number of voluntary ethics-based ideas begin to find their way into the corporate world, such as CSR and corporate citizenship. While these concepts have provided strategies and tools to strengthen the ethical foundations of businesses, scandals do continue, and new approaches to address them emerge. Ethical failures such as the Michael Milken/Drexel Burnham Lambert scandal, the Enron collapse, and many others, including the recent 2008/2009 mortgage industry/derivatives scandal, led Congress to enact new laws. Examples of statues enacted by the federal government in response to ethical failures include laws such as the Sarbanes-Oxley Act, the Insider Trading and Securities Fraud Enforcement Act, and the Dodd-Frank Act.
In addition to the enactment of statutory reforms, various government agencies have also promulgated new regulations in an attempt to prevent companies from engaging in unethical, illegal, and otherwise damaging activities. Examples of agencies that have created new regulations in response to ethical failures in the business sector include the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), the Consumer Financial Protection Bureau (CFPB), and the Financial Industry Regulatory Authority (FINRA).
The concept of doing what’s right ethically, following the law, and giving back to society are closely related concepts (see ).
Examples of organizations that have experienced ethical lapses causing serious and costly multi-billion-dollar problems can be seen in . Each has had a profound and far-reaching impact on the lives of individuals, on the communities and society in which they operate, and/or on the global environment. These problems—which have resulted in loss of lives, loss of jobs, property damage, depletion of life savings, and environmental devastation—resulted from issues of quality and ethics.
One vulnerability in the corrective measures discussed to address the scandals listed in is that they do not necessarily prevent the repeat of ethical deviations because they are primarily compliance and fear based. In some instances, instead of preventing unethical activity, the system has enabled unethical leadership to take minimum actions and merely pay fines rather than correct their actions or change their approach.
In recent years, many organizations have embraced CSR, in which the company’s expected actions include not only producing a reliable product, charging a fair price with fair profit margins, and paying a fair wage to employees, but also caring for the environment and acting on other social concerns. Many corporations work on prosocial endeavors and share that information with their customers and the communities in which they do business. CSR, when conducted in good faith, is beneficial to corporations and their stakeholders. This is especially true for stakeholders that have typically been given low priority and little voice, such as the natural environment and community members who live near corporate sites and manufacturing facilities. CSR in its ideal form focuses managers on demonstrating the social good of their new products and endeavors. It can be framed as a response to the backlash that corporations face for a long track record of harming the environment and communities in their efforts to be more efficient and profitable.
The trend to adopt CSR may represent an opportunity for greater engagement and involvement by groups mostly ignored until now by the wave of corporate economic growth reshaping the industrialized world.
### Social Entrepreneurship
Social entrepreneurship describes ventures launched by entrepreneurs who are first and foremost advocates or champions for a social cause. However, they are able to leverage that cause as a platform to develop and maintain an economically viable organization. These individuals are primarily driven and motivated by a higher vision or grander purpose. This new breed of entrepreneur leverages the power of their position, their standing in the community, and the potential synergy and wealth-creation power of an enterprise as a vehicle or platform to advance their social goals and personal agenda. These social causes often include a solution for a costly and chronic social problem or pain, a social wrong or injustice that must be corrected, or a global issue that has been either overlooked or marginalized by society or organizations.
While the primary goal and end-state for a socially responsible entrepreneur is to generate wealth, the dominant goal for a social entrepreneur is to serve a specific cause as they generate wealth to support that cause. This means a social entrepreneur works to advance society instead of accumulating greater wealth for the shareholder. Social entrepreneurs often share qualities such as a selfless attitude, a sense of obligation and responsibility towards someone or something, a strong commitment to make a change, and a resilience to withstand failure.
There are numerous examples of companies that have embraced the concept of CSR. In fact, some entrepreneurs have created startups based primarily on the idea of giving back, many of whose ventures have become well-known. The list includes, to name a few, TOMS Shoes (discussed in a feature box in this chapter), Bombas Socks, and Warby Parker Eyewear. Each of these companies follows a CSR approach and donates one product for each one purchased, (shoes, socks, glasses). Some companies go the extra mile and become officially certified as B-corporations, which is a CSR-type of designation. (See Business Structure Options: Legal, Tax, and Risk Issues for more discussion of B-corps).
### Environmental Entrepreneurship
Similar to social entrepreneurship, environmental entrepreneurship advocates for a meaningful and beneficial social cause that is also economically viable. This environmental focus deals with such initiatives that preserve our ecosystem such as clean and renewable energy, waste management, programs to counteract climate change, improved water supplies, protection of biodiversity, and reduction of environmental degradation and deforestation.Thaddeus McEwan. “Ecopreneurship as a Solution to Environmental Problems: Implications for College Level Entrepreneurship Education.” These initiatives are financially sound from a business standpoint and, at the same time, don’t pollute, waste, destroy, and leave a negative environmental footprint.
There are multiple ways in which an entrepreneur can demonstrate a commitment to environmental awareness. One way is to own a company that directly helps clean up the environment, such as Ocean Cleanup, the nonprofit started by a twenty-five-year-old entrepreneur to clean up the Great Pacific Garbage Patch. Another option is to own a traditional private sector company that pledges to operate in an environmentally responsible way, such as Patagonia, committed to responsible sourcing and other initiatives. A third option is to become part of an advocacy organization, an example of which is E2. E2 is “a national, nonpartisan group of business leaders, investors and others who advocate for smart policies that are good for the economy and good for the environment.”E2. www.e2.org This group strives to influence policies at the state, regional, and federal levels dealing with energy, climate, oceans, water, transportation, and smart growth. These policies are primarily intended to improve air, water, public health, as well as job creation in these areas. One example of an initiative that has resulted from this group deals with passing the nation’s first automobile emissions standards.
In recent decades, corporations have responded to stakeholder concerns about the environment and sustainability. In 1999, Dow Jones began publishing an annual list of companies for which sustainability was important. Sustainability, in this context, is the practice of preserving resources and operating in a way that is ecologically responsible in the long term.Victoria Knowles. “What’s the Difference Between CSR and Sustainability?” The Dow Jones Sustainability Indices “serve as benchmarks for investors who integrate sustainability considerations into their portfolios.”“Dow Jones Sustainability Indices.” ,“Results Announced for 2017 Dow Jones Sustainability Indices Review.” There is a growing awareness that human actions can, and do, harm the environment. Destruction of the environment can ultimately lead to reduction of resources, declining business opportunities, and lowered quality of life.
Enlightened entrepreneurs realize that profit is only one positive effect of business operations. Operating a successful business creates opportunities for entrepreneurs to give back to society in responsible ways. In addition to safeguarding the environment, other ethical contributions that entrepreneurs can consider include establishing schools and health clinics in impoverished neighborhoods and endowing worthwhile philanthropies in the communities in which companies have a presence.
During the last few decades, there has been an explosion of studies on how business activities affect our planet. In one study, Tony Juniper points out that population growth, with its accompanying demand for natural resources and the impact of environmental disasters, has had a profound and lasting impact on the planet. Juniper states that we have increased our consumption of natural resources tenfold, increased grain production fourfold, increased freshwater usage fivefold, increased fish capture fourfold, doubled our consumption of earth’s renewable production, and increased the concentrations of greenhouse gases in the atmosphere.Tony Juniper.
In prior sections, we briefly discussed the devastating environmental impact of oil companies such as Texaco and Chevron. When you drill for oil in one of the most biodiverse corners of the world, the Ecuadorian rainforest of the Amazon, and dump 18.5 billion gallons of oil byproducts and waste into the Amazon’s rainforest and streams, you are definitely leaving a negative footprint on our planet. If you meticulously study the local wildlife, vegetation, and other natural characteristic of a region before clearing a region to conduct your business (e.g., harvest the trees for lumber, plants for medication, or drill for oil) and then restore the region to its original natural form when done, you are neutralizing your footprint on the planet. However, it you enhance and strengthen the region, open up schools, provide jobs, educate the local population to preserve and strengthen their natural resources, and take other actions to improve the region, you are in fact leaving a positive footprint on the planet. Entrepreneurs should learn the impact made by all aspects of their company, weigh the choices, and consider adopting a policy that does no harm and possibly leaves a positive footprint on the planet.
### Sustainability
Sustainability deals with actions and a way of life that considers the continuity of future generations. It is deeply rooted in doing what is moral/ethical. For example, it is unjust to take actions that benefit the current generation at the detriment of future generations. What this means is that a sustainable entrepreneur is also driven by and is an advocate for a socially responsible approach to owing and running a business, leveraging the economic potential of renewable and readily available resources to add value to the world in which it operates. However, sustainability means more than just environmental awareness. A simple definition of sustainability is the ability to be maintained at a certain rate or level. This means not only the environment, but also natural resources, human resources, product supply chains, and multiple related concepts. Thus, as an entrepreneur aware of issues related to sustainability, one would want to consider a wide range of issues. Examples might include the responsible use of electricity or water, or participating in supplier diversity/responsible sourcing programs, or funding worker wellness initiatives. The idea of sustainability, at its root, is to think long term as opposed to short term.
Given the prominence of the sustainable environment movement worldwide, no well-managed business today should be conducted without an awareness of the tenuous balance between the health of the environment and corporate profits. It is quite simply good business practice for executives to be aware that their enterprise’s long-term sustainability, and indeed its profitability, depend greatly on their safeguarding the natural environment. Ignoring this interrelationship between business and the environment not only elicits public condemnation and the attention of lawmakers who listen to their constituents, but it also risks destroying the viability of the companies themselves. Virtually all businesses depend on natural resources in one way or another.
### Responsible Entrepreneurs and Social Entrepreneurship Opportunities
The ability to establish a new venture is an exciting opportunity and privilege. To intentionally plan and establish a new venture in a responsible manner promotes the continuation of a better world. Development of a new venture that supports an awareness and sensitivity to immediate and long-term impacts reflects upon the entrepreneur’s personal and organizational values and goals.
Some entrepreneurs start businesses with a community project in mind. A community project venture leverages the available power, synergy, talents, capabilities, and resources of the community to add value and change the world in a positive way. This approach uses the creativity, viewpoints, and feelings of community members to innovate and add value to the local area. An example is that of an entrepreneur who started a company with the idea of giving back to the community.
There are multiple types of business entities that function with a social purpose in mind. entrepreneurs (as well as those starting for-profit companies such as the TOMS story) have the potential to look beyond their own financial gains. These organizations typically partner with federal, state, or local government organizations, public and private institutions, foundations, or individuals with financial means and community standing to serve the greater public. One example of a nonprofit initiative is the National Kidney Foundation of Arizona.National Kidney Foundation of Arizona. www.azkidney.org This organization seeks solutions for kidney and urinary diseases through education, prevention, and treatment.
A leverages the talents, finances, and intellectual resources of the members of an organization to operate and deliver value to the members of the organization. One difference between a cooperative and a nonprofit corporation is how money flows back into the community. In a nonprofit organization, the managers cannot distribute profits to members or investors; the remaining money stays in the nonprofit. In contrast, a cooperative generally can distribute profits to members based on member participation/temporary ownership. One example of a cooperative would be the Unity One Credit Union, which is a member-owned, not-for-profit cooperative, working for its members’ benefit.
Two other types of entities that are essentially the same are known as or . These entities are primarily driven by a meaningful social cause. Social entrepreneurs are able to meet their strategic organizational goals and objectives by delivering a value-added product/service that closes a gap, addresses a problem or pain, or corrects a social injustice. A social enterprise is typically designed to be financially self-sufficient. One example of a social entrepreneur and a social enterprise is the Grameen Bank founded by Muhammed Yunus, a Nobel Peace Prize laureate who defined the term micro-lending and micro-finance. Grameen Bank thrives on giving small loans to those individuals who have very little to no collateral and wish to start a business to support their family.Muhammad Yunus.
A social purpose business is often referred to as a B- or benefit Corporation (also discussed in Business Structure Options: Legal, Tax, and Risk Issues). The process of becoming a certified B-corporation is a formal process that involves compliance with various standards and an audit of this compliance (managed by the B-Corp organization).Certified B-Corporations. https://bcorporation.net/ The essence of these new B-corporations is that “they recognize the imperative to do no harm and create positive impact throughout the value chain.”Network for Business Innovation and Sustainability. “B Corporations, Benefit Corporations, and Social Purpose Corporations: Launching a New Era of Impact-Driven Companies.” October 2012. http://nbis.org/wp-content/uploads/2012/10/ImpactDrivenCompanies_NBIS_Whitepaper_Oct2012.pdf According to the B-Corp organization, these certified businesses are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. As of 2019, there are approximately 3,000 certified B-corps in 65 countries, covering 150 different industries.Certified B-Corporations. https://bcorporation.net/
One example of a certified B- (or benefit) corporation is Kickstarter, the crowdfunding website. Kickstarter is one of the world’s largest funding communities for creative projects—everything from films, games, restaurants, and music to art, design, and technology—and offers entrepreneurs a way to raise funds when they cannot borrow from a bank.
A uses a combined business strategy to enable the organization to deliver profitable and socially valued products and services. The hybrid business model attracts different investors and capitalizes on a variety of investment opportunities, while supporting a mission centered on a socially meaningful cause and grander purpose. One example is Embrace Innovations, a manufacturer of incubators for infants born prematurely, originally established as a nonprofit entity. Embrace, an example of a relationship between academic and business, was started as part of a special course at Stanford University. The Stanford Design for Extreme Affordability Program consists of a course for student teams seeking further support (the Social Entrepreneurship Lab and the Design Lab). This project was launched in 2007, the company was formed in 2008, and the first version of the product launched in 2011. The product is currently being distributed to clinics in India, where dozens of babies have already benefited. Partnerships have been formed with several multinational organizations to distribute the product.Design for Extreme Affordability. “Embrace.” https://extreme.stanford.edu/projects/embrace/
When launching a social enterprise, you need to consider both the technical aspects of launching an enterprise as well as the underlying cause or purpose that has driven you to launch a social enterprise. As you develop your business model, marketing strategy, and other elements to support your venture, it is crucial to ensure your grander purpose remains the foundation of your business planning and decisions.
### Identifying Your Values and Mission
The values we choose to honor are the essence of ourselves, and we carry them with us wherever we live, work, and play. As we noted, the entrepreneurial path you choose should reflect your values, whether you create a for-profit or nonprofit organization. It also is possible that you might establish a for-profit company and volunteer extensively on your own or on behalf of your firm in the nonprofit sector. Whatever your entrepreneurial path, it remains important not to let your well-considered values be diminished by others who do not prize loyalty or industriousness, for instance. Entrepreneurship is not a contest in which the person who finishes with the biggest portfolio or fastest jet skis wins anything other than an empty prize. It is far better to treat others with integrity and respect, and be surrounded by the true emblems of a successful career—family, friends, and colleagues who will attest to the dignity with which you have worked. In the final analysis, if you achieve a life of honor, then you have succeeded.
How do you keep personal values like integrity, fairness, and respect close at hand? The best way is by writing them down, prioritizing them, and fashioning them into a personal mission statement. Most companies have mission statements, and people can have them, too. Yours will guide you on your path, clear away distractions on the road, and help you correct any missteps. It should be flexible, too, to account for changes in yourself and your goals. Your mission statement is not a global positioning system so much as a compass that guides you toward discovering who you are and what drives you ().
Let us write your mission statement. Because it will reflect your values, start by identifying a handful of values that matter most to you. You can do this by answering the questions in ; you may also find it beneficial to keep a journal and update your answers to these questions regularly. Additionally, the US Department of Labor has a free online self-assessment called the Interest Profiler. The Interest Profiler can help you find out what your interests are and how they relate to the world of work. The Interest Profiler can help you focus on avenues of interest that you might want to explore as an entrepreneur.
Now you can incorporate these values into your business mission statement, which can take the form of a narrative or action. There are many formats you can follow, but the basic idea is to unite your values with the goals you have set for your life and career. You can, for instance, link the benefit you want to create, the market or audience for which you want to create it, and the outcome you hope to achieve.Jessica Stillman. “Here Are the Personal Mission Statements of Musk, Branson, and Oprah (Plus 7 Questions to Write Your Own).” Keep your statement brief. Richard Branson, founder of the Virgin Group, wants “to have fun in [my] journey through life and learn from [my] mistakes.” Denise Morrison, CEO of Campbell Soup, aims “to serve as a leader, live a balanced life, and apply ethical principles to make a significant difference.”Drew Hendricks. “Personal Mission Statement of 13 CEOs and Lessons You Need to Learn.” Your own statement can be as simple as, for instance, “to listen to and inspire others,” or “to have a positive influence on everyone I meet.”
### Putting Your Values and Mission Statement to the Test
There may be no better place to put your personal values and mission to the test than in an entrepreneurial role. Startups cannot be run on concepts alone. More than almost any other kind of venture, they demand practical solutions and efficient methods. Entrepreneurs usually begin by identifying a product or service that is hard to come by in a particular market or that might be abundantly available but is overpriced or unreliable. The overall guiding force that inspires the startup then is the execution of the company’s mission, which dictates much of the primary direction for the firm, including the identification of underserved customers, the geographic site for operations, and the partners, suppliers, employees, and financing that help the company get off the ground and then expand. In a brand-new organization, though, where does that mission come from?
The founder or founders of a firm develop the company’s mission directly from their own personal beliefs, values, and experience; this is particularly true for nonprofits. Sometimes the inspiration is as simple as the recognition of an unmet need, such as the rising global demand for food. Bertha Jimenez, an immigrant from Ecuador who was studying engineering at New York University, could not help but be concerned that while craft breweries were riding a wave of popularity in her adopted city, they were also throwing away a lot of barley grain that still had nutritional value but that no one could figure out how to reuse it. After a few attempts, Jimenez and two friends, also immigrants, finally hit on the idea of making flour out of this barley grain, and thus was born the Queens, New York–based startup Rise Products, whose website proclaims that “Upcycling is the future of food.”
Rise Products supplies local bakers and pasta makers with its protein- and fiber-packed “super” barley flour for use in products from pizza dough to brownies. It has also sent product samples on request to Kellogg, Whole Foods, and Nestlé, as well as to a top chef in Italy. Jimenez and her fellow cofounders say, “In the long term, we can bring this to countries like ours. We want to look at technologies that won’t be prohibitive for other people to have.”Larissa Zimberoff. “From Brewery to Bakery: A Flour That Fights Waste.”
If we were to diagram the relationship between founders’ values and the entrepreneurial mission, it would look something like this:
personal values → personal mission statement → entrepreneurial mission statement
Just as a personal mission statement can change over time, so can the company mission be adapted to fit changing circumstances, industry developments, and client needs. TOMS Shoes, profiled earlier, is an example of a business that has expanded its mission to also offer eyeglasses and improved access to clean water to people in developing countries, in addition to its original mission of shoes for the needy. It calls itself the “One for One” company, promoting founder Blake Mycoskie’s promise that “With every product you purchase, TOMS will help a person in need.”TOMS. https://www.toms.com/
The point is, if you have clarified your personal values and mission statement, there is almost no limit to the number of ways you can apply them to your business goals and decisions to “do good and do well” in your entrepreneurial career. The purpose of business is relationships, and the quality of relationships depends on our acceptance of self and concern for others. These are developed through the virtues of humility on one hand and courage on the other. The demanding but essential task of life is to practice both. In that way—perhaps only in that way—can we be truly human and successful business professionals.
### Summary
This section explored examples of entrepreneurship in which social responsibility plays a key role in the organization. Causes such as sustainability/environmental awareness are often important to an entrepreneur and their workforce. Most startup businesses want to make money, and in fact, as this section demonstrates, it’s quite possible to make money and carry out a social responsibility goal simultaneously. Some social entrepreneurship companies go the extra mile and become certified B-corporations, as opposed to C-corps or S-corps, which are tax distinctions. If an entrepreneur elects to become a B-corporation, it means that it has satisfied an outside organization’s audit, proving that they truly act in a socially responsible manner.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
List of Social Enterprise Business Models or Frameworks: http://www.thesedge.org/socent-spotlights/22-awesome-social-enterprise-business-ideas
TedTalk video: Carol Sanford at TEDxBerkeley 2014. “The Responsible Entrepreneur: Four Game Changing Archetypes”: https://www.youtube.com/watch?v=Dqza5Uo1cFE
Global Entrepreneurship Monitor (GEM): www.gemconsortium.org
Social Enterprise and Entrepreneurship (SEE) the Change: https://seethechange.ca |
# The Ethical and Social Responsibilities of Entrepreneurs
## Developing a Workplace Culture of Ethical Excellence and Accountability
### Learning Objectives
By the end of this section, you will be able to:
1. Describe workplace challenges in an entrepreneurial culture
2. Distinguish between reactive and proactive approaches to managing ethics
3. Describe the foundations and framework of an organizational culture of ethical excellence
4. Define the components of an ethical workplace
Successful entrepreneurs understand that the workplace of 2020 is quite different from that of 2000, just twenty years ago. As the heading to this section suggests, progressive entrepreneurs want to create a workplace culture of ethical excellence. However, doing that means understanding a changing workforce, both in terms of demographics and values. Millennials, born between 1983 and 1995, now outnumber baby boomers in the workforce, and by 2025, will compose three-quarters of all workers on a global basis.Deloitte Reports. 2019. https://www2.deloitte.com/global/en/pages/about-deloitte/articles/millennialsurvey.html Entrepreneurs and managers who are in a position to hire and supervise millennial workers must adjust to the differing expectations and demands of a mid-twenty-first century workplace. This is especially true with regard to CSR/ethics. What matters most to millennials, according to a recent New York Times article, is that work aligns with their values.Elizabeth Olsen. “Graying Firms Wrestle with Making Room for Younger Lawyers.”
Approximately 60 percent of millennial workers would agree to work for 15 percent less money just for the chance to work for a company whose business values parallel their personal values.Elizabeth Olsen. “Graying Firms Wrestle with Making Room for Younger Lawyers.” It turns out that millennials don’t just want a job, they want a job that matters—one in which they can do rewarding work that achieves a worthwhile outcome. In other words, they want the work they do to mean something. Furthermore, according to an article in the Texas Bar Journal by career coach and consultant Martha Newman, millennial workers place a high value on workplace policies that promote open communication, collaboration, and participation in short- and long-term decision making with their employer.M. Newman, “Decoding Millennial Lawyers,” Newman also says that millennials expect a degree of work-life balance; career isn’t all that matters in their life.
What this means for entrepreneurs who manage employees is that they must adjust. For example, an owner can create a workplace in which there is a culture ensuring that people matter as much as money, where there is work-life balance with things like flexible scheduling, and where good work is recognized and rewarded. There’s an adage that says, “People don’t quit their job, they quit their bosses.” If you don’t want a very high turnover rate among your workforce, be the kind of boss that millennials want to work for and with.
### Entrepreneurial Culture
A fairly common characteristic of successful startups is charismatic, driven founders with competitive mentalities. After all, it takes a thick skin and powerful ego to get through the inevitable disappointments that confront a startup leader. Often, however, companies discover that a different leadership ethos is necessary as they grow. Could entrepreneurs still succeed if they also embraced a humanistic leadership style at the outset, or would this invariably undermine the already low initial odds of success? It is a difficult problem with which many firms wrestle. Dedicated employees may be put off by demanding leaders who are harsh, giving little back to loyal workers even after achieving success. New employees may decide the working climate is less congenial than they anticipated and simply leave.
One question an ethical entrepreneur should ask is this: Do my employees feel like they can speak freely? In reality, at many companies, according to SHRM (Society for Human Resource Management), human resources departments often find it difficult to get employees to complete employee workplace climate (satisfaction) surveys.Dana Wilkie. “Employee Engagement Surveys: Why Do Workers Distrust Them?” Society for Human Resource Management. January 5, 2018. https://www.shrm.org/resourcesandtools/hr-topics/employee-relations/pages/employee-engagement-surveys.aspx Workers often believe that if management really wants to find out who said what, they easily could, although the surveys are supposed to be anonymous. The difference between ethical and unethical entrepreneurial management is whether they want to find out. Whether it involves small, mid-size, or large companies, management should encourage employees to speak out, whether as an anonymous whistleblower or in person to their supervisor. Absence of this type of encouragement often allows unethical business practices to flourish, such as was seen in the Wells Fargo case example.
These observations identify what may be unique to entrepreneurial culture. This is a combination of personality and management style often identified with those business leaders who strike out on their own, bring a startup to life, and shape its initial business practices and culture on the job. If the enterprise is successful, the principles and philosophy of the founder become enshrined in the lore of the company, so that long after their departure, succeeding leaders find themselves beholden to the management philosophy exemplified from the early days of the firm.Steven Byars. Personal statement. Dr. Byars worked for many years in the 1980s in human resources at the Walt Disney Company at its corporate site in Burbank, California. A popular training course offered in-house to employees new to professional or managerial roles was “Disney Way,” in which the leadership culture of the company was traced back to its founding in 1926 and how that culture had remained greatly intact over the intervening years. As you seek the right leadership style to implement in your entrepreneurial plans, begin by asking precisely what kind of leader you would prefer to work for if you were not the boss. The answer you provide may very well be the best model to follow as you develop your own leadership personality.
The first employees of a startup realize what is at stake as the company tiptoes into new entrepreneurial waters. The founder may be the boss, but their associates sense a collaborative spirit that directly joins them to the founder as well as to each other. There can be a genuine camaraderie among those who have been with the firm since day one or shortly thereafter. Founding members of an entrepreneurial business are also often willing to undergo the strains and rigors attached to a startup in return for an ownership stake in the company that allows them to profit handsomely from its later growth and success.
Newer staff, however, may not share this mindset. They may simply be seeking a secure position with a growing business rather than a chance to get in on the ground floor of a risky startup. They will not necessarily have the tolerance for the demanding hours, chaos, and abrasive personalities that can characterize the early days of an enterprise. Can entrepreneurial founders shape a company’s culture so that it can accommodate talented employees who are looking for a corporate culture that supports some work-life balance?
Consider also the ethical practices of an entrepreneur and the ethical expectations of employees. Suppose that one of the distinguishing features woven into the fabric of the startup is the respect extended to customers or clients. An entrepreneur typically promises always to hold customers in the highest regard, never lie to them, and serve them well. Furthermore, suppose this entrepreneur successfully instills this same ethos among all employees from the outset. Respect for customers is intended to become a distinguishing feature of the business; even if it causes monetary loss to the company, this entrepreneur will neither cheat a client nor misrepresent the company’s services. Finally, presume that this ethos is embedded into the culture of the company while it is still in startup mode.
Now suppose the company becomes successful. This may signal the hardest time of all for the entrepreneur. Growth often accompanies success, and growth means, among other things, more employees. Not all these new hires will be as committed to the same degree of responsibility for customers. They will not necessarily set out to cheat clients, but they might lack the founder’s enthusiasm for the most honorable treatment of customers. How can an entrepreneur ensure that the initial commitment carries over to the second generation of leadership? He or she cannot simply order it to happen—human nature usually does not respond so easily. So entrepreneurs must do their best to ensure that their version of customer service, one that prioritizes respect for clients, is passed along to new employees. It may be ingrained in the longest-serving employees, but it must be nurtured to the point where it has the same significance for the newest hires.
As a leader, you need to plan and follow-up to ensure your organization follows the values and ethical principles you uphold. This planning process goes beyond taking a few simple actions such as hiring the right people, providing consequences, or setting expectations. It goes beyond communicating a few niceties and encouraging sound bites such as establishing trust and working with uncompromising integrity. It needs more than the application of a few popular concepts and slogans such as CSR, conscious capitalism, or servant leadership. It also needs more than the effective communication of a few success criteria and expectations.
There are effective techniques that can support the infusion of ethical principle into the daily work life of employees. Sometimes known as anchoring strategies, ethical values can become part of the business culture through the implementation of employee training, and reward/recognition programs. The Society for Human Resource Management (SHRM) website has a toolkit for entrepreneurs and managers that provides useful ideas on infusion and anchoring strategies.
While the use of popular management approaches can be successful, they can be inadequate to stop unethical behavior. Instead, you need a plan to nurture and develop a culture where ethical qualities and capabilities such as truthfulness, justice, responsibility, and compassion are developed and internalized as a moral compass. It also demands that these qualities and capabilities are infused into the fabric of organization, adhered to habitually, and are integrated into the organization’s daily operations.
### Proactive versus Reactive Approaches
Creation of an ethical workplace environment has both reactive and proactive components. The reactive side enables an entrepreneur to identify and address reckless behavior, irresponsible actions, and ethical deviations as they occur. However, there may be times that a reactive approach, which can be heavy-handed, may not be the best approach for addressing ethical deviations.
In contrast, a proactive approach to developing an ethical workplace strives to prevent reckless behavior, irresponsible actions, and ethical deviations by establishing and nurturing a culture of ethics, responsibility, and compliance. It also demands that you establish a workplace environment of ethics where every member of the organization is able to proactively develop, internalize, and apply a moral compass. This approach serves to operationalize popular—but often silent or nebulous—concepts such as truthfulness, fairness, trust, integrity, commitment, innovation, and excellence, leading to a sustained competitive advantage.
### Developing the Foundation and Framework of an Ethically Responsible Organization
An entrepreneur must build a foundation for developing an organization grounded in ethics and responsibility. Foundational building blocks enable an entrepreneur to systematically add the greatest value to society, and to do so responsibly. Additionally, for entrepreneurs modifying their businesses or taking over new ventures, building a foundation of ethical conduct should neither disrupt normal business operations nor add significant overhead, since the main concepts are infused into the fabric of the organization.
To develop an organization’s foundation for ethics and a framework for management, an entrepreneur needs to incorporate three essential ethical qualities—trust, fairness, and excellence—into the organization’s core values (see ). Additional ethical qualities, dependent on the enterprise’s specific goals, might include responsibility, commitment, compassion, and so on. The entrepreneur should infuse these qualities into all aspects of organizational governance and daily operations, and track these values to ensure they are being integrated into planning, and are met and enforced by all business units.Mehran Ferdowsian. “Total Business Excellence—A New Management Model for Operationalizing Excellence,” ,Thomas A. Hemphill and Waheeda Lillevik. “The Global Economic Ethics Manifesto: Implementing a Moral Values Foundation in the Multinational Enterprise.” ,Hans Küng. “The Global Economic Crisis Requires a Global Ethic: The Manifesto for a Global Ethics.” Symposium on the Global Economic Ethics, United Nations Headquarters, New York, NY. October 6, 2009. https://www.bbvaopenmind.com/en/articles/the-global-economic-crisis-requires-a-global-ethic/ The application and implementation of these three core qualities will begin to shape the framework and establish a foundation of ethics and responsibility.
illustrates and approach to building a foundation for ethics-based behaviors, principles, and effective collaboration.
Second, the organization should consider what ethical principles it wants to prioritize. Examples of ethical principles might include:
1. Service and advancement of society
2. Collaborative excellence
3. Gender equity
4. Elimination of prejudices
Once the framework and foundation for an ethical and high-performing organization has been established, other qualities and principles can easily be integrated as needed to further strengthen this framework, differentiate the organization, and develop a sustained competitive advantage. It also enables leadership to align other aspects of organizational governance with ethics and responsibility. For example, if leadership wants to leverage the power of diversity to develop a sustained competitive advantage, they would adopt the principles of equality of sexes, the elimination of prejudices, and the principle of oneness of humanity. If leadership wants to develop and use teamwork and collaboration as a strategic competitive advantage, they would integrate the behaviors and principles for collaborative excellence and working cohesively as one.
The framework and foundation of ethics and responsibility will enable the entrepreneur to consistently manage the needed qualities and principles for success in all aspects of daily operations. These aspects include research and development, engineering, manufacturing, sales, marketing, planning, decision-making, problem solving, conflict management, and other aspects of organizational governance. To demonstrate what this means in practice, the leadership of each of functional area could serve as role models, raise awareness, and encourage individuals to internalize a line of ethical reasoning, asking questions such as, “Is my decision right or wrong (good or bad)?” “Am I dealing with factual information or is conjecture?” “What is the consequence of my action?” “Is my decision fair and equitable?” “Did I give the individual what they are due?” “Would I want to be treated this way?” “Will this action help me achieve the best results for the collective?” This mindset, line of reasoning, and congruence between individual and organizational ethics is often lacking, which leads to ethical deviations.Mehran Ferdowsian. “Total Business Excellence—A New Management Model for Operationalizing Excellence.” ,Shannon Bowen. “Organizational Factors Encouraging Ethical Decision-Making: An Exploration into the Case of an Exemplar.” ,Muel Kaptein. “Developing and Testing a Measure for the Ethical Culture of Organizations: The Corporate Ethical Virtues Model.” ,B. Elango, Karen Paul, and Shishir K. Paudel. “Organizational Ethics, Individual Ethics, and Ethical Intentions in International Decision-Making.” ,Ding-Yu Jiang, Yi-Chen Lin, and Lin-Chin Lin. “Business Moral Values of Supervisors and Subordinates and Their Effect on Employee Effectiveness.” ,Robert J. Sternberg. “Ethics from Thought to Action.” Establishing the foundation outlined here enables each member of the organization to exercise sound moral judgment, develop ethical capabilities, and internalize a moral compass. It also allows employees to be aligned with the company’s grander purpose, vision, mission, and values that then translates into actions.
### Develop a Grander Purpose
Once the entrepreneur has designed and configured the organization to develop a sustained competitive advantage in a responsible manner, they need to develop a higher vision or a grander purpose for the organization. This grander purpose is not the same as a mission or vision (although they may overlap). It is not financially motivated, it is not product/service centric, and it is not shareholder driven. Instead, the grander purpose defines and highlights the reasoning for a firm’s long-term existence and success; it provides guidance and direction during decision-making, problem solving, and conflict resolution; it provides the motivation for individuals to achieve excellence and the sense of urgency for social change; and it enables individuals to be part of a larger cause. For example, the integration of the right grander purpose into the operations of an organization could have prevented the manufacturing of toys made with lead-based paint or the poisoning of the Flint, Michigan, water supply. The grander purpose provides a mechanism to help individuals calibrate their day-to-day activities against a more meaningful and stable target.Mehran Ferdowsian. “Total Business Excellence—A New Management Model for Operationalizing Excellence.”
### Develop a Culture of Collaborative Excellence
The establishment of a framework and foundation for ethical behavior opens up the organization for effective and meaningful teamwork and collaboration. Many existing approaches to collaboration, while demonstrating successes and benefits, also are sometimes inadequate in addressing complex group interactions dealing with mistrust, competition, politics, and ideological differences. A successful culture of collaboration should convince individuals to find the best ideas, leverage diversity, grow new solutions, gain wholehearted support, develop champions of change, nurture a safe environment, and encourage people to express all ideas.
An effective process for encouraging collaboration takes time to build; however, it’s worth it because it will provide the inspiration and motivation needed to accomplish tasks and exceed expectations. The organization should also have consequences in place for ineffective collaboration, which may be evidenced in gossip, backstabbing, self-centered behavior, and biases or prejudices. Such consequences could include probation plans and one-on-one meetings that work to determine the root cause and identify steps forward.
Creativity is also key for a team to think differently. There must be freedom in the workplace for creativity to blossom. When developing a culture of creativity, entrepreneurs should consider these issue and challenges:
1. How can we create a culture of creativity and innovation?
2. How can we encourage the members of the organization to collaborate and leverage each other’s creativity?
3. How can we reward and recognize people for their creativity?
### Human Resources Development
A human resources development plan enables a company to continually grow its intellectual resources, enables individuals to develop ethical capabilities, strengthens individual creativity and organizational innovation, provides a steady stream of capable human resources for its leadership pipelines, and enables the firm to leverage and harvest those human resources to advance society in a responsible manner. This is achieved by providing a new employee assessment process where every member of the organization is given the needed opportunities and is expected to collaborate with their superior(s) to own and manage their lifelong development plan (LDP). At a minimum, an LDP should:
1. Include short-term and long-term career goals and objectives
2. Help identify, continually develop, and leverage individual strengths
3. Enable individuals to identify and measurably close gaps in deliverables, behavior, and professional improvement
4. Clarify major deliverables and success indicators
In sum, an LDP becomes the primary instrument to assist individuals to achieve excellence by raising performance, closing gaps in assessment, and aligning the individual with the grander purpose, vision, mission, goals, needs, and objectives.
### Develop Ethical and Responsible Leadership/Management
Significant research shows that the culture of the organization is mostly shaped by its leadership values—by how leaders develop the bonds of trust, by how they motivate their people, by their responsible decisions and actions, and by how they empower, delegate, and monitor tasks. A recent Harvard Business Review article, by a group of professors and entrepreneurs, synthesized the research of experts including Edgar Schein, Shalom Schwartz, Geert Hofstede, and other leading scholars on this topic.Boris Groysberg, Jeremiah Lee, Jesse Price, and J. Yo-Jud Cheng. “The Leader’s Guide to Corporate Culture.” January/February 2018. The article indicates that the attributes of a business’s leaders define that organization’s culture. A business’s culture is essentially defined as the social order within an organization that helps shape attitudes and behaviors—delineating what type of behavior is encouraged and/or discouraged.
While it is possible for a company to hire individuals who possess these attributes, the organization should have a plan in place to systematically train and develop responsible leaders. At minimum, this should include the development and management of a leadership pipeline, the nurturing of ethical and intellectual capabilities, and rewards and consequences that enable a leader to develop and internalize a moral compass.
### Develop Internal/External Organizational Alignment and Cohesion
Key to ethical organizational success is the alignment and cohesion between individuals, groups, and the enterprise as a whole. This alignment starts with the development of a grander purpose that enables the entrepreneur and the organization to serve, add value, and advance the society in which it operates. It ensures individuals and units within the company understand the grander purpose, mission, vision, and the goals and objectives of the company, and it provides each member or the organization the opportunity to serve and fit into that grander purpose, mission, and vision. It is further strengthened by asking individuals to achieve excellence in their own right instead of competing with each other. It sets clear expectations about how people are to treat and deal with each other to deliver results. It deals with the alignment of corporate values with the espoused values, and the alignment between what leadership says and does. When combined, these and other alignments can enable individuals and groups to stay on track and reach the company’s goals efficiently.
### Develop a Culture of Creativity and Innovation
The next building block is developing a culture of creativity and innovation. This means going beyond a spark of creativity from select individuals or business units, and instead nurturing a culture where every member of the organization is continually creative and the organization is innovative. This also means providing the means and opportunities for individuals to be engaged, creative, and contributing members on a full-time basis. What makes this possible results from the prior building blocks. Innovation requires good leadership and management; a meaningful and effective process for teamwork and collaboration; a culture of learning and improvement; a consistent and measurable process to encourage, recognize, compensate, and track innovation; and company-wide focus on the training and development of the sense of creativity.Mehran Ferdowsian. “Total Business Excellence—A New Management Model for Operationalizing Excellence.”
### Develop a Culture of Delivering Responsible Results
Measurable results compose the final building block of a framework for ethics and responsibility. This involves developing systems and indicators that will demonstrate how your business is achieving ethical standards and progressively improving as it adds value to society. While the details of which indicators to select is left up to the discretion of the entrepreneur, this building block defines success in terms of ten dimensions of business excellence, shown in .
serves as an easy-to-understand guide for entrepreneurs seeking to create a culture of excellence. Focusing on these ten dimensions can help a business achieve excellence, from which a company may derive multiple benefits. Examples of reasons why a company strives to achieve excellence include strengthening alignment between company values and those of stakeholders, balancing goals versus measures of success, clarifying strategic focus versus operational concerns, selecting areas within the company wherein improvement is needed, and shifting from a preoccupation with daily activities and processes to focus on outcomes. Companies seek excellence with regard to internal and external outcomes, both of which are important. Thus, whether examining internal aspects such as finance and operations, or external aspects such as product quality and customer service, each of these ten areas is an ingredient of company excellence.
### Creating an Ethical and Responsible Workplace Environment
A safe, healthy, and productive workplace is an environment in which an individual has a high level of trust and confidence that if they give their best, they will see a number of results and be afforded a number of things in exchange for their hard work. This concept resembles an employer-employee contract. This contract includes the following employee expectations:
1. They are treated with the respect, dignity, and courtesy they deserve as a human being.
2. They are given the needed support, equal opportunities, and resources to excel.
3. They are given what they deserve and what they are due in a fair and equitable way.
4. They are provided a safe, secure, and prejudice-free work environment.
5. They are not pushed, pressured, or expected to behave irresponsibly.
This type of workplace environment enables individuals to continually grow and develop to their full potential and then leverage that potential to add value to their own lives, careers, and society. This type of environment is one in which individuals are not afraid to speak their mind; they feel safe to discuss problems and concerns, and feel free to question and reject that which is wrong.
### Prejudice
Prejudice is often thought of as a negative attitude and/or feeling toward an individual based solely on one’s membership in a particular group. Prejudice is common against people who are members of unfamiliar cultural groups. In employment, it can be the root cause of unfair discrimination.Paul C. Holinger. “Understanding Bias, Prejudice, and Violence.” One factor essential to the development of a safe and healthy work environment is that it strives to be a place free of prejudice. This is an environment where everyone is treated with the respect and dignity they deserve and are afforded equal opportunities for growth, development, and advancement both within and outside of the organization. For example, it is important to look at the merit or value of the work done by an individual and the manner by which those results have been delivered. It is unethical to treat people differently based on their race, gender, age, nationality, and other differentiating factors. To develop trust and respect, everyone needs to be afforded the same opportunities.
### Competition and Collaboration
Effectively managing a workforce includes a systematic approach to appraisal of employee performance. A manager/entrepreneur must decide how to do this within their company. A forced ranking system is one in which scoring employee performance is competitive and can pit employees against each other instead of fostering a collaborative work environment. Some employers have switched to a system that does not require forced rankings and attempts to downplay the competitive nature of assessment, focusing instead on individual continuous improvement. There is a legitimate difference of opinion on this issue. According to a Wall Street Journal article by the accounting and consulting firm Deloitte,Deloitte CIO Journal. “It’s Official: Forced Ranking Is Dead.” executives are split on whether it is an effective practice. Jack Welch, former CEO at General Electric, was a proponent of it, whereas others see it as counterproductive. Companies that have discontinued the process include Microsoft and GE.
In an environment of collaborative excellence, individuals are encouraged to express their ideas and viewpoints in an unfettered and respectful way, where the merit of each idea is weighed against the merit of other ideas. In this environment, individuals are not reprimanded for being creative, taking calculated and reasonable risks, or challenging management or leadership.
One example of a problem that can arise in an overly competitive environment or culture created by an organization would be the faulty ignition switch scandal at GM. According to Valdes-Depena, and Yellin,Peter Valdes-Dapena and Tal Yellin. “GM: Steps to a Recall Nightmare.” GM knew about this problem in 2001. However, it took the company over twelve years, more than 100 deaths, and 30 million vehicles being recalled to finally admit that there was a problem. In 2014, GM admitted that a faculty ignition switch may result in the engine of a vehicle being shut down while in drive, resulting in accidents, severe injuries, or death.Arthur W. Page Society. “General Motors’ Corporate Culture Crisis: An Assessment of the Ignition Switch Recall.” 2015 Case Study Completion. January 16, 2016. https://page.org/attachments/1edd5184509636aabbdc07ef0c3546e0facf5c0c/store/00f8d9b37cec4d725c881b7235467635aeab21b4d2333398c819839d426b/General-Motors-Case-Study-2015.pdf If GM had developed an effective environment of collaboration, individuals from leadership, management, sales, marketing, engineering, manufacturing, and human resources, as well as major stakeholders, might have collaborated and prevented the ignition switch problem.
### Diversity
Entrepreneurs need to appreciate, respect, and learn to effectively leverage the unique and diverse qualities that each individual brings to the table. These qualities can be used to innovate, make better decisions, solve complex problems/conflicts, move an organization cohesively in a single direction, or rapidly change direction when needed. If used correctly, these differences enable an entrepreneur to develop a sustained competitive advantage by looking at the different thoughts, ideas, and viewpoints to make better and more informed decisions.
Diversity, in terms of a legal concept, deals with innate characteristics such as an individual’s sex, color, race, national origin, religion, and age. It might also include educational background, cultural background, socioeconomic background, and potentially even political affiliations. However, diversity in terms of an ethical concept rather than purely a legal one also deals with a number of not-so-obvious characteristics such as the diversity of behavior, thought-process, comprehension, attitudes, temperaments, and learning styles. Combined, these differences can be beneficial to a business organization and result in high-level performance by the workforce as a whole.
Diversity may be an actual legal requirement depending upon what type of business an entrepreneur enters. For example, if you plan on doing any government contracting work, whether local, state, or federal, the chances are that your business will have to meet a diversity standard. Many private companies also have diversity clauses in the supply chain contracts related to supplier diversity initiatives.
### Gender Equality
As an entrepreneur, you need to recognize the significance, value, and impact of the principle of equality of men and women on developing a sustained competitive advantage. Then you need to incorporate this principle into the fabric of your organization. Aside from being the right thing to do, one reason why this principle is so important is that close to one-half of the planet is female (and has traditionally been marginalized in the business world).R. A. Fisher. ,W. D. Hamilton, “Extraordinary Sex Ratios,” If you overlook this fact, you will also be potentially overlooking one-half of the talent that can help you excel and develop a sustained competitive advantage. In turn, this will result in a loss of trust and confidence. A second and more important reason would be that any deviation from this principle goes against the whole concept of ethics and responsibility. Moreover, this principle will help your organization attract the best and brightest employees.
The principle of gender equality does not deny differences between men and women. This principle primarily asks that we give each member of society fair and equal opportunities for growth, development, and advancement. It also recognizes that women have been historically marginalized or excluded from the business world. This claim holds true today and is applicable to even to the most advanced countries in the world (e.g., the discrepancy of pay between women and men in Western societies). Therefore, women need to be afforded the same opportunities for education, rewards, recognitions, and promotions as men.
### Trust and Ethical Accountability
Finally, the development of safe environments also deals with an environment where individuals are able to develop unbreakable bonds of trust, where they don’t feel they have to constantly watch their backs, where individuals are free to point out misconduct without being reprimanded, and where individuals feel they will be given what they are due or deserve. This dimension of the development of a safe work environment deals with making sure individuals feel they are being treated in a fair and equitable manner and that their need for the development of an ethical and moral work environment is being met.
Ideally, it is best that entrepreneurs exemplify good ethical behavior, expect their people to do the same, and help the members of the organization develop a moral compass. However, it is equally as important that business owners take action and put in place the right checks and balances that verify that the organization’s people are complying with its policies and principles of ethical behavior.
Organizations should set up systems that monitor compliance. In addition, you should develop a leadership pipeline that ensures that individuals would be placed in the pipelines only if they exhibit good ethical behavior, working with each business unit manager to ensure this is happening. Individual assessments should clearly assess ethical behavior and provide rewards, recognitions, and promotions for good ethical behavior, and consequences and training/solutions for actions that do not meet company standards. You should provide meaningful, substantial, and timely consequences for lack of acceptable behavior, such as removing an executive from a leadership pipeline when it has been established that they will not govern responsibly.
Importantly, members of the organization should not be intimidated to blindly follow or accept the existing monitoring system without question. An entrepreneur needs to cultivate an environment where they expect, support, and encourage every member of their organization to be inquisitive, be creative, question authority, and search for the underlying truth in all matters. It must be noted that questioning authority does not mean anything goes; it simply means that employees are expected to think on their own. Accountability should be encouraged; it is both an ethical and legal issue.
An example of a system of accountability that is appropriate for entrepreneurs is one proposed by an article in the Harvard Business Review.Peter Bregman. “The Right Way to Hold People Accountable.” A sound approach to accountability requires a multistep process that includes establishing expectations, ensuring employees have the capability to do it, measurement of results, feedback, and consequences for unethical behavior. In addition to an ethical approach, remember that there are federal laws mandating accountability. The most well-known of these is the Sarbanes-Oxley Act,Pub.L. 107–204. https://legcounsel.house.gov/Comps/Sarbanes-oxley%20Act%20Of%202002.pdf discussed elsewhere in this chapter, and other chapters in this text. Also called the Corporate and Auditing Accountability, Responsibility, and Transparency Act, the Sarbanes-Oxley Act requires publicly traded companies to have an internal system of control that emphasizes transparency and accountability.
### If You Make a Mistake
If you or your organization makes a mistake or misstep, you must decide how to address it. In general, you are faced with the choice of paying now or paying a hundredfold later. A closer look at the largest, most expensive, and most devastating corporate failures of our times shows that these failures have resulted in the loss of life, property, and/or monumental environmental disasters. For the most part, these corporate failures have been caused by one or more ethical deviations on behalf of leadership. To combat these problems, entrepreneurs need to start by first being responsible, accepting their failures, and admitting when they have made mistakes. This admittance needs to be genuine, transparent, prompt, truthful, and authentic if they wish stakeholders to accept and believe their remorse. Once that first step is taken, they need to take immediate steps to proactively address the problems they have caused. Many leaders or entrepreneurs have learned the hard way that they need to be open and transparent with their stakeholders at the outset. Failure to rapidly admit mistakes can and has resulted in paying a very steep price when exposed. The actions that an entrepreneur needs to take include:
1. Admitting their mistakes, failures, and shortcomings to all stakeholders
2. Effectively communicating the nature of the problem to major stakeholders
3. Informing the stakeholders of the impact, side effect, and causes of the problem
4. Taking necessary and immediate steps to address the issue and stop the bleeding
5. Conducting a thorough and unbiased root-cause analysis to identify the underlying cause
6. Addressing any people and systemic gaps that caused the problem in the first place
7. Putting in place measures that will prevent the repeat of the same mistakes
To summarize, the best approach is that you admit your mistakes and shortcomings, pay the price, fix and uproot the problem, and systematically prevent the repeat of the same mistakes. A few examples of corporate mistakes and shortcomings that were quickly addressed before turning into severe problems would be the Tylenol poisoning and the customer accounts stolen at Target. A few examples of a problem that were not handled correctly and resulted in multi-billion-dollar problems are GM’s faulty ignition switch problem, Volkswagen’s emission control fraud, and Wells Fargo’s account fraud.
### Summary
This section of the chapter covers the area of employment. We explored how entrepreneurs can make their company one for which people want to work: where being ethical is a highly regarded trait. This type of approach to employment includes both ethical and legal considerations, such as no discrimination, fair pay, encouraging/rewarding ethical behavior, and creating an atmosphere of collegial teamwork. This approach to creating a socially responsible workplace requires a long-term commitment to being an ethical employer, which is not always easy. For example, it may mean, even though you are the boss or owner, admitting you made a mistake, accepting responsibility for it, and correcting it. You do not want to be the type of boss who can never say I got that wrong, and I’ll do better next time.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Society for Human Resource Management: https://www.shrm.org |
# Creativity, Innovation, and Invention
## Introduction
We enter the world as curious beings. However, as we grow up, we are told to color inside the lines and that real animals can’t talk—direction that can squelch creativity. Many successful entrepreneurs work to unlearn some of those messages in order to tap into creative thinking. What do you do when you are given a task that requires you to be creative? Do you get out your art supplies and start drawing? Do you pull out your phone or get on your computer and head straight for a search engine? Steve Jobs, the Apple founder and well-known innovator, had a preference when it came to creative contemplation, and it had nothing to do with art supplies or smartphones. Jobs did some of his best creative thinking when he went on a walk, or a walking chat.
Why did Jobs prefer walking as a way to develop new ideas? A Stanford University study found that walking improves creative thinking.Marily Oppezzo and Daniel Schwartz. “Give Your Ideas Some Legs: The Positive Effect of Walking on Creative Thinking.” When you launch an entrepreneurial journey and set out to innovate and create, or when you hit a sticking point that requires a creative solution, it may be time to take a walk. Better yet, if you can find a friend, walk and talk. It might energize your creativity and lead to innovation and, possibly, to invention. |
# Creativity, Innovation, and Invention
## Tools for Creativity and Innovation
### Learning Objectives
By the end of this section, you will be able to:
1. Describe popular, well-supported, creative problem-solving methods
2. Understand which innovation or problem-solving methods apply best in different settings
3. Know where to look for emerging innovation practices, research, and tools
Creativity, innovation, and invention are key concepts for your entrepreneurial journey. Fostering creativity and innovation will add essential tools to your entrepreneurial toolkit. In this chapter, first you’ll learn about a few practical tools that can assist you in your efforts to create and innovate. Then, we’ll define and distinguish creativity, innovation, and invention, and note the differences between pioneering and incremental innovation. Finally, we’ll cover models and processes for developing creativity, innovation, and inventiveness. The science, study, and practice of creativity and design thinking are constantly evolving. Staying on top of well-documented, successful approaches can give you a competitive advantage and may remind you that entrepreneurship can be fun, exciting, and refreshing, as long as you keep your creative spirit alive and in constant motion.
### Creative Problem-Solving Methods
Creative thinking can take various forms (). This section focuses on a few creative thinking exercises that have proven useful for entrepreneurs. After discussing ideation practices that you can try, we conclude with a discussion of an in-depth innovation exercise that can help you develop a habit of turning creative ideas into innovative products and services. In this section, outcomes are vital.
Three ideation practices are discussed here. Several others are offered in links at the end of this section. The first ideation practice comes from Stanford’s Design School.Stanford d.school. https://dschool.stanford.edu/ The objective is to generate as many ideas as possible and start to develop some of those ideas. This practice is the quintessential design thinking practice, or human-centric design thinking exercise, and it consists of five parts: accessing and expressing empathy, defining the problem, ideating solutions (brainstorming), prototyping, and testing (). Empathy is the human ability to feel what other humans are feeling, which in the context of creativity, innovation, and invention is essential to beginning a process of human-centric design. Practicing empathy enables us to relate to people and see the problem through the eyes and feelings of those who experience it. By expressing empathy, you can begin to understand many facets of a problem and start to think about all of the forces you will need to bring to bear on it. From empathy comes the ability to proceed to the second step, defining the problem. Defining the problem must be based on honest, rational, and emotional observation for human-centric design to work. Third in the process is brainstorming solutions. The other two ideation exercises or practices in this section delve more deeply into brainstorming (also discussed in Problem Solving and Need Recognition Techniques), what it means, and how you can brainstorm creatively beyond the basic whiteboard scribbling in almost every organization. Designing for other people means building a prototype—the fourth step—and to test it. Once you apply this process to developing a product or service, you need to return to the empathetic mindset to examine whether you have reached a viable solution and, thus, an opportunity.
To delve more deeply into ideation as a practice, we introduce here the Six Thinking Hats method ().“10 Creative Techniques for You and Your Team.” There are different versions of this ideation game, but all of them are quite useful for encouraging thought by limiting the mindset of those involved in the game. Being encouraged to embody one mode of thinking frees you from considering other aspects of a problem that can limit creativity when you are looking for a solution. The six hats are:
1. White Hat: acts as information gatherer by conducting research and bringing quantitative analysis to the discussion; sticks to the facts
2. Red Hat: brings raw emotion to the mix and offers sensibilities without having to justify them
3. Black Hat: employs logic and caution; warns participants about institutional limitations; also known as the “devil’s advocate”
4. Yellow Hat: brings the “logical positive” of optimism to the group; encourages solving small and large problems
5. Green Hat: thinks creatively; introduces change and provokes other members when needed; new ideas are the purview of the Green Hat
6. Blue Hat: maintains the broader structure of the discussion and may set the terms by which progress will be judged; makes sure the other hats play by the rules, or stay in their respective lanes, so to speak
You can apply the Six Thinking Hats exercise to force structure on a discussion where, without it, several members of the group might try to wear several hats each. This game is not always easy to implement. If members cannot follow the rules, the process breaks down. When it works best, the Blue Hat maintains control and keeps the practice moving quickly. What you and your group should experience is a peculiar freedom arising from the imposition of limitations. By being responsible for only one mode of thinking, each participant can fully advocate for that point of view and can think deeply about that particular aspect of the solution. Thus, the group can be deeply creative, deeply logical, deeply optimistic, and deeply critical. This practice is meant to move entire groups past surface-level solutions. If you practice this exercise well, the challenges of implementing it are well worth the effort. It gives you the opportunity to vet ideas thoroughly while keeping many personality clashes at bay. If the participants stay in character, they can be accused only of acting in the best interests of their hat.
Your instructor may have your group members try different hats in different ideation exercises so you all can more fully develop each mindset.“Six Thinking Hats.” This exercise forces you out of your most comfortable modes of thinking. You and your classmates can recognize in each other skills that you may not have realized you possess.
The third ideation practice is quite simple. If stagnant thinking has begun to dominate an ongoing discussion, it can be helpful to inject an ideation framework. This is the “statement starters” method.Michelle Ferrier. “Ideation.” Ask, “How might we ________?” or “What if we ________?” in order to open up new possibilities when you seem to have reached the limits of creativity. This method is more than simply asking “Why not?” because it seeks to uncover how a problem might be solved. For entrepreneurs, the simplest form of framing a problem in the form of a question can be eye opening. It assumes open possibilities, invites participation, and demands focus. Statement starters assume that, at least, there might be a solution to every problem. Ideation is about starting down new paths. This mode of thought applies to social problems as well as consumer pain points (discussed later). Creating a list of statement starters can help entrepreneurs examine different possibilities by simply adopting different points of view when asking questions. For example, the question, “How might we keep rivers clean?” is similar to the question, “How might we prevent animal waste runoff from entering our city’s waterways?” but the implications of each question are different for different stakeholders. Recall that stakeholders are individuals who have a vital interest in the business or organization. Statement starters almost always lead to a discussion of stakeholders and how they might be involved in finding solutions, offering support, and perhaps one day purchasing or contributing to dynamic, disruptive inventions or changes in social practice.
### Matching Innovation Methods to Circumstances
Searching for innovation methods will often reveal many of the same, or similar, creativity exercises as we’ve just discussed. To go beyond ideation exercises, we will conclude with a foundation of thinking that can help when you are tackling all sorts of innovation problems. Simply put, open innovation involves searching for and finding solutions outside of the organizational structure. Open innovation is somewhat difficult to pin down. The educator and author Henry Chesbrough was one of the first to define it: “Open innovation is ‘the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.’”Henry Chesbrough. “Everything You Need to Know about Open Innovation.” In other words, firms built on a structure of open innovation look beyond their own research and development capabilities to solve problems. This outlook can guide all sorts of product and service development processes. Open innovation models also allow innovations to be shared widely so that they can seed other innovations outside the original firm or institution.
Open innovation takes an optimistic view of sharing information and ideas across a society connected by instantaneous communication networks. It is also a shift from the classic research and development model. In a sense, you allow others to solve problems in your business, startup, or social entrepreneurship project. In this reciprocal world, you are open to the reality that information is difficult to keep under wraps. You may seek patents for your intellectual property, particularly in fixed product or service practice form, but you should expect, or even encourage, the widespread circulation of key elements of your solutions. This makes sense: If, as an entrepreneur or an innovative corporation, you are going to look beyond your own ideation, research, and development capabilities for solutions, you must expect that others will look to your solutions for ideas to borrow.
The open innovation model is far easier to describe in idealistic terms than it is to put into practice without ethical consequences. Unfortunately, industrial and corporate espionage, theft of intellectual property, and lawsuits are commonplace. Nevertheless, inspiration in innovation can come from myriad sources when constant streams of information are available to anyone with a high-speed data connection. Open innovation is a simple but essential framework for future innovation and for managing, even possibly guiding, disruption in an industry as discussed previously (i.e., disruptive innovation). provides some examples of companies using disruptive technology.
Another element of the open innovation model is the connection between academic research and practical solutions. Reciprocal influence between academia, which often moves slowly, and leading corporate and entrepreneurial forces, which often focus too narrowly on short-term gains, could offer the balance this rapidly changing world needs. If you can manage to plug into the exchange of ideas between longstanding institutions and disruptive technological innovators, you may be positioned to effect positive change on society and to develop products that are received as useful and elegant, wildly new and creative, and essential to the human experience at the same time.
### Staying on Top of Emerging Practices
Consider searching for ideation and innovation practice links using a web browser and comparing those results to what you can find in the academic literature via Google Scholar or other academic databases. To adopt a truly open innovation mindset, it is essential to leave yourself open to all sorts of influences, even if it demands time and much cognitive energy. The financial, social, and personal rewards may be great.
### Summary
There are many practical approaches to being creative and developing innovations. Many programs and models encourage creative thinking. Some of the best encourage entrepreneurs to think like the stakeholders they hope their products and services will help. Human-centered design begins with empathizing with the people experiencing a problem or pain point. It continues through steps meant to clearly define problems and examine solutions through careful testing. Returning to empathy is essential in the human-centric design protocol. The Six Thinking Hats method of ideation can open up deep avenues of creative thought directed at solving problems by limiting the roles individuals in a group play. This reinforces the idea that creative thinking is a practice, that it can be guided, and that sometimes a combination of open thinking and rule following is ideal for collaborative creativity. The statement starter method of creative thinking frames every problem as though there must be a solution. This type of open thinking is an effective way to begin a creative journey that can lead to innovation and invention of products or services for social benefit.
### Review Questions
### Discussion Question
### Case Questions
### Suggested Resources
The World’s 25 Best Design Schools: https://www.businessinsider.com/the-worlds-25-best-design-schools-2012-11
Open Innovation Community: http://openinnovation.net/
The Seven All-Time Greatest Ideation Techniques: http://www.innovationmanagement.se/2013/05/30/the-7-all-time-greatest-ideation-techniques/
Ideation Method: Mash-Up: https://www.ideou.com/pages/ideation-method-mash-up
LUMA Institute’s LUMA System of Innovation: https://www.youtube.com/watch?v=qDyElJ0xe2o
Ideation Method: Top Five: http://www.designkit.org/methods/15 |
# Creativity, Innovation, and Invention
## Creativity, Innovation, and Invention: How They Differ
### Learning Objectives
By the end of this section, you will be able to:
1. Distinguish between creativity, innovation, and invention
2. Explain the difference between pioneering and incremental innovation, and which processes are best suited to each
One of the key requirements for entrepreneurial success is your ability to develop and offer something unique to the marketplace. Over time, entrepreneurship has become associated with creativity, the ability to develop something original, particularly an idea or a representation of an idea. Innovation requires creativity, but innovation is more specifically the application of creativity. Innovation is the manifestation of creativity into a usable product or service. In the entrepreneurial context, innovation is any new idea, process, or product, or a change to an existing product or process that adds value to that existing product or service.
How is an invention different from an innovation? All inventions contain innovations, but not every innovation rises to the level of a unique invention. For our purposes, an invention is a truly novel product, service, or process. It will be based on previous ideas and products, but it is such a leap that it is not considered an addition to or a variant of an existing product but something unique. highlights the differences between these three concepts.
One way we can consider these three concepts is to relate them to design thinking. Design thinking is a method to focus the design and development decisions of a product on the needs of the customer, typically involving an empathy-driven process to define complex problems and create solutions that address those problems. Complexity is key to design thinking. Straightforward problems that can be solved with enough money and force do not require much design thinking. Creative design thinking and planning are about finding new solutions for problems with several tricky variables in play. Designing products for human beings, who are complex and sometimes unpredictable, requires design thinking.
Airbnb has become a widely used service all over the world. That has not always been the case, however. In 2009, the company was near failure. The founders were struggling to find a reason for the lack of interest in their properties until they realized that their listings needed professional, high-quality photographs rather than simple cell-phone photos. Using a design thinking approach, the founders traveled to the properties with a rented camera to take some new photographs. As a result of this experiment, weekly revenue doubled. This approach could not be sustainable in the long term, but it generated the outcome the founders needed to better understand the problem. This creative approach to solving a complex problem proved to be a major turning point for the company.“How Design Thinking Transformed Airbnb from Failing Startup to Billion Dollar Business.”
People who are adept at design thinking are creative, innovative, and inventive as they strive to tackle different types of problems. Consider Divya Nag, a millennial biotech and medical device innovation leader, who launched a business after she discovered a creative way to prolong the life of human cells in Petri dishes. Nag’s stem-cell research background and her entrepreneurial experience with her medical investment firm made her a popular choice when Apple hired her to run two programs dedicated to developing health-related apps, a position she reached before turning twenty-four years old.“Divya Nag, 26.”
Creativity, innovation, inventiveness, and entrepreneurship can be tightly linked. It is possible for one person to model all these traits to some degree. Additionally, you can develop your creativity skills, sense of innovation, and inventiveness in a variety of ways. In this section, we’ll discuss each of the key terms and how they relate to the entrepreneurial spirit.
### Creativity
Entrepreneurial creativity and artistic creativity are not so different. You can find inspiration in your favorite books, songs, and paintings, and you also can take inspiration from existing products and services. You can find creative inspiration in nature, in conversations with other creative minds, and through formal ideation exercises, for example, brainstorming. Ideation is the purposeful process of opening up your mind to new trains of thought that branch out in all directions from a stated purpose or problem. Brainstorming, the generation of ideas in an environment free of judgment or dissension with the goal of creating solutions, is just one of dozens of methods for coming up with new ideas.Rikke Dam and Teo Siang. “Introduction to the Essential Ideation Techniques Which Are the Heart of Design Thinking.”
You can benefit from setting aside time for ideation. Reserving time to let your mind roam freely as you think about an issue or problem from multiple directions is a necessary component of the process. Ideation takes time and a deliberate effort to move beyond your habitual thought patterns. If you consciously set aside time for creativity, you will broaden your mental horizons and allow yourself to change and grow.Dawn Kelly and Terry L. Amburgey. “Organizational Inertia and Momentum: A Dynamic Model of Strategic Change.”
Entrepreneurs work with two types of thinking. Linear thinking—sometimes called vertical thinking—involves a logical, step-by-step process. In contrast, creative thinking is more often lateral thinking, free and open thinking in which established patterns of logical thought are purposefully ignored or even challenged. You can ignore logic; anything becomes possible. Linear thinking is crucial in turning your idea into a business. Lateral thinking will allow you to use your creativity to solve problems that arise. summarizes linear and lateral thinking.
It is certainly possible for you to be an entrepreneur and focus on linear thinking. Many viable business ventures flow logically and directly from existing products and services. However, for various reasons, creativity and lateral thinking are emphasized in many contemporary contexts in the study of entrepreneurship. Some reasons for this are increased global competition, the speed of technological change, and the complexity of trade and communication systems.Ian Fillis and Ruth Rentschler. “The Role of Creativity in Entrepreneurship.” These factors help explain not just why creativity is emphasized in entrepreneurial circles but also why creativity should be emphasized. Product developers of the twenty-first century are expected to do more than simply push products and innovations a step further down a planned path. Newer generations of entrepreneurs are expected to be path breakers in new products, services, and processes.
Examples of creativity are all around us. They come in the forms of fine art and writing, or in graffiti and viral videos, or in new products, services, ideas, and processes. In practice, creativity is incredibly broad. It is all around us whenever or wherever people strive to solve a problem, large or small, practical or impractical.
### Innovation
We previously defined innovation as a change that adds value to an existing product or service. According to the management thinker and author Peter Drucker, the key point about innovation is that it is a response to both changes within markets and changes from outside markets. For Drucker, classical entrepreneurship psychology highlights the purposeful nature of innovation.P. F. Drucker. Business firms and other organizations can plan to innovate by applying either lateral or linear thinking methods, or both. In other words, not all innovation is purely creative. If a firm wishes to innovate a current product, what will likely matter more to that firm is the success of the innovation rather than the level of creativity involved. Drucker summarized the sources of innovation into seven categories, as outlined in . Firms and individuals can innovate by seeking out and developing changes within markets or by focusing on and cultivating creativity. Firms and individuals should be on the lookout for opportunities to innovate.P. F. Drucker.
One innovation that demonstrates several of Drucker’s sources is the use of cashier kiosks in fast-food restaurants. McDonald’s was one of the first to launch these self-serve kiosks. Historically, the company has focused on operational efficiencies (doing more/better with less). In response to changes in the market, changes in demographics, and process need, McDonald’s incorporated self-serve cashier stations into their stores. These kiosks address the need of younger generations to interact more with technology and gives customers faster service in most cases.Blake Morgan. “5 Fresh Examples of Customer Service Innovation.”
Another leading expert on innovation, Tony Ulwick, focuses on understanding how the customer will judge or evaluate the quality and value of the product. The product development process should be based on the metrics that customers use to judge products, so that innovation can address those metrics and develop the best product for meeting customers’ needs when it hits the market. This process is very similar to Drucker’s contention that innovation comes as a response to changes within and outside of the market. Ulwick insists that focusing on the customer should begin early in the development process.Tony Ulwick. “Reinventing Innovation for 25 Years.”
Disruptive innovation is a process that significantly affects the market by making a product or service more affordable and/or accessible, so that it will be available to a much larger audience. Clay Christensen of Harvard University coined this term in the 1990s to emphasize the process nature of innovation. For Christensen, the innovative component is not the actual product or service, but the process that makes that product more available to a larger population of users. He has since published a good deal on the topic of disruptive innovation, focusing on small players in a market. Christensen theorizes that a disruptive innovation from a smaller company can threaten an existing larger business by offering the market new and improved solutions. The smaller company causes the disruption when it captures some of the market share from the larger organization.Chris Larson. “Disruptive Innovation Theory: What It Is & 4 Key Concepts.” ,Rosamond Hutt. “What Is Disruptive Innovation?” One example of a disruptive innovation is Uber and its impact on the taxicab industry. Uber’s innovative service, which targets customers who might otherwise take a cab, has shaped the industry as whole by offering an alternative that some deem superior to the typical cab ride.
One key to innovation within a given market space is to look for pain points, particularly in existing products that fail to work as well as users expect them to. A pain point is a problem that people have with a product or service that might be addressed by creating a modified version that solves the problem more efficiently.Lloyd Waldo. “What’s a Pain Point? A Guide for Startups.” For example, you might be interested in whether a local retail store carries a specific item without actually going there to check. Most retailers now have a feature on their websites that allows you to determine whether the product (and often how many units) is available at a specific store. This eliminates the need to go to the location only to find that they are out of your favorite product. Once a pain point is identified in a firm’s own product or in a competitor’s product, the firm can bring creativity to bear in finding and testing solutions that sidestep or eliminate the pain, making the innovation marketable. This is one example of an incremental innovation, an innovation that modifies an existing product or service.Abdul Ali, Manohar U. Kalwani, and Dan Kovenock. “Selecting Product Development Projects: Pioneering versus Incremental Innovation Strategies.”
In contrast, a pioneering innovation is one based on a new technology, a new advancement in the field, and/or an advancement in a related field that leads to the development of a new product.Abdul Ali. “Pioneering versus Incremental Innovation: Review and Research Propositions.” Firms offering similar products and services can undertake pioneering innovations, but pioneering the new product requires opening up new market space and taking major risks.
Is a pioneering innovation an invention? A firm makes a pioneering innovation when it creates a product or service arising from what it has done before. Pokémon GO is a great example of pioneering innovation. Nintendo was struggling to keep pace with other gaming-related companies. The company, in keeping with its core business of video games, came up with a new direction for the gaming industry. Pokémon GO is known worldwide and is one of the most successful mobile games launched.JV Chamary. “Why ‘Pokémon GO’ Is the World’s Most Important Game.” It takes creativity to explore a new direction, but not every pioneering innovation creates a distinctly new product or capability for consumers and clients.
Entrepreneurs in the process of developing an innovation usually examine the current products and services their firm offers, investigate new technologies and techniques being introduced in the marketplace or in related marketplaces, watch research and development in universities and in other companies, and pursue new developments that are likely to fit one of two conditions: an innovation that likely fits an existing market better than other products or services being offered; or an innovation that fits a market that so far has been underserved.
An example of an incremental innovation is the trash receptacle you find at fast-food restaurants. For many years, trash cans in fast-food locations were placed in boxes behind swinging doors. The trash cans did one job well: They hid the garbage from sight. But they created other problems: Often, the swinging doors would get ketchup and other waste on them, surely a pain point. Newer trash receptacles in fast-food restaurants have open fronts or open tops that enable people to dispose of their trash more neatly. The downside for restaurants is that users can see and possibly smell the food waste, but if the restaurants change the trash bags frequently, as is a good practice anyway, this innovation works relatively well. You might not think twice about this everyday example of an innovation when you eat at a fast-food restaurant, but even small improvements can matter a lot, particularly if the market they serve is vast.
### Invention
An invention is a leap in capability beyond innovation. Some inventions combine several innovations into something new. Invention certainly requires creativity, but it goes beyond coming up with new ideas, combinations of thought, or variations on a theme. Inventors build. Developing something users and customers view as an invention could be important to some entrepreneurs, because when a new product or service is viewed as unique, it can create new markets. True inventiveness is often recognized in the marketplace, and it can help build a valuable reputation and help establish market position if the company can build a future-oriented corporate narrative around the invention.Morten Thanning Vendelø. “Narrating Corporate Reputation: Becoming Legitimate through Storytelling.”
Besides establishing a new market position, a true invention can have a social and cultural impact. At the social level, a new invention can influence the ways institutions work. For example, the invention of desktop computing put accounting and word processing into the hands of nearly every office worker. The ripple effects spread to the school systems that educate and train the corporate workforce. Not long after the spread of desktop computing, workers were expected to draft reports, run financial projections, and make appealing presentations. Specializations or aspects of specialized jobs—such as typist, bookkeeper, corporate copywriter—became necessary for almost everyone headed for corporate work. Colleges and eventually high schools saw software training as essential for students of almost all skill levels. These additional capabilities added profitability and efficiencies, but they also have increased job requirements for the average professional.
Some of the most successful inventions contain a mix of familiarity and innovation that is difficult to achieve. With this mix, the rate of adoption can be accelerated because of the familiarity with the concept or certain aspects of the product or service. As an example, the “videophone” was a concept that began to be explored as early as the late 1800s. AT&T began extensive work on videophones during the 1920s. However, the invention was not adopted because of a lack of familiarity with the idea of seeing someone on a screen and communicating back and forth. Other factors included societal norms, size of the machine, and cost. It wasn’t until the early 2000s that the invention started to take hold in the marketplace.Thomas J. Fitzgerald. “For the Deaf: Communication without the Wait.” The concept of a black box is that activities are performed in a somewhat mysterious and ambiguous manner, with a serendipitous set of actions connecting that result in a surprisingly beneficial manner. An example is Febreeze, a chemical combination that binds molecules to eliminate odors. From a black box perspective, the chemical engineers did not intend to create this product, but as they were working on creating another product, someone noticed that the product they were working on removed odors, thus inadvertently creating a successful new product marketed as Febreeze.
The process of invention is difficult to codify because not all inventions or inventors follow the same path. Often the path can take multiple directions, involve many people besides the inventor, and encompass many restarts. Inventors and their teams develop their own processes along with their own products, and the field in which an inventor works will greatly influence the modes and pace of invention. Elon Musk is famous for founding four different billion-dollar companies. The development processes for PayPal, Solar City, SpaceX, and Tesla differed widely; however, Musk does outline a six-step decision-making process ():
1. Ask a question.
2. Gather as much evidence as possible about it.
3. Develop axioms based on the evidence and try to assign a probability of truth to each one.
4. Draw a conclusion in order to determine: Are these axioms correct, are they relevant, do they necessarily lead to this conclusion, and with what probability?
5. Attempt to disprove the conclusion. Seek refutation from others to further help break your conclusion.
6. If nobody can invalidate your conclusion, then you’re probably right, but you’re not certainly right.
In other words, the constant underlying Musk’s decision process is the scientific method.Abby Jackson. “Elon Musk Uses This 6-Step Process to Make Decisions.” The scientific method, most often associated with the natural sciences, outlines the process of discovering an answer to a question or a problem. “The scientific method is a logical organization of steps that scientists use to make deductions about the world around us.”Joan Whetzel. “Formula for Using the Scientific Method.” The steps in the scientific method line up quite nicely with Musk’s decision-making process. Applying the scientific method to invention and innovation makes sense. The scientific method involves becoming aware of a problem, collecting data about it by observing and experimenting, and coming up with suggestions on how to solve it.
Economists argue that processes of invention can be explained by economic forces. But this hasn’t always been the case. Prior to 1940, economic theory focused very little on inventions. After World War II, much of the global economy in the developed world needed to be rebuilt. New technologies were developing rapidly, and research and development investment increased. Inventors and economists alike became aware of consumer demand and realized that demand can influence which inventions take off at a given time.N. Rosenberg. “Science, Invention and Economic Growth.” However, inventors are always up against an adoption curve.Everett M. Rogers.
The Rogers Adoption Curve was popularized through the research and publications of the author and scientist Everett Rogers.John-Pierre Maeli. “The Rogers Adoption Curve & How You Spread New Ideas Throughout Culture.” He first used it to describe how agricultural innovations diffused (or failed to) in a society. It was later applied to all inventions and innovations. This curve illustrates diffusion of an innovation and when certain people will adopt it. First is the question of who adopts inventions and innovations in society: The main groups are innovators, early adopters, early and late-majority adopters, and “laggards” (Rogers’s own term).Everett M. Rogers. The innovators are the ones willing to take a risk on a new product, the consumers who want to try it first. The early adopters are consumers who will adopt new inventions with little to no information. Majority adopters will adopt products after being accepted by the majority. And finally, laggards are often not willing to readily adopt change and are the hardest to convince to try a new invention.Wayne W. LaMorte. “Diffusion of Innovation Theory.” September 9, 2019. http://sphweb.bumc.bu.edu/otlt/MPH-Modules/SB/BehavioralChangeTheories/BehavioralChangeTheories4.html
Rogers’s second way of looking at the concept is from the point of view of the invention itself. A given population partially or completely adopts an invention or rejects it. If an invention is targeted at the wrong population or the wrong population segment, this can dramatically inhibit its chances of being adopted widely. The most critical point of adoption often occurs at the end of the early adoption phase, before the early majority steps in and truly confirms (or not) the diffusion of an invention. This is called the diffusion chasm (though this process is usually called the , for our purposes, it applies quite well to new inventions as we define them here).
The diffusion curve depicts a social process in which the value of an invention is perceived (or not) to be worth the cost (). Early adopters generally pay more than those who wait, but if the invention gives them a perceived practical, social, or cultural advantage, members of the population, the popularity of the invention itself, and marketing can all drive the invention over the diffusion chasm. Once the early majority adopts an innovation (in very large numbers), we can expect the rest of the majority to adopt it. By the time the late majority and the laggards adopt an innovation, the novelty has worn off, but the practical benefits of the innovation can still be felt.
Inventors are constantly trying to cross the diffusion chasm, often with many products at a time. Crossing the diffusion chasm is a nearly constant concern for business-focused or outcomes-focused inventors. Inventors put many of their resources into an invention during the innovation and early adoption stages. Inventions may not turn a profit for investors or the inventors themselves until they are well into the early majority stage of adoption. Some inventors are pleased to work toward general discovery, but most in today’s social and cultural context are working to develop products and services for markets.
One shortcoming of the diffusion of innovations model is that it treats inventions and innovations as though they are finished and complete, though many are not. Not all inventions are finished products ready for market. Iterative development is more common, particularly in fields with high levels of complexity and in service-oriented ventures. In the iterative development process, inventors and innovators continuously engage with potential customers in order to develop their products and their consumer bases at the same time. This model of business learning, also known as the science of customer development, is essential.Eric Ries. Business learning involves testing product-market fit and making changes to an innovation or invention many times over until either investment funding runs out or the product succeeds. Perhaps the most accurate way to summarize this process is to note that many inventions are hit-or-miss prospects that get only a few chances to cross the diffusion chasm. When innovators follow the build-measure-learn model (discussed in detail in Launch for Growth to Success), they try to work their way across the diffusion chasm rather than making a leap of faith.
### Summary
Creativity is defined as the ability to develop something original, particularly an idea or an artistic representation of an idea. Innovation occurs when an individual or a firm applies something new to an existing product or service that adds value. Innovation can be planned or spontaneous, incremental or pioneering. Some pioneering innovations rise to the level of being unique inventions—truly novel products, services, or processes that, though based on ideas and products that have come before, represent a leap.
The diffusion curve is related to iterative innovations versus black box innovations. Innovators and inventors conduct the iterative innovation process by engaging with potential consumers on a near-continuous basis in order to develop the product and the consumer base at the same time, thus bridging the diffusion chasm. Black box innovations either jump the chasm or not, depending on the social perceptions through which they are perceived by potential users, the quality of the product itself, and marketing strategies.
### Review Questions
### Discussion Questions
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# Creativity, Innovation, and Invention
## Developing Ideas, Innovations, and Inventions
### Learning Objectives
By the end of this section, you will be able to:
1. Describe and apply the five stages of creativity
2. Discuss innovation as a system for problem solving and much more
3. Outline the sequence of steps in developing an invention
The previous section defined creativity, innovation, and invention, and provided examples. You might think of creativity as raw; innovation as transforming creativity into a functional purpose, often meant to eradicate a pain point or to fulfill a need; and invention as a creation that leaves a lasting impact. In this section, you will learn about processes designed to help you apply knowledge from the previous section.
### The Creative Process: The Five Stages of Creativity
Raw creativity and an affinity for lateral thinking may be innate, but creative people must refine these skills in order to become masters in their respective fields. They practice in order to apply their skills readily and consistently, and to integrate them with other thought processes and emotions. Anyone can improve in creative efforts with practice. For our purposes, practice is a model for applied creativity that is derived from an entrepreneurial approach ().Aleza D’Agostino. “5 Stages of the Creative Process with James Taylor.” It requires:
1. Preparation
2. Incubation
3. Insight
4. Evaluation
5. Elaboration
### Preparation
involves investigating a chosen field of interest, opening your mind, and becoming immersed in materials, mindset, and meaning. If you have ever tried to produce something creative without first absorbing relevant information and observing skilled practitioners at work, then you understand how difficult it is. This base of knowledge and experience mixed with an ability to integrate new thoughts and practices can help you sift through the ideas quicker. However, relying too heavily on prior knowledge can restrict the creative process. When you immerse yourself in a creative practice, you make use of the products or the materials of others’ creativity. For example, a video-game designer plays different types of video games on different consoles, computers, and online in networks. They may play alone, with friends in collaboration, or in competition. Consuming the products in a field gives you a sense of what is possible and indicates boundaries that you may attempt to push with your own creative work. Preparation broadens your mind and lets you study the products, practice, and culture in a field. It is also a time for goal setting. Whether your chosen field is directly related to art and design, such as publishing, or involves human-centric design, which includes all sorts of software and product design efforts, you need a period of open-minded reception to ideas. Repetitive practice is also part of the preparation stage, so that you can understand the current field of production and become aware of best practices, whether or not you are currently capable of matching them. During the preparation stage, you can begin to see how other creative people put meaning into their products, and you can establish benchmarks against which to measure your own creative work.
### Incubation
refers to giving yourself, and your subconscious mind in particular, time to incorporate what you learned and practiced in the preparation stage. Incubation involves the absence of practice. It may look to an outsider as though you are at rest, but your mind is at work. A change of environment is key to incubating ideas.Eugene Sadler-Smith. “Wallas’ Four-Stage Model of the Creative Process: More Than Meets the Eye?” A new environment allows you to receive stimuli other than those directly associated with the creative problem you are working on. It could be as simple as taking a walk or going to a new coffee shop to allow your mind to wander and take in the information you gathered in the previous stage. Mozart stated, “When I am, as it were, completely myself, entirely alone, and of good cheer—say, traveling in a carriage, or walking after a good meal, or during the night when I cannot sleep; it is on such occasions that my ideas flow best and most abundantly.”Neal Zaslaw, “Mozart As a Working Stiff,” in James M. Morris, ed., Incubation allows your mind to integrate your creative problem with your stored memories and with other thoughts or emotions you might have. This simply is not possible to do when you are consciously fixated on the creative problem and related tasks and practice.
Incubation can take a short or a long time, and you can perform other activities while allowing this process to take place. One theory about incubation is that it takes language out of the thought process. If you are not working to apply words to your creative problems and interests, you can free your mind to make associations that go deeper, so to speak, than language.Steven M. Smith, Thomas B. Ward, and Ronald A. Finke, eds., Patiently waiting for incubation to work is quite difficult. Many creative and innovative people develop hobbies involving physical activity to keep their minds busy while they allow ideas to incubate.
### Insight
or “illumination” is a term for the “aha!” moment—when the solution to a creative problem suddenly becomes readily accessible to your conscious mind. The “aha!” moment has been observed in literature, in history, and in cognitive studies of creativity.Eugene Sadler-Smith. “Wallas’ Four-Stage Model of the Creative Process: More Than Meets the Eye?” Insights may come all at once or in increments. They are not easily understood because, by their very nature, they are difficult to isolate in research and experimental settings. For the creative entrepreneur, however, insights are a delight. An insight is the fleeting time when your preparation, practice, and period of incubation coalesce into a stroke of genius. Whether the illumination is the solution to a seemingly impossible problem or the creation of a particularly clever melody or turn of phrase, creative people often consider it a highlight in their lives. For an entrepreneur, an insight holds the promise of success and the potential to help massive numbers of people overcome a pain point or problem. Not every insight will have a global impact, but coming up with a solution that your subconscious mind has been working on for some time is a real joy.
### Evaluation
is the purposeful examination of ideas. You will want to compare your insights with the products and ideas you encountered during preparation. You also will want to compare your ideas and product prototypes to the goals you set out for yourself during the preparation phase. Creative professionals will often invite others to critique their work at this stage. Because evaluation is specific to the expectations, best practices, and existing product leaders in each field, evaluation can take on many forms. You are looking for assurance that your standards for evaluation are appropriate. Judge yourself fairly, even as you apply strict criteria and the well-developed sense of taste you acquired during the preparation phase. For example, you might choose to interview a few customers in your target demographics for your product or service. The primary objective is to understand the customer perspective and the extent to which your idea aligns with their position.
### Elaboration
The last stage in the creative process is , that is, actual production. Elaboration can involve the release of a minimum viable product (MVP). This version of your invention may not be polished or complete, but it should function well enough that you can begin to market it while still elaborating on it in an iterative development process. Elaboration also can involve the development and launch of a prototype, the release of a software beta, or the production of some piece of artistic work for sale. Many consumer-product companies, such as Johnson & Johnson or Procter & Gamble, will establish a small test market to garner feedback and evaluations of new products from actual customers. These insights can give the company valuable information that can help make the product or service as successful as possible.
At this stage what matters most in the entrepreneurial creative process is that the work becomes available to the public so that they have a chance to adopt it.
### Innovation as More than Problem Solving
Innovative entrepreneurs are essentially problem solvers, but this level of innovation—identifying a pain point and working to overcome it—is only one in a series of innovative steps. In the influential business publication Forbes, the entrepreneur Larry Myler notes that problem solving is inherently reactive.Larry Myler. “Innovation Is Problem Solving . . . And a Whole Lot More.” That is, you have to wait for a problem to happen in order to recognize the need to solve the problem. Solving problems is an important part of the practice of innovation, but to elevate the practice and the field, innovators should anticipate problems and strive to prevent them. In many cases, they create systems for continuous improvement, which Myler notes may involve “breaking” previous systems that seem to function perfectly well. Striving for continuous improvement helps innovators stay ahead of market changes. Thus, they have products ready for emerging markets, rather than developing projects that chase change, which can occur constantly in some tech-driven fields. One issue with building a system for constant improvement is that you are in essence creating problems in order to solve them, which goes against established culture in many firms. Innovators look for organizations that can handle purposeful innovation, or they attempt to start them. Some innovators even have the goal of innovating far ahead into the future, beyond current capacities. In order to do this, Myler suggests bringing people of disparate experiential backgrounds with different expertise together. These relationships are not guarantees of successful innovation, but such groups can generate ideas independent of institutional inertia. Thus, innovators are problem solvers but also can work with forms of problem creation and problem imagination. They tackle problems that have yet to exist in order to solve them ahead of time.
Let’s examine one multilevel approach to innovation (). The base is problem solving. The next level up in the pyramid, so to speak, is prevention. The next level is working toward continuous improvement, and at the top of such efforts is creating the capacity to direct the future of your industry or multiple industries so that you can weather disruption in your career or even to create it.
Even if you are not interested in shaping the future of whole industry sectors, developing future-focused innovation practices still is a good idea. It will help you prepare for disruption. The pace of technological change is such that workers at all levels need to be prepared to innovate. Innovation leaders, such as the marketing guru Guy Kawasaki, have built on psychological principles to suggest new ways to approach innovation. According to Kawasaki, innovative products include five key qualities: deep, indulgent, complete, elegant, and emotive—DICEE ().Guy Kawasaki. “Guy’s Golden Touch.” You can strive to infuse individual innovations with these qualities in practical ways.
### Deep
Deep products are based on the logic of innovation that we’ve just established and anticipate users’ needs before they have them. These types of innovations often have masterful designs that are intuitive for new users while still being capable of completing complex tasks. Adobe is an innovative corporation working in several fields, such as software, marketing, and artificial intelligence. Adobe often creates software applications with basic functions that are easily accessible to new users but that also enable experienced users to innovate on their own.Adobe Communications Team. “Adobe Named One of Fast Company’s ‘Most Innovative Companies’ for AI.” Creating a platform for innovation is a hallmark of deep, forward-thinking innovation.
### Indulgent
Innovations with lasting power engage users in ways that make them feel special for having purchased the product or for having found the service. Indulgence refers to a depth of quality that does not come from being the fastest solution to a problem. Indulgence may even sound like a negative trait. In humans, it certainly can be, but for someone using an innovative product, feeling indulgent can relate to a richness of experience with the user interface (UI). The UI of a product, particularly a software product, is what the user sees and interacts with. A feeling of indulgence imbues your product with a sense of value and durability that reassures users and encourages them to use your product confidently.
### Complete
Kawasaki’s vision of a complete product includes the services wrapped around it and underlying it such that users understand the product well enough to be comfortable using it. Information about how it works and how it is meant to work is readily available. Thus, product innovation must include marketing and other communication efforts. For Kawasaki, this builds the “total user experience.”Guy Kawasaki. “Guy’s Golden Touch.” If you truly have solved a problem in the marketplace, users will understand what that problem is and how your product and related services deliver.
### Elegant
Elegance also is part of a product’s UI. It refers to intuitive design that immediately makes sense to consumers. Elegance conveys more information with fewer words. Elegant design is not afraid of negative space or of the occasional pause. Elegant innovations solve problems without creating new ones. For Kawasaki, elegance is the difference between a pragmatic, good innovation and something great.
### Emotive
Emotive innovations evoke the intended emotion and demand to be admired and shared. In other words, truly great innovations create fandoms, not just consumer bases. You can’t force people to love your product, but you can give them experiences that create a sense of excitement and anticipation of what you might come up with next.
### Developing an Invention
The general process of inventing involves systematic and practical steps that might include linear and nonlinear thinking. You might think that only people with innate artistic skills are creative and that only geniuses become innovators and inventors, but much of creativity is driven by being immersed in a practice. You can build and foster your own creativity. Your idea of an inventor might be someone like Johannes Gutenberg, who developed the printing press. The spread of printing ultimately redrew the map of Europe and resulted in the foundation of new centers of learning. Gutenberg’s supposed spark actually was more of a slow burn. He was creative and innovative—one of history’s most famous inventors—but his printing press, like all other inventions, was a synthesis of existing technologies. Gutenberg’s most important innovation was his use of moveable, interchangeable metal type instead of entire hand-carved wooden blocks of text (). Perfecting his printing process took decades and left him all but broke.John Man. The notion of the inventor’s single stroke of genius is mostly myth. The people that history remembers usually worked very hard to develop their creativity, to become familiar with the processes and tools that were ripe for innovation in their time, and ultimately to make something so unique that society recognizes it as an invention.
The old adage claims that “necessity is the mother of invention,” but an innovator needs experience in a field, creative effort, and knowledge to be a successful inventor. Entrepreneurship means taking your efforts and knowledge, and finding a market where your invention can first survive, then thrive.
One model for developing an invention is the first five steps of a plan adapted from Sourcify.com, which specializes in connecting product developers with manufacturers.Natalie Peters. “9 Key Steps to Bring Your Invention to Life.” This process is succinct and includes suggestions for building a team along the way ().
### Step 1: Educate Yourself
Before your inventive product can do battle with other inventions, you will need to educate yourself. To prepare yourself to weather the competition, you need to learn as much as you can about the current investing climate, current product development opportunities, and current leadership approaches. Even if you are not deeply interested in leadership dogma, it helps to know what the current trends are in leadership and product development. To succeed as an inventor in a vast marketplace, you need to understand the rules, written and unwritten, of the industry and competitive landscape. The product development process can be quite involved. The process can vary by industry and by availability of resources.
Part of educating yourself is also gaining an understanding of your own strengths and weaknesses, and how those relate to your leadership style. A leadership style inventory can help you better understand your approach to leading others. This is just one example of many that exist to give you a starting point. As the inventor of your product or service, you will manage/lead others as you attempt to make your idea a reality. Also, the environment can constantly change. For this reason, it is important to understand the basic tenets of leadership and management in a dynamic work atmosphere. Many sources will give you insights into the challenges of management.
Another key step in educating yourself is to find out which kinds of contributors you are going to need to build a successful entrepreneurial team. Building a team is essential to making your invention a reality. Even those who invent alone—and they are quite rare—must have a development team, a manufacturing and/or service team, a marketing team, and other members with specific skill sets such as coders, graphic designers, test marketers, and more.
### Step 2: Stay Organized
Most tip sheets for inventors suggest that you find a method for organizing your creativity so that you don’t spend time trying to remember previous ideas, plans, and decisions. You must organize information related to your business idea, your business plan, and your potential teammates in the process.
Contact management software has been popular for decades. Nowadays, you can investigate many other productivity and team-chat tools. Research ways to organize information about the people you plan to work with and hope to work for. The team-chat program Slack (www.slack.com) enables you to create specific topics for team members to discuss and collaborate on. Slack offers several features to help keep employees connected. Insightly (www.insightly.com) is a customer relationship management tool to stay better connected to your customers. Ryver and Glip incorporate task management. Flock and Microsoft Teams offer a host of features, with Microsoft leveraging its corporate position to bring about deployment in more than 200,000 organizations. Select the tool set that works best for you and consider paying for the software that offers the precise team communication functionality and utility you need.Aleksey Chepalov. “9 Slack Competitors in 2019: What Team Chat Tools Are Leading the Way?”
### Step 3: Conduct Market Research
Market research is an obvious must, but many entrepreneurs fail to go as deeply as they should in researching their competition. You must be aware of current and future competitors so that you are prepared to compete in the marketplace when you are actually ready. Being the best on paper now won’t be much use when you enter the marketplace with an MVP in six to eight months in competition with competitors’ new products and updates.
What should you consider with regard to team development when you’re looking at the competition? Within the legal limits of any noncompete clauses, you should be shopping the competition for potential team members. The best leaders are always seeking talented people. If you sense that someone would be a good fit for your team, that they have not only the skill set but also the temperament that would help put your invention in the market, do not be afraid to reach out to them. How you reach out is something you must research for each industry. In some industries, you will have to be highly secretive. Part of market research is understanding the market well enough to understand the soft skills you need to find contributors who are already working in the industry or in an adjacent one
### Step 4: Conduct Patent Research
If you expect to apply for a patent, take the time to read up on policies and procedures. Officials in the US Patent Office, or in similar bureaus in other countries, decide whether an invention is worthy of receiving a patent. A patentable invention must meet the criteria of being novel, useful, and nonobvious; it must be proven to be workable.“Patent Subject Matter Eligibility.” United States Patent and Trademark Office (USPTO). n.d. https://www.uspto.gov/web/offices/pac/mpep/s2106.html Those three standards—novel, useful, and nonobvious—are subjective. So is the concept of invention, but conceptualizing invention this way sets a high bar for entrepreneurs who truly wish to make a social impact. Developing an invention that is patentable also creates a barrier against competition, which can make the difference between business success and failure. There are two types of patents. last twenty years, and usually last fourteen years. If a patent is granted, the inventor has a window of time in which to secure further funding, work to produce the product, and try to gain mass-market adoption.“How Long Does Patent, Trademark, or Copyright Protection Last?” Intellectual Property Rights Information and Assistance. July 7, 2016. https://www.stopfakes.gov/article?id=How-Long-Does-Patent-Trademark-or-Copyright-Protection-Last After all is said and done, you can apply your creativity to social innovations, product innovations, or service innovations. If you can combine enough innovations, add your unique creativity, and create something that survives the diffusion chasm, you can truly invent something new.
The patent basics page of the US Patent and Trademark Office’s website is roughly forty pages long.“General Information Concerning Patents.” The utility patent process includes a thirteen-step flow chart“Process for Obtaining a Utility Patent.” that outlines the process. The patent office encourages you to use a registered patent attorney or agent. If you are skilled and diligent enough to secure a patent, you should expect to pay fees and file paperwork to maintain it for years after it is granted. We’ve already discussed the keys to securing a patent, but to reiterate, here is how an invention is defined in US patent law: “In the language of the statute, any person who ‘invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent,’ subject to the conditions and requirements of the law.”“What Can Be Patented” in “General Information Concerning Patents.”
When building a team to make your invention a reality, finding a patent lawyer or agent is key. Even those who have advocated for hiring patent attorneys in the past now suggest that hiring a patent agent might work. What’s the difference? Patent attorneys often bill by the hour, but they offer a full suite of legal advice. As the author Stephen Key indicates, patent agents are narrowly focused on helping you get and defend your patent.Stephen Key. “Should You Hire a Patent Agent Instead of a Patent Attorney?” The other limitation that Key mentions is that patent agents may write a patent application in such a way that you are less prepared to protect your invention against future legal challenges. Key quotes Gene Quinn, a leading attorney on intellectual property and patent law: “By the time you realize that you are sitting on a million-dollar invention it will be too late to do anything about it.…Patent agents as a general rule tend to be very good at describing what it is that you as an inventor show up with.” What they tend to be much less good at is describing what your invention could be. They also frequently will use terms that are more concrete and limiting than would a patent attorney. Attorneys are taught the art of being hyper-specific, which is necessary at times, but also the art of being anything but specific.”“Gene Quinn.” Patents cannot be vague, but they can be written with just the right amount of specificity to protect against similar products that may arise and threaten your market share.
### Step 5: Develop a Prototype
Developing a prototype can be the most fun or the most tedious part of inventing. Much of your attitude toward developing a prototype depends on available resources, technology, and expertise. In this text, we reference the concept of the lean startup from time to time. In the lean startup model, the prototype is most often an MVP. As we saw earlier, an MVP is a version of your invention that may not be polished or complete in terms of how you envisioned it, but it functions well enough and looks good enough that you can begin to market it with reasonable hopes that it will be adopted. For other inventions, you may need to build a more advanced prototype. This requires serious investment capital, but the payoff is that users will interact with a version of the product that looks and functions more like what you had in mind during your ideation phase. As an inventor, you are responsible for establishing quality control minimums for your product. You may have to compromise on your vision, but you should not compromise on basic functionality or basic levels of quality in materials.
You have many options at the prototype development stage. You can build the prototype yourself or with a small team. You can partner with design/invention firms that specialize in helping inventors create, but you must be very careful and involve your legal representation when working with such firms to be sure that you maintain the patents and other rights to your invention. Many inventors have partnered with such firms only to see their intellectual property stolen. Another option is to get funding for your invention on Kickstarter or some other crowdfunding site, but again you must beware that establishing such a campaign puts your idea in the public sphere. “Copycatters are monitoring crowdfunding platforms like Kickstarter and watching for trendy products to go viral,” according to Amedeo Ferraro, an intellectual property attorney.Jennifer Schlesinger, Andrea Day, Bianca Fortis, Eunice Yoon, and Lilian Wu. “How One Entrepreneur’s American Dream Turned into a Copycat Nightmare.” Competing companies, particularly in foreign markets, actively scout Kickstarter and similar platforms for new ideas that they can manufacture and bring to market before your crowdfunding project has run its course. Perhaps most chilling is this comment regarding legal protections that do not function, even when inventors take precautions to protect their intellectual property when working with some Chinese firms: “But even with these protections, there’s no guarantee that you can stop someone from copycatting your product. [One U.S. intellectual property lawyer] said that the problem lies not in China’s courts but enforcing rulings. Winning a case against one factory is relatively easy. But suing every factory and winning is expensive and time consuming.”Josh Horwitz. “Your Brilliant Kickstarter Idea Could Be on Sale in China before You’ve Even Finished Funding It.” For this reason, some inventors prefer to start small and local, if possible. It can be better for them to start with a trusted team striving for a small profit and a good market position than to see the market flooded with copycat products.
### Summary
Whether an entrepreneur has innate creativity or not, practice can help improve creative efforts. One practice model includes preparation, incubation, insight, evaluation, and elaboration. Entrepreneurs can use their creativity to solve problems and innovate. However, innovators strive to anticipate and prevent problems, rather than react to them. The innovation pyramid begins with problem solving at the base, moving up to prevention, then continuous improvement, and finally directing the future of an industry. Innovative products are DICEE: They are deep, indulgent, complete, elegant, and emotive.
Building and fostering your own creativity often involves linear and nonlinear thinking. Models are available that help develop inventions, such as Sourcify.com’s five steps: Educate yourself, stay organized, conduct market research, conduct patent research, and develop a prototype. This model has guidelines for working with teams as well. These models allow you to apply your knowledge of creativity, innovation, and invention in an entrepreneurial context. Seek inspiration from inventors who have come before and learn from the modes of thought and models of practice that guide inventors today.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Additional information about product development: https://www.smartsheet.com/all-about-new-product-development-process
A summary of various leadership styles and traits that are essential for a changing business environment: https://www.christinespeaks.com/management/demonstrate-dynamic-leadership |
# Identifying Entrepreneurial Opportunity
## Introduction
Like many college students, Chris Johnson ate a lot of ramen noodles, and like many college students, cooking meant microwaving something in his dorm room. At the time, ramen noodle companies did not print microwave instructions on the package, and there was a lack of microwave cookware in which to prepare the popular college food fare.
Many entrepreneurial ideas aim to solve small everyday problems. In his quest to find a better way to prepare ramen noodles, Chris Johnson invented the Rapid Ramen Cooker.
Johnson is now the CEO of Rapid Brands. He founded his company in 2013 with the Rapid Ramen Cooker. Johnson pitched his idea on the TV show . Although he negotiated with investor Mark Cuban for an ownership stake in the company, Johnson wound up not taking the deal. Instead, he made a deal with Walmart to position the Ramen cooker on the retailer’s shelves. Rapid Brands sold more than 4 million Rapid Ramen Cookers in its first two years at Walmart and other retailers. Johnson has since introduced several new products, including cookers for eggs, hot dogs, and brownies.Mark Anderson. “Local ‘Shark Tank’ Winner Cooks up a Major Expansion.”
Finding an entrepreneurial opportunity and persisting until your business becomes successful is not easy and involves risk. But whether you start a new venture because you came up with an idea to solve an everyday problem, or whether you are deliberately searching for an opportunity because you want to start your own business, doing the research beforehand will help mitigate risk and determine the venture’s likelihood of success. |
# Identifying Entrepreneurial Opportunity
## Entrepreneurial Opportunity
### Learning Objectives
By the end of this section, you will be able to:
1. Define entrepreneurial opportunity
2. Discuss Joseph Schumpeter’s theories of opportunity
3. Identify key drivers of opportunity
Aspiring entrepreneurs can come up with ideas all day long, but not every idea is necessarily a good idea. For an idea to be worth pursuing, we must first determine whether the idea translates into an entrepreneurial opportunity. Entrepreneurial opportunity is the point at which identifiable consumer demand meets the feasibility of satisfying the requested product or service. In the field of entrepreneurship, specific criteria need to be met to move from an idea into an opportunity. It begins with developing the right mindset—a mindset where the aspiring entrepreneur sharpens their senses to consumer needs and wants, and conducts research to determine whether the idea can become a successful new venture.
In some cases, opportunities are found through a deliberate search, especially when developing new technologies. In other instances, opportunities emerge serendipitously, through chance. But in most cases, an entrepreneurial opportunity comes about from recognizing a problem and making a deliberate attempt to solve that problem. The problem may be difficult and complex, such as landing a person on Mars, or it may be a much less complicated problem such as making a less expensive and more comfortable mattress, as companies like Casper and Purple did.
### Theories of Opportunity
In the twentieth century, economist Joseph Schumpeter, as shown in , stated that entrepreneurs create value “by exploiting a new invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry” or similar means.Joseph Schumpeter.
According to Schumpeter, entrepreneurial innovation is the disruptive force that creates and sustains economic growth, though in the process, it can also destroy established companies, reshape industries, and disrupt employment. He termed this force creative destruction. Schumpeter described business processes, including the concept of downsizing, as designed to increase company efficiency. The dynamics of businesses advances the economy and improves our lifestyle, but the changes (sometimes through technology) can make other industries or products obsolete. For instance, Schumpeter provided the example of the railroad changing the way companies could ship agricultural products quickly across the country by rail and using ice “cold cars,” while at the same time, destroying the old way of life for many ranchers who wrangled cattle from one location to their intended commercial destination.
Today, we might think of the displacement of taxi drivers by ride-sharing services such as Uber and Lyft as a modern-day example of this concept. To own and operate a New York City cab, for instance, one must buy what is called a taxi medallion, which is basically the right to own and operate a cab. Drivers take out loans to buy these medallions, which cost hundreds of thousands of dollars. But now, ride-sharing services have eaten in to the taxi industry, all but destroying the value of the medallions, and the ability of taxi drivers to make the same money they were before the popular services existed. This change has left many taxi drivers in financial ruin.Winnie Hu. “Taxi Medallions, Once a Safe Investment, Now Drag Owners Into Debt.” Schumpeter argued that this cyclic destruction and creation was natural in a capitalist system, and that the entrepreneur was a prime mover of economic growth. To him, the goal was to progress, and progression starts with finding new ideas. He identified these methods for finding new business opportunities:
1. Develop a new market for an existing product.
2. Find a new supply of resources that would enable the entrepreneur to produce the product for less money.
3. Use existing technology to produce an old product in a new way.
4. Use an existing technology to produce a new product.
5. Finally, use new technology to produce a new product.
We can understand theories of opportunity as related to supply or demand, or as approaches to innovations in the use of technology. The first situation is a demand opportunity, whereas the remaining situations are supply situations. The final three incorporate technological innovations. Supply and demand are economic terms relating to the production of goods.
Supply is the amount of a product or service produced. Demand is the consumer or user desire for the outputs, the products, or services produced. We can use the ideas from Schumpeter to identify new opportunities. Our focus is on identifying where the current or future supply and the current or future demand are not being met or are not aligned, or where technological innovation can solve a problem.
More recent research has expanded on the concept of technological entrepreneurial opportunities, identifying several areas: creating new technology, utilizing technology that has not yet been exploited, identifying and adapting technology to satisfy the needs of a new market, or applying technology to create a new venture.Jamalia Behrooz, Reza MohammadKazemi, Jahangir Yadollahi Farsi, and Ali Mobini Dehkordi. “Theories of Opportunity Creation and Effective Entrepreneurial Actions in Opportunity Creation Context.”
Regardless of which of Schumpeter’s paths entrepreneurs pursue, before investing time and money, the business landscape requires a thorough investigation to see whether there is an entrepreneurial opportunity. Remember, entrepreneurial opportunity is the point at which identifiable consumer demand meets the feasibility of satisfying the requested product or service. “Feasibility” in this definition includes identifying a sizable target market interested in the product or service that has sufficient profitability for the venture’s financial success.
### Identifying Opportunity
A good place to begin your entrepreneurial quest is to read as much as you can, especially with new technology developments, even outside the field you work in. Remember that as technologies start to emerge, we often do not yet understand their commercial potential. For example, microwave technology was first applied in radars to track military submarines. But, thanks to a curious man named Percy Spencer and the accidental melting of a peanut bar in his pocket one day while tinkering with the technology, the microwave was born. It would take a few decades for it to be produced at a price the mass market could afford.Matt Blitz. “The Amazing True Story of How the Microwave Was Invented by Accident.”
Think of drones, too. When they were invented, the multiple uses for this technology were not yet identified. Now, drone technology is being used by real estate firms, package delivery services, agriculture, underwater search and scientific research, security, surveillance, and more. Being tuned in to new experiences and information can lead to identifying opportunities. Entrepreneur Fred Smith found a system to solve the problem of overnight package delivery in founding Federal Express.“Success Story – Fred Smith | Federal Express.” As a college student, he wrote a paper for an economics class where he discussed his business idea. He earned only a C on his paper, by the way. He received his bachelor’s degree in 1966 and went on to found Federal Express a few years later, which, in 2019, generated almost $70 billion in revenue.“FedEx Corp. Reports Fourth Quarter and Full-Year Earnings.” Prior to starting Federal Express, Smith was in the US Marine Corps serving in Vietnam where he observed the military’s logistics systems.Vance H. Trimble. This is where he honed his interest in shipping products while in the military. Many entrepreneurs start their business after working for someone else and seeing a better way to operate that business, and then start their own competing business.
Note that entrepreneurs need to be careful about starting competing businesses. See Telling Your Entrepreneurial Story and Pitching the Idea and Business Structure Options: Legal, Tax, and Risk Issues for information on noncompete clauses and agreements. Indeed, some entrepreneurs, like Smith, conduct research as an idea percolates, paying attention to new experiences and information to further advance their idea into an entrepreneurial opportunity. However, they must ensure that the existing product, service, or business process is not covered by any active and protected intellectual property (patent, trademark, copyright, or trade secret), as discussed in Creativity, Innovation, and Invention and Fundamentals of Resource Planning.
Identifying consumer needs may be as simple as listening to customer comments such as “I wish my virtual orders could be delivered more quickly.” or “I can never seem to find a comfortable pillow that helps me sleep better.” You can also observe customer behavior to gather new ideas. If you are already in business, customer feedback can be a simple form of market research.
When purchasing an existing business or franchise, the process is a bit different. The first step will usually be searching for a business that suits your experience, personal preferences, and interests. You will still want to conduct research to understand the industry, the local market, and the business itself. Then, you will begin to examine all available company financial data. If purchasing a franchise, you may want to contact other franchise owners and discuss their experience in working with the franchisor.
When researching supply and demand, you should also consider political factors. For example, changes in tax laws can inform decisions. One example is a tax credit that encourages alternative energy use, such as electric or hybrid vehicles. For 2019, the IRS tax credit is between $2,500 and $7,500 per new electric vehicle, with a concurrent phase-out of the plug-in electric vehicle tax credit. Changes in the tax code can therefore influence buyer behavior or the demand for vehicles. Another example is the Residential Energy Efficient Property Credit of up to $4,000 for solar electronic appliances such as solar water heaters and solar panels and for small wind turbines, through the end of 2021.“Tax Credits for Energy Efficient Home Improvements.” Tax incentives do not usually last more than a few years (the tax subsidy for corn farmers to produce ethanol, an ingredient in automotive fuels, is a notable exception due to heavy lobbying by the farming industry), so it is important that entrepreneurs do not rely on these incentives as a permanent “pillar” of their value proposition and business model.
Let’s say you have an interest in machinery and art. Taking these two areas of interest, and knowing about this tax credit, you recognize that you have the talents to create artistic backyard wind turbines to create energy for a homeowner. Of course, you will still need to determine whether this is merely an idea, or if the conditions are in place to move forward in translating this idea into an entrepreneurial opportunity.
### Drivers of Opportunity
Some recent drivers for change in the entrepreneurial space include new funding options, technological advancements, globalization, and industry-specific economics.
1. Increased access to capital through social media sources like crowdsourcing (see the chapter on Problem Solving and Need Recognition Techniques for a more detailed discussion of crowdsourcing) is having a significant impact on entrepreneurship in that it enables underserved people and communities—such as women, veterans, African Americans, and Native Americans, who otherwise might not be able to start and own a business—to become entrepreneurs.
2. Technological advancements continue to provide new opportunities, ranging from drones to artificial intelligence, advancements in medical care, and access to learning about new technology. For example, drone technology is being used to map and photograph real estate, deliver products to customers, and provide aerial security and many other services. Cell phones have spawned many new business opportunities for a wide range of cell phone accessories and related products, ranging from cell phone cases to apps that help make our cell phones faster for business and personal use.
3. Increased globalization drives entrepreneurship by allowing importing and exporting to flourish. Globalization also helps spread ideas for new products and services to a world market instead of a local or regional market. Combined with the Internet and computer technology, even small businesses can compete and sell their products around the globe.
4. Economic factors could include a strong economy that fuels other businesses. For example, growth in the housing market fuels growth for many housing-related products and services, ranging from interior decorating to landscaping as well as furniture, appliances, and moving services.
David Pridham, CEO of the patent advisory board and transaction firm Dominion Harbor Group in Dallas, cites six reasons that current conditions are excellent for startups:
1. Venture capital investment, which you will learn more about in Entrepreneurial Finance and Accounting, has surged to the highest level ever, totaling $148 billion in 2018.
2. The concern over patent protection is improving with better trade protection of intellectual property rights.
3. Artificial intelligence could be a tremendous opportunity based on a McKinsey report projection, estimating artificial intelligence to become a $13 trillion industry by 2025.
4. The explosive growth in freelance workers has been a boon to startups and small businesses.
5. Another hot sector is technology-driven advancements such as self-driving vehicles.
6. Intellectual property now accounts for 38.2 percent of our total Gross Domestic Product (GDP) in the United States. That totals $6 trillion per year, more than any other nation’s GDP except for China.David Pridham. “Entrepreneurs: Here’s Good News for 2018.”
In addition, Silicon Valley Bank (SVB) Financial Group surveyed new startup businesses in 2017 and found that 95 percent indicated they believe that business conditions will be the same or better. In addition, 83 percent plan to increase their workforce, and 24 percent found fundraising not to be a challenge.Silicon Valley Bank. These numbers represent the highest levels of optimism among entrepreneurs over the most recent five-year period.
Some other economic indicators favor entrepreneurship. According to the 2019 Goldman Sachs Economic Outlook, consumer confidence is up, business confidence is up, interest rates remain reasonable and steady, more people are working, and wages are higher.Goldman Sachs. When the economy is strong, there are generally more opportunities available and more potential customers with money to purchase your products and services; but of course, there are no guarantees.
### Summary
Entrepreneurial opportunity exists when consumer demand meets the feasibility of bringing the product or service to market. Joseph Schumpeter, an early scholar of entrepreneurship, identified creative destruction—when innovation is disruptive and creates potential entrepreneurial opportunities. Schumpeter’s focus on economics led him to categorize potential opportunities based on supply, demand, or changes in how technology is used.
Burgeoning entrepreneurs should be engaged with industries of interest to remain informed and aware of opportunities to research. Additionally, they should be attentive to drivers of opportunity, such as emerging funding options, technological advancements, and economic factors.
### Review Questions
### Discussion Questions
### Case Questions
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# Identifying Entrepreneurial Opportunity
## Researching Potential Business Opportunities
### Learning Objectives
By the end of this section, you will be able to:
1. Describe opportunity screening
2. Identify common sources of research data
3. Explain how to research and verify business opportunities
4. Identify industry and consumer sources of opportunities
In order to discover how reasonable your business idea is, you need to research many aspects of the concept. Opportunity screening is the process by which entrepreneurs evaluate innovative product ideas, strategies, and marketing trends. Focusing on the viability of financial resources, the skills of the entrepreneurial team, and the competition, this screening helps determine the potential for success in pursuing the idea and can help refine planning.
### Common Sources of Research Data
As you embark on researching whether your idea is viable, a good place to start is with the sources recommended by the US Small Business Administration. These include US Census data (https://www.census.gov/academy), which provides insight into the population in your market area, such as the metropolitan statistical area data, as well as statistics on the economy and trade. For most entrepreneurs, research will also include asking potential customers, specifically your target customers, questions about products they like and don’t like, how a product or service could be improved, how the customer buying experience could be improved, and even where customers might go to purchase products and services instead of your business.
Small business marketers can use several no-cost or low-cost methods, including surveys, questionnaires, focus groups, and in-depth interviews. Of course, you do not need to be an expert in these areas. Business assistance is available to you from the Small Business Administration, the Service Corps of Retired Executives (SCORE), and your local Small Business Development Center. You may also have a local college or university business department that provides assistance to local area businesses.
You will likely begin with secondary research—that is, data that are already available through some published source. There may be articles, research reports, or reliable Internet sources where you can research information about your industry, products, and customers. If you have the funds, you can also purchase research reports from firms that specialize in gathering research on certain topics or products. Secondary research has the advantage of being quickly available. However, secondary research often is not specific enough to provide all the details you need to know about your idea. For example, secondary research (this is research that has been developed from primary sources that is almost as useful as primary, direct research) might report how often consumers purchase shampoo, where they purchase shampoo, and what brands of shampoo they purchase. But if you want to understand the details of how people shampoo—for example, whether they shampoo then repeat, use a separate conditioner, or use a combination shampoo/conditioner product—then you would want to conduct primary research. Primary research is needed when secondary research does not address the questions you want to explore while investigating your business idea.
Primary research gathers data that do not yet exist. The information is specific to the business, product, or consumer. It takes time and money to obtain primary data. Some of the methods used to gather primary research data include developing a survey questionnaire, using secret shoppers, or using focus groups. Survey questionnaires can be simple, such as a customer comment card included on a receipt, or extensive, including dozens of detailed questions. Secret shoppers can be used by hiring a shopping service or using friends, family members, and even your customers. One local small business owner gave a friend gift certificates that could be used at his ice cream business in exchange for the friend reporting back on product quality, service, and other key issues.
### Researching and Verifying the Entrepreneurial Opportunity
Whether you start your own business, buy an existing business, or purchase a franchise, researching the industry, your target market, and examining the economic and funding options are all part of performing due diligence. Due diligence is the process of taking reasonable steps to verify that your decisions are based on well-researched and accurate information. It means thoroughly researching potential pursuits, asking detailed questions, and verifying information.
Different industries have different meanings for due diligence. For example, in the legal industry, due diligence involves understanding the terms of a transaction and contract. In business finance, due diligence refers to raising capital or the work involved in merger and acquisition transactions. In the entrepreneurship field, research is necessary to verify whether the idea is really an opportunity, considering the entire process of starting the venture and funding the venture.
One of the more common questions entrepreneurs must ask is whether now is a good time to start a business. This question of timing is addressed in the investigation to determine whether the idea is merely interesting or fits the criteria of being an entrepreneurial opportunity.
An idea can move to a recognized opportunity when the following criteria are met. shows these three factors:
1. Significant market demand
2. Significant market structure and size
3. Significant margins and resources to support the venture’s success
Significant market demand means that the idea has value by providing a solution to a problem that the target market is willing to purchase. This value can result from a new product or service that fills an unmet need, a lower price, improved benefits, or greater financial or emotional value. This value can also result from capitalizing on “nonconsumption.” For example, in the 1980s, the Disney Corporation realized that it was losing an opportunity to entice visitors to come to their theme parks from 9 p.m. to 9 a.m. when they were closed. So the company started having “school nights” when schools and students could use the parks at a discount.
Significant market structure and size involve growth potential and drivers of demand for the product or service. Barriers to entry are manageable, meaning that entering the industry or creating a new industry is not exceptionally difficult. If the industry already exists, there must be room within the industry for your venture to gain market share by providing a value that creates a competitive advantage.
Significant margins and resources involve the potential for achieving profit margins at a high-enough level that the work of starting the venture (including the entrepreneur’s time and energy) is worth the risks involved. If the operating costs are too high and the profit margin is too low, it is important to analyze whether the idea is truly feasible. Significant margins also include the capital requirements—how much money is needed to start the venture—as well as the technical requirements, the complexity of the distribution system, and similar resources.
Determining whether an idea has significant market demand, significant market structure and size, and significant margins and resources to support the venture’s success represents the most basic concerns when screening a business idea as an entrepreneurial opportunity.
Keep in mind that these three criteria are based partially on creating a for-profit venture. If your entrepreneurial venture is focused on solving a societal problem, you want to know that the identified problem is realistic and that there is a need for solving it. In a for-profit venture, significant market structure and margins relate to the expectation that the venture will have significant sales with significant profit margins to sustain and grow. There are also examples of profitable entrepreneurial ventures, like YouTube, that did not have any sales, but there was still an expectation that harvesting or selling YouTube would result in a significant profit for the entrepreneurial team. You can read more about Google’s purchase of YouTube at https://www.theringer.com/2016/10/10/16042354/google-youtube-acquisition-10-years-tech-deals-69fdbe1c8a06.
After confirming that a business idea is an entrepreneurial opportunity, the entrepreneur should ask more detailed questions in the next phase of screening the business. Here are some examples:
1. Would other people value your product or service?
2. Does your product or service solve a significant problem?
3. Is the market for the product definable/specific?
4. Does the market have unique needs or expectations that align with your entrepreneurial opportunity?
5. Is the timing right to start the venture?
6. Are there infrastructure or supporting resources that need to be commercialized or created prior to your launch of the venture?
7. What resources are needed to start the venture?
8. What is the competitive advantage your venture offers within the industry and is this competitive advantage sustainable?
9. What is the timeline between starting the venture and the first sale?
10. How long before the venture becomes profitable and do you have the resources to support this timeline?
A good starting point in your opportunity screening research is to begin learning about the demographics of the market you are targeting (your target market). Demographics are statistical factors of a population, such as race, age, and gender.
The government collects census data demographics,United States Census Bureau. https://www.census.gov/ which can provide a snapshot of the population in your city or town. Census data include the total population, a breakdown of the population by age, gender, race, and income, and some other useful data.
For example, if you were considering opening a new ice cream store with unique flavors preferred by children, census data could tell you the number of children living in the area, the ratio of boys to girls, their ages, and the general income levels of the families in town. The census data would help you determine the size of the market and potential target market, local market growth, income levels, and key demographics that might fit the potential customer profile. Of course, there is other information you might want to collect, such as the percentage of the population that had lactose intolerance. If you found that a significant portion of your market was lactose intolerant, this could be your identified opportunity: You could create a lactose-free ice cream store or expand with a variety of lactose-free flavors. The census data also help identify where to locate your entrepreneurial venture. For example, if your lactose-free ice cream was expensive because of the necessary ingredients, you would not want to open your store in a low-income area.
There is a vast amount of data and information available through the Internet that can support your success in making informed decisions as you explore the feasibility of opening a successful venture. Or you can purchase more detailed consumer data through providers such as Claritas Research, which gathers information on demographics, consumer lifestyles, attitudes, and behaviors (https://claritas360.claritas.com/mybestsegments/?ID=70). For many small business startups that cannot afford sophisticated research data, the entrepreneur will probably have to rely on census data along with information that the local economic development council is able to provide.
After analyzing demographic data, the entrepreneur can then develop and conduct some basic research, which could range from observing customers to shopping at potential competitors. Entrepreneurs can also uncover business opportunities by asking questions of, and listening to, their customers, if they are working within the industry or looking for new entrepreneurial opportunities with a similar target market. Sometimes an easy and inexpensive customer survey can uncover problems and opportunities. Entrepreneurs can also gather information using their social media accounts and customer sales records.
For example, imagine a men’s clothing store in Denver that maintained a detailed customer database that they used primarily to order the colors and sizes their customers were most likely to purchase. A marketing consultant begins researching customer data and finds a number of former customers who had not shopped at the store for a year or more. The consultant uncovers some lapses in service that had cost the store thousands of dollars in sales. Store management, working with the information from the consultant, develops a direct marketing campaign that helps bring back former customers and adds new customers, resulting in a substantial sales increase.
The lesson here is that research is important at all stages of the business—before you start your business and consistently thereafter. Markets change as new people move in or out of an area, styles and preferences change over time, and new technology can radically impact what customers want to buy. We all know of businesses like Blockbuster or Xerox that ignored evolving technology, to the detriment of their success. Constantly tracking changes in the external environment and competitive arena is an ongoing activity that supports the continued success of the venture.
A popular tool for market analysis is a product from Claritas Research called Potential Rating Index for Zip Markets (PRIZM), which characterizes census data according to certain lifestyle traits, even down to the neighborhood level. As an example, let’s see how PRIZM can help us better understand the consumer market of a small town in Massachusetts. Oxford, Massachusetts (zip code 01540), has a population of 11,653, with slightly more half being female; a median income of $70,444; and a median age of 42.3 years. PRIZM data give us a better understanding of consumers than census data do in Oxford by examining the five dominant lifestyle segments from within PRIZM’s sixty-six segments. The PRIZM segments are based on socioeconomic rank determined by characteristics such as income, education, occupation, and home value. A thorough analysis of available data could suggest the most likely products and sources consumers in this zip code market would likely purchase.
Entrepreneurs might also obtain data from economic development agencies, the local chamber of commerce, the state small business development center, or industry associations. Of course, lots of data can be found with a good search on your computer. Your university reference librarian can tell you what resources they have available and which resources would best fit your research question(s) and area of focus for your idea.
What should you do if your idea does not fit these criteria—significant market demand, market structure and size, and margins and resources—and your passion to develop the idea into an opportunity and new venture is still strong? This is also part of the entrepreneurial process. You, as the lead entrepreneur, are charged with the task of identifying the obstacles to turning your idea into an opportunity and what actions are necessary to overcome these. This could mean adjusting the idea, adding new features, or even removing some features. Adding new features should focus on increasing the value or benefit offered by the product or service, or creating a tighter alignment with the needs of the target market. Removing features could decrease the production costs or even the complexity in using the product.
As part of your research to verify whether your idea is truly an entrepreneurial opportunity, researching your state’s laws and regulations is essential. Conduct an Internet search for your state’s business regulations applicable to your business. You will need to comply with these laws, as well as purchase any licenses and permits necessary for your business. You should also check with your local or county government for additional local regulations, including zoning and signage laws. Remember that laws vary by state, so what is legal in one state may not be legal in another, or there might be stricter regulations. For emerging industries, the regulations and laws can fluctuate as industries evolve. This is especially true for emerging industries such as the sale and distribution of medical marijuana.
Many estimates indicate that half of all new businesses will no longer exist within the first five years, but good research can help you avoid your business becoming a statistic.US Small Business Administration Office of Advocacy. On the surface, this fact can be daunting. However, there are many reasons why a business no longer exists that can reflect a positive outcome, such as the sale of a business or a merger with another business. Another example is when an entrepreneur intentionally starts a venture knowing that there is a short-term timeline for success, with the expectation that new technology will replace the gap that the venture originally filled. Most entrepreneurs are not big risk-takers but understand that there are no guarantees in starting a new business venture. Instead, entrepreneurs tend to take calculated business risks based on the best research they can gather. At some point, however, the entrepreneur recognizes that despite all the good research they have gathered, they still need to take a leap of faith when starting their new venture.
Let us analyze, as an example, opportunity recognition displayed by a company called Sweet Beginnings. Eddie Griffin, Kevin Greenwood, and Tiffany Chen were all residents of Chicago who were seeking jobs and a fresh start on life after serving time in prison. They wanted a chance to rebuild their lives and the ability to support themselves financially. Unfortunately, the odds were against them in their North Lawndale community: There was a 40 percent unemployment rate, 57 percent of residents had criminal histories, the average annual income was only $25,000, and the area was known for drugs, sex workers, and gangs. Statistically, they were destined to return to the criminal justice system.
But fate intervened in the form of Brenda Palms Barber, who knew all of these statistics. Palms Barber was the Executive Director of the North Lawndale Employment Network (LEN). When employers refused to hire Griffin, Greenwood, and Chen, whom she had coached, she researched what it would take to open various businesses, including a temp agency, a landscaping company, and a delivery service, with the intent to offer employment to LEN clients. A recommendation from a board member’s connection led her to consider, of all things, raising bees. It was not until she learned that the ins and outs of the apiary profession are passed on by word of mouth that she felt it was ideal for her clients who often faced learning challenges due to limited academic experience.
In 2005, Palms Barber founded Sweet Beginnings, a social enterprise that employs former inmates and teaches them job skills by running an apiary business directly in the heart of North Lawndale. The Sweet Beginnings brand, Bee Love (shown in ), sells honey and honey-infused skincare products in airports, hotels, and supermarkets, including Whole Foods. Palms Barber recognized that the skills her potential employees learned in the streets were transferrable to running and managing the business.“Sweet Beginnings.” ,BeeLove. www.beelovebuzz.com ,Leigh Buchanan. “Finding Jobs for Ex-Offenders.”
Palms Barber also realized that a product gap existed between customer needs and products offered. She identified the niche market of customers who wanted all-natural skin care products and liked the idea of purchasing them from a social enterprise. Bee Love positioned itself for success as an appealing, high-end natural product to environmentally conscious consumers willing to pay a premium for it.
Palms Barber recognized an opportunity when she identified the societal problem of employment for people who had experienced incarceration. In seeking solutions to this problem, she encountered roadblocks from employers’ resistance to hiring ex-prison inmates. She then researched other possible solutions including business startups. The idea of raising bees at first seemed an unusual solution to the problem of employment for her unique clients. In her due diligence, she identified a gap between customer preferences for all-natural skin care products and currently available offerings. Combining these ideas resulted in the opening of Bee Love. The fits between the clientele of ex-inmates, apiary, and skin care products supported the opening of this unique venture. Exploring the gaps was part of the process of finding the right solution and realizing that the idea of starting a business to support ex-inmates was an actual opportunity worth developing into a new venture.
### Industry Sources of Opportunity
Your research process should include learning everything you can about the industry you plan to enter. This will help you to identify opportunities. An excellent source for industry information is the business reference section of your college library. Industry averages are available in reference books and can also be found at Dun & Bradstreet/Hoovers (http://www.hoovers.com/industry-analysis.html). The industry analysis contains important information including a brief description of the industry and its characteristics, the competitive landscape, along with products, operations, and technology.
Industry sources reveal knowledge about a specific industry from the perspective of identifying unmet needs or areas for improvement within that industry. For example, Airbnb reshaped the hotel industry by connecting travelers with property owners, so that the travelers could rent the property when the owner was not using it. As Airbnb has grown, the company has made improvements to their offerings in meeting the needs of the traveler’s demand based on property location and in categorizing the supply (the homeowner’s property) for increased efficiency, meeting the needs of both the property owner and the traveler. Researching specific industries from supply and demand perspectives, and noticing unused supplies, as we saw in the Airbnb example, also applies to other industries, such as a sandwich shop. What happens to the unsold bread at the end of the day when there is an excess supply? For Stacy Madison and her pita sandwich food cart, unsold bread presented an opportunity to create pita chips by turning an oversupply into sliced and seasoned pita chips.“Stacy’s Pita Chips: Stacy Madison.”
Almost every industry is worth investigating from the perspective of identifying unused resources or extra resources that could be restructured for what are known as a shared economy or a gig economy. A shared economy considers that there are times when an asset in not in use. This down time when the asset is not in use provides an opening for someone else to use that asset, like Airbnb. Other companies, like Uber, Lyft, DoorDash, and Postmates, support the gig economy in aligning a person’s choices for when they want to work with the flow of the work demand. A gig economy is an open or fluid market system with temporary positions made up of independent short-term workers. In these examples, we can see the alignment of supply and demand. The entrepreneurial opportunity happens in providing a platform to assist in connecting the supply and demand.
The tech sector, for example, is continually adapting to change. Items such as 3D printers and mobile devices are making the technology landscape expand. As new products come to market, the need for applications and increased efficiency abound. Several other industries are experiencing growth, including health care and nutrition. According to Global Market Insights (2019), the clinical nutrition market will exceed $87,530.7 million dollars by 2025.Global Market Insights. “The Clinical Nutrition Market to Surpass $87,530.7 Million by 2025: Global Market Insights, Inc.” This same source reported that this industry was valued at over $10,562.7 million in 2018, a significant increase over the previous seven years. Drivers in this industry include sedentary lifestyles and related health issues, such as obesity. The result of these societal changes is an increase in clinical nutrition products and home healthcare services. According to business management author, professor, and corporate consultant, Peter Drucker, entrepreneurs excel at finding and developing potential business opportunities created by social, technological, and cultural changes.
### Consumer Sources of Opportunity
Consumer sources of opportunities relate to changes in our society, such as new habits or behaviors brought about by exposure to new information. For example, most people feel the pressure related to having less free or unrestricted time. tracks the average number of hours worked by country per worker per year.
The International Labour Organization and Bureau of Labor Statistics report that most people in the United States work more than forty hours per week, work significantly more hours per year than workers in many other countries, and are vastly more productive than they were half a century ago.G.E. Miller. “The US Is the Most Overworked Developed Nation in the World.”
Another consideration is tracking where our time is spent during commuting. The average commute time in major cities in the United States is twenty-six minutes, ranging from thirty-eight minutes in New York City to the shortest commute time of twenty minutes in Buffalo, New York.Jeff Desjardins. “Visualizing the Average Commute Time in US States and Cities.” When we add in commute times, work hours, and other required activities like sleeping and eating, we find that people struggle to find time for relaxation and personal activities. This large trend leads to recognizing that our working population in the United States and other countries would value novel approaches to completing tasks and making life simpler. For instance, several businesses have looked at making life easier and saving the consumer time, such as Amazon’s One-Click-Checkout, grocery delivery, and product recommendations. Other examples include mobile businesses like pet grooming that come to your home, or diaper delivery services that pick up used diapers, wash and dry them, and return clean diapers to your home. Understanding consumer needs and problems opens the possibility of creating a business that addresses those needs or problems.
Another consumer trend is the demand for affordable housing. One solution involves offering more affordable “tiny homes” that make home ownership more accessible ().Linda Federico-O’Murchu. “Tiny Houses: A Big Idea to End Homelessness.” As one entrepreneurial opportunity materializes into a new product, spin-off ideas may also arise. The tiny home concept attracted the attention of groups that assist homeless veterans. The Veterans Community Project in Kansas City, has developed a community of forty-nine tiny homes for homeless veterans and the project is so successful that more than 500 cities around the country are building tiny home housing projects for veterans there.Lauren Stewart. “Community Is Building Tiny Homes for Homeless Veterans in 500 Different Cities.”
### Summary
Researching the viability of your entrepreneurial idea will help you determine whether the venture is currently worth pursuing. Use primary and secondary research to determine whether there is adequate demand, market structure and size, and the needed margins and resources to launch and sustain the enterprise. Entrepreneurs researching options should also be aware of industry and consumer sources of opportunities.
### Review Questions
### Discussion Questions
### Suggested Resources
American Fact Finder (market research): http://factfinder2.census.gov/main.html
FedStats (statistics from more than 100 federal agencies): https://www.usa.gov/statistics
FindLaw Small Business Center (business forms): https://smallbusiness.findlaw.com/
National Federation of Independent Business: https://www.nfib.com/business-resources
The Small Business National Center: https://sites.google.com/a/uca.edu/sbanc/home
The U.S. Small Business Administration (SBA): www.sba.gov
Top Franchises of 2019: https://www.entrepreneur.com/franchise500/2019
U.S. patent and Trademark Office: https://www.uspto.gov/
General Business Statistics: https://www.census.gov/eos/www/naics/, http://www.census.gov/library/publications/2011/compendia/statab/131ed.html
Consumer Statistics: https://www.federalreserve.gov/releases/G19/, https://www.cpsc.gov/Research--Statistics
Demographics: https://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml, http://www.bls.gov/bls/demographics.htm
Economic Indicators: https://www.bls.gov/cpi/, bea.gov
Employment Statistics: https://stats.bls.gov/bls/employment.htm
Income Statistics: https://www.bls.gov/cps/earnings.htm, https://www.bls.gov/data/#employment
Money and Interest Rates: https://www.federalreserve.gov/releases/h15/, https://www.federalreserve.gov/data.htm
Production and Sales Statistics: https://www.bea.gov/data/consumer-spending/main,
Trade Statistics: https://www.bea.gov/data/economic-accounts/international#bop, https://usatrade.census.gov/
Statistics of specific Industries: https://www.census.gov/eos/www/naics/, https://www.census.gov/programs-surveys/susb.html
https://www.sba.gov/business-guide/plan-your-business/market-research-competitive-analysis#section-header-5 |
# Identifying Entrepreneurial Opportunity
## Competitive Analysis
### Learning Objectives
By the end of this section, you will be able to:
1. Understand the elements of a competitive analysis
2. Describe tools you can use to refine and focus your planning (three circles, SWOT, PEST)
3. Recognize social media’s role in saving time and money on research
4. Understand how a business model helps determine the feasibility of an opportunity
Conducting a competitive analysis helps you focus your idea and identify your unique selling proposition and competitive advantage.
### Competitive Analysis
A competitive analysis should provide the entrepreneur with information about how competitors market their business and ways to penetrate the market by entry through product or service gaps in areas that your competitors do not serve or do not serve well. More importantly, competitive analysis helps the entrepreneur develop a competitive edge that will help create a sustainable revenue stream. For example, a big company like Walmart primarily competes on price. Small companies typically cannot compete on price, since the internal efficiencies and volume sales available to large corporations like Walmart are not available to small companies, but they may be able to compete successfully against Walmart on some other important variable such as better service, better-quality products, or unique buying experiences.
When preparing the competitive analysis, be sure to identify your competitors by product line or service segment. For an entrepreneur, this activity can be difficult when the industry does not yet exist. In the case of Bee Love, Palms Barber didn’t have direct competitors, but she did have related competitors of traditional skin care products. Her unique idea of all-natural, honey-based skin care products created a new market. The competitive analysis might need to focus on substitute products rather than direct competitors. There are two main tools used in analysis of competitors: a competitive analysis grid and the “three circles” approach.
### Competitive Analysis Grid
The competitive analysis grid should identify your competitors and include an assessment of the key characteristics of the competitive landscape in your industry, including competitive strengths and weaknesses and key success factors.
provides an example of what a competitive analysis might look like for a bicycle shop in a tourist locale.
As you complete an analysis for your venture’s competitors, identify what contributes to the competitor’s success. In other words, why do people purchase from the company? Some possible reasons include no nearby competitors, lower prices than competitors, a wider variety of products, offering services not offered elsewhere, or branding and marketing that appeals to the target market. Your analysis should inform you of a combination of key success factors within the industry (what it takes to be successful in the industry) and of what your competitors are not offering that is valued by your target market.
Another frequently used tool is a SWOT analysis (strengths, weaknesses, opportunities, and threats), which focuses on analyzing your venture’s potential and builds on the knowledge gained from the competitive analysis grid and the three circles. You will need to identify the strengths your venture will need to support the competitive advantage identified through the competitive analysis tools. The weaknesses can be identified based on your current and foreseeable expectations. For a new venture, the opportunities and threats sections are based on current factors in the external environment that come from your research. In this context, opportunities are facts, changes, or situations within the external environment that could be favorably leveraged for the venture’s success.
Another tool that can be used to analyze opportunities and threats section is called PEST analysis (political, economic, societal, technology). In this analysis, we identify issues in each of these categories. shows an example of the topics that could be placed in a PEST analysis. The chapter on Fundamentals of Resource Planning discusses this tool as it relates to resource procurement.
Each of these categories should be completed with relevant facts related to your entrepreneurial opportunity. After completing this analysis, you then determine if these facts, or factors, would be placed in the opportunity section or the threat section of the SWOT.
### Three Circles Tool
Another tool that can be used in competitive analysis is the three circles tool (). The goal is to identify competitors’ strengths and competitive advantages with any overlaps among competitors. Then, you would identify values or features not offered by competitors. This gap in value or offered services helps to identify your unique selling proposition and thereby your competitive advantage.
The unique selling proposition is important to the marketing plan and is often used as a slogan. It should also align with the value communicated by the product or company brand. These concepts are different from your venture’s competitive advantage; the competitive advantage describes your venture’s unique benefit, which supports growth of the venture, whereas the unique selling proposition describes the product or service itself, rather than the venture. Although these concepts are different, there should be alignment between the concepts.
For example, Amazon has a competitive advantage in its virtual presence, knowledge of the market, knowledge and application of technology, and knowledge of the industry. Through these competitive advantages, Amazon offers unique combinations of benefits to their customers, such as one-click checkout and algorithm-based recommendations using data mining to track an individual customer’s preferences. Amazon’s unique selling proposition becomes making the purchase as easy and as accurate as possible, whereas their competitive advantage lies in their ability to foresee future advances and act on those predictions, even to the point of shaping the industry.
The competitive advantage results from the analysis of the strengths and unique aspects of a venture, an analysis of the industry, including competitor’s advantages, customer needs, and what the venture provides within this competitive landscape. The unique selling proposition should support the competitive advantage, just as the competitive advantage needs to support the unique selling proposition.
### Social Media’s Role in Research
For almost all new business ventures, two key issues related to research are time and money. Large-scale research projects can take months or longer, and cost a significant amount of money. Social media can offer some opportunities to overcome these concerns. Ray Nelson, writing for Social Media Today, reports several ways that social media can provide speedy, low-cost market research: tracking trends in real-time, helping the entrepreneur “learn the language” of their potential customers, discovering unnoticed trends by engaging consumers, and performing market research using a very cost-efficient means.Ray Nelson. “How to Use Social Media for Market Research.” If the entrepreneur can perform social media research on their own, the cost will primarily be in terms of time. But the time it will take to conduct research through social media platforms such as Facebook or Twitter is usually well spent. This research should include learning the unique selling proposition of competitors, understanding their competitive advantage, and identifying what the customer values, which can be rather difficult. For example, before Amazon recognized that people are busy, were we aware that we wanted faster check-out processes for making purchases? Or were we aware that we wanted the package delivered to our home to be easier to unwrap? And yet, if we asked Amazon shoppers what they value in shopping at Amazon, we will receive answers that support an easier and faster process.
Another technique would be to read through customer reviews on Amazon (or another company related to your entrepreneurial venture) to find out what customers like and don’t like about existing products and brands. You can also develop your own surveys on an app like SurveyMonkey and send them to customers and prospective customers. This usually works when sent to persons who have a strong interest in the product or issue rather than randomly sending out surveys.
### Business Models and Feasibility
Part of the analysis in determining if your idea is an actual entrepreneurial opportunity is identifying a feasible business model. A business model is a plan for how the venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and how income will be generated through this process. Basically, a business model describes how a venture will create a profit by describing each of these actions. The business model at this stage is composed of four components: the offering, customers, infrastructure, and financial viability (). A fuller version of the business model is covered in Business Model and Plan.
The offering refers to the product or service you will be selling, the value proposition, and how you will reach and communicate with your target customers. The customer value proposition includes a detailed description of the products and services you will offer to customers, and what benefits (value) the customer will derive from using your product or service. The customer benefit could be the ability to do something more easily, more quickly, or at a lower cost than customers could before. The benefit could also solve a problem no one else has solved.
Customers are the people you will be serving, including potential customers from one or more market segments, or subsections of the market categorized by similar interests or needs. Products seldom appeal to everyone, so the entrepreneur needs to determine, through high-level segmentation and targeting analysis, which segments of the market would make the most sense for the business, and the market environment and dynamics. Some products might appeal to market segments based on age or income, whereas other products might appeal to customers based on their lifestyle. A sign of a potential market opportunity is when a certain market is experiencing rapid growth. This could be a city with a fast-growing population, or it could be a style or consumer trend that is really taking off. The chapter on Entrepreneurial Marketing and Sales goes into more detail about these topics.
Infrastructure refers to all the resources the entrepreneur will need to launch and sustain the business venture. These include people, products, facilities, technology, suppliers, partners, and finances, all of which the entrepreneur must have to fulfill the customer value proposition.
Financial viability relates to the long-term financial sustainability of an organization to fulfill its mission. This goes back to our definition of an entrepreneurial opportunity. Knowing that the venture solves a sizable and significant problem that the target market is willing to purchase is a key piece in determining financial viability. This category also addresses how the venture will create profits.
For example, would a subscription-based business model fit the target market and venture’s success? Currently, we see a significant growth in startups offering subscription services. What are the benefits to this sales method? For the venture, this model increases upfront cash to support the growth of the venture, especially when customers pay a year in advance for products that will be delivered over the subsequent twelve months. Receiving the payment prior to completing the sales provides the venture with operating cash to support current and future growth. The benefit to the customer in this situation is fewer transactions. The customer knows that the payment covers the next twelve months’ worth of benefits (the received product or service) with no further purchases until the subscription runs out.
Another choice involves deciding whether to have a physical location, a virtual location, or both. Financial viability means exploring the benefits and drawbacks of various methods in creating your business model.
When you have a business idea that you have been researching and find that there is a large enough market that has a need that your idea meets, that this target market has the willingness and ability to satisfy the need through purchasing the provided solution, that you have access to the necessary resources to build an infrastructure for your business, that you have the right mix of products and services with a sound value proposition, and that you can secure funding, you have a real opportunity. This chapter has introduced you to all of these concepts. Further chapters delve into them in more depth.
### Summary
A competitive analysis helps determine the viability of your idea by considering how feasible it is within a specific competitive landscape. Tools such as a competitive analysis grid, a SWOT analysis, a PEST analysis, and the three circles approach can help you further examine issues and refine your plans.
### Review Questions
### Discussion Questions
### Case Questions
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# Problem Solving and Need Recognition Techniques
## Introduction
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
Marah Lidey and Naomi Hirabayashi met when they worked together at DoSomething.org, a youth-oriented global nonprofit organization. They considered each other aspirational peers—accessible friends they looked up to and leaned on. While working together, they got the idea to turn the support they gave each other into a product idea: an inspirational platform that would send users a motivational text message each day. In 2015, Hirabayashi and Lidey began to focus on turning their idea into a reality. They conducted a test with seventy individuals before publicly releasing Shine in beta in October 2015. They formally left DoSomething.Org in April 2016 and their startup venture, Shine, was born.
The problem Shine tackles is that “self-help is broken” and its value proposition addresses in part what is known as “the confidence gap,” often cited as a barrier that holds women back when it comes to advancing in their careers, raising money, investing, and planning retirement. Shine has four pillars it is built to address: mental health, confidence, daily happiness, and productivity. As of 2018, the Shine community had two million users from 189 countries. What began as a motivational text message service has since evolved to include an app and additional services such as Shine Talks and audio challenges.
Hirabayashi and Lidey recognized a need—or an . You learned about identifying opportunities in the chapter on Identifying Entrepreneurial Opportunity. This chapter will explore what happens next—the problem solving and need recognition techniques that entrepreneurs employ to carry the idea forward, and to solve issues that arise as the enterprise advances. Problem solving is essential to the genesis of entrepreneurship. At the same time, problem-solving techniques can be used in management and in an individual’s everyday personal life. |
# Problem Solving and Need Recognition Techniques
## Problem Solving to Find Entrepreneurial Solutions
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Define problem solving in the context of entrepreneurship
2. Describe and compare the adaptive model and the innovative model of problem solving
3. Identify the skills entrepreneurs need for effective problem solving
4. Identify types of problem solvers
As you’ve learned, entrepreneurs often visualize an opportunity gap, a gap between what exists and what could exist, as Hirabayashi and Lidey did with Shine. Entrepreneurial problem solving is the process of using innovation and creative solutions to close that gap by resolving societal, business, or technological problems. Sometimes, personal problems can lead to entrepreneurial opportunities if validated in the market. The entrepreneur visualizes the prospect of filling the gap with an innovative solution that might entail the revision of a product or the creation of an entirely new product. In any case, the entrepreneur approaches the problem-solving process in various ways. This chapter is more about problem solving as it pertains to the entrepreneur’s thought process and approach rather than on problem solving in the sense of opportunity recognition and filling those gaps with new products.
For example, as we read in Identifying Entrepreneurial Opportunity, Sara Blakely (as shown in ) saw a need for body contouring and smoothing undergarments one day in the late 1990s when she was getting dressed for a party and couldn’t find what she needed to give her a silhouette she’d be pleased with in a pair of slacks. She saw a problem: a market need. But her problem-solving efforts are what drove her to turn her solution (Spanx undergarments) into a viable product. Those efforts came from her self-admitted can-do attitude: “It’s really important to be resourceful and scrappy—a glass half-full mindset.”Helen Lock. “‘I Put My Butt on the Line’: How Spanx Took Over the World.” Her efforts at creating a new undergarment met resistance with hosiery executives, most of whom were male and out of touch with their female consumers. The hosiery owner who decided to help Blakely initially passed on the idea until running it by his daughters and realizing she was on to something. That something became Spanx, and today, Blakely is a successful entrepreneur.Gary Keller. “Business Success Series, Part 1: Sara Blakely-Spanx.”
Before getting into the heart of this chapter, we need to make a distinction: Decision making is different from problem solving. A decision is needed to continue or smooth a process affecting the operation of a firm. It can be intuitive or might require research and a long period of consideration. Problem solving, however, is more direct. It entails the solution of some problem where a gap exists between a current state and a desired state. Entrepreneurs are problem solvers who offer solutions using creativity or innovative ventures that exploit opportunities. This chapter focuses on different approaches to problem solving and need recognition that help potential entrepreneurs come up with ideas and refine those ideas.
### Two Problem Solving Models: Adaptive and Innovative
There are two prominent established problem-solving models: adaptive and innovative. A renowned British psychologist, Michael Kirton, developed the Kirton Adaption-Innovation (KAI) Inventory to measure an individual’s style of problem solving.“Characteristics of Adaptors and Innovators.” Problem-solving preferences are dependent on the personality characteristics of originality, conformity, and efficiency, according to Kirton. The KAI inventory identifies an individual’s problem-solving approach by measuring agreement with statements that align with characteristics, such as the ability to produce many novel ideas, to follow rules and get along in groups, and to systematically orient daily behavior. The results categorize an individual as an innovator or an adaptor. Innovators are highly original, do not like to conform, and value efficiency less than adaptors.
The first and more conservative approach an entrepreneur may use to solve problems is the adaptive model. The adaptive model seeks solutions for problems in ways that are tested and known to be effective. An adaptive model accepts the problem definition and is concerned with resolving problems rather than finding them. This approach seeks greater efficiency while aiming at continuity and stability. The second and more creative approach is the innovative model of entrepreneurial problem solving, which uses techniques that are unknown to the market and that bring advantage to an organization. An innovative problem-solving style challenges the problem definition, discovers problems and avenues for their solutions, and questions existing assumptions—in a nutshell, it does things differently. It uses outside-the-box thinking and searches for novel solutions. Novelty is a shared trait of creative entrepreneurship, and it’s why entrepreneurs gravitate toward this method of problem solving. According to Dr. Shaun M. Powell, a senior lecturer at the University of Wollongong, Australia: “Creative entrepreneurs are notable for a distinctive management style that is based on intuition, informality and rapid decision making, whereas the more conventional thinking styles are not in accord with the unique attributes of creative entrepreneurs.”Shaun Powell. “The Management and Consumption of Organisational Creativity.” This way of problem solving doesn’t alter an existing product. It is the creation of something entirely new.
For example, healthcare facilities have long been known as a source of methicillin-resistant Staphylococcus aureus (MRSA), a deadly infection that can have long-term effects on patients. Vital Vio, led by Colleen Costello, has developed white light technology that effectively disinfects healthcare facilities by targeting a molecule specific to bacteria. The light, safe to humans, can burn constantly to kill regenerative bacteria. An adaptive problem-solving model would seek to minimize harm of MRSA within a hospital—to respond to it—whereas the Vital Vio is an entirely new technique that seeks to eliminate it. Adaptive solutions to MRSA include established processes and protocols for prevention, such as having doctors, nurses, and other healthcare providers clean their hands with soap and water, or an alcohol-based hand rub before and after patient care, testing patients to see if they have MRSA on their skin, cleaning hospital rooms and medical equipment, and washing and drying clothes and bed linens in the warmest recommended temperatures.N.C Healthcare-Associated Infections Prevention Program.
### Problem-Solving Skills
While identifying problems is a necessary part of the origin of the entrepreneurial process, managing problems is an entirely different aspect once a venture is off the ground and running. An entrepreneur does not have the luxury of avoiding problems and is often responsible for all problem solving in a startup or other form of business. There are certain skills that entrepreneurs possess that make them particularly good problem solvers. Let’s examine each skill (shown in ) .
### Critical Thinking
Critical thinking is the complex analysis of a problem or issue with the goal of solving the problem or making a decision. The entrepreneur analyzes and peels away the layers of a problem to find the core of an issue facing a business. The entrepreneur focuses on the heart of the problem and responds reasonably and openly to suggestions for solving it. Critical thinking is not only important for developing entrepreneurial ideas: it is a sought-after asset in education and employment. Entrepreneur Rebecca Kantar dropped out of Harvard in 2015 to found the tech startup Imbellus, which aims to replace standardized college admissions tests like the SAT with interactive scenarios that test critical-thinking skills. Many standardized tests may include multiple choice questions asking for the answer to a straightforward knowledge question or math problem. Kantar seeks to create tests that are more concerned with the analytic ability and reasoning that goes into the process of solving the problem. Imbellus says it aims to test “how people think,” not just what they know. The platform, which has not yet launched, will use simulations for its user assessments.Romesh Ratnesar. “What If Instead of Taking the SAT You Got to Play a Video Game?”
### Communication
Communication skills, the ability to communicate messages effectively to an intended recipient, are the skills entrepreneurs use to pool resources for the purposes of investigating solutions leading to innovative problem solving and competitive advantage. Good communication allows for the free association of ideas between entrepreneurs and businesses. It can illustrate a problem area or a shared vision, and seeks stakeholder buy-in from various constituencies. Networking and communication within an industry allow the entrepreneur to recognize the position of an enterprise in the market and work toward verbalizing solutions that move an organization beyond its current state. By “verbalizing,” we mean communication from and with the company/entity. Internal communications include company emails, newsletters, presentations, and reports that can set strategic goals and objectives, and report on what has been accomplished and what goals and objectives remain, so that employees within an organization are knowledgeable and can work on solving problems that remain within the organization. External communications could include press releases, blogs and websites, social media, public speeches, and presentations that explain the company’s solutions to problems. They could also be investor pitches complete with business plans and financial projections.
Ideation exercises, such as brainstorming sessions (discussed in Creativity, Innovation, and Invention, are good communication tools that entrepreneurs can use to generate solutions to problems. Another such tool is a hackathon—an event, usually hosted by a tech company or organization, which brings together programmers and workers with other degrees of specialization within the company, community, or organization to collaborate on a project over a short period of time. These can last from twenty-four hours to a few days over a weekend. A hackathon can be an internal company-wide initiative or an external event that brings community participants together. A business model canvas, which is covered in Business Model and Plan and other activities outlined in other chapters can be used internally or externally to identify problems and work toward creating a viable solution.
Networking is an important manifestation of useful communication. What better method is there of presenting one’s concept, gaining funding and buy-in, and marketing for the startup than through building a network of individuals willing to support your venture? A network may consist of potential employees, customers, board members, outside advisors, investors, or champions (people who just love your product) with no direct vested interest. Social networks consist of weak ties and strong ties. Sociologist Mark Granovetter studied such networks back in the 1970s, and his findings still apply today, even if we include social media networks in the definition too. Weak ties facilitate flow of information and community organization, he said, whereas strong ties represent strong connections among close friends, family members, and supportive coworkers.Mark Granovetter. “The Strength of Weak Ties.” Strong ties require more work to maintain than weak ties (as illustrated by the strong lines and weak dotted lines in ) and in a business context, they don’t lead to many new opportunities. Weak ties, in contrast, do open doors in that they act as bridges to other weak ties within functional areas or departments that you might not have had access to directly or through strong ties.Jacob Morgan. “Why Every Employee Should Be Building Weak Ties at Work.”
In fact, many young entrepreneurs, including tech entrepreneur Oliver Isaacs, realize college is a great place to begin building teams. Isaacs is the founder of viral opinion network Amirite.com, which is widely credited as the place where Internet memes started and online slang got a foothold.John White. “Top UK Influencer Oliver Isaacs Reveals What It Takes to Go Viral.” Amirite.com consists of a large network of pages and partnerships on Facebook and Instagram that reach 15 million users each month. Isaacs recommends using your alumni network to build a team and customer base for your own venture because you never know if you’re talking to a future employee or partner.
Sharing of ideas and resources is highly valued in the entrepreneurial process. Communication is a vital skill in problem solving because the ability to identify and articulate the problem (define the problem space) is necessary to adequately address a problem. A problem can be too vague or broad or narrow. Thus, communicating the problem is important, as is conveying the solution.
### Decisiveness
Decisiveness is as it sounds: the ability to make a quick, effective decision, not letting too much time go by in the process. Entrepreneurs must be productive, even in the face of risk. They often rely on intuition as well as on hard facts in making a choice. They ask what problem needs to be solved, think about solutions, and then consider the means necessary to implement an idea. And the decisions must be informed with research.
For example, as explained in Adam Grant’s book The Originals, the co-founders of Warby Parker, a venture-backed startup focused on the eyewear industry, started their company while they were graduate students. At the time they knew little about the industry, but after conducting some detailed research, they learned that the industry was dominated by one major player—Luxottica. They used this information and other data to refine their strategy and business model (focusing mainly on value, quality, and convenience via an online channel). By the time they decided to launch the business, they had thought through the key details, and they attained rapid early success. Today Warby Parker has over 100 retail stores in the US, is profitable, and is valued at almost $2 billion.
Decisiveness is the catapult to progress. Amazon founder Jeff Bezos preaches the importance of decisiveness throughout his organization. Bezos believes that decisiveness can even lead to innovation. Bezos advocates for making decisions after obtaining 70 percent of the information you need to do so: “Being wrong may be less costly than you think, whereas being slow is going to be expensive for sure,” Bezos wrote in a 2017 annual letter to stockholders.Erik Larson. “How Jeff Bezos Uses Faster Better Decisions to Keep Amazon Innovating.”
### Ability to Analyze Data
Data analysis is the process of analyzing data and modeling it into a structure that leads to innovative conclusions. Identifying Entrepreneurial Opportunity covered much of the sources of data that entrepreneurs might seek. But it is one thing to amass information and statistics. It is another to make sense of that data, to use it to fill a market need or forecast a trend to come. Successful founders know how to pose questions about and make meaning out of information. And if they can’t do that themselves, they know how to bring in experts who can.
In addition to public sources of broad data, a business can collect data on customers when they interact with the company on social media or when they visit the company website, especially if they complete a credit card transaction. They can collect their own specific data on their own customers, including location, name, activity, and how they got to the website. Analyzing these data will give the entrepreneur a better idea about the interested audience’s demographic.
In entrepreneurship, analyzing data can help with opportunity recognition, creation, and assessment by analyzing data in a variety of ways. Entrepreneurs can explore and leverage different data sources to identify and compare “attractive” opportunities, since such analyses can describe what has happened, why it happened, and how likely it is to happen again in the future. In business in general, analytics is used to help managers/entrepreneurs gain improved insight about their business operations/emerging ventures and make better, fact-based decisions.
Analytics can be descriptive, predictive, or prescriptive. Descriptive analytics involves understanding what has happened and what is happening; predictive analytics uses data from past performance to estimate future performance; and prescriptive analytics uses the results of descriptive and predictive analytics to make decisions. Data analysis can be applied to manage customer relations, inform financial and marketing activities, make pricing decisions, manage the supply chain, and plan for human resource needs, among other functions of a venture. In addition to statistical analysis, quantitative methods, and computer models to aid decision-making, companies are also increasingly using artificial intelligence algorithms to analyze data and make quick decisions.
### Understanding of Business and Industry
Entrepreneurs need sound understanding of markets and industries. Often times, they are already working in a large organization when they see growth opportunities or inefficiencies in a market. The employee gains a deep understanding of the industry at hand. If the employee considers a possible solution for a problem, this solution might become the basis for a new business.
For example, consider a marketing agency that used traditional marketing for thirty years. This agency had an established clientele. An executive in the organization began studying social media analytics and social media. The executive approached the owner of the business to change processes and begin serving clients through social media, but the owner refused. Clients within the agency began to clamor for exposure on social media. The marketing executive investigated the possibility of building an agency in her locale servicing clients who wish to utilize social media. The marketing executive left the organization and started her own agency (providing, of course, that this is in compliance with any noncompete clauses in her contract). Her competitive advantage was familiarity with both traditional and social media venues. Later, the original agency started floundering because it did not offer social media advertising. Our intrepid executive purchased the agency to gain the clientele and serve those wishing to move away from traditional marketing.
A similar experience occurred for entrepreneur Katie Witkin. After working in traditional marketing roles, the University of Wisconsin-Madison graduate, pictured in , left agency life behind four years out of college to cofound her own company, AGW Group. In 2009, Witkin had been interning at a music marketing agency that didn’t have a social media department. She knew, both from her time at college and from observing industry trends, that social media was changing the way companies connected with customers. For her own venture, she expanded the focus to all supporting brands to manage all things digital. Today, the cultural and marketing communications agency has fifteen employees and big-name clients ranging from HBO to Red Bull.Stephanie Schomer. “How Getting Laid Off Empowered This Entrepreneur to Start Her Own Award-Winning Marketing Agency.”
### Resourcefulness
Resourcefulness is the ability to discover clever solutions to obstacles. Sherrie Campbell, a psychologist, author, and frequent contributor to Entrepreneur magazine on business topics, put it this way:
Entrepreneurs start thinking about a business venture or startup by talking to people and procuring experts to help create, fund, and begin a business. Entrepreneurs are risk takers, passionate about new endeavors. If they don’t have a college degree or a great deal of business experience, they understand there are many resources available to support them in the endeavor, such as the Service Corps of Retired Executives (SCORE) and the Small Business Administration (SBA). There are many sources available to fund the business with little or no debt and options, as you will see in the chapter on Entrepreneurial Finance and Accounting. The entrepreneur follows a vision and researches opportunities to move toward a dream.
For example, in the late 1990s, Bill McBean and his business partner Billy Sterett had an opportunity to buy an underperforming auto dealership that would make their company the dominant one in the market. Neither wanting to take cash from other ventures nor wanting to borrow more money and tie themselves to more debt, the entrepreneurs were resourceful by finding another path forward to obtaining the money necessary for the acquisition they both coveted. They changed banks and renegotiated their banking payback requirements, lowering their interest payments, reducing fees, and lowering their monthly payments, ultimately freeing up a significant amount of cash that allowed them to buy the new company.“Resourcefulness Is More Important Than Resources.”
### Types of Problem Solvers
Entrepreneurs have an insatiable appetite for problem solving. This drive motivates them to find a resolution when a gap in a product or service occurs. They recognize opportunities and take advantage of them. There are several types of entrepreneurial problem solvers, including self-regulators, theorists, and petitioners.
### Self-Regulating Problem Solvers
Self-regulating problem solvers are autonomous and work on their own without external influence. They have the ability to see a problem, visualize a possible solution to the problem, and seek to devise a solution, as illustrates. The solution may be a risk, but a self-regulating problem solver will recognize, evaluate, and mitigate the risk. For example, an entrepreneur has programmed a computerized process for a client, but in testing it, finds the program continually falls into a loop, meaning it gets stuck in a cycle and doesn’t progress. Rather than wait for the client to find the problem, the entrepreneur searches the code for the error causing the loop, immediately edits it, and delivers the corrected program to the customer. There is immediate analysis, immediate correction, and immediate implementation. The self-regulating problem solvers’ biggest competitive advantage is the speed with which they recognize and provide solutions to problems.
### Theorist Problem Solvers
Theorist problem solvers see a problem and begin to consider a path toward solving the problem using a theory. Theorist problem solvers are process oriented and systematic. While managers may start with a problem and focus on an outcome with little consideration of a means to an end, entrepreneurs may see a problem and begin to build a path with what is known, a theory, toward an outcome. That is, the entrepreneur proceeds through the steps to solve the problem and then builds on the successes, rejects the failures, and works toward the outcome by experimenting and building on known results. At this point, the problem solver may not know the outcome, but a solution will arise as experiments toward a solution occur. shows this process.
For example, if we consider Marie Curie as an entrepreneur, Curie worked toward the isolation of an element. As different approaches to isolating the element failed, Curie recorded the failures and attempted other possible solutions. Curie’s failed theories eventually revealed the outcome for the isolation of radium. Like Curie, theorists use considered analysis, considered corrective action, and a considered implementation process. When time is of the essence, entrepreneurs should understand continual experimentation slows the problem-solving process.
### Petitioner Problem Solvers
Petitioner problem solvers () see a problem and ask others for solution ideas. This entrepreneur likes to consult a person who has “been there and done that.” The petitioner might also prefer to solve the problem in a team environment. Petitioning the entrepreneurial team for input ensures that the entrepreneur is on a consensus-driven path. This type of problem solving takes the longest to complete because the entrepreneur must engage in a democratic process that allows all members on the team to have input. The process involves exploration of alternatives for the ultimate solution. In organizational decision-making, for example, comprehensiveness is a measure of the extent a firm attempts to be inclusive or exhaustive in its decision-making. Comprehensiveness can be gauged by the number of scheduled meetings, the process by which information is sought, the process by which input is obtained from external sources, the number of employees involved, the use of specialized consultants and the functional expertise of the people involved, the years of historical data review, and the assignment of primary responsibility, among other factors. Comprehensive decision-making would be an example of a petitioner problem-solving style, as it seeks input from a vast number of team members.
A —a meeting to resolve conflicts and identify solutions—is another example that employs a petitioner problem-solving approach. Often times, a developer of a new project might hold a community charette to aid in the design of a project, hoping to gain approval from elected officials. In the building example, this could consist of the developer and his team of architects, project designers, and people with expertise in the project working alongside community members, business executives, elected officials, or representatives like staff members or citizen-appointed boards like a planning board. Such an activity is representative of a petitioner problem-solving approach, as opposed to a developer representative designing the project with no input from anyone else.
In summary, there is no right or wrong style of problem solving; each problem solver must rely on the instincts that best drive innovation. Further, they must remember that not all problem-solving methods work in every situation. They must be willing to adapt their own preference to the situation to maximize efficiency and ensure they find an effective solution. Attempting to force a problem-solving style may prevent an organization from finding the best solution. While general entrepreneurial problem-solving skills such as critical thinking, decisiveness, communication, and the ability to analyze data will likely be used on a regular basis in your life and entrepreneurial journey, other problem-solving skills and the approach you take will depend on the problem as it arises.
There are a number of resources online that can help analyze your problem-solving abilities. Mindtools.com is one such resource. These are useful to learn your general problem-solving tendencies before being called upon to apply them in a real-world setting. One of the problem-solving techniques available from mindtools.com offers that problems can be addressed from six different perspectives. Called CATWOE, the approach is an acronym for Customers, Actors (people within the organization), Transformative, Worldwide, Owner, and Environment (organizational).
### Summary
Problem solving involves more than making decisions. Problem solving is a necessary component of entrepreneurial genesis, used to manage your business and helpful in addressing everyday personal situations. Entrepreneurs must know their personal strengths and capitalize on applicable problem-solving methods to create innovative products. Moving a startup ahead of the competition requires the entrepreneur to use all problem-solving sources and skills in the entrepreneur’s tool box. Problem-solving models can be adaptive or innovative, the latter being more common among entrepreneurs. Problem-solving skills include critical thinking, communication, decisiveness, resourcefulness, business and industry awareness, and an ability to analyze data. There are various types of problem solvers, including self-regulating, theorist, and petitioner problem solvers.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Tony Robbins’ tips on decisiveness: https://www.tonyrobbins.com/stories/unleash-the-power/be-decisive/ |
# Problem Solving and Need Recognition Techniques
## Creative Problem-Solving Process
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the five steps in the creative problem-solving process
2. Identify and describe common creative problem-solving tools
Creativity can be an important trait of an entrepreneur, as the chapter on Creativity, Innovation, and Invention discussed. In that discussion, we learned about creativity’s role in innovation. Here, we will look in more depth at creativity’s role in problem solving. Let’s first formally define creativity as the development of original ideas to solve an issue. The intent of being an entrepreneur is to break away from practical norms and use imagination to embrace quick and effective solutions to an existing problem, usually outside the corporate environment.
### The Steps of the Creative Problem-Solving Process
Training oneself to think like an entrepreneur means learning the steps to evaluating a challenge: clarify, ideate, develop, implement, and evaluate ().
### Step 1: Clarify
To clarify is the critical step of recognizing the existence of a gap between the current state and a desired state. This can also be thought of as having need awareness, which occurs when the entrepreneur notes a gap between societal or customer needs and actual circumstances. Clarifying the problem by speaking with clients and developing a detailed description of the problem brings the specifics of a problem to light. Failure to identify the specifics of a problem leaves the entrepreneur with the impossible task of solving a ghost problem, a problem that is fully unknown or unseen. To establish and maintain credibility, an entrepreneur must clarify the problem by focusing on solving the problem itself, rather than solving a symptom of the problem.
For example, a farm could have polluted water, but it would not be enough to solve the problem only on that farm. Clarifying would involve identifying the source of the pollution to adequately tackle the problem. After gaining an understanding of a problem, the entrepreneur should begin to formulate plans for eliminating the gap. A fishbone diagram, as shown in , is a tool that can be used to identify the causes of such a problem.
In the case of our water pollution example, a fishbone diagram exploring the issue might reveal the items shown in .
### Step 2: Ideate
To ideate is the step of the creative problem-solving process that involves generating and detailing ideas by the entrepreneur. After collecting all information relevant to the problem, the entrepreneur lists as many causes of the problem as possible. This is the step in which the largest variety of ideas are put forth. Each idea must be evaluated for feasibility and cost as a solution to the problem. If a farm does not have clean water, for example, the entrepreneur must list causes of toxic water and eliminate as many of those causes as possible. The entrepreneur must then move forward investigating solutions to bring the water back to a safe state. If, say, nearby livestock are polluting the water, the livestock should be isolated from the water source.
### Step 3: Develop
To develop is the step in which the entrepreneur takes the list of ideas generated and tests each solution for feasibility. The entrepreneur must consider the cost of each idea and the obstacles to implementation. In the preceding example, adding a chemical to the water may not be a feasible solution to the farmer. Not every farmer wants additional chloride or fluoride added to the water due to the effect on both humans and livestock. These tradeoffs should be addressed in the feasibility assessment. The farmer might prefer a filtration system, but the cost of that solution might not be practicable. The entrepreneur should identify and assess alternative solutions to find one that is most cost-effective and feasible to the customer.
### Step 4: Implement
To implement is the step in which the solution to the problem is tested and evaluated. The entrepreneur walks through the planned implementation with the client and tests each part of the solution, if a service, or thoroughly tests a developed good. The entrepreneur implements the solution and goes through a structured system of follow-up to ensure the solution remains effective and viable. In the water example, the solution would be reducing runoff from toxic insecticides by adding prairie strips, buffers of grass, and vegetation along banks of streams.
### Step 5: Evaluate
To evaluate is the step in which the final solution is assessed. This is a very important step that entrepreneurs often overlook. Any fallacy in the implementation of the product or service is reassessed, and new solutions are implemented. A continual testing process may be needed to find the final solution. The prairie strips, buffers of grass, and vegetation along banks of streams chosen in the farming water example should then be analyzed and tested to ensure the chosen solution changed the content of the water.
### Using Creativity to Solve Problems
Entrepreneurs are faced with solving many problems as they develop their ideas for filling gaps, whether those opportunities involve establishing a new company or starting a new enterprise within an existing company. Some of these problems include staffing, hiring and managing employees, handling legal compliance, funding, marketing, and paying taxes. Beyond the mundane activities listed, the entrepreneur, or the team that the entrepreneur puts in place, is indispensable in maintaining the ongoing creativity behind the product line or service offered. Innovation and creativity in the business are necessary to expand the product line or develop a groundbreaking service.
It is not necessary for the entrepreneur to feel isolated when it comes to finding creative solutions to a problem. There are societies, tools, and new methods available to spur the creativity of the entrepreneur that will further support the success and expansion of a new enterprise.“Creating a World of Opportunities.” Learning and using entrepreneurial methods to solve problems alleviates the stress many startup owners feel. The entrepreneur’s creativity will increase using collaborative methodologies. Some entrepreneurial collaborative methodologies include crowdsourcing, brainstorming, storyboarding, conducting quick online surveys to test ideas and concepts, and team creativity activities.
### Crowdsourcing
Professor Daren Brabham at the University of Southern California has written books on crowdsourcing and touts its potential in for-profit and not-for-profit business sectors. He defines it simply as “an online, distributed problem-solving and production model.”Daren C. Brabham. “Crowdsourcing as a Model for Problem Solving: An Introduction and Cases.” Crowdsourcing involves teams of amateurs and nonexperts working together to form a solution to a problem.Michael Houlihan and Bonnie Harvey. “How Crowdsourcing Is Shaping the Future of Everything.” The idea, as cbsnews.com’s Jennifer Alsever has put it, is to “tap into the collective intelligence of the public at large to complete business-related tasks that a company would normally either perform itself or outsource to a third-party provider. Yet free labor is only a narrow part of crowdsourcing's appeal. More importantly, it enables managers to expand the size of their talent pool while also gaining deeper insight into what customers really want. The challenge is to take a cautionary approach to the ‘wisdom of the crowd,’ which can lead to a ‘herd’ mentality.”Jennifer Alsever. “What Is Crowdsourcing?”
This new business prototype, similar to outsourcing, features an enterprise posting a problem online and asking for volunteers to consider the problem and propose solutions. Volunteers earn a reward, such as prize money, promotional materials like a T-shirt, royalties on creative outlets like photos or designs, and in some cases, compensation for their labor. Before proposing the solution, volunteers learn that the solutions become the intellectual property of the startup posting the problem. The solution is then mass produced for profit by the startup that posted the problem.Daren C. Brabham. “Crowdsourcing as a Model for Problem Solving: An Introduction and Cases.” The process evolves into the crowdsourcing process after the enterprise mass produces and profits from the labor of the volunteers and the team. Entrepreneurs should consider that untapped masses have solutions for many issues for which agendas do not yet exist. Crowdsourcing can exploit those agendas and add to the tools used to stimulate personal creativity. This type of innovation is planned and strategically implemented for profit.
For example, Bombardier held a crowdsourced innovation contest to solicit input on the future of train interiors, including seat design and coach class interior. A corporate jury judged the submissions, with the top ten receiving computers or cash prizes. Companies are often constrained, however, by internal rules limiting open source or external idea sourcing, as they could be accused of “stealing” an idea. While crowdsourcing outside of software can be problematic, some products such as MakerBot’s 3D printers, 3DR’s drones, and Jibo’s Social Robot have used developer kits and “makers” to help build a community and stimulate innovation from the outside.
Amazon’s Mechanical Turk is an online crowdsourcing platform that allows individuals to post tasks for workers to complete. In many instances, these tasks are compensated, but the payment can be less than one dollar per item completed. Mechanical Turk is one of the largest and most well-known crowdsourcing platforms, but there are a number of other more niche ones as well that would apply to smaller markets. In the case of innovation contests and outsourced tasks from corporations, those tasks may be hosted internally by the corporation.
### Brainstorming
Brainstorming is the generation of ideas in an environment free of judgment or dissension with the goal of creating solutions. See Creativity, Innovation, and Invention to refresh yourself on this technique. Brainstorming is meant to stimulate participants into thinking about problem solving in a new way. Using a multifunctional group, meaning participants come from different departments and with different skill sets, gives entrepreneurs and support teams a genuine chance to suggest and actualize ideas. The group works together to refine and prototype potential solutions to a problem.
The setting for a brainstorming session should remain as informal and relaxed as possible. The group needs to avoid standard solutions. All ideas are welcome and listed and considered with no censorship and with no regard to administrative restrictions. All team members have an equal voice. The focus of brainstorming is on quantity of ideas rather than on the ideal solution provided in every suggestion. A classic entrepreneurial brainstorming activity, as popularized by business software developer Strategyzer, is known as the “silly cow” exercise. Teams come up with ideas for new business models pertaining to a cow, with the results often outrageous, ranging from sponsored cows to stroking cows for therapeutic release. Participants are asked to identify some aspect of a cow and develop three business models around that concept in a short time period, typically two minutes or fewer. The activity is designed to get creative juices flowing.
### Storyboarding
Storyboarding is the process of presenting an idea in a step-by-step graphic format, as shows. This tool is useful when the entrepreneur is attempting to visualize a solution to a problem. The steps to the solution of a problem are sketched and hung in graphic format. Once the original graphic is placed, images of steps working toward a solution are added, subtracted, and rearranged on a continual basis, until the ultimate solution emerges in the ultimate graphic format. For many years, entrepreneurs have used this process to create a pre-visual for various media sequences.
### Team Creativity
Team creativity is the process whereby an entrepreneur works with a team to create an unexpected solution for an issue or challenge. Teams progress through the same creative problem-solving process described already: clarify, ideate, develop, implement, and evaluate. The main advantage of team creativity is the collaboration and support members receive from one another. Great teams trust in other team members, have diverse members with diverse points of view, are cohesive, and have chemistry.
Team members should work in a stress-free and relaxing environment. Reinforcement and expansion of ideas in the team environment motivates the team to continually expand horizons toward problem solution. A small idea in a team may spark the imagination of a team member to an original idea. Mark Zuckerberg, cofounder of Facebook, once said, “The most important thing for you as an entrepreneur trying to build something is, you need to build a really good team. And that’s what I spend all my time on.”“Three Tips for Entrepreneurs Creating the Perfect Team.”
### Summary
The creative problem-solving process is a logical process. The steps to the creative problem-solving process are clarify, ideate, develop, implement, and evaluate. Each step is an aid to creating a solution. The steps are repeated cyclically until the entrepreneur develops an innovative solution. When entrepreneurs experience creativity block, tools to alleviate the block are available. These tools include crowdsourcing, brainstorming, and storyboarding. Each of these tools assist the entrepreneur in innovative thinking.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
https://www.nngroup.com/articles/storyboards-visualize-ideas/
https://www.studiobinder.com/blog/downloads/storyboard-template/
https://www.mturk.com/
https://www.mindtools.com |
# Problem Solving and Need Recognition Techniques
## Design Thinking
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Explain the design thinking process
2. Discuss some design thinking tools
David Kelley, founder of Stanford University’s Design School and cofounder of design company IDEO, is credited as the originator of design thinking, at least within business and entrepreneurial contexts. You were briefly introduced to design thinking in Creativity, Innovation, and Invention, but we will delve into it in more depth here. IDEO grew from a merger of the creator of Apple’s first mouse and the first laptop computer designer, David Kelley Design and ID Two, respectively. Almost a decade after the 1982 Apple creations, the 1991-merged company primarily focused on the traditional design of products, ranging from toothbrushes to chairs. Yet another decade later, the company found itself designing consumer experiences more so than consumer products. Kelley began using the word “thinking” to describe the design process involved in creating customer experiences rather than creating physical products. The term design thinking was born.
The current IDEO CEO Tim Brown defines design thinking as “a human-centered and collaborative approach to problem-solving, using a designed mindset to solve complex problems.”Mark Logan. “Design Thinking for Entrepreneurs.” Design thinking is a method to focus the design and development decisions of a product on the needs of the customer, typically involving an empathy-driven process to define complex problems and create solutions that address those problems.
A common core of design thinking is its application beyond the design studio, as the methods and tools have been articulated for use by those outside of the field, particularly business managers. Design practice is now being applied beyond product and graphic areas to the design of digital interactions, services, business strategy, and social policy.
### Design Thinking Process
Business schools have typically taught a rational, analytic approach to thinking. It focuses on well-defined goals and constraints, and thought precedes action in a sequential process of planning and analysis. The design thinking process approaches problem solving differently. Thinking and doing are often intertwined in an iterative exploration of the design “space,” and the process uncovers goals and constraints, rather than identifying them up front.
One design thinking approach that is taught at places like Stanford’s Design School and organizations like the LUMA Institute (a global company that teaches people how to be innovative) is human-centered design (HCD). HCD, as the name suggests, focuses on people during design and development. This speaks to the Tim Brown definition of design thinking. Inspiration for ideas comes from exploration of actual people, their needs and problems.
Three spaces—inspiration, ideation, and implementation—compose the design thinking process (). The process uses “spaces” and not “phases” because multiple spaces can happen simultaneously.
Nevertheless, inspiration usually occurs first. This entails identifying a problem or opportunity that motivates someone to search for solutions. Ideation is the process of generating ideas and solutions through various techniques such as brainstorming and sketching sessions. There are hundreds of ideation techniques available. A few examples of ideation exercises include Top Five, How Might We, Mash-up, and Co-Creation Session. In Top Five, everyone on the team writes down their top five ideas, shares them, and clusters similar ideas. In How Might We, the team looks at insight statements and reframes them as “How Might We” questions by adding that phrase at the beginning. The goal is to find opportunities for design that also allows for a variety of solutions. Mash-up involves combining existing brands or concepts to create something new. The team identifies those brands or concepts that represent a quality they desire in their solution, and they “mash up” those ideas to create a new idea. A co-creation session incorporates the desired market into the creation process by recruiting a group of people from the market to work on the design with the team. The goal is to capture the feedback the group provides by treating them as designers, not as interview subjects. Implemented solutions evolve from interactions with users and from the ongoing creation and refinement of possible solutions. Design thinking incorporates experience-based insights, judgments, and intuition from the end users’ perspectives, while in a rational analytic approach, the solution process often becomes formalized into a set of rules.
Nesta is a UK-based innovation foundation that offers many design thinking tools and resources similar to IDEO. Named for the acronym NESTA, the National Endowment for Science, Technology and the Arts, the organization was established in 1998 with an endowment from the UK National Lottery and became an independent charity in 2012. Nesta’s strategy focuses on health, government innovation, education, arts, and creative economy and innovation policy. Nesta offers a set of five criteria to ascertain that an occupation is creative:Christine Harris, Margaret Collins, and Dennis Cheek.
1. Novel process
2. Mechanization resistant
3. Nonrepetitive or nonuniform function
4. Makes a creative contribution to the value chain
5. Involves interpretation not merely a transformation in the service or artifact
As the name implies, design thinking originates from design. As design is one of the identified creative industries, there’s a clear connection between creative industries and design thinking. In fact, Nesta offers inspiration and ideation exercises that are freely available for users wishing to implement design thinking practices.
### Human-Centered Design Thinking Spaces
The Stanford Design School uses human-centered design thinking (HCD) as its design thinking approach. HCD emphasizes the following spaces of the design thinking process:
1. Empathizing: As illustrated by the human-centered approach, it is important to have empathy for the problem you are attempting to solve. Empathy, as the chapter on Creativity, Innovation, and Invention defined, means observing and immersing yourself in the surrounding environment to engage with and understand people’s experiences and motivations.
2. Defining: This aspect involves describing the core problem(s) that you and your team have identified. Asking “how might we?” questions helps narrow the focus, as the ultimate aim here is to identify a problem statement that illustrates the problem you want to tackle. “Frame Your Design” is one such challenge in what IDEO calls its “toolkit” that works well here. Frame Your Design asks you to write down your problem and then refine it by following specific steps so that you end up with a design question that serves as a starting point but leaves room for creativity.IDEO.org.
3. Ideating: This is where you begin to come up with ideas that address the problem “space” you have defined. There are hundreds of exercises aimed at the ideation process, ranging from brainstorming to “Five whys?” in the IDEO toolkit. The “Five whys” is a questioning method in which the researcher, in looking for information to solve a problem, asks a respondent a broad question, then asks “why” to get deeper into the respondent’s thinking. IDEO puts it this way: “You’ll use this method while you’re conducting an interview and start with really broad questions like “Do you save much money?” or “How was your harvest this year?” Then, by asking why five times you’ll get some essential answers to complicated problems. This can be a great method to use if you’re trying to get at the human and emotional roots of a problem.”“The Five Whys.”
4. Prototyping: In this space, the entrepreneur creates and tests inexpensive, scaled-down versions of a product with features or benefits that serve as solutions for previously identified problems. This could be tested internally among employees, a process known as dogfooding, or externally with potential customers. This is an experimental phase.
5. Testing: Designers apply rigorous tests of the complete product using the best solutions identified in the prototyping space.
### Design Thinking Tools
There are numerous design thinking tools aimed to aid or stimulate your design thinking activities. They stem from organizations dedicated to design thinking like IDEO and Google Ventures. While methodologies incorporate processes and techniques, tools are resources that enable such approaches. These may be activities, or templates that facilitate the approach.
1. Innovation Flowchart: A sample innovation flowchart may map out the details of the process. The structured overview serves as an organizational tool in the development process.
1. Question Ladder: A tool that helps you ask the “right” questions by refining your questions (). Asking the “wrong” questions can yield meaningless or less-than-adequate results.
1. Design Thinking Tool Kit: There are various tool kits for select audiences. For example, the “design thinking for educators” toolkit has design thinking resources related to education. A typical tool kit includes a wide assortment of resources with methods and instructions to help you put design thinking into action.
2. IDEO Design Kit: IDEO offers an approximately 200-page free PDF, “The Field Guide to Human Centered Design,” with activities on mindsets, ideation, inspiration, implementation and a few case studies: http://www.designkit.org/resources/1.
3. Google Ventures Design Sprint: A five-day design-thinking exercise that helps resolve questions through design, prototyping, and testing: https://www.gv.com/sprint/.
4. Design Thinking Mix Tapes: Stanford’s Design School offers three “mixtapes” that serve as guides through a half day of design thinking work in the areas of understanding, experimentation, and ideation: https://dschool.stanford.edu/resources/chart-a-new-course-put-design-thinking-to-work.
5. WE THINQ: Software designed to enable collaboration in innovation management: https://www.ideaconnection.com/software/we-thinq-258.html.
### Summary
Design thinking in business and entrepreneurship was made prevalent by David Kelley, founder of Stanford University’s Design School and cofounder of design company IDEO. Design thinking, which espouses an HCD approach, can be applied beyond product and graphic design to include the design of social policy, business strategy, services, and digital interactions. The five stages as espoused in Stanford’s design thinking model are empathizing, defining, ideating, prototyping, and testing. There are numerous design thinking tools that help develop and carry out these processes from various organizations and companies, ranging from IDEO to Google.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Google Ventures Design sprint: https://www.gv.com/sprint/
IDEO Design Kit: http://www.designkit.org
Stanford Design Thinking Mix Tapes: https://dschool.stanford.edu/resources/chart-a-new-course-put-design-thinking-to-work
Stanford Design Thinking Process Diagram: https://dschool.stanford.edu/executive-education/dbootcamp |
# Problem Solving and Need Recognition Techniques
## Lean Processes
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Discuss the lean process methodology
2. Understand the phases of the lean problem-solving process.
You have learned about different problem-solving approaches that entrepreneurs take to lead their startups and work with others. Most of these approaches have had to do with the entrepreneur’s cognitive or creative mindsets. Now we will learn about an approach that is more rooted in process, called lean process. Lean problem solving has been used as an entrepreneurial methodology in new and emerging ventures, and it’s interesting that it comes from a large corporate, manufacturing background that focuses on efficiencies. The Six Sigma methodology, pioneered at Motorola in the 1970s and 1980s, and adopted by many companies, is a disciplined, data-driven approach that provides companies tools to improve the capability of their business processes. According to the American Society for Quality, “Six Sigma views all work as processes that can be defined, measured, analyzed, improved and controlled. A set of qualitative and quantitative tools is used to drive process improvement. This increase in performance and decrease in process variation helps lead to defect reduction and improvement in profits, employee morale, and quality of products or services.”American Society for Quality. “What Is Six Sigma?” n.d. https://asq.org/quality-resources/six-sigma GE copied it and created the “Process Excellence” programs that millions of managers and others have taken to get certified at various “belts.” Although Six Sigma and Process Excellence do not fit strictly in terms of entrepreneurship, as they are used mainly by large, mature companies, many of the methods fit in the lean model.
Toyota pioneered the lean process in the 1980s. The term “lean manufacturing” is the most common, but it is much more than manufacturing. The lean process is a systematic method for the maximizing of continuous improvement and the minimization of surplus or unused material in the production of a process. The entrepreneur begins the startup with a sense the original product will be the product carrying the organization to success in the long term. In most cases, the good or service will require modification to maintain a process, technology, or up-to-date product offering. Lean problem solving means the entrepreneur’s entire team scans both the company’s internal and external environments for continuous improvement and methods for bringing additional revenue to the startup by cost improvement processes that promote sustainable value. The external environment encompasses customers, industry trends, and competition. The internal environment comprises the factors inside the enterprise, such as employees, and internal practices and processes. In lean manufacturing, for example, improving efficiencies in the internal environment should lead to advantages in the external environment (whether that be cost savings to customers, competitive advantage from more output/superior product, etc.).
For example, every mile saved per day per UPS truck driver results in approximately $50 million in savings per year, according to Juan Perez, the company’s chief information and engineering officer. Using customer data and artificial intelligence, the company created a system dubbed ORION, which is an acronym for On-Road Integrated Optimization and Navigation.Juan Perez. “UPS’ Approach to Innovation and Technology.” Presentation sponsored by J. Mack Robinson College of Business, Georgia State University, Atlanta, GA. March 28, 2019. To date, the system has resulted in $400 million in savings to UPS. By applying the lean process, everything that UPS saves on the input (by reducing mileage) leads to savings on the output, which leads faster deliveries, lower costs for consumers, and more profit for UPS.
### Lean Problem-Solving Process
The lean problem-solving process is a cycle of observation, assessment, and continual evaluation. As shown in , this cycle typically involves eight specific steps.
### Lean Problem-Solving Phases
Observation is the phase in which the entrepreneur studies the challenge and notes all facets of the challenge requiring solution. In this phase, the entrepreneur asks questions and conducts research about the change needed for a successful product, outcome, or service. The entrepreneurs must determine why the change is needed. What is the purpose of the endeavor? Feedback is extremely important in this phase.
For example, a community asked a group of entrepreneurs to help address the youth obesity problem in a middle school. The entrepreneurs began to study the intake of food by the children and determined that both the content of the school lunch menu and the lifestyle of the majority of the children were affecting the obesity rate in the community. They then defined the purpose of the project as finding a low-cost, low-risk method of changing the lunch menu and agreed that the primary outcome would be a 30 percent reduction in the obesity rate of the children. The entrepreneurs began to assess the cost of changing the lunch menu and observing what else the kids ate. The entrepreneurs discovered that the lunch menu change required to reduce the obesity rate was beyond the financial capability of the school district. Research also showed that many of the children, products of single-parent homes, were eating high-calorie, high-fat, take-out foods for dinner. Further observation revealed that the children did not engage in physical activity after hours because the local surroundings were not safe. The community needed a process to transform the wellness of the children, and the entrepreneurs recommended using a lean process approach to help the children as quickly as possible.
After the observation of the problem comes assessment, the phase in which the entrepreneur experiments and analyzes the potential process and its capabilities. The entrepreneur leverages creative tools and resources to arrive at a solution and assesses each step of a possible solution. Each step must add value to the solution, or that step in the solution is unnecessary. In addition, the step must be capable of solving the issue and add flexibility to the solution. How is the process or product being improved? In this phase, a prototype of the product is developed and delivered. The entrepreneur must ask the customer if all needs and wants are satisfied with the prototype. If the prototype is being developed for mass production, surveying customers about potential sales is essential. In the school lunch example, the school system would have been the customer of the new food menu (prototype) in the assessment phase.
Evaluation is the phase in which behaviors are analyzed to assess success. The entrepreneur continually studies each phase of the solution to observe the effectiveness of outcomes desired by the client. The entrepreneur ensures that transformation is built into the habits of the school to obtain, maintain, and develop the desired outcomes.
In a real-world example of a company applying lean processes, the New Balance Company, which designs and manufactures both athletic and casual shoes, used a batching approach in the early 2000s that organized production by departments, so that all of the cutting took place in one department, all of the stitching took place in another, and so forth. While it seems that batching tasks would improve efficiency, at New Balance, it meant that production of one pair of shoes took nine days. Executives observed piles of inventory sitting between floors and departments, and noticed employees waiting while there were delays in the production line. They also noticed that the pay structure contributed to the piles of works in process because employees were paid by the piece, which encouraged them to produce as much as possible.
The company applied lean principles to rearrange the production floor by value streams, or the making of a product by sharing similar processing steps. On one side was “cut and stitch” products using US materials of leather and mesh, while another side used premade products from overseas for soles, inserts, and kits. This change cut the time to make a pair of shoes down to four hours, meaning that domestic plants could ship some orders in twenty-four hours, while competitors may need as much as 121 days to ship when they outsourced manufacturing to Asia.
An often-used lean problem-solving tool is whiteboarding (). Whiteboarding is a type of graphing that permits the entrepreneur to plot each step in a process to build comprehension and detailing of the process. The entrepreneur draws each step on the whiteboard using a linking-type diagram, and draws arrows to show how processes affect other processes. Seeing the flow of the process allows the entrepreneur to note where functions in the process are duplicated or inconsistent.
For example, in a community garden, storing tools, such as hoes and hand trowels for weeding, in different sheds wastes time when preparing to begin the process of weeding. These tools should be stored collectively to eliminate multiple trips and wasted time. Seeing the process on a whiteboard or other medium brings awareness to how processes can be improved. After the process is changed, it is graphed again for further scrutiny.
### Summary
Lean process is a systematic process for maximizing continuous improvement through minimizing surplus or unused material in the production of a current process. With origins in manufacturing, the lean process can be applied to internal organizational processes as well as external product development. Lean process uses observation, assessment and evaluation, and whiteboarding techniques to solve problems.
### Review Questions
### Discussion Questions
### Suggested Resource
Lean Enterprise Institute: https://www.lean.org/WhatsLean/ |
# Telling Your Entrepreneurial Story and Pitching the Idea
## Introduction
Sara Minkara, a Muslim American of Lebanese decent, lost her eyesight at age seven because of a genetic disorder. She grew up experiencing ethnic discrimination and mistreatment because of her disability. As a college student in the United States, Minkara realized that she had access to privileges that other children in her native Lebanon did not. Her desire to make things better for youth like her developed into a passion for empowering blind children to get engaged in their communities. The problem: Many societies marginalize visually impaired people and may even see them as a burden. This bias can be attributed in part to physical and cultural constraints and habits that create de facto limitations on their ability to function freely and effectively in those societies. The solution: educational programs and public awareness campaigns that empower visually impaired persons from a young age and provide them with assertiveness training.
At 27, Minkara founded Empowerment Through Integration (ETI), a social enterprise that empowers youth with visual impairments in the Middle East-North African region and in the United States. The organization has grown from a summer camp to a small movement that assists more than 3,000 individuals across Lebanon and the United States. The mission and vision of ETI are to develop an inclusive society that transforms the global social stigma against disabilities and empower blind youth.“About Eti.” One of Minkara’s signature events is “Dining in the Dark,” which is designed to expose participants to the life of a blind person and educate them about the potential in all people, particularly those with disabilities, including the visually impaired. |
# Telling Your Entrepreneurial Story and Pitching the Idea
## Clarifying Your Vision, Mission, and Goals
Portions of the material in this section are based on original work by Mark Poepsel and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Clarify the vision statement, mission statement, and goals for your enterprise
2. Define and develop a problem-solution narrative that is compelling
3. Define and develop a value proposition that is credible and appealing to customers and investors
Entrepreneurs can sometimes be compared to superheroes: They solve problems. They wield great power and responsibility. They’re willing to take on risks the way superheroes are willing to take on villains. They are undaunted in the face of failure. They seek solutions and continuous improvement of their products with their customers in mind so that their solutions go beyond addressing their individual needs. When an entrepreneur succeeds, others say “If only I’d thought of that!”
But thinking isn’t enough. And even doing isn’t enough. Successful entrepreneurs also understand the need to communicate the origin and value of their venture. They not only solve problems, they tell stories of crises averted, foes bested, and painful defeats from which they learned how to start anew. After all, what’s a hero without an origin story and a list of tales, battles lost, and markets won?
In superhero narratives, these origin stories are sacred lore. For an entrepreneur, a problem-solution narrative is like the origin story for their offering. The problem-solution narrative concisely introduces a specific problem that affects many people and presents the good or service as an innovative, unique, and insightful solution. Here are some classic problem-solution narratives in advertising and in corporate origin stories to think about as you consider how to craft a quick, compelling problem-solution narrative.
1. A young basketball player lacks muscle mass. The athlete drinks milk and gets stronger, earning the a place on the school team.
2. Young people, pictured in silhouette, walk around a city looking bored with life. Then, they turn on their new MP3 players and start dancing in the streets. Their world is set ablaze in color and sound.
3. A hardworking ballerina lands the lead in a school performance, only to have it canceled as a result of the 2020 pandemic. Family and friends order lights and stage a rendition on the street.
These may not be the greatest stories ever told. You’re not going to get a National Book Award for a Snickers commercial, but these are memorable narratives about people who have a problem that the product in question can solve.
To stay focused through repeated series of successes and failures, you need more than a problem-solution narrative: You need a vision and, in turn, a mission statement and goals. You learned about these in The Entrepreneurial Perspective, but you should revisit them as you develop your story and refine how to pitch that story to potential investors, customers, and employees. A pitch is a formal presentation in which you ask for something. It is delivered (usually) to potential investors in a startup. More on pitches later in the chapter.
Sara Minkara’s vision statement may be defined as wishing to live in a world where visually impaired people are not discriminated against. Her venture’s mission is to establish a well-functioning nonprofit organization showing people in the United States, the Middle East, and North Africa the humanity and value in those with severely impaired eyesight. Minkara’s vision, imagining the organization’s long-term future, is to make it a global leader in providing services to visually impaired people. Specific goals include hosting events, developing educational programs, organizing awareness campaigns, and, of course, fundraising. Following this example of mission, vision, and goals, let’s break down each concept and consider how they work broadly and apply to your potential venture.
### Vision
A vision statement, as you saw in The Entrepreneurial Perspective, outlines the venture’s broader purpose, what the entrepreneur sees the venture growing into in the future. Before you can create a focused mission statement and goals answering who you are, what you do, and what you plan to do in the future, you must develop a vision statement that allows you look into the future to answer this question: “What might we become someday if our organization were the best possible version of itself?”
Drafting a vision statement is an exercise in ideation—a purposeful process of opening up one’s mind to new trains of thought that branch out in many directions from a stated purpose or problem—in this case, with the goal of generating new possibilities for goods, services, or processes to make your venture sucessful. A vision statement is more open-ended than a mission statement. For example, shows Amazon’s vision and mission statements. Notice how they differ.
To create a strong vision statement, look at the broader field in which your organization operates. Be general. State a dream that is not currently attainable but that defines what your collective outcomes would be in a best-case scenario. Crafting a vision statement enables your organization, as a team, to identify key areas for potential growth and key social influences you can have, but it is important to stay focused on changes in your industry or sector as a general rule of thumb and to revisit your vision when those may warrant a change. For example, Netflix started out with the goal of providing optimum value and convenience for customers renting DVDs but as entertainment consumption platforms evolved it needed to adjust, and it has since shifted into streaming content for television. The company’s 2019 vision statement is “Becoming the best global entertainment distribution service.”“Netflix Mission and Vision Statement Analysis.”
When crafting a vision statement, write questions beginning with, “How might we…?” or statements starting with, “In a perfect world, our organization would…” Craft a vision statement that hinges on the organization’s service goals and turns it into a lasting social good. (You should not promise to create world peace or give everybody a puppy, but you should look at how businesses operate in your field and dream of doing better strategically and socially.) These steps provide a good starting point:
1. State how your organization would function in a dream scenario.
2. Connect your organization’s dreams to broader hopes for progress.
3. Define how you’re going to make the world a better place in the future through your products and services.
Dreams do not have to be wild to be broadly appealing or influential. The purpose of the vision statement is not to set unattainable goals but to open minds in the organization. If the vision statement has no grounding in reality, it can easily be written off; if it focuses on market share and product development (that is, tangible, mission-oriented things), the point is lost. Imagine your best team doing its best work with future capabilities and affordances made possible by other entrepreneurs and creators like you, and then state clearly what your influence as world changers could be. Again, the goal is not to develop unmanageable expectations or demand constant innovation from employees and contributors who have jobs that sustain day-to-day operations. The purpose is to develop a conversation about what is possible for the enterprise. For smaller startup enterprises (a deli or coffee shop, for example), the vision can be simpler but still focused on a unique experience they want to create for their customers. In other words, it should still be aspirational, with a link to the mission statement. lists the vision statements of some companies across a variety of industries.
A vision statement does not have to be long to be strong. One well-known vision statement contains only fifteen words: “At IKEA our vision is to create a better everyday life for the many people.”“Vision and Business Idea.” This vision statement focuses on what IKEA hopes to accomplish, and what its employees can aspire to be—people who make everyday life better for others. Note the phrase “the many people.” This is purposeful: IKEA makes mass-marketed products and chooses to align its vision with its targeted consumers: many people. This vision statement is not framed as a political statement; rather, it is an ideal established for the global brand, and it indicates a broad positive outcome. IKEA’s statement is almost pure vision. A vision statement should connect an organization’s day-to-day work to a universal ideal rather than trying to draw a roadmap for implementation.
That being said, alongside its vision, the company follows up with what IKEA calls its “business idea.” It states: “Our business idea is ‘to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.’” This is something of a value proposition and a mission statement wrapped up in one. A value proposition explains what it is, exactly, that an organization or firm does that people will pay for (or contribute, to in the case of a nonprofit), and it is a central point in any pitch. We learned about value propositions in Identifying Entrepreneurial Opportunity as being integral to identifying opportunities, and you will learn how they figure into your business model in Business Model and Plan. But the discussion in this chapter is about how and why the value proposition needs to be articulated.
An example of a complicated vision statement is Coca-Cola’s.“Mission, Vision, and Values.” While they are a very successful company, in the vision and mission statements published on their website, the distinctions between each can be difficult to discern. shows a large collection of statements and comments titled “Mission, Vision, & Values” on Coca-Cola’s website that includes sections on workplace culture, market focus, and “working smart.” These concepts, taken together, cover most of what is discussed in this section. Coca-Cola is not committing sins of omission with its “Mission, Vision, & Values” page. If anything, it tries to say too much. Also at issue is how these ideas are stated. For a company with massive global reach and some of the best, most memorable marketing moments, the relatively lifeless nature of its vision stands out.
This is a classic case of telling rather than showing. IKEA and Coca-Cola arguably have a similar vision. They want to make life a little bit better for people in an everyday way. But with this series of statements, Coca-Cola tries to cover all possible types of vision for almost every major relationship or facet of the corporation imaginable. Coca-Cola has a separate mission statement on its website, shown in .
While this is shared as a mission statement, it reads like a vision statement. The value proposition is relegated to an afterthought in convoluted corporate-speak. This is all tied into a vague “2020 Vision,” which is not truly a vision statement but appears more like a wrapper for the “Mission, Vision, & Values” content.“Mission, Vision, and Values.” It is not clear what leadership, employees, business partners, or consumers are supposed to do with this information.
Coca-Cola is one of the world’s most recognizable brands. The company can grow by creating new products and by recapturing market share from competitors. It is essential, if and when Coca-Cola revises these statements, that it succinctly speak to all of those groups with one voice rather than trying to address each independently.
Crafting a vision statement for an entrepreneurial endeavor is different from redrafting Coca-Cola’s vision statement. A startup is in the process of defining itself, which can make it challenging to establish a far-off vision, but crafting and adhering to a vision statement can remind leaders and employees what they are capable of and what their market is all about, so it is an important step. A good vision statement is sufficiently broad to allow for your organization to move within its marketplace while still aiming to do some good in the world.
### Mission
In the chapter’s opening vignette, you learned about a young woman seeking to battle social injustice. Minkara’s mission was self-evident. It followed her experience facing prejudice in society. Other entrepreneurial missions may not be as personal or altruistic, but they can still be a force that drives passionate solution seeking. As we saw with Minkara, entrepreneurs often develop a product or service idea through a difficult or frustrating experience, whether a social injustice or a consumer frustration.
An entrepreneurial mission is a business or nonprofit organization’s reason for being. It is expressed as a self-conceptualization in the context of a marketplace and includes a sense of action. In considering a venture’s mission, relevant questions are: Who are we? What do we make or do? Why do we exist as an enterprise in the first place? Steve Jobs and Steve Wozniak, cofounders of Apple, had a mission to put personal computing in the hands of everyday consumers, which meant they had to create simple tools (a graphic user interface, mouse, and so on) in parallel with hardware.
A well-developed sense of mission establishes what an organization is and what it seeks to become. Even nonprofit organizations exist in marketplaces. They have to compete for resources and define themselves by the services they provide. Establishing a clear mission helps a nonprofit organization seek funding. It helps entrepreneurs in the for-profit world explain to investors, to customers, and to employees why their “thing,” whatever it is, is worth doing.
For example, the American Red Cross, one of the oldest and most well-known relief organization in the United States, has a very specific mission statement: “The American Red Cross prevents and alleviates human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.”“Mission and Values.” Defining an organization’s mission clearly and specifically is essential for success.
A mission statement, as you read in the chapter on Identifying Entrepreneurial Opportunity is a clear expression of an organization’s reason for being that defines its primary long-term goal and often includes an abbreviated plan of action for how to reach that goal. A mission statement is written by answering these questions:
1. Who are we?
2. What do we make or do?
3. Why do we exist as an enterprise?
Developing an effective mission statement and adhering to it puts members of an organization on the same page, and it communicates to potential partners and consumers that your organization knows where it is going. Mission statements can be revised, but it’s best to get it right at the start. A strong mission statement helps stakeholders prioritize the entity’s action steps and should guide decisions.
When it comes to crafting an effective mission statement, clarity is key: It must be specific. What is left out of a mission statement is often as important as what is kept in. A good mission statement is focused, direct, and honest about the marketplace in question as well as the organization’s capabilities. It strikes the right balance between practicality and hope. For example, Patagonia, a well-known outdoor apparel company, has a compelling mission statement: “Patagonia: Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.”
An inadequate mission statement might say this: “At Toys Inc., we make the best wooden toys money can buy, and our mission is to continue to grow to be a market leader in the classic toy industry.” A better mission statement might say this: “Toys Inc. is a market leader in North American wooden toy manufacturing. It is our mission to lead the global market in wooden puzzle and wooden toy car manufacturing and to serve customers with fresh versions of classic toys.” Both mission statements leave room for growth, but the second one defines more precisely what the organization is and where it is headed in the long term.
A mission statement should refrain from using clichés since these constrain the specific and unique vision of the venture. It should not limit innovation or creativity, and it should reference consumers or clients.
To create a strong mission statement, start by defining what the organization is. Even in a startup, you have a core problem-solution and an idea of what the product—and therefore the brand—will be. Be specific when defining your organization’s reason for being without limiting your avenues for growth. Include or embed the service mission within the broader mission. Again, the mission statement needs to do the following things with a tone of optimism:
1. Define who you are.
2. Define what you do now and for whom.
3. Define what you want to do in the future.
In a startup, the mission may change substantially in the early phases. Mission statements should not be crafted in a way that limits an organization’s ability to pivot—that is, to adjust the value proposition to better achieve product-market fit (see the Launch for Growth to Success for a more in-depth discussion of pivoting). And while they should not be impervious to change, revise the mission statement only when it is necessary and helpful to do so. Companies and organizations usually change their mission statement when they have made a major shift (due to an acquisition, pivot to another market, new growth strategy, etc.) or if their purpose has changed in a major way.
For example, the March of Dimes organization was originally founded to serve people afflicted by polio, but with the success of polio vaccinations, the disease was eradicated in the United States. As a result, the March of Dimes changed its mission to focus on preventing birth defects, premature birth, and infant mortality.Kelly Medwick. “Why, When and How to Change Your Mission Statement.” In another example, Slack, a venture-backed startup that went public in mid-2019, was founded as a way for online game developers to collaborate. The original venture failed (twice), but the founder noticed that his engineers used the tool for rapid collaboration and did not need email or other functions of Microsoft Windows. Slack quickly communicated this change in a simple mission statement: “Slack is where work flows. It’s where the people you need, the information you share, and the tools you use come together to get things done.”“Slack Integration.”
One thing should be clear: It is not the purpose of an organization to come up with better mission and vision statements. The purpose of an organization is to provide value to people and try to get paid or supported in doing so. The point of crafting mission and vision statements is to assist you to that end. Essentially, your vision statement is your dream, and your mission statement is your strategy in a real-world marketplace. The vision is a statement about why you matter as an organization with a view of what the organization will become in the future, while the mission is a statement about those who might be served by the venture. Refining these statements will help you clarify your entrepreneurial story.
### Goals
An organization needs to establish concrete goals for its products and services to remain viable. Goals should be stated in precise terms that are appropriate for the marketplace. For example, a new “white table” Italian restaurant in Chicago needs an initial goal on how it will attract and retain new customers based on its vision and mission, relative to what is already available. A new company’s initial goal is probably not to crush all competition and take over a monopoly position. Instead, it may hope to capture a percentage of a close competitor’s market share or create a new product to reach a niche market. In those instances, goals would be stated as specific outcomes to attract competitors’ customers, or in the case of a niche business (like Spanx), to define a new category of women’s comfort apparel. Lululemon Athletica, which pioneered customer-centered designs for women’s athletic apparel, recently established new growth goals that were consistent with its mission: “Management is hard set on growing the company to $4 billion in revenue by 2020. This involves growing historically small contributors to the top line, such as men’s, international, and the digital business.”John Ballard. “Lululemon Athletica Pushes Forward With Ambitious Goals for 2020.”
Goals can be tactical in the short term too. They should be reasonable, influenced by a detailed understanding of the marketplace and the competition, and attainable. Nothing stunts growth and clouds the path to achieving your vision more quickly than setting unattainable goals and holding members of an organization to impossible standards. Instead, set SMART goals, which you first were introduced to in The Entrepreneurial Perspective. SMART stands for specific, measurable, achievable, relevant, and timely. The best goals clearly communicate all of these elements, as shown in .
To break these down, SMART goals should be:
1. Specific: Your goals should be precise rather than overly broad.
2. Measurable: You should be able to test, in some quantifiable manner, whether a goal has been met, meaning that there needs to be some method to determine whether the goal has been met.
3. Achievable: The goal must be attainable; it cannot be so lofty that it cannot be accomplished. On the other hand, the goal should not be so easy that it can be accomplished quickly or with little effort.
4. Relevant: The goal should be well suited for what you want to accomplish; this means that the goal should be relevant to the outcome needed.
5. Timely: Each goal needs to have a defined deadline: the time when the goal must be accomplished. What time frame do you have for completing your goals? How does this timeline fit into your overall plan?
Is it a reasonable goal for a specialty soap company to strive to capture 1.5 percent of the global market share two years after incorporating? Let’s deconstruct the goal to assess how SMART it is. It is specific because it establishes a clearly targeted amount (1.5 percent) of a defined market (global specialty soaps). Market share is measurable. We can assume that this is an attainable goal for our imaginary startup. Is it relevant? Capturing market share is always relevant because it translates to near-term earnings and potential for future earnings at the same time. The goal as stated is also timely (within two years). Thus, this is a SMART goal.
SMART goals are not guarantees of success. As an entrepreneur, you could be wrong about whether a goal is attainable, for example. Or you may fail at measuring outcomes correctly, and your idea may not be as well defined or unique as you thought. Nevertheless, it is much better to set goals with all of these factors in mind than to practice wishful thinking or set abstract goals and hope to reach business benchmarks by luck.
Thinking like a business entrepreneur again, recognize that SMART goal setting is a tactic for getting things done in the short term. You can line up several attainable goals over a period of several weeks or months, and build your way to a complex, realistic business plan. The Small Business Administration (SBA) business plan template,US Small Business Administration. “US Small Business Administration 8(a) Business Plan.” March 31, 2014. https://www.sba.gov/sites/default/files/SBA%201010C.pdf for example, includes eleven core sections and, as a blank outline, is thirty-five pages long. If you set a SMART goal to complete each section in about a week, in three months, you would have a comprehensive business plan.
### Summary
The most basic formula for telling the story of your innovation is the problem-solution narrative. Entrepreneurs are problem solvers, but they need to strategize to battle competitors and to weather the risks inherent in starting a new venture. Vision and mission statements are crucial to planning a venture. Vision statements are broader than mission statements. Entrepreneurs can set attainable goals with the help of the SMART goals framework. All of these tools—vision statements, missions, and SMART goal formulation—help build on the venture’s origin story and serve as a general and specific organizing narrative.
### Review Questions
### Discussion Questions
### Suggested Resources
This publication offers a thematic analysis of how mission statements are used in higher education: https://muse.jhu.edu/article/196947
This video provides a walkthrough for crafting your mission statement: https://www.entrepreneur.com/article/65230 |
# Telling Your Entrepreneurial Story and Pitching the Idea
## Sharing Your Entrepreneurial Story
Portions of the material in this section are based on original work by Mark Poepsel and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Identify the importance of telling your own story
2. Describe the advantages and disadvantages of using stories to build a startup
The popular reality TV show about entrepreneurs making pitches, , is sometimes erroneously described as a show about pitching. This is false. Shark Tank is a show about people, usually inventors, with interesting back stories who are now looking for help getting their product to its next step. The show offers them the opportunity to pitch their idea to a panel of investors who, if they like the idea, make a financial offer in return to help get the product to market. Every pitch is preceded with what reality TV producers deem to be the more interesting narrative—the entrepreneur’s story. Viewers learn what inspires entrepreneurs, how hard they have worked on their prototypes and pitches, and what they have riding on those few minutes in the room with the “sharks.” Only after the entrepreneur’s story is set up do we get to the punch line, so to speak—the five-minute memorized pitch—which, if the entrepreneurs’ ideas seem viable, is followed by further talk about valuation and mentoring.
Shark Tank is not a course in pitching products, but it does highlight an important aspect about the practice: Stories matter. They matter to both investors and customers. Many angel investors base their decision more so on the team giving the pitch than on the product itself.
### Telling Your Story
As an entrepreneur, you need to be able to effortlessly discuss your product and its problem-solution narrative, its value proposition, its market niche, and the competition, but in your pitches, you also need to be able to tell your story. Prepare to tell your entrepreneurial story by applying the most universal story format: the fairy tale. Here is a template you can use:
Of course, the fairy tale format is not a formula for giving a practical, professional pitch, but it can help you put the pieces of your own entrepreneurial journey on paper so you can weave key details into your pitch as it develops.
Once a company grows, its story grows. But the original stories of the founders still play a part. This bigger story is called a corporate narrative. A corporate narrative is not a fairy tale but relays how a successful company grew from something small, perhaps starting in a garage in California, into a powerful firm or corporation serving millions of people. Companies craft narratives, often with several embellishments, for marketing purposes, but they also serve to remind leaders and employees about the vision and dreams the company’s founders once had.
An example of a startup that still inspires many today is the Hewlett-Packard Corporation (HP). Its origins lie in the efforts of Bill Hewlett and David Packard, two Stanford University classmates in the 1930s. Much like members of a garage band, they started their company in a real garage, and the firm has outgrown its humble beginnings many times over. You can see the actual (restored) garage in .
### The Advantages and Disadvantages of Using Stories
The primary advantage of using stories in pitch development is that they are relatable. Stories are how we make sense of our lives, so it’s natural for stories to help others make sense of our new ventures. Stories are useful for transferring concepts with imagery told from a particular point of view.
When making a pitch, it is best not only to convey the value proposition of your product but to convey the value in the way that a loyal, enthusiastic consumer of the product (a brand advocate) would see it. Your goals become their goals. For example, Nike’s Air Jordan brand has one of the most powerful advocate communities in the world. They are motivated by stories of being, in some small way, like one of the greatest athletes of all time. Inspired, they not only buy Nike shoes and clothes, they camp out and wait to be a part of the latest release—like people waiting for the next installment of their favorite film on opening night. Using narrative structures to get your pitch points across can inspire potential investors to see and share your vision and goals. The downside to narrative-based customer development and marketing is that it can lead to a culture of manufactured need. A new form of consumerism, built on what marketers call the “fear of missing out,” is another way of characterizing the euphoria people feel when they are enraptured by a brand. Fear of missing out (FOMO) refers to the sense that we need to keep up with our peers and the personas they represent in social settings, particularly on social media. They can say they were there and that they had the best stuff first. Critics would say that building such a strong identity to a brand, or even material goods, clouds people’s sense of what is really important in life.
Even as you develop skills in pitching products by crafting inspiring narratives, be aware of the ethical implications of your work. You need to learn how to successfully make pitches to grow a brand and a company or nonprofit, but this is not a license to ignore the impacts of your work. Instead, consider this a call to action to balance your entrepreneurial, consumerist pitches and efforts with pro-social ones as well. Across a career, this kind of balance may be achievable, and, for both mass consumer products and purposeful social entrepreneurship efforts, good storytelling will help you achieve your objectives.
There is another type of narrative that can be pernicious—that of the wildly successful entrepreneur who has it all. Yes, this chapter starts by comparing entrepreneurs to superheroes. They do accomplish things other people only dream about, but many of the most famous ones have anomalous careers marked also by favorable conditions, luck, and hard work. The narrative that matters other than that of your entrepreneurial effort is your own personal one. The same way a successful startup is expected to iterate and overcome failures, so too are you encouraged and expected to persevere after setbacks when it is reasonable to do so.
As with the rapidly evolving tastes and habits of consumers in the face of “omnichannel” marketing practices in the US economy, it is impossible to be out in front of all of the latest information and communication technologies (ICTs). Even manufacturing technology evolves rapidly. If you make it an essential part of your corporate narrative that you are always “on top” of all technologies, you may be setting your business or service up for failure. ICTs and manufacturing are massive sectors in the global economy. You are not expected to know everything about them. If you can conquer your FOMO regarding the latest technological developments, your story may not be perfect, but you will be able to work from a personal and corporate position of balance.
Also, be realistic about your own entrepreneurial story. Entrepreneurs who focus too much on their own narrative might miss important market challenges or deep-seated problems with their design or key features. Issues may arise and be ignored, to the peril of the endeavor, if entrepreneurs believe their own stories are a matter of destiny. Ignoring hurdles, failures, and shortcomings within yourself, your value proposition, or your organization can seriously hinder your ability to grow your venture. Your role as a communicator is not to spin a fairy tale yarn and try to live in it. Rather, your role in telling your entrepreneurial story is to demonstrate your capability to overcome challenges and show your capacity for growth as it relates to perseverance, thoughtful inquiry, and providing value and solutions to others.
### Summary
This section outlined the importance of conceptualizing and communicating your venture in narrative form. Not every startup venture is a fairy tale, but if you can recognize and apply trusted story formats, you can help establish prominence for your brand, your products, and their specific features. Eventually, your story might be the genesis of a corporate narrative if the startup grows to become one. There are advantages and disadvantages to crafting stories. The advantages are that stories help you communicate the problem your innovation addresses, the solution it offers, and its market need. The disadvantages are that a story can create the fear of missing out in consumers and can set unattainable, rigid goals that can cause you to miss key factors in the venture’s development.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Using empathy in storybuilding: https://www.inc.com/craig-bloem/all-strong-startup-brands-have-a-great-story-heres-how-to-tell-yours.html
Harvard Business Review’s how to craft a corporate narrative: https://hbr.org/2016/03/how-to-build-a-strategic-narrative |
# Telling Your Entrepreneurial Story and Pitching the Idea
## Developing Pitches for Various Audiences and Goals
Portions of the material in this section are based on original work by Mark Poepsel and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Understand the various audiences an entrepreneur may pitch to and how the pitch goals vary for each
2. Define and develop the key elements of a pitch
3. Describe a pitch deck and pitfalls to avoid
4. Create and create an elevator pitch
Let’s look more closely at how to develop pitches. Remember that we defined a pitch as a formal but brief presentation that is delivered (usually) to potential investors in a startup. As such, a pitch is designed to be clear, concise, and compelling around key areas, typically the key problem or unmet need, the market opportunity, the innovative solution, the management plan, the financial needs, and any risks.
You will often need to craft different types of pitches for different audiences. Key audiences include potential investors, social connectors, potential partners, key employee recruits, and the broader community, particularly if one needs to request permits or regulatory concessions. One misconception about pitching is that it is always done to investors who are ready to fork over a few hundred thousand dollars to the team that presents the best idea of the day. While this is, more or less, the premise of Shark Tank, it is not how pitching works for most entrepreneurs.Bill Rader. “The Truth about Pitching (and Why Many Entrepreneurs Fail Here).” Entrepreneurs may pitch to friends and family as they develop an idea, and, at another time, they may pitch to well-connected entrepreneurs and investors who have little interest in the market sector in question but who can make the right introductions or helpful connections. Entrepreneurs might make pitches in what is known as a pitch competition, hoping for a shot at funding and mentoring.
Pitches come in many forms, but underlying them is that to pitch is to ask for something. provides an overview of different audiences you might pitch to, outlining how the approach and presentation may vary for each.
### Pitch Audiences
No matter to whom you are pitching, you usually need to include references to your problem-solution statement, value proposition, and key features, and how you prioritize that information will change for different audiences. As shown in , once those core sections are covered, your different presentations should be tailored for different ultimate “asks.” The ask in a pitch is the specific amount of money, type of assistance you request, or outcome you are seeking.
### Investors
You have been introduced to different types of investors and will learn about them in more depth in Entrepreneurial Finance and Accounting. For now, you just need to know the different types so you can start to think about how entrepreneurs structure their pitches to them. Individual investors want to know about team, product, value proposition, and potential return on investment. Angel investors are individuals who use their own money to invest in companies they’re interested in. Venture capitalists are investors who pool money from others and use that money to invest in companies.
Pitching to many potential investors without success can be time consuming and disheartening, but in most cases, the investor’s time is worth more than that of the people giving the pitch. If an investor offers feedback, it must be considered. You will probably not get all of the answers you need regarding how to make your venture an immediate success after giving a few pitches to individual investors and pitch competition judges, but if they take the time to offer a constructive critique, consider the pitch development and performance feedback a valuable experience.
### Friends and Family
Imagine asking friends and family for money to keep your startup going after you have maxed out your credit cards and secured a small business loan only to build a prototype and realize you do not have enough funds to get it to market. A common entrepreneurial journey starts with this sort of self-funded effort. Between 50 percent and 70 percent of startup companies in United States self-fund (savings, credit cards, or friends and family) their initial capital needs.Laura Entis. “Where Startup Funding Really Comes From (Infographic).” ,Meredith Wood. “Raising Capital for Startups: 8 Statistics That Will Surprise You.” In one sense, you may be perceived as being more trustworthy with so much riding on the endeavor. Still, you would frame your pitch differently when going to friends and family than you would if preparing for an investor. You would probably make the tone less formal. You would focus on the value proposition and the immediate outcomes of the loan. You would point out tangible deliverables or milestones that this money would help you attain, and you would need to draw a roadmap from this contribution to likely, not just hoped for, revenues if you were to give yourself the best shot at raising money. Asking friends and family for, say, $10,000 might be more stressful to an individual than to ask an investor for ten times that amount. Your friends and family may want to invest in you, but they will also want to make their decision with a tangible narrative in mind. You want to build this narrative so that they can say: “I gave my family member X, so that they can finish building Y, to earn revenues of Z and continue forward with their innovation.”
### Potential Employees
Entrepreneurs also pitch to potential employees by focusing on why they are needed to help the team create something innovative and valuable. Once a product is under development, you must pitch to vendors. Prepare to explain the value proposition and key features in detail and explain how the vendor shares in revenues, such as options about accepting equity in part or in lieu of cash payments for services.
Entrepreneurs might also pitch to each other in hopes of building teams. Since most entrepreneurs are familiar with the structure of the pitch, you might be able to streamline proposals and simply state the value proposition and the ask. You will want to mention your team. The level of detail you share about who is working with you and what their contributions will be depends on the level of interest of the potential collaborator or investor. Future employees will likely want to know who they will be working with. Family and friends may not need to know the employment history of team members, but they, like other investors, will expect to know that there is a team capable of continuing to develop the product.
### Other Audiences
Other types of audiences, which you can read more about in the Building Networks and Foundations chapter, include quasi-governmental bodies, individual investors, incubators, trade groups, and competition judges. (Pitch competitions are discussed at length in Reality Check: Contests and Competitions.) Understand that governments usually care most about creating jobs or retaining jobs in their communities. Advanced competitions and larger investment firms will want to see concrete numbers demonstrating product viability, market relevance, and previous growth. In other words, they will expect to see more details, and they will usually communicate ahead of time their specific interests. That being said, you must network and investigate which elements of your pitch to prioritize based on individual investor or investment firm preferences.
### Pitch Goals
Planning a pitch means researching region, potential investors, and current competitors working in the same or similar marketplaces. A good pitch explains not only what makes the product or service good but what makes a market good. Research markets in addition to the individual investors you would like to target. Angel investors are hard to find, but markets can be thoroughly dissected. Marc Andreessen, cofounder of Andreessen Horowitz, one of the most successful Silicon Valley venture capital firms in existence, once wrote, “In a great market—a market with lots of real potential customers—the market pulls product out of the startup.”Marc Andreessen. “Part 4: The Only Thing That Matters.” This is presented as an answer to a question Andreessen posed to himself: “What correlates the most to success—team, product, or market?” He set up this question as a rhetorical tool to teach entrepreneurs that without a market, you do not have a product no matter how hard you work or how genius your team is. Investors specialize: Find investors in the right geographic location and find investors who know the market sector. Your goal should be to find mentors who can explain markets to you in significant, accurate ways. If you find a fertile marketplace, you can practice customer development, and learn and iterate your way to success.
### Key Elements of the Pitch
A pitch is usually presented through what is called a pitch deck, alternately called a slide deck. This is a slide presentation that you create using a program such as PowerPoint, Prezi, Keynote, or Google Slides that gives a quick overview of your product and what you’re asking for. As such, a pitch is designed to be clear, concise, and compelling, and should include the key areas shown in .
Here are six key elements of an entrepreneurial pitch from Media Innovation and Entrepreneurship.Mark Poepsel. “Pitching Ideas.”
If you have followed this discussion, you have established a vision for your innovation and the company you want to build around it. You have established a mission and identified a clear purpose for it. You should have a keen sense of your entrepreneurial story, but if you cannot express these things in a way that makes other people see the value, your innovation may not survive. You don’t build pitch decks solely for the purpose of asking for money or support. That may be the primary objective, but when you work on your pitch, you build the narrative case again and again for why your idea has value and why other people should buy into your vision.
### The Pitch Deck
As you can see, the primary means entrepreneurs have of sharing their vision is the pitch deck. Usually ten to twenty slides can explain your company, its goals, and key information to persuade an audience to take action (usually investors to consider investing in the enterprise). Pitch presentations should be visual and engaging. They should be easy to edit and rearrange, and should engage viewers with art, panache, and reasonable appeals. In general, they communicate the inspiration behind the innovation, its future capabilities, and the strengths of the team. Incorporate as many visuals as you need and make sure the visuals match the script.
As an entrepreneur, you will be judged on your ability to develop and deliver a pitch. It can be taken as shorthand for your ability to research a marketplace, guide a team, and manage a product. Sharing your vision using slideshow software is not easy. Viewers are not impressed by status quo pitch presentations, but critical audiences will also quickly notice when a pitch is all flash and lacks a good value proposition. A strong pitch, content-wise, can be noticed, even if the slide design is less than stellar. In other words, developing a great-looking pitch deck is important, but there has to be substantial content.
Let’s use the slide deck from Airbnb as an example. It was presented after the company grew from its initial seed funding stage into a viable operation with high hopes for future revenue growth. That is, they were already established and making money when this deck was in use. It was presented after the initial investment stage, when the company had done a good deal of customer development.
The track record is always in question when small firms go asking for big money, so note how Airbnb describes its previous success and potential for future growth. When funded, AirBed&Breakfast would change its name and grow it into a global brand. This relatively straightforward deck from 2008–2009 is a popular example because of its simplicity and its powerful value proposition, although some experts note that the design could be better.“Airbnb Pitch Deck.” Nevertheless, this was a successful pitch deck.
Visit https://press.rebus.community/media-innovation-and-entrepreneurship/chapter/pitching-ideas/ to see a SlideShare page containing the following ten slides and two more add-ons from SlideShare. The description of this pitch deck comes from Media Innovation and Entrepreneurship.This material is based on original work by Mark Poepsel, and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
1. Slide 1: Airbnb started out as “AirBed&Breakfast.” Brand identity is established with a sans-serif typeface, use of color, and a clear tagline: “Book rooms with locals, rather than hotels.”
2. Slide 2: The problem statement is straightforward: Travelers need an affordable alternative to hotels.
3. Slide 3: The solution statement focuses on the nature of the product, that is, that it’s a web platform, and on key features and how they create value, both financial and cultural capital. Note that key features and the value proposition are already addressed through three simple slides.
4. Slide 4: To establish product-market fit, you first have to have a market. The Airbnb pitch deck notes that at the time there were 630,000 users on couchsurfing.com and that there were 17,000 temporary housing listings on Craigslist in San Francisco and New York combined in one week. Thus, there existed a large potential traveler pool and a large pool of people with rooms for lease, but these groups were in need of a unified platform.
5. Slide 5: The fifth slide details the size of the market and Airbnb’s share, showing potential for growth.
6. Slide 6: Completing the case for product-market fit, this slide shows the attractive user interface and provides a mini-narrative for how the product works.
7. Slide 7: This slide shows four years’ of revenue totals as simple math: 10 million + trips × $20 average fee = about $200 million in revenue. This is evidence of product-market fit and whets the investor’s appetite for potential future earnings.
8. Slide 8: This slide shows how Airbnb has already beaten its competition to own the market for certain events and create partnerships.
9. Slide 9: Here, investors get the full picture of the competition.
10. Slide 10: The financial expectations are pretty well established by this point and were explained verbally. What this shows are the barriers to competition expected to help preserve Airbnb’s position, future earnings, and growth expectations.
Consider what was involved in creating this Airbnb slide deck. The deck is not particularly complicated. AirBed&Breakfast, as it was called at the time, was a market leader in a niche that other companies had previously tried to exploit. The company’s rapid growth was not a guarantee, but this offer was too good for investors to pass up, although at the seed funding stage, some investors did not see the potential in a service that helps people sleep in others’ private residences.Alice Truong. “The Investors Who Passed on Airbnb’s Seed Funding Had Their Reasons.” By the point this deck was in use, the company had gotten past initial concerns about safety and viability, and was ready to grow quite quickly. A 2018 check shows Airbnb has secured funding through six rounds from a variety of major investors.“Airbnb Investors.”
As we have seen, pitch decks and pitches are developed and delivered for various reasons, to various audiences, with varying content. For example, you may prepare pitches to pursue different long-term visions for your product. Or, if you do not secure seed funding, you might scale back your idea, adjust your vision, and rework your pitch. What remains the same is the need to convey how you will bring value to users or customers, and demonstrate the core pitch elements, adjusted for each altered outlook.
### Elevator Pitches
After looking at an exemplary pitch deck adapted by a niche market leader between seed funding and the venture capital quest, it may seem difficult to inspire investors via a one- or two-minute elevator speech for a project under development, but preparing for this type of pitch is essential. An elevator pitch is an abbreviated pitch, a memorized talk that can get you in the door to put your full pitch deck on display. The elevator pitch should touch on the key elements of problem-solution, value proposition, product-market fit, and team, and not much else.
Giving an elevator pitch is an art. The elevator pitch can be memorized and should be. It might be delivered informally at networking events or at dinner parties or other social engagements. You never know when you might need to give an elevator speech. You might find yourself talking to someone who’d be interested in your venture, and it might be at a golf outing, on the ski slopes, on the street, in a store, or, yes, in a giant investment firm’s lobby as a courtesy, as in The Big Short. And of course, in elevators. That’s why it should be memorized and up to date.
The classic example of a good elevator pitch is the one job candidates give that lands them an entry level job in a company for they have always dreamed of working. Adapted from an article in Forbes,Nancy Collamer. “The Perfect Elevator Pitch to Land a Job.” there are six elements of a good job-seeking elevator pitch. First, the pitch must be targeted. It cannot sound as though just any job will do. You need to pitch yourself for the specific role the employer is trying to fill. It helps, second, to write your pitch down in order to edit it and perfect it. Third, it should be correctly formatted and, fourth, focused on the company where you hope to work rather than on yourself. Explain how you understand what they are hiring for and let that be the setup to a story that ends with you being the best person to fit their needs. Fifth, clear away the buzzwords and corporate-speak, and, finally, practice performing your pitch aloud. Elevator speeches, after all, are given in person.
However, a personal pitch is a relatively simple and straightforward task. If you’re asked to write an elevator pitch for your proposed venture, start with about three sentences, or a 280-character Tweet. Write it first as a set of talking points so that you don’t get hung up on trying to present the exact words in the exact order. Make your elevator speech broad enough that any member of your team could deliver it and any potential investor could comprehend it in passing. Delivering an elevator speech is a linear process, meaning a person can’t be expected to read back or probe for more information the way they might with a written presentation or in a formal pitch presentation with time for follow-up questions. Be sure to bring business cards and keep your smartphone charged and ready for the exchange of contact information, a sign that you have succeeded in this first step.
### Summary
A pitch is a request for support, either financial investment or some kind of support. A great pitch takes into account the intended audience and the goal of the talk, and prioritizes information accordingly. In other words, it answers the questions Who? (Who are we pitching?), What? (What are we pitching to them?), and Why? (Why are we pitching: What is the “ask”?). Once you establish these elements, you need to develop a professional pitch deck and include engaging materials that share your passion and communicate your vision. Your pitch should paint a picture of a successful product or service delivering strong returns for investors or for those who choose to work for you or do business with you.
This section offered an outline of elements for a professional pitch deck and provided a few details about what ought to be included. Pitches may vary in length and should take into consideration the demands of contest rules and the quirks of potential investors. That said, there are elements that almost every pitch needs to include, and they are presented in the approximate order in which they might appear in your pitch deck. In general, you should cover all elements of the pitch as outlined here, but the level of detail may vary based on the audience. The entrepreneur should ask the key contact what specific area(s) she should cover so as to make the best impact.
We also discussed crafting different pitches with different senses of vision in mind, which can be particularly helpful post-pivot when an organization has a product but needs to adjust it to target new markets. Finally, we looked at the elevator pitch, which is miniature version of your more complete professional pitch and an introduction to your vision. The pitch before the pitch, if you will, should be clear, concise, and catchy—enough to get an investor’s attention without driving them to hop off the elevator.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Pitch deck templates: https://articles.bplans.com/what-to-include-in-your-pitch-deck/ and https://www.forbes.com/sites/allbusiness/2017/03/04/how-to-create-a-great-investor-pitch-deck-for-startups-seeking-financing/#4bbce7c2003e and https://www.startupgrind.com/blog/the-quick-and-dirty-guide-to-creating-a-winning-pitch-deck/ |
# Telling Your Entrepreneurial Story and Pitching the Idea
## Protecting Your Idea and Polishing the Pitch through Feedback
Portions of the material in this section are based on original work by Mark Poepsel and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Understand why you need to protect your idea
2. Describe both legal and unconventional tools to keep your ideas safe
3. Understand the importance of feedback and how to manage and use it
When you start to pitch your idea, it means you are sharing it with a variety of people for different purposes. When encouraged to develop entrepreneurial ideas, students often ask, “How can I be sure no one is going to steal my idea?” The response often is that ideas come easily, while knowledgeable, driven leaders are hard to find. In other words, for those of you just starting out as entrepreneurs, it is important to recognize that coming up with ideas is much easier and much less important than learning how to turn those ideas into products that fit a market and that have a customer base already, or one you develop through painstaking customer development strategies. Many entrepreneurs find it is more important to sell an investor on their leadership potential and the strength of their team than on the strength of their idea or prototype. Even so, it is common for entrepreneurs to want to protect their intellectual property because more well-established companies might leverage deeper wells of resources and broader, more powerful networks to bring an innovative product or service to market in the time it takes an entrepreneur to move from securing seed funding to landing their first support for their first venture capital round (after seed funding).Some of this material is based on original work by Mark Poepsel and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
Protecting your business idea with a patent, should you choose to apply for one, is important. Patents are granted for the purpose of encouraging entrepreneurship. If innovators have some reassurance that others will be kept out of the marketplace for a certain amount of time, they may be more likely to take the risk to pursue an innovation in the first place. Intellectual property protection (patents, trademarks, copyrights) is covered in much more depth in the Creativity, Innovation, and Invention and Fundamentals of Resource Planning chapters.
Products in most fields need to be developed and brought to market more quickly than the time it takes to go through the standard patent process. For manufactured goods, it is important to seek a patent when a product is finalized to protect the design. For intellectual property, it may be best to build first and seek patents later, particularly in a highly competitive field where it would be difficult to show that you truly have a unique breakthrough.
Entrepreneur.com has some helpful suggestionsStephen Key. “How to Protect Your Business Idea without a Patent.” that are paraphrased and reframed here: First, recognize that almost nothing comes to market having been created by a sole inventor or innovator. Some ideas truly are unique, but even they are nearly impossible to keep “under wraps.” Ideas have to be shared with many people for products or services to be developed. If nothing else, you will likely have to present your idea to investors at some point. Protecting initial ideas is not as important as protecting versions of products and services developed through iterative learning and testing processes because “know how” and trade secrets are considered intellectual property and must be protected since they are not always patentable. Aim to protect your successful value propositions, not your every technological whim. Most new business ideas are variations of solutions that others have anticipated or even written about, but others have not had the drive, the networking skills, or the fundraising ability of a true entrepreneur. Balance your time wisely between trying to protect your idea and working to develop it.
One way you can gain some peace of mind, again to paraphrase Entrepreneur.com,Stephen Key. “How to Protect Your Business Idea without a Patent.” is by thoroughly investigating everyone with whom you plan to partner. If you have some assurance that they have not “burned” collaborators in the past, you can proceed with a sense of security. Conduct research without invading anyone’s privacy but use all of the public tools available to you. Search online to learn about potential partners and their previous endeavors. Request contact information and perhaps a list of references or former collaborators from potential partners. The level of formality is going to depend on the nature of the industry you are working to enter and the nature of the relationship you have with your collaborators, but if they resist being researched, that could be a sign that they will probably not prioritize you or your product’s protection.
### Legal Agreements
Outside of patents, there are additional legal means of protecting your intellectual property.Stephen Key. “How to Protect Your Business Idea without a Patent.” You may wish to require partners to sign a nondisclosure agreement (NDA). Typically, NDAs carry with them a penalty should the partner disclose what they know of the proprietary information that lies at the heart of your value proposition. These can be time limited, meaning after a certain amount of time, someone will be free to discuss the business and its proprietary practices, or, for stronger legal controls, they may be open-ended. An open-ended NDA can require a person to stay silent about key information for life or face possible civil lawsuits worth potentially millions of dollars.
A noncompete agreement in a contract prevents an employee from working for the competition for a specified period of time after working for you. The intention is to prevent them from taking your secrets or their skills to a competitor. Some of these practices have been called into question particularly in industries where low-level workers who do not carry around trade secrets find they are asked to sign these types of agreements. However, they can help keep corporate espionage to a minimum, and they can prevent certain key employees from taking the organization’s intellectual property with them to their new employer, or perhaps to create their own startup. Employees should only sign them if they are a condition for employment. These agreements can vary from state to state. California in general does not enforce noncompete agreements; this is due in part to the dynamic nature of startups, particularly in Silicon Valley. It also reflects a philosophy that working professionals should not be inhibited or restrained from pursuing their livelihood.
A work-for-hire agreement between an individual employee and a company states that ownership of innovations belongs to the company, even if an individual makes substantial contributions to the product, service, or process. You should expect to be required to list collaborators on patents, even those working under a work-for-hire clause, but the purpose of the contractual agreement is to ensure that you or your company maintains exclusive rights to the patent.
### Unconventional Methods
One further suggestion is to apply creativity and mask your product or service’s true nature. By de-emphasizing certain key features or by burying them in the user interface (UI), you might be able to turn attention away from your value proposition while still building your product, platform, or prototype. The user interface (UI) is what a customer sees when they use your product. A graphic user interface (GUI) is common for all Windows and Apple-based devices. Smartphones use application (app) interfaces built off the base operating system (mainly iOS or Android). UI’s have become very common for many consumer and professional products, as they link to microprocessors, sensors, memory, and other embedded features. From a design standpoint, your team must decide where every button, search box, graphic element, and information display is placed and what it will look like. Good UI is useful and feels intuitive to the user.
For digital products and services, this aspect of your product is incredibly important, which is why manipulating it to mask functions or features is particularly risky. This is not a fool-proof approach by any means, but in hyper competitive, rapidly evolving environments such as the web software and mobile app industries, where invention and iteration occur at a breakneck pace and where, as soon as you go to market, your competitors can see and try to re-create your service or platform, a little subterfuge can give your business an edge at a relatively low cost.
An example of masking the true intentions of a product, perhaps, is the development of the mobile game Ingress by Niantic, Inc. Ingress is a GPS-based augmented reality game played around the world where users join imaginary factions and take over imaginary portals tied to real geographical locations in order to link up those portals and help their faction gain territory and resources. But while Niantic was taking its global mapping expertise and making a SciFi game out of it, it was also developing Pokémon GO. After specific geographic “nodes” were mapped by users the world over, Niantic had a global network of points of interest indicated by users. In many cases, nodes in Ingress—places with public art, cool architecture, or historical markers, for example—later became PokéStops in the Pokémon GO game, where players of the global augmented reality game gather resources to catch and battle their pocket monsters.
One way to protect your intellectual property is to strategically mask dormant features or capabilities until they can be more fully exploited. While few startups have the technological clout of Niantic, almost every business makes decisions on what to push forward, what to hold back, and when to release new products or features.
### Using Feedback to Refine Your Pitch
Pitching requires you to demonstrate that you have assembled a capable, professional team that can turn an idea into an innovation. Users, partners, investors, and others will offer thoughts on how your product or your organization should change. Investors consider it a warning sign if an entrepreneur cannot handle feedback.John Rampton. “25 Reasons I Will Not Invest in Your Startup.” Applying lessons learned from feedback is the purpose of business learning.
Entrepreneurial ventures often start out as problems with no easy solutions. Your initial idea involves your best guess at what will be an innovative solution, but that will evolve more quickly toward product-market fit if your response to feedback is to accept it with grace. Your pitch must demonstrate that you have a great product, that you have done your research, and that you are able to take feedback and apply it to your products to make them better.Michelle Ferrier and Elizabeth Mays. In other words, you must show you are coachable.
Your venture’s development depends on gathering data to find out what customers like and what investors are willing to fund, so you must seek out positive feedback and build on it, but you must also think critically about the positive messages you receive. Are consumers or users enthusiastic in their support or merely polite (this can especially be a concern when pitching to friends and family)? Can you clearly identify why you received positive feedback about certain features and not others? Be sure to gain feedback on many product variables and be sure you can isolate data points for meaningful analysis. The best feedback includes quantitative responses indicating what consumers like and what they don’t, as well as qualitative information explaining why. Quantitative data relate to numerical measurements including actual purchase and behavior as well as opinion research about a product. Qualitative data are complex information that answers the questions “Why?” and “How?” It is often impossible to tell why people do what they do with your product unless you ask them.
In the short term, you can use feedback to decide which features to focus on early in the venture. Many entrepreneurs are faced with the dilemma of having too many good ideas.Mayo Oshin. “5 Things to Do When You Have Too Many Ideas and Never Finish Anything.” n.d. https://mayooshin.com/5-things-to-do-too-many-ideas/ If you pursue all of your good ideas at the same time, your organization can quickly run out of resources. Focus first on features that are most popular and relatively affordable to produce and deliver. Those high-return products, services, or features might not be what you use to define your brand in later years, but they can sustain a startup long enough to develop more elaborate products and features that require more time and investment. Over the long term, feedback helps you direct your company.
Feedback may also come from employees, market leaders, and your competition. Feedback from these sources may be more useful for guiding long-term growth projects. In this sense, feedback means more than advice or product ratings. It can mean tactical moves in the marketplace. Your competitors offer you feedback when they take actions in a marketplace in response to your actions. Be sure to attend to competitors’ actions with the same open mind and the same air of thoughtful skepticism you apply to other forms of feedback.
Once you have the opportunity to pitch your idea, the next step is the careful measuring of quantitative and qualitative feedback about the pitch presentation, mockup, poster, or, in the case of many manufacturing processes, a 3D-printed model that approximates what the tangible finished product might look and feel like. Data from pitch competitions are sometimes out of your control, so it may be preferable to incorporate the learning you get from pitch feedback into this customer development process.
### Summary
Protecting your intellectual property is something you must plan for as an entrepreneur. In crowded marketplaces, small innovations or variations on a theme might be difficult to patent, and the process takes time; thus, not every product or iteration needs to be patented. Investors are often more interested in the potential of a leader and team than the potential of an idea. With that in mind, the protection of an idea shouldn’t supersede building a great team or pitching your idea widely enough to tap into appropriate funding channels.
A patent can protect your intellectual property. Other protections are nondisclosure agreements, work-for-hires, and noncompete agreements. If someone breaks a contract, your only recourse is through legal channels. It is better to conduct thorough research to be as confident in your team as possible before you share your ideas, designs, and prototypes with those who will be helping you make your innovation a reality.
Entrepreneurial learning comes from seeking feedback on your ideas from potential customers and investors. Feedback on your pitch itself can help you refine how you present those ideas.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Patent pitfalls to avoid:
http://www.ipwatchdog.com/2016/01/23/patent-drafting-learning-from-common-patent-application-mistakes/id=65243/
Giving and receiving better: https://www.entrepreneur.com/article/219437
NDA templates: https://www.rocketlawyer.com/ |
# Telling Your Entrepreneurial Story and Pitching the Idea
## Reality Check: Contests and Competitions
Portions of the material in this section are based on original work by Mark Poepsel and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you should be able to:
1. Identify resources for locating contests and competitions
2. Understand the opportunities and realities of contests and competitions
Now you have an idea of how to communicate the purpose of your innovation through clear mission and vision statements, while setting tangible SMART goals for your startup. You should also have a basic understanding of how to pitch your innovation to different groups using different types of pitches to garner financial support, to attract skilled talent, and/or to garner contributions if you are a social entrepreneur. You have some strategies to protect your idea, and you have reviewed how to incorporate feedback into an iterative process to improve and refine the concept or prototype. Now it is time for a reality check. What can you actually do as a student entrepreneur to enter the marketplace ready to innovate and make your first pitches?
First things first: Use your educational and professional background to conduct research to determine the kind of entrepreneurial environment that suits you. Do you wish to work for a startup and put your creative talents to work helping an existing team to build on their ideas? Are you looking to get in on the ground floor to help develop a startup from scratch, adding your knowhow about pitching to the mix? Or, are you looking to be an entrepreneur and build your own team around your own innovative ideas? You owe it to yourself to explore these options through careful research.
### Regional Resources
Just as communities invest in schools to educate students for the improvement of the entire community’s standing, some communities are starting to see the long-term value in investing in entrepreneurs. Here are some of the resources to look for:
1. Shared workspaces where entrepreneurs come together to work on their independent projects as well as to build teams. HQ Raleigh in North Carolina is one such space that offers multiple membership options, office and kitchen facilities, and other perks. WeWork is another space, located in New York City, as is Spark in Baltimore, Maryland ().
2. Business incubators or accelerators that do more than offer office space. They offer mentorship rather than a good coffee bar.
3. Pitch competitions to begin to garner the feedback you need to refine your value proposition(s) and develop a comprehensive business plan.
Depending on the size of the community where you choose to live, there may be different types of entrepreneurial niches for you to target, or there may be a more generalized entrepreneurship space. Regardless of the size of the community, it is the people in it and your ability to network that will most strongly influence your potential. One option to pursue is to be part of a product pitch within six months of landing in a new city. Perhaps you are pitching your own focused idea, or perhaps you take your talents to a team with a pitch already in the works. Regardless, as an individual with an interest in being an entrepreneur, if you are not collaborating and competing, you are not growing your business or social venture.
### Contests
According to Entrepreneur.com,“Entering a Small Business Funding Contest.” it is essential to take the temperature of the contests available in a certain geographic region before diving in. An entrepreneurial contest is any entrepreneurial competition other than a pitch competition. They usually are run by nonprofit organizations and universities, but more companies are hosting them to open up to more outside innovation to attract diverse entrepreneurs and access nontraditional sources of new ideas with commercial potential. They usually entail submitting documentation about your business, items such as business models (covered in Business Model and Plan), prospectuses, and forms tailored to contest specifications.
There are many reasons for joining a contest. Finding a mentor is at the top of the list. Your first contests and pitch competitions provide a learning experience for yourself as well as an opportunity to network and look for mentors and potential collaborators. To prepare for a contest, find out exactly what is expected of you and do as much research as you can so that you are writing using the iceberg principle. Following this writing principle, each word or sentence in your contest submission should be backed up with a wealth of supporting information and details. Even if judges never see a long-form prospectus, a detailed summary of the business, the investment that the company is seeking, or the key risks that the company faces—ensuring you have the hard data to back up those points in your executive summary or introduction increases your chances of success in the competition.
Entering a contest is similar to deconstructing your pitch deck, backing up every point with careful research, and writing and presenting the information in the various formats requested. Contests may ask for papers, posters, videos, social media campaigns, and other materials. Whatever kinds of media product the contest requires, you must complete them in a professional manner. If you truly want to win a contest that requires multimedia or social media elements, you might want to hire a media professional to assist you in this, which is essentially a marketing effort.
If and when you win a contest, make connections with organizers and seek mentorship. Great mentorship, in the long run, is more valuable than a cash prize with strings attached. A good mentor and a good market niche are often better predictors of entrepreneurial success than a person’s ability to develop compelling contest packets or highly charged pitch presentations. To be an entrepreneur, you need to know how a business sector functions within a social, cultural, and regulatory geographic context. To the extent that entering a contest can help you learn about these things, it is a valuable effort, but in most cases, the prize funding of $5,000, $10,000, or even $20,000 won’t guarantee your startup much of a head start.
Contests on college campuses may be more worthwhile than others because of the number of mentors brought in to judge them. Mentors that understand regional markets and opportunities for networking can be quite valuable, and contests may be one of the few times that large numbers of professionals get involved in a college course or extracurricular exercise. Also, competitions may be put on by business groups or social entrepreneurship groups on campus that provide great networking opportunities. Some contests compose the preliminary phase before the pitch competition that follows. In that case, you would prepare your pitch deck as you prep your contest application to ensure that your pitch matches your claims. It may seem fairly straightforward, but when discrepancies exist between what you submit and what you ultimately present, judges will notice. Regardless, a contest on a college campus or in your niche market gives you a chance to research your market, scrutinize your own ideas, and build a team.
Building a team for a contest with the ultimate goal of creating a successful endeavor is one of the most exciting but trying aspects of entrepreneurship. Many entrepreneurs are reluctant to relinquish control and seek people who will do things only the way they want them done. This is not usually possible, and it is not advisable. You want to build a team of people who can see a problem from different points of view and can offer constructive, honest input. Your best hope is to establish an ethic of clear communication and respectful give-and-take when it comes to criticism because there will be differences of opinion and approaches. If a contest is nothing more than an impetus to build a good team, it is a worthwhile effort. There are many ready sources to find out about these contests; check most entrepreneurship programs at major universities (some are open only to students and/or alumni, but others may be open to others). Also check with major startup sources (such as TechStars or Y Combinator) as well as with local economic development entities. Finally, you might locate contests focused on particular groups for which you may qualify, such as women entrepreneurs or other historically underrepresented groups.
### Competitions
Like contests, pitch competitions () may offer cash prizes or mentorship opportunities to the winners. Some larger pitch competitions have seed funding agreement contingencies that winners must sign before they can accept cash prizes. The key difference between a contest and a pitch competition is that in the latter, you are expected to present your business idea in the form of a presentation, usually with a pitch deck, whereas in the former, you are expected to provide a more informal summary of your idea, though the prizes in contests are less (e.g., $1,000 in free legal or other business services vs. a much larger cash prize).
Look for competitions in your city and in locales within half-a-day’s drive such that you could compete in pitch competitions without spending too much time or resources on travel. Seek out competitions that focus on the market sector you are most interested in. Play to your capabilities and strengths. Some pitch competitions are sponsored by regional economic development offices. Such offices are often associated with small business development centers, which are often based at or connected to major universities, local SCORE offices, and SBA offices. They often offer cash prizes in the hopes of attracting nascent startups to their region. Others connect entrepreneurs to investors waiting with seed money and a contract stipulating what percentage of the business they will own. Some offer money toward legal, accounting, mentoring, and other services. This is how seed funding works, but contest winners would do well to ask for legal advice before signing a contract tying up a portion of their business as a condition of receiving an award or a level of seed funding they might be able to secure through other venues.
This explains why some entrepreneurs seem to tank their own deal on Shark Tank. In some cases, perhaps they are foolish to pass up a deal, but in other cases, they have other avenues for seed funding in mind that may give them more control of the future of their company. The last thing you want to do is to win a competition and sign a contract for an investment in the business that does not lead to or protect your end goals. While the show American Idol has been a cautionary exampleNasir Pasha and Matt Staub. “The Prize for Winning American Idol? A One-Sided Contract.” (winners of American Idol usually sign an exclusive recording contract that is restrictive for the artist and limits them from signing with a major recording company for several years), most investors will almost always want to own a piece of the long-term future of any entrepreneurial effort they help fund. Before entering a competition, learn whether the nature of the prize requires this type of seed funding agreement or not. Base your decisions on your own comfort level with this type of arrangement as well as research how previous winners have been treated and what successes and failures they have had.
To win a pitch competition, find out exactly who you are pitching to and what criteria they will use. Be sure to thoroughly read through the competition guidelines and learn what you can about the specific judges and their backgrounds. Tailor your pitch to fit contest objectives as much as you can without changing your value proposition or promising features or deliverables you cannot make good on. Match the ask with what the contest offers. Nothing annoys contest judges more than when the prizes and offers are clearly laid out in the contest guidelines and then pitch presenters ask for much more money or for something completely different than what they have on offer.
You should develop one core business model (which you’ll learn about in the Launch for Growth to Success chapter), pitching several times to individuals, entrepreneur groups, investors, and competition judges (unless that is your day job). This will help you develop your pitch for the market niche. Over time, you will learn what to stress and what to downplay or cut, and this may help you win competitions.
As a college student, you can participate in campus pitch competitions to practice learning a market niche. Perhaps the market niche you explore in college will be similar to the ones in which you work after graduating. If you are in a college town, it may be a peculiar marketplace, but it will usually have an abundance of mentorship opportunities making up for what it may lack in business infrastructure. Make your pitch decks professional and rehearse your presentations until they are perfect. You must also be a studious audience member at such competitions. It is not uncommon for an entrepreneur to master their own approach after watching others present for a year or two.
The Collegiate Entrepreneurs’ Organization, for which the initialism, CEO, is apt, has chapters in more than 300 universities around the United States. It champions entrepreneurship as a field unto itself rather than as a byproduct of an MBA program or a limited track in a business school, as it is treated in many universities. Regardless of the institutional infrastructure, many colleges have chapters.
The entrepreneur website resource AlphaGamma.com lists many of the largest business plan competitions for recent and student entrepreneurs. Here is a list of the top competitions that took place in 2019. Check its website for listings on future competitions.8 Kima Mayes. “12 Best Business Plan Competitions in 2019.” In most cases, aggregate yearly awards are listed along with other information specific to the competition:
1. Harvard Business School New Venture Plan Competition – $300,000
2. Rice Business Plan Competition – $1.5 million
3. Milken-Penn GSE Education Business Plan Competition – $1,000,000
4. Utah Entrepreneur Challenge – $100,000
5. Next Founders – $30,000
6. Technovation world Challenge – $42,000
7. CodeLaunch – $67,000
8. Burton D Morgan – $100,000
9. Edward L. Kaplan Business Model Competition – $100,000
10. UPitch Competition – $10,000
11. The Hult Prize Student Competition – $1,000.000
12. Thiel Fellowship – $100,000
This list doesn’t include some other valuable competitions. The George Washington University business plan competition, called the GW New Venture Competition, in 2017 awarded more than $300,000 worth of cash and in-kind services in all.“New Venture Competition.” The Baylor University New Venture Competition is open to colleges across the country and awarded a total of more than $85,000 to student teams from Arkansas, Iowa, and Pennsylvania with finalists coming from California and Illinois as well.“Baylor New Venture Competition.” Singapore hosts a global business plan competition with prizes totaling $1 million.“Lee Kuan Yew Global Business Plan Competition.” Smith College’s Draper Competition for Collegiate Women Entrepreneurs offers more $60,000 in total prizes, including a top cash award of $10,000 plus a scholarship.“Draper Competition.” Arizona State, Indiana, and many other universities host these contests. Deadlines are staggered year-round. Competitions are sometimes open to nationwide competitors, but some are open to students in only a particular campus community or region. Competitions are not necessarily tied to academic schedules. Research the competitions that are most appropriate for you and your program, and collaborate with a professor to enter, learn, network, and ideally, win funding.
Successful entrepreneurship happens when innovative people find fertile ground, develop ideas and concepts, and persevere through learning to fit new products in appropriate marketplaces. College graduate entrepreneurs owe it to themselves to research the entrepreneurial community they would prefer to target. Economic development offices all over the world encourage entrepreneurs to come to their cities because they need innovative people with energy and a willingness to take risks to come up with the economic engines of the future.
One of the ways regions incentivize entrepreneurship is through contests, which are any means of competing for startup funding that does not involve a pitch competition. If you can build a team for a static contest, you are well on your way to building a team to pitch new innovations.
### Summary
Pitch competitions may be global, national, or regional in scale. There is no single model for a pitch competition, but teams can prepare based on the terms that organizers set forth, and they can anticipate the need to demonstrate key core elements including value proposition, marketplace and competition, funding strategy, brand, and team. Winners of pitch competitions would do well to examine any contracts they must sign before accepting cash awards or investments; some deals are structured unfavorably for the entrepreneur.
If you lose a pitch competition or contest but enhance your network of contributors and collaborators and/or find a mentor, it has been a successful early effort. Consider developing your collaborator network while still in school using social media tools and entering into college competitions, some of which are listed in this chapter.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
The International Business Model Competition that focuses on Lean Startup models, sponsored by BYU and Harvard: http://www.businessmodelcompetition.com/ |
# Entrepreneurial Marketing and Sales
## Introduction
Birchbox founders Katia Beauchamp and Hayley Barna loved shopping for beauty products but found the experience expensive and frustrating. So many brands making so many claims—how could anyone find the best beauty buys without wasting money on products they might not need? There had to be an efficient and cost-effective solution to this problem.
Their solution was to start Birchbox: an easy and affordable way to shop online for the best and newest beauty products by trying out samples first. Their entrepreneurial concept requires customers to share lifestyle and grooming preferences with Birchbox via an online form. The company then sends a personalized box of beauty product samples from brand partners along with information about each product. If customers like the offerings, they can purchase the full-size merchandise from big cosmetic manufacturers through Birchbox with a few clicks. Birchbox was a success from the start. Beauchamp and Barna were able to create relationships with cosmetic brands, fund their website, and hire the necessary workforce. However, they did not turn a profit until a few years later.
While Birchbox was initially an innovator and disruptor within the cosmetics and beauty supply market by supplying products in a new and different way, competition increased as retailers like Macy’s, Target, and Walmart started to offer similar services to customers worldwide. Birchbox was valued at $485 million in 2014, but stiff competition plus the high costs of operations and customer acquisition pressured the new company. In 2016, Birchbox aggressively cut costs in marketing, logistics, production, and staffing, and invested in mobile platforms that allowed the company to secure their competitive advantage, resulting in the company turning a profit for the first time in 2017.Clare O’Connor. “Pioneering Beauty Startup Birchbox Turns Profit after Tough 2016.” Birchbox has continued to expand its business, thanks to the founders’ ability to distinguish their brand from competitors by collecting customer information to customize experiences and by providing the experience through platforms that reach a vast number of customers online. |
# Entrepreneurial Marketing and Sales
## Entrepreneurial Marketing and the Marketing Mix
### Learning Objectives
By the end of this section, you will be able to:
1. Distinguish between traditional marketing and entrepreneurial marketing
2. Describe the seven elements of the marketing mix
Being a successful entrepreneur often means being able to balance the many different aspects of a business, such as financing, accounting, and management. One of the most important of those aspects is marketing. After all, if no one hears about the new product, how can it be successful? According to marketing research company CB Insights, in a survey of 101 companies that failed, 14 percent of them failed due to poor marketing.Erin Griffith. “Why Startups Fail, According to Their Founders.” Marketing is an umbrella term given to those activities that companies use to identify consumers and convert them into buyers for the purposes of achieving a profit. No matter the size of the enterprise, marketing lays the foundation for how a company reaches and serves its target customers. Whether it’s a global brand such as PepsiCo or Apple, a small- to mid-size company such as Birchbox, or a small restaurant or local gym, marketing refers to the core strategies companies use to reach and sell to customers. As you might expect, the way entrepreneurs market their new product is somewhat different from how a large company markets an established brand.
### Traditional Marketing
Traditional marketing for large businesses such as Coca-Cola, Disney, and Dell tends to focus on managing and growing existing programs and brands. Companies like these enjoy greater resources such as substantial financial support and large numbers of marketing professionals to steer their efforts. However, marketing for small- and medium-sized businesses (those with 500 or fewer employees and less than $7.5 million of yearly receipts, as defined by the Small Business Administration)“Meet Size Standards.” Basic Requirements. U.S. Small Business Administration. n.d. https://www.sba.gov/federal-contracting/contracting-guide/basic-requirements#section-header-6 is different because financial resources are limited, and it is often the entrepreneur alone who is in charge of marketing efforts. If they do have funds for marketing expenses, they might use a small agency on a fee-for-project basis.
As you have learned in previous chapters, small start-ups are usually tight on resources, so they need to augment their resources through creativity and hard work. While having limited resources creates obvious challenges, being small also has its advantages. For example, it allows new companies to be more flexible, agile, and creative than their established competition. These qualities can allow new companies to disrupt their industries and become major global players by employing entrepreneurial marketing practices.
### Entrepreneurial Marketing
On a basic level, entrepreneurial marketing is a set of unconventional practices that can help start-ups and younger firms emerge and have an edge in competitive markets. The main difference between these and traditional approaches is that entrepreneurial marketing tends to focus on satisfying the customer and building trust by providing innovative products and services that disrupt or appeal to a specific market. provides an overview of differences between traditional and entrepreneurial marketing.
As the table shows, entrepreneurial marketing emphasizes flexibility and innovation as a way to stake a claim within competitive markets. For example, consider how Drybar founder Alli Webb used her understanding of market needs to create a niche within the traditional hairstyling industry. A hairstylist by trade, Webb spent five years as a stay-at-home parent, drying hair for friends and family members at their homes to make extra cash. During this time, she realized there was a market need for “just” blowouts, or professional hair drying and styling.
Seeing this need, Webb developed a business model that would offer women a way to get a blowout without having to also get a cut or color. Webb didn’t invent the blowout; she just reinvented the space to do it, focusing on that sole aspect of hair styling, and offering the service in trendy settings (). By being flexible and innovative through a new space to provide this service, Drybar was able to carve a niche in the hairstyle industry. In business since 2008, Drybar is still expanding. Webb expected to open at least 20 new locations in 2019.Diana Blass. “Drybar’s Rise to Success with NetSuite Has a Hidden Message for Partners.”
### Marketing Mix
One of the biggest misconceptions people have about marketing is that it is all about promotion, or how a company sells or advertises something. But the truth is, promotion is just one facet of the marketing mix, which describes the basic set of strategies and approaches that marketers use to identify and reach their target market. A target market is the specific group of consumers for which a company seeks to provide a good or service.
One common way of understanding and remembering the components of the marketing mix for products and services is by thinking in terms of the “7 Ps.” While each of these can be part of a company’s marketing mix, the first four relate more to products: product, pricing, promotion, and place (and traditionally have been called “the 4 Ps of marketing”). The remaining three relate more to services: physical environment, process, and people. While the 7 Ps are conceptually the same for all businesses, how a company addresses each “P” will be specific to that company’s needs and goals.
For a better understanding of the marketing mix, look at how breaks down the 7 Ps into their related activities.
### Product
Within the marketing mix, product refers to a good or service that creates value by fulfilling a customer need or desire. Goods are tangible products that can be touched, smelled, heard, and seen, such as a pair of tennis shoes, a granola bar, or a bottle of shampoo. In contrast, services are intangible products. They usually entail paying an expert to do something for you, such as car repair or house cleaning.
Companies can bundle both goods and services together to create extra value for their customers. Birchbox, for example, provides goods (product samples) and services (customized product recommendations) to satisfy their customers’ desire to be able to buy beauty products in a hassle-free manner. The value Birchbox provides to customers relies on their ability to do both. In the United States, service-oriented businesses are increasingly playing a larger role in our local and national economies.
For start-ups, defining the value of the products they are going to offer is an important step toward identifying their competitive advantage within a marketplace. On a basic level, if you don’t know what benefit your product provides or what need it fulfills, neither will your customers. Kevin Plank, founder of Under Armour, knew that the value of his product would benefit many athletes who were tired of having to frequently change their wet sportswear. As a former football player, he had spent many hours training and enduring drenched practices, and wondered how he could alleviate this problem that companies didn’t address well with cotton sportswear. After college, he decided to take his idea to the next level and started a company making athletic wear that had special microfibers that kept athletes dry throughout practice and games. He then embarked on a trip to try to sell his value proposition to college football teams on the east coast. Nearing the end of 1996, he landed his first sale of shirts to Georgia Tech, which totaled $17,000—and the rest is history. Under Armour became a strong competitor to Nike and Adidas by providing a new type of athletic wear that has revolutionized performance by keeping athletes dry.Under Armour. “Our Story.” n.d. http://www.uabiz.com/company/history
In contrast, Jawbone, the company that manufactured Bluetooth speakers and other hardware, has gone out of business because it changed its focus from audio to health devices, which placed it directly in competition with FitBit and similar hardware companies. Product failures, among other problems, caused this tech company to flop.Lauren Goode and Chris Welch. “Jawbone Is Going Out of Business.” The company is now working on reinventing itself and will use artificial intelligence and sensor hardware to provide customers information about their health through a subscription. The wearable sensors will record vital customer information that will be tracked on an online platform that will then provide suggestions for medical action.Conor Allison. “Jawbone Health: Everything We Know So Far about the New Premium Health Platform.” June 17, 2019. https:www.wareable.com/health-and-wellbeing/jawbone-health-hub-medical-health-wearable-2144 The company’s redesign is not yet complete, so it is not officially in business again yet.
### Promotion
Communicating a product’s benefits to customers is a significant aspect of any marketing mix. Even if a product is the best in its class, a company must communicate this value to customers, or it will fail. This is what promotion does: It is the process of communicating value to customers in a way that encourages them to purchase the good or service. Promotions must have a goal, a budget, a strategy, and an outcome to measure. Companies must use their promotional budget wisely to create the best results, which can include sales, profit, and awareness through the use of a cohesive message throughout the campaign.
Some typical forms of promotion are advertising, social media, public relations, direct mail, sales promotions, and personal selling.
Advertising is a form of mass communication that allows companies to reach a broad audience through TV, radio, newspaper, Internet, magazines, and outdoor ads. Many of these media can be quite expensive for small companies, forcing them to choose one strategy, or to opt for other less expensive tactics such as guerrilla marketing or viral marketing (which will addressed in Marketing Techniques and Tools for Entrepreneurs). As shows, the advantages of advertising include reaching a mass audience and increasing sales, but on the downside, the cost may be too much to bear, and the company might face a difficult time reaching the right target. As we move from advertising to social media, we can see that social media allows for more accurate targeting and better metrics to assess results.
Social media is a must-use tool for entrepreneurs to connect with consumers, especially younger demographics. Many customers can be found online in one social media platform or another. The goal is to find the customers who fit your target market. The benefits of social media include targeting customers more accurately using the platform of their choice and being able to communicate directly with them. These platforms include networking sites such as Facebook, Twitter, and LinkedIn; photo and video sites such as Snapchat, Instagram, and Pinterest; blogs; and news sites. A business must find the time to connect with its customers wherever they are. As a budding entrepreneur, the best way you can start connecting with them is by identifying your target customers and by figuring out what kind of social media they frequent. You can ask your current customers about their social media habits; you can look up reports about the types of social media your customers frequent; or you can use special software that tracks conversations on social media that pertain to your business and industry.
For example, you may find out that your young customers hang out mostly on Twitter and Instagram, and not so much on Facebook. You could benefit from focusing on only those two platforms and finding out about their conversations. You may want to search hashtags and stories that pertain to your type of business so you can join their conversation. You could then set up your profile, write relevant content and hashtags that make sense to your consumer, and request to follow influencers who can help you create awareness of your business and product. Once you have a profile set up, there are many ways you can create campaigns: contests, discounts, or by simply providing useful content that your customer appreciates. The goal is to be part of the conversation and not sound like you are selling something.
In addition to posting good content and reaching out to influencers, you may also benefit from buying ads that can be geographically targeted to your customer and that are more affordable and effective because you’re directly targeting someone who is specifically interested in your product. The disadvantages of targeting social media include the time and skills required to engage with customers, and the need for consistently fresh content. Many start-ups believe that having a Facebook page will be enough to reach their customers, but their customers may spend more time on other social media platforms. The time and effort required to find the right platform, develop good content, and connect with customers on a daily basis is worth it.
Public relations are the efforts and tools companies use to connect and develop goodwill with their constituents. Constituents can include customers, investors, employees, business partners, government entities, and the community at large. The goal is to highlight the company in a positive light by contributing as a community player. Tools can include newsletters, press conferences, community service, events, sponsorships, press releases, articles, and stories that help entrepreneurs create a positive image about their company and get its name out there. If participating in an event, for example, the sponsor will display the logo and name of the company in a place where everyone can see it. This shows the company as a supporter of the community and as a provider of not just products and services, but of intangible contributions, such as supporting the dreams of the event participants. The goal is not to make a sale at that point, but to impact the community and create positive relationships in general because it’s the right thing to do—it may positively influence the consumer when they make a purchase in the future.
Direct mail, which is a way to connect to consumers via email or through printed, mailed pieces, is also a necessary tool to keep in touch with customers, especially when creating long-term relationships. The advantage of this strategy lies in connecting to a customer who is already interested in your product and would like to receive news and promotions from you; however, the disadvantage is that it usually takes time to create these lists because it involves collecting information about customers during events, through online requests, or at the cash register. It also can be expensive to send out pieces of mail that might end up in the trash.
Sales promotions are incentives that attract attention and push the customer to take action. These incentives include discounts, samples, rebates, rewards programs, gifts, and premiums. Sales promotions can attract new customers, but it may also reduce profits because coupons and discounts are offered for trying a product.
Personal selling is a tool that uses face-to-face interactions to communicate and influence a customer to make a purchase. It is especially suited for luxury goods. Usually, higher-priced products will need a longer selling process, and sales personnel will need more training on the product to learn about its unique qualities. This is one of the most expensive ways to reach and retain customers, but it can be worth the investment.
Overall, a good entrepreneur must find the right mix of marketing communications to reach customers. This will vary depending on the start-up’s budget, goals, and strategies. identifies the advantages and disadvantages of each, as they relate to small and new businesses.
### Price
One of the most important and challenging elements of the marketing mix is pricing. Price is the value that must be exchanged for a customer to receive a product or service. This is usually monetary and has a direct impact on sales. Many entrepreneurs are intimidated by financials and the prospect of using statements and other information to make projections (you will learn about these in Entrepreneurial Finance and Accounting). Correctly pricing your product enables your company to be competitive while maximizing your product’s profit potential.
Here are several methods that entrepreneurs can use to effectively price products:
Cost-led pricing is the easiest way to price a product. This involves taking the cost of making the product and creating a profit margin, which is how much profit your business stands to make after costs have been deducted. For example, if you add the direct costs for materials and labor to the indirect costs of salaries, marketing, rent, and utilities, you determine that your product costs $5 to make. Adding, say, a 30 percent profit margin would give you a sales price of $6.50. The percentage added depends on the business’s goals. This type of pricing is helpful when start-ups do not have much information about their target market and need more time to define their value proposition and business identity.
Another way to price a product or service is to consider what the competition is charging and determine whether to go above, below, or match their prices. If going above, or using premium pricing (also called perceived value pricing), you need a clear reason why customers would want to spend more on your product. While using penetration pricing, or pricing below competitors, can give you a competitive advantage, it may also lead to “price wars” in which competitors keep dropping prices in an attempt to beat each other. Obviously, the disadvantage is diminished profits for all. While pricing the same as your competitors seems like a logical choice, if your product offers no added value, this strategy is unlikely to entice customers to switch to your brand.
Customer-led pricing is just as described: pricing led by the customer. You ask what the consumer is willing to pay and charge that. You can find this by doing research and asking customers what they would be willing to pay for a product. Many technology products are priced that way. Companies survey customers about what they are willing to pay, and they create products that deliver the value at the market price.
Loss leader pricing uses a below-standard price to attract business in the hope that customers will stay and shop for other, more profitable products. It is called a loss leader because companies lose money on the lower-priced product. Grocery store ads usually contain several loss leaders that are designed to lure you into their store in the hopes that you do the rest of your food shopping there.
Introductory offers use lower initial prices to attract new customers and build a customer base before prices return to “normal.” This method is a form of penetration pricing, as its goal is to help new products penetrate markets with established competitors and brands. Many subscription-based products such as gyms are introduced this way to gain market share and revenue.
In contrast, skimming is a pricing strategy that leverages the newness of a product to justify the highest price possible in order to “skim” the most profits off the top, meaning in the first phase of sales. As time passes, the price is lowered to accommodate for more price-sensitive customers. Apple often introduces its products with this particular method, charging the highest price for them until it has exhausted the market willing to buy at that price and when newer and more technologically advanced products are introduced. Then, Apple slowly lowers its pricing.
In bundling, a discount price is set for a bundle of products to encourage customers to buy in bulk. While they pay more than if they were buying just one good or service, they do so because the overall price for a bundle reduces the individual price of that product, giving them a better deal than if they were to purchase items separately. An example of this strategy is used by DirectTV, which bundles its phone, Internet, and satellite services for a monthly fee. If a customer were to purchase these services separately, they would be more expensive. The benefits of bundling include gaining more revenue per customer, as they would not have paid for some services separately, and making the order-taking task simpler. Take fast-food chains, for example. Instead of asking the customer to list everything separately from the menu, they give you the name or number of the bundle. They make more profit by including the drink and sides to the main entrée, and the customer saves money and time ordering.
The odd numbers strategy is a psychological pricing strategy often used in conjunction with other pricing methods to make a product’s price point more attractive to consumers. Using odd numbers takes advantage of the idea that such numbers have a positive psychological effect on customers. For example, instead of pricing something at $20, the price would be set at $19.99, which consumers perceive as closer to 19 than 20.
While pricing must be established when starting a new business, pricing strategies should be reviewed on an ongoing basis. These occasions in particular merit consideration:
1. When adding a new product or service to your offerings
2. When demand shifts (due to market, consumer, or other factors)
3. When entering a new market
4. When competitors are making changes
5. When your costs are changing
6. When adjusting products/services or strategies
### Place
Place refers to the channels or locations—physical or digital—where customers can purchase your products; it is sometimes called . For the entrepreneur, the choice of place lies in figuring out which channels will create the most profit. In other words, which channels will reach the majority of the target market at the most efficient cost. Choosing the right distribution channels is one way to create a competitive advantage and generate more success for your business. Certain channels have specific capabilities such as reaching more customers, providing promotions, and providing credit.
As shows, distribution channels fall into two main groups: direct and indirect. Direct channels, such as physical or online storefronts, require no intermediaries and allow you to sell directly to consumers. For example, if you own a bakery, you would likely have a retail storefront that sells directly to consumers.
Indirect channels require intermediaries such as distributors or sales agents to sell your products to the end customer or to other physical or online retail outlets. Indirect channels often have more than one intermediary. For example, to acquire more customers than you could reach on your own, your bakery would use indirect channels such as wholesalers or agents to get your products into local markets and grocery stores across the country. These companies would also help with logistics, which include transportation, warehousing, and handling of products.
Taking advantage of multiple distribution channels is one strategy companies use to expand their brand and grow their profits. This can include having a physical storefront, developing an e-commerce website to sell goods online, and distributing goods through wholesalers and retailers. Including multiple touchpoints with the customer can increase the likelihood that they will choose your product.
The longer your distribution channels, the longer it takes for your product to reach the end consumer, and the less control you have over the product and the price. As an entrepreneur, you must decide which channels best fit your product and pricing requirements.
### Additional Ps for Services
As you have learned, products include services as well. These include legal, accounting, consulting, medical, entertainment, advertising, banking, and other professional services. When providing services, three additional Ps should be considered in the marketing mix.
### People
People, or a company’s human resources, will always be a key factor in any successful business. In a service-oriented business, the people who interact with customers are especially important. Because the service is the product, they are the face of the brand and a direct link between the company and the customer.
When an employee delivers an acceptable or outstanding service, customers are encouraged to return to purchase the service again and also share their positive experience with others. When customers go into a jewelry store and receive good service from the salespeople, they will likely let their friends and family know about the positive experience through a personal referral or on social media.
When service is poor, customers don’t return. If customers have a bad experience at a restaurant, it is likely they will not patronize the establishment any longer and will probably share a negative review online. Sometimes, poor service has to do with factors other than employees, but as online review sites such as Yelp become more common, poor customer service reviews can have a devastating effect on a brand, especially for start-ups trying to break into a market. It is important to hire experienced people and have a good training system in place with rewards that will help employees deliver the best service to customers. Companies should take into consideration that no matter the size of a business, they must market not only to their customers but also to their employees, as they are the face of the company and the ones who interact with customers. Employees can make or break the brand.
### Physical Environment
The physical environment where a service is provided is an important part of the marketing mix. It can influence the company’s image and convey a lot of information about the quality of a product, service, company, or brand. The old adage that you “get only one chance to make a first impression” is especially true for new businesses. Tangible cues—décor, smell, music, temperature, colors—send an immediate message to customers about quality and professionalism.
For example, if you walked into two dentists’ offices (remember, they are also entrepreneurs), and one office smelled and looked clean, and one did not, which one would you choose? The same goes for restaurants, retail stores, and any other physical environment. Since a service cannot be inspected before it is received, these cues help customers make their decisions.
### Process
Process is the chain of procedures or activities required to provide a service to the customer. It is all of the activities that take place between the service provider and the customer, from beginning to end.
In the case of a doctor’s office, this would include making the appointment, filling out paperwork, waiting to be seen, seeing the doctor, and paying. Because processes can be long and involved, they need to be designed to flow as efficiently and logically as possible. In the case of services that are provided online, process includes the website’s design and functionality, and all of the steps customers take from browsing through check out. A strong website design helps the entrepreneur say what the company is about, what it does and for whom, and what actions the customer can take. Actions can range from clicking for more information, the ability to purchase a product, or checking whether there is availability for a service and being able to book it or make an appointment. An example of a great website is Airbnb’s website whose design is focused, inspiring, and to the point. What do you think is its main call to action?
### Summary
Marketing refers to those activities companies use to identify consumers and convert them into buyers. Entrepreneurial marketing is a set of unconventional practices that can help start-ups and younger firms survive in competitive markets. One way to think of the marketing mix is to break it into the 7Ps: product, promotion, price, place, people, physical environment, and process. Entrepreneurs often don’t have deep enough resources to use all of these marketing tools, so they need to be strategic in which ones they choose and how they execute them.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
American Marketing Association: https://www.ama.org
Small Business Administration: https://www.sba.gov/ |
# Entrepreneurial Marketing and Sales
## Market Research, Market Opportunity Recognition, and Target Market
### Learning Objectives
By the end of this section, you will be able to:
1. Distinguish between primary and secondary market research
2. Define a research goal and the importance of research design
3. Understand how to choose a sample, and collect and analyze data
4. Identify common sources for secondary market research
5. Understand how to identify the target market within the total available market and serviceable available market
Now you know the components of the marketing mix. But, as an entrepreneur, before you can make decisions about them, you need to roll up your sleeves and do some research. This type of research is similar to the concepts covered in Identifying Entrepreneurial Opportunity; however, that research focused on whether an entrepreneur has what is needed to move forward with an idea. This research is more market focused, and it’s done after the entrepreneur has decided to move forward and start the enterprise or launch the product. Essentially it is about the product, not the entrepreneur’s readiness.
Market research is essential during the planning phases of any start-up; otherwise, you’re shooting in the dark. On a basic level, market research is the collection and analysis of data related to a business’s target market. Market research can entail everything from information on competitors’ products to the interpretation of demographic data related to potential customers.
The main purpose of market research is to gain an understanding of customer needs and wants in an effort to reveal potential business opportunities. When you have a clear picture of what your target market is and what it wants, you can more effectively design your marketing mix to engage that demographic.
Imagine that you are creating a cosmetic line that is organic, contains vitamins and minerals, and is easy to apply. Your target market is women who are interested in high-quality beauty products that are not harmful to themselves or the environment. But after conducting extensive market research, you learn that women aged eighteen to forty-five years tend to be interested in the benefits your product line provides, but that women over fifty years of age are not. In light of these findings, you can either adjust your line’s benefits to serve the market you initially wanted to serve (all women), or you can cater to the needs of a smaller audience (eighteen to forty-five-year-old women).
A good exercise for better understanding your target market is to detail the everyday life of your ideal customer. You can do this by describing in detail a set of possible customers who would buy your product. Details could include demographic information such as gender, age, income, education, ethnicity, social class, location, and life cycle. Other information that would be helpful would include psychographics (activities, hobbies, interests, and lifestyles) as well as behavior (how often they use a product or how they feel about it). The better you know your ideal customer, the better you can focus on capturing their attention by matching their preferences with your offerings.
Market research also helps you understand who your competitors are and how they serve the target market you want to engage. The more you know about your competition, the easier it will be to determine and differentiate your offerings. Let’s dive into how marketers gather all of these data and the value the data provide to entrepreneurs.
### Primary Market Research
Primary research entails collecting new data for the purpose of answering a specific question or set of questions. While conducting your own research can be resource intense, it is also the best way to get answers specific to your business and products, especially if you want to penetrate niche markets that have not been studied. It also allows you to get specific. By asking the right questions, you can determine people’s feelings and attitudes toward your brand, whether they like your product design, whether they value its proposed benefits, and whether they think it is priced fairly. shows the steps common in conducting primary market research.
### Define the Research Goal
You should start by defining the goal of your research project. What are you trying to find out? Do you want to know more about your target market, their preferences, lifestyle choices, and culture, or do you want to know more about your competitors and why your target market buys from them? What are your criteria for validation of the research goal or goals?
The more time you take to clarify your research questions, the more likely you will be to achieve your research goals. If you can’t figure out exactly what you’re looking for, that’s okay. Exploratory research using a focus group can help you decide what kind of research questions to ask. A focus group is a gathering of people, typically six to twelve participants, who come together to discuss a topic presented by a moderator, who usually poses questions and collects qualitative data that can be used to answer questions or define research further.
For example, a manufacturer of water bottles might know there is a problem with their products as sales have been declining over time. The company doesn’t know exactly why or where to start, so it would use a focus group to better define the research goal or problem. Using focus groups, they might find out that they are targeting the wrong segment or that there is a need for better water bottle designs. Talking to the focus group can uncover possible research questions to undertake.
Merkadoteknia Research and Consulting is a Hispanic-owned company that conducts research for different industries that cater to Hispanic consumers. This company helps fast-food companies, retailers, and pharmaceutical companies, among others, conduct focus groups and gather insights about specific groups of people that may have different cultural backgrounds. These companies may not know exactly how to start researching their target market, so they use Merkadoteknia Research and Consulting to learn more through the use of focus groups. This approach helps better define the research goal or problem.
### Determine Research Design
The next step is to determine which research techniques will most effectively help you answer your questions. Considering what you want to learn and determining what your budget is will help you decide if qualitative or quantitative research best suits your needs. Well-designed research projects often use some combination of both.
Qualitative research uses open-ended techniques such as observation, focus groups, and interviews to gain an understanding of customers’ basic reasons, opinions, and motivations. Simply observing potential customers, whether at a store or in daily activities, and noting their behaviors are a simple, effective form of ethnographic research that can help you better understand the lifestyles and habits of potential customers. Ethnographic research includes the personal observations of the subject by being immersed in the subject’s environment. Research like this helps companies see how people use their product over the course of a day.
For example, if you manufactured a water bottle and wanted to design a “better” water bottle, you could watch how people use their water bottles while working, exercising, during their commute, and so on to better understand their needs and habits. This “ethnographic” research can often uncover latent, or unstated, needs that you can use to build your concept. Unstated needs refer to those that are expected from a company, such as a certain level of quality or good customer service. These are default expectations that a customer has based on their experience with products in general.
Employing a mystery shopper, or pretending to be one yourself, is another way to learn how customers and employees act within a specific retail environment. A mystery shopper is a person who has been hired by the company or a third party to pose as a real shopper and has gone undercover with a specific goal of testing certain aspects of a business. This can take the form of purchasing a product, browsing and asking questions of an employee, interacting with other customers, or simply observing what is happening inside the store. After the experience, this person will provide feedback to the company.
Focus groups and one-on-one interviews can be useful to obtain more thoughtful answers and explore debatable topics. Both are good methods for digging deeper into the specific motivations and concerns of people, especially as they pertain to personal, privately held beliefs. This research is useful when trying to develop a more novel product, but you must do your best to eliminate “support bias” in that the panelists might seem favorable to new concepts to please or accommodate the moderator. For one-on-one interviews, it is important to develop a thorough interview or discussion guide, so other team members can also conduct the interviews. By doing this, you will ensure a consistent approach to asking key questions and documenting responses to help guide the next step of the development of your product.
Quantitative research focuses on the generation of numerical data that can be turned into usable statistics. This kind of research most often takes the form of surveys or questionnaires that pose multiple-choice questions with predefined answers. While these surveys do not allow for much free expression on the part of the participant, the focused nature of the answers means marketers can identify trends, such as which social media platforms are preferred by customers or potential customers. For example, the researcher may very well find that Instagram is the most used social media app because of its ease of use and its ability to incite emotional responses to pictures.
Sample survey questions can be anything from “How many times have you gone to the corner store this week?” to “Which age range do you belong in?” This kind of approach is an efficient way to collect a lot of data because once the survey is written, it can be distributed in person or online to as many participants as you like. Typically, the more people you survey, the more accurately your data will reflect the demographic you are examining.
Another way to generate quantitative results is through causal research and test marketing. In both cases, you present participants with a cause and record the effect. An example of this might be a taste test in which people’s reactions to and preferences for different juice flavors are recorded. Given the limited resources of many start-ups, test marketing is a great way to make sure your product works before you start investing in its distribution.
An even more sophisticated—and expensive—method is conjoint analysis, in which respondents must rank, choose, or a rate a number of “conjoint,” or linked, features or benefits. This real-life scenario approach will give you very useful results from potential buyers, often with features or benefits ranked relative to perceived value or importance.
For instance, let’s say your company is trying to create a reusable water bottle to compete in a crowded marketplace. If you were to use conjoint analysis, you would create a survey that lists the water bottle attributes and prices to show consumers different choices. For example, customers could be given a set of very similar water bottles, each with a set of features the company would like to test. Features can include a locking lid so the water doesn’t leak, different bottle shapes for easier hold and water retrieval, and different colors and sizes. Each of the choices could have its own price point and the customer can choose, rank, or rate each of the choices based on those attributes and prices. Each of the choices could be described on a survey with words or pictures, and it would ask customers to choose their favorite or rank all of the choices. After collecting information and data from many consumers, researchers would use statistical analysis by applying linear regression (a predictive tool that measures the causality of one marketing variable on another) or other techniques to determine which attributes of a water bottle are more important to the customer and what price they would be willing to pay. Based on this knowledge, the company would create a product that could possibly beat the competition.
### Choose a Sample
Next, researchers need to determine the sampling method. In terms of research, your sample refers to who you will survey and how many people you will include. In most cases, you will want a sample that reflects your target market, especially if you are trying to figure out your ideal customer’s interests and how to get them to buy your product. Untargeted samples can be useful when trying to figure out who your target market might be, but they aren’t an efficient way to get to know your ideal customer.
Generally speaking, larger samples provide more accurate data, although researchers should not feel like they need to survey everyone in a market. For example, if you have a list of 5,000 contacts, you might choose to contact 500 people who would be representative of the total group of contacts. Surveying all of your population could be time consuming and expensive, so choosing a subset of the right people can yield good results. The sample must be large enough to be statistically significant, meaning that the relationship between variables is not a result of chance. The sample can then show the researcher an accurate depiction of a specific phenomenon.
For example, you can test whether men and women actually have different or similar tastes in water bottle attributes. In this case, the significance rests on the gender of the potential customer. If your sample is large enough (say 500 out of 5,000), and you find that men look for different attributes than women do, it is unlikely that the differences found were by chance. The cause of the differences would be the gender.
Therefore, keep in mind that errors of reliability and validity can arise if your sample is not thoughtfully selected. Statistical significance is then important in measuring reliability because it means that there is an actual difference in what is being measured. If there is a difference between men’s and women’s responses in our water bottle example, checking the significance will determine whether the differences really matter or if they are due to chance. Significance is measured by looking at the probability value, or , of the result. If it is 5 percent or less, it is usually considered a significant difference that is not due to chance, and the researcher can determine that the answers are indeed different between the two genders. Validity, on the other hand, means that the item that is being measured is relevant to the research. This means that the questions that are being asked will actually answer your research objective.
While random samples can be useful for some types of research projects, many researchers intentionally choose their sample participants based on economic and ethnographic factors to make sure they accurately reflect the nature of the demographic they seek to understand.
### Collect Data
Once you’ve identified your research goals, chosen your design, and determined your sample, you are ready to start collecting data. The data may be collected through observation and taking notes. For example, if you are trying to figure out if your store layout is yielding the most productive sales, you can observe traffic flow and note what people look at and what they actually purchase. Then, you may change the merchandise layout, or the aisle size or space, to see whether people peruse other merchandise that they hadn’t seen before. Based on your observations and sales data, you can determine the best flow for your floor.
Interviews can also help secure open-ended answers. You might interview potential customers on what they think is the best way to communicate with them and what they like about certain competitors’ products. This can help you obtain additional options that you may not have thought to add on a survey, which is another way to get aggregate data.
Surveys can be done by hand or through online tools such as Survey Monkey or Qualtrics. Surveys are very helpful because you can ask question to current or potential customers about your product, competitors’ products, customer service, and any other information you may seek to create or improve your business. They are an easy way to collect large amounts of data from many customers, and they allow you to calculate responses. Online tools are particularly useful in providing repositories of data that can be later exported to other analytical tools such as Excel or SPSS.
Regardless of what research technique you use, be on the lookout for data collection errors. Recording the wrong answers, failing to convey the right instructions to participants, or having to translate on the fly can all create biases that skew the answers and give you inaccurate results.
### Analyze Data
Once you collect your data, the next step is to make sense of it. How you analyze the data depends largely on what you want to get out of it. Typically, you will be looking for patterns and trends among the answers. Data analysis is a field unto itself, and when complex analysis is required, seeking the assistance of experts is often worth the extra cost. You can find experts within research marketing firms that specialize in collecting and analyzing data for businesses, such as Merkadoteknia Research and Consulting. These can be found online or through local business organizations, such as chambers of commerce.
### Results and Next Steps
At this stage, the entrepreneur seeks to reconcile the results of their examination with the goals of their research. For example, if you were doing exploratory research about a potential product you wanted to bring to market, now would be the time to ask questions such as whether the research suggests market potential. Similarly, if the goal was to figure out what customers like about competing products, now would be the time to list those results and determine whether they are worth incorporating into your product. Regardless, it is important to be open to what the data say, even if they indicates results that are contrary to what you were hoping for. Research should be an opportunity for growth and a roadmap for the refinement of your idea.
### Secondary Market Research
Secondary research is research that uses existing data that has been collected by another entity. Oftentimes, these data are collected by governmental agencies to answer a wide range of questions or issues that are common to many organizations and people. Secondary research often answers more general questions that an entrepreneur may have, such as population information, average purchases, or trends. If there is a specific question that cannot be answered, such as how many people would be interested in a new product with certain attributes, then primary research will have to answer that. While some of this kind of research must be purchased, much of it is free to the public and a good option for entrepreneurs with limited financial resources. Some commonly used sources for free data include the US Census Bureau, Fact Finder, Pew Research Center, Current Population Survey, the Small Business Administration (SBA), and the Texas State Data Center.
Other useful resources are trade organizations that provide information about specific industries, as well as newspapers, magazines, journals, chambers of commerce, and other organizations that collect local, state, national, and international data. Resources such as these can provide information about everything from population size to community demographics and spending habits. lists several free databases that are rich sources of information.
While free sources can provide a lot of information, their research tends to be less specific than that by sources that charge for their data. Companies such as Nielsen/Arbitron, Simmons, and Geoscape can provide more detailed information about specific behaviors on media use, lifestyle choices, specific product consumption, geographic segmentation data, and others. lists some sources for this research.
In the end, there is no perfect way to conduct research. It all depends on what you are trying to find out and what the best approach is to do that. If you are just starting out, you may want to maximize secondary research because it is free. You can also try primary data collection by speaking to friends, family, and others you encounter in your local and online communities. If you are working at a university, you will likely have access to free market research reports (marketresearch.com, Frost & Sullivan, etc.).
### Market Opportunity Recognition and Validation
One common goal of market research, which has been mentioned earlier in other chapters, especially the Identifying Entrepreneurial Opportunity chapter, is the identification of a market opportunity, or an unmet need within a target demographic that might be fulfilled by an existing or new product. Looking for gaps or unmet needs within a marketplace is one way to identify market opportunities for both goods and services. For new products, this entails looking at the needs of a demographic, identifying which of those are not being met, and determining what kind of product could fulfill it. Based on our earlier discussion on secondary research, there are many places where data can be found online or offline to determine these needs.
Similarly, you might identify common local, national, or global problems through observation and directly interacting with potential customers, and try to create services that would solve them. Social, economic, technological, and regulatory changes all have the potential to create market opportunities.
When inventor David Dodgen saw the suffering that Hurricane Katrina had left behind, he saw an unmet need that this event had created. By witnessing the disasters, he realized that when hurricanes or other disastrous events strike, they can contaminate the water supply in a region or city, or prevent access to clean water. As a result, he created the AquaPodkit, a plastic container that can temporarily store fresh water for weeks at a time in the event of an emergency. The Federal Emergency Management Agency (FEMA) recommends that people fill their tub if they feel that there may be a chance that water will be scarce. Oftentimes, tubs can be dirty, and people may not have the time to clean them. With this in mind, Dodgen developed a plastic lining, or bathtub bladder, which is manufactured in the United States and is safe to drink from, together with a pump that helps seal and open the plastic when the water is needed. This kit can hold up to 100 gallons of fresh water in the tub and has proven successful; it has also been featured by CNBC, Entrepreneur, and the New York Times.
Sometimes unmet needs are not uncovered immediately. One way to better understand a market’s opportunities is to conduct a market analysis, which is an analysis of the overall interest in the product or service within the industry by its target market to determine its viability and profit potential. Validation, not to be confused with validity, is the act of verifying that a specific product is needed in a target market. This can be done by conducting formal or informal interviews or surveys with potential customers to gather their feedback. Dropbox is an example of a company that conducted validation over and over until they created a product that could work with a mainstream audience (see Launching the Imperfect Business: Lean Startup).
In addition to identifying competition and determining growth and profit potential, a good market analysis will identify the total available market (TAM) for a specific product, which is the total perceived demand for a product or service within the marketplace. It will also identify the serviceable available market (SAM), which is the portion of the market that your business can serve based on your products, services, and location ().
To calculate this, let’s go to our water bottle example. Let’s say that you are trying to figure out what your target market is based on this concept. To calculate the TAM, you would look at the whole industry and determine the total number of customers available for water bottles or total revenue available. To find the number, you can look up the industry numbers for the category on databases such as IBISWorld, mentioned earlier, or any other data available through the World Bank or World Factbook to see the potential number of customers or revenue. This is called the top-down approach, as you are looking at macroeconomic factors to determine an industry’s potential.
Another way to calculate the TAM would be by using the bottom-up approach, which involves counting local market sizes and figuring out the competitors’ number of customers. After collecting this information, then all the local markets would be added up and multiplied by the average amount they spend on the product per year. Since your company cannot service all markets, the next step is to figure out the SAM. You could estimate the number of customers you can service by splitting the market into those you can service given your product characteristics and geographic, demographic, and cultural factors, among others.
Finally, considering the constraints of the company and strength of the competition, you would determine your focused target market to avoid wasting valuable resources marketing to people who are generally not interested in buying your product.
As an entrepreneur, you want to segment the market and figure out if there are possible pockets of people that you can serve. Segmenting, targeting, and positioning (STP) will help you figure out who is your best customer and will allow you to allocate your resources so that you can more effectively serve that customer. Let’s look at these processes now.
Segmenting means that you separate the total population by homogeneous groups of people that have similar tastes, backgrounds, lifestyles, demographics, and even culture. You may segment along lines such as age ranges, gender, ethnicity, line of work, earnings, or activities. There are many ways to separate these groups to choose the right one for your business.
The next step is targeting. You select a target based on their ability and willingness to buy. As stated earlier, a target market serves to specify which group of the total market you will serve and how you will position yourself to distinguish your company or product from your competitor.
Positioning (value proposition) is a statement of how you want the customer to perceive your company, good, or service. For example, ModCloth is an online indie retailer that sells vintage, or vintage-looking, trendy, fun clothing that appeals to the global consumer who wants to be stylish. Another example is Wag! which positions itself as the app that lets the pet owner look for a walker on demand. Kind of like the Uber for dogs who want a walk when their owners can’t take them!
### Summary
Market research is an important aspect of being an entrepreneur. Research can help you vet ideas as well as reveal opportunities that you may not have seen before. Whether you are using secondary data or performing primary research, it is important to know your research questions and goals. Good market research and analysis can help you position your product within your target market.
### Review Questions
### Discussion Questions
### Case Questions
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# Entrepreneurial Marketing and Sales
## Marketing Techniques and Tools for Entrepreneurs
### Learning Objectives
By the end of this section, you will be able to:
1. Describe effective entrepreneurial marketing techniques (guerilla, relationship, expeditionary, real-time, viral, digital, word-of-mouth)
2. Discuss the pros and cons of these marketing techniques
One of the hardest facts for entrepreneurs to absorb when starting a new business is that financial and human resources are limited. Fortunately, there are many marketing techniques available to entrepreneurs that require little more than a good dose of “sweat equity.”
### Guerilla Marketing
Coined by business writer and strategist Jay Conrad Levinson in 1984, guerrilla marketing refers to creative approaches to marketing that seek to gain maximum exposure through unconventional means. Guerilla marketing often means staging some sort of event or interaction that is designed to attract attention to a brand or product. The goal is to intrigue consumers by standing out from normal sales messages and the thousands of advertisements they are exposed to every day. These approaches usually have a component that encourages potential customers to interact with a company or product in a fun way.
Dennis Crowley, a serendipitous entrepreneur who taught himself to code and who was laid off by Google while working on his social networking site Dodgeball, was able to create and grow Foursquare through the use of guerrilla marketing techniques. Foursquare, the search and discover nearby businesses app, used this technique at the Austin, Texas-based South by Southwest film and music festival. The idea was to set a real game of foursquare in front of the convention hall that also raised awareness for the app (). The games were an instant success and attracted thousands of participants who played all day long. If someone didn’t know what the game was, a marketing team of 11 people helped them find it on their phones. Their efforts resulted in 100,000 views for the app that that day alone.Knowledge @Wharton. “How to Generate Buzz on Social Networks.” All of this was achieved for the cost of a box of chalk and two rubber balls. Although the company had plenty of investments to sustain its operations, guerrilla marketing was a clever and helpful way to get users to test it and enjoy it.
Another example of guerrilla marketing that has been prominent over the last few years is flash mobs. A flash mob is a gathering of people at a public place to perform an act, be it a dance, entertainment, political stance, or some sort of artistic expression that conveys a message to the public for a brief period of time. This is organized through social media calls or emails to gather enough people to perform them. Flash mobs have been effectively used by companies to create awareness and reminders about their brands.
### Relationship Marketing
One of the main differences between start-up companies and established brands is the need for start-ups to nurture and maintain relationships with new customers. One way to accomplish this is through relationship marketing, which seeks to create customer loyalty through personal interactions and long-term engagement strategies. A small company can try to have a closer relationship with clients by writing personal notes by hand or sending an email thanking them for their business, by acknowledging their presence by their first or last name when they come into the establishment, by offering beverages, and by offering other personalized services.
An example of successful relationship marketing from a larger company comes from MooseJaw, a retailer specializing in outdoor clothing for hiking and snowboarding. At one point, a MooseJaw customer returned a piece of clothing that he had bought as a gift for his girlfriend. In his explanation for the return, he wrote, “Girlfriend dumped me.” Seeing this as an opportunity to engage with a customer, the company decided to send the man a care package.
A few weeks later, the man received a surprise shipment with a note saying they were sorry his girlfriend broke up with him so they decided to give him a gift. The box contained shirts, stickers, and other goodies. There was also a card with notes from MooseJaw’s employees.Joshua Kraus. “The Dos and Don’ts of Relationship Marketing.” MooseJaw’s efforts were rewarded when the situation went viral on social media, which generated more exposure and support for the company.
Another way companies maintain relationships with their customers is through regular email newsletters. By using sales history and other market data, companies are able to customize the content of these usually free newsletters to the needs, concerns, and desires of their target market. This allows them to stay connected to their customers while developing strong connections and brand loyalty. Start-up companies can take advantage of the free and affordable options offered by such newsletter management software companies as MailChimp, Constant Contact, Mad Mimi, Marketo, Insightly, Slack, and Salesforce.
### Expeditionary Marketing
One of the toughest aspects of entrepreneurship is to stay in business and grow in a highly competitive landscape. Businesses are born every day with the goal of making a name for themselves by providing better goods and services. One way that companies big and small can stay relevant is through expeditionary marketing.
Expeditionary marketing refers to strategies that are aimed at moving established companies and their products into new markets and territories. As the name implies, there is an element of risk and discovery involved in expeditionary marketing strategies as they help a company grow into new areas. Determining where and how to effectively enter these new markets often begins with an analysis of a company’s current market and its financial and human resources. Entrepreneurs will choose new markets based on where those resources might be able to fulfill an unmet need. Many small businesses need to leverage their gains as they move into new waters and perhaps more competitive landscapes. Having awareness of changes can foster planning and look for new ways to expand.
This type of marketing is very similar to entrepreneurial marketing, and the terms are often used interchangeably, except that expeditionary marketing involves existing companies continuing to innovate whereas entrepreneurial marketing also involves new companies. Companies that have succeeded in taking their businesses into new markets and consistently pivoting to create new products for current and new markets can be thought of as entrepreneurial companies. Big companies such as Apple, Google, and Dropbox Launch for Growth to Success have consistently developed products and entered new markets to keep abreast of the competition. Companies that did this while small like Birchbox (see Introduction) also use this method to grow and fight off competitors.
### Real-Time Marketing
Real-time marketing attempts to turn immediately available sales data (often collected from social media, websites, point-of-sale systems, and the like) into actionable and timely strategies that target the shifting landscape of consumer tastes and trends. Some of the tools entrepreneurs can use to secure information include analytics from Facebook, Twitter, and Google, as well as internal sales data. The information can include preferences for one brand over another, lifestyles, behavior, purchase frequency, and dollar amount spent. This helps entrepreneurs set up strategies that focus on providing the customer what it needs in today’s instant gratification society.
For example, a company such as Birchbox creates a post on Facebook or Twitter regarding a new promotion. It can then confirm the number of “clicks” the post gets and determine the depth of engagement for each of the posts. Clicks can be likes, shares, comments, and purchases that can be tracked immediately, minute by minute, hour by hour, or day by day, depending on the length of the promotion. Real time allows the marketer to assess the action followers take immediately after this happens. Success will depend on the goal that was set by the company. For example, if for one of their promotions, Birchbox expects 1,000 likes, 100 shares, and 30 conversions or purchases per day, it will be very easy to track whether the company is accomplishing its goal just by looking at the results every hour. This makes it very easy to gauge and to change. If a post is not getting the desired results in likes, shares, comments, or conversions in the desired timeframe, then the company can make changes to the communication sent to provide a different incentive, such as providing a deeper discount, or using different language, a new picture, and a better call to action. In addition, real-time tracking also allows for the company to answer tweets and comments from its followers immediately. This enables direct communication from customer to company without any interference or time constraints.
### Viral Marketing
Viral marketing is a technique that uses engaging content in the hopes that viewers will share it on their personal and social media networks. Successful content then spreads like a virus, creating exponential exposure to a company’s message.
The most important element of any viral marketing campaign is developing content that is not only engaging but that people also feel must be shared. Generally speaking, viral content is not “salesy” in nature; rather, it tends to be subtle about its presentation of branded items. In this way, the product or brand reaps the indirect exposure that comes with being part of content that people want to consume. A very successful campaign that included viral marketing is the Dove Real Beauty Sketches campaign where a real-life forensic artist sketches women’s faces based on their own descriptions and sketches them again through other people’s descriptions of their faces. When these sketches were revealed to the women who were asked to participate, they saw how much kinder and more beautiful other people had described them. This video never mentioned any Dove product at all. The result of this campaign was astounding, as it had more than 140 million views worldwide, becoming the best viral video of 2013 by connecting to the customer in an emotional way that was sincere and warm. This campaign also enabled the company to track results in real time and answer comments from viewers in a timely manner, while enhancing brand awareness.Nidhi Dave. “Top 3 Viral Marketing Campaigns to Take Inspiration From.”
Another example of an effective viral campaign is that of Dollar Shave Club which has garnered more than 26 million views on YouTube in response to the low budget and entertaining video by the owner of the company. Founded in 2011 in California with the goal of providing low-cost razors to men every month through a membership, the company has been so successful that it has since been acquired by Unilever.
The benefit of this kind of marketing is that it can lead to massive exposure for little or no effort or investment once the content is developed. The challenge, though, is that it is difficult to predict what will be successful viral content. Viral marketers often create a lot of content that does not go viral before finding content that does.
### Digital Marketing
Digital marketing refers collectively to all digital (online) marketing efforts, which can include social media, email communications, websites, blogs and vlogs, and search engine optimization (SEO). This is an important area for entrepreneurs to explore because learning how to leverage digital channels and online analytics is key to remaining competitive in this technological era.
Digital ad spending has outpaced television ad spending in recent years.Greg Sterling. “Digital Now Makes Up 51% of US Ad Spending.” Digital ads include display ads, search ads, and social media ads. These can be very successful at targeting specific people in your target market and are usually more affordable than a TV ad. They are cheaper to make and to place than TV ads, which can cost millions of dollars for production and air time to reach a wide number of people. Digital ads are important for entrepreneurs because they are an effective way to redirect traffic to their websites and gain conversions on a budget. It does not matter how big your budget is. These ads can be strategically bought to be as cost effective as possible. They can range from a few dollars to millions of dollars, depending on your resources. Display ads are those that resemble banners and showcase a product or company on a website in a noticeable way. They come in various sizes, and the entrepreneur may buy them on third-party websites or search engines that provide space for ads. These ads are usually paid using a pay-per-click model, which means that you only pay for the times that someone clicks on your ad, or you can pay for impressions, which means that you only pay for the number of times the ad appears on readers’ screens.
Search ads, conversely, are those text ads you see while you are looking for something on a search engine, whether it’s on your laptop, tablet, or mobile device. Google, Bing, and Yahoo! are the three biggest search engines in the United States that provide businesses the ability to create targeted ads to reach customers who are looking for something in particular. These ads are created using keywords that are strategically chosen to target people typing those specific words in the search engine and are paid through a bid system that allows the business to specify how much they will pay for an ad to be displayed in a better position on the engine’s display pages. Google Ads and Google Analytics are tools that allow a digital marketer to search for popular keywords and create ads based on these terms to target the right consumer. These tools are so well designed and complex that it takes some time to get acquainted with all of their features and capabilities. Their main features, however, are to look for the right keywords, create the ad campaigns, and track their success.
Go to your favorite search engine and try to search for something (). What kind of ads do you see on your screen? Someone on the other side has created these ads to connect with you. Did they do a good job?
Social media platforms also have the capability for users to create similar ads on their systems to target people based on their behavior, likes, profiles, and searches for products online. Their popularity has increased as more people join the platforms and more information is gathered from them.
Blogging has become an important tool for business owners. It allows them to share information about their companies, products, and their experiences in written or video form. Blogging enables entrepreneurs to create a name for themselves, especially when the content is useful and people are interested in what the blogger has to say. Strategies that help entrepreneurs include making the time to blog, having a specific niche, choosing interesting topics that matter to the blogger and the audience, and using other branding and SEO techniques that help the blog become more visible.
Content marketing is an important topic for digital marketing, as content has become more important in recent years. Content can be displayed as a story, a blog, a website, social media posts, a newsletter, an article, videos, or anything else that has the ability to convey a message to the consumer. This is a valuable tool to distribute content that is useful, which can engage the target audience and entice them to take some sort of action. The entrepreneur must take the time to create useful content to connect with current and potential customers online. Entrepreneurs can also tap influencer marketers to disseminate information about their brands. This includes tapping into social media celebrities, who usually have millions of followers on YouTube, Facebook, Instagram, or similar platforms. This has been one of the biggest recent trends in marketing.Sumit Gharal. “7 Reasons Why Content Marketing Is Important! Number 7 Is a Must Read!” When working with influencers, it’s important that they disclose that they receive compensation for any product or service they are talking about to avoid legal risks.
Email marketing is a form of direct mail that connects to consumers in a personal way. Emails can contain useful content for consumers, promotions, and tips that entice them to try or be aware of a product. Many email marketing platforms offer services at an affordable price, including Constant Contact, Mad Mimi, Mail Chimp, and Drip. All of these platforms allow the entrepreneur to upload a list of customers or potential customers and create email marketing campaigns that are tailored to each target market. These platforms also offer useful metrics, such as open rates, click-through rates, time spent viewing the message, and conversion rates, which can measure the effectiveness of a campaign.
### Word-of-Mouth Marketing
Word-of-mouth (WOM) marketing occurs when a satisfied customer tells others about their positive experience with a good or service. Although similar to viral marketing, WOM does not involve active participation from the marketer and almost exclusively involves only customers, whereas viral marketing attempts to build awareness and buzz mostly via videos or email.
When consumers are very happy with their purchases, they will let people know, whether it is in person or on social media. The company has less control over this type of marketing because it happens organically. While effective WOM marketing can have a huge impact on a brand’s sales and visibility, creating WOM is tricky—people have to want to talk about your product.
One way to encourage WOM is to ask satisfied customers to help you spread the word by talking to their circle of friends and family, or by sharing comments online on the website, through portals, or through social media. Companies often include call-to-action cards in their shipments that direct customers to post reviews on their website, the website where they purchased the item (Ebay and Amazon), or on public review sites such as Yelp.
Entrepreneurs who do this need to make sure they monitor what is being said about their businesses so that poor reviews don’t undermine their marketing efforts. Many of these sites allow businesses to address and resolve bad reviews, which is a good way to turn a potentially damaging situation into one that creates goodwill and positive brand recognition.
Lululemon is a yoga and athletic wear company that knows well about customer reviews. On its site, customers have the opportunity to leave comments about each of the garments regarding the size, fit, quality, and ease of use. Although the quality of Lululemon garments is high, some customers still have negative experiences and don’t hesitate to share their comments on the site. The company responds with an apology for the negative experience and redirects the unsatisfied consumer to an email so they can move the conversation off the site. This allows the company to make amends with the customer and hopefully remove the negative comments if the issue can be resolved.
summarizes entrepreneurial marketing techniques.
### Summary
Marketing doesn’t have to be expensive; entrepreneurs have many affordable techniques at their disposal. The only input necessary for these techniques is plenty of passion, creativity, and energy. These tools include guerrilla, relationship, expeditionary, real-time, viral, digital, and WOM marketing. The pros of using these techniques are plenty, as you can see from the examples shared for each of the tools. They include being able to reach many people at the same time; leveraging the timeliness of feedback; and making real, sincere connections with people. In addition, affordability, creativity, and good results (clicks, shares, comments, purchases, and awareness) can stem from using these techniques. On the negative side, customer reviews that are not so positive can also make their way through these channels and damage the reputation of a company if they are not handled with care.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
AMA Digital Marketing Certification: https://www.ama.org/events-training/Certification/Pages/digital-marketing-certification.aspx
AMA on Demand course: Digital Marketing: Delivering a Custom Experience: https://www.ama.org/events-training/virtual-events/Pages/digital-marketing-virtual-conference-051717.aspx
Google Ads: https://ads.google.com/home/
Google Analytics: https://analytics.google.com/analytics/web/provision/#/provision
Hubspot Google Ads guide: https://blog.hubspot.com/marketing/google-adwords-ppc |
# Entrepreneurial Marketing and Sales
## Entrepreneurial Branding
### Learning Objectives
By the end of this section, you will be able to:
1. Understand the importance of customer-focused branding
2. Explain the steps in defining and developing a brand
3. Describe the benefits of brand advocacy
In a business context, the word brand has multiple meanings. First, a brand name is the name of a product or service offered by a company. For example, Coca-Cola and Goodyear are brand names. But the brand also means the image a company promotes and the connotations it fosters of itself and its products. For example, the Coca-Cola brand might be seen as refreshing, youthful, and quintessentially American. The Goodyear tire brand might be seen as performance-driven, affordable, and reliable. A logo, advertising messages, public perception, celebrity endorsements, promotional strategies, and other factors all play a part in promoting a company’s particular brand.
Branding is often less about a product’s actual benefits or value, and more about how it positions itself within its target market and connects with its loyal customers. Establishing a brand at a company’s inception is more challenging than managing a brand that has been present for many years. In the case of a start-up, the initiatives undertaken must be customer centric and should speak directly to the heart of the consumer. These must have a trustworthy and emotional appeal to create a bond with the customer. Let’s delve deeper into this.
### Customer-Focused Branding
The image a company conveys to its customers is managed through what is called brand strategy, which can include advertising, public relations, customer service, and sales promotions.
One common branding strategy is the use of taglines, which are short and catchy positioning statements that quickly communicate some core aspect of the brand to the consumer. Taglines can be a powerful tool, and in some cases can become as recognizable as the brand names themselves. Consider the list of taglines from recent start-ups in . Do they do a good job of communicating the key attributes or benefits of the brand name they are linked to?
Consider the taglines shown in . They have been around for a long time, and most customers are familiar with them. Why do you think these taglines have endured over time?
Consider, also, how jingles can have a powerful effect on people’s recollection of a message. A jingle is a very short song or sound that brands a product or company and helps promote it. These tunes are very easy to remember, bold, and fun. Jingles are similar to taglines in that they feature a sound that is catchy and easy to understand by the recipient. Which jingle do you remember off the top of your head?
Other components in a brand include the website, social media, customer service, and packaging. These are important components of a branding strategy that use technology to convey the message. A website allows a company to create an image of its business pages that are linked to each other. These pages convey branding information about a company that sends a message to the consumer through the use of the business logo, colors, copy, ease of use, product information, and e-commerce capabilities. The LuminAID website conveys an image and at the same time has important calls to action and serves as an example of successful branding. This site uses colors, images, and fonts that create a specific image of modern lighting that entices customers to purchase the products and other stakeholders to give light to people who need it.
In addition to the ability of a business’s website to convey the company’s story, social media platforms reinforce the connection to the consumer. Social media platforms such as Facebook, Twitter, Instagram, and YouTube allow companies to invite customers to join the conversation by posting pictures of their use of products, making recommendations, participating in contests and giveaways, and obtaining coupons and other perks. Entrepreneurs have these tools at their disposal to continue creating the image of the business that perhaps got started as a brick-and-mortar business. Today, tools such as Wix, an easy, online website builder, can be used to develop this branding. Entrepreneurs with larger budgets can hire a website designer to create and help promote the site.
Customer service is another tool that can create a strong company image. Training salespeople and cashiers to be courteous, resourceful, and knowledgeable creates an image in the customer’s mind about the product and the business. Wearing uniforms can also create a positive image. Customer service is particularly helpful when dealing with services because it gives some tangibility to the product that the customer cannot see. For example, a hairstylist cannot provide a tangible depiction of how a haircut might look on a customer, but the stylist's demeanor, attire, and hair can give the customer clues as to what treatment and results to expect. Packaging is an important component of branding. The design of the package, the color, the information that is conveyed on the package, and the practicality of the package all create an image of what is to be expected from the product.
Method, an environmentally conscious and customer-focused brand of cleaning products, is an example of a company that distinguished itself from the competition by employing effective branding strategies. By using recycled, environmentally friendly packaging and promoting their commitment to using plant-based, nontoxic chemicals, the company was able to attract the attention of, and eventually place their products in, Target stores nationwide.
First, Method convinced Target to use their products to clean their own stores; after a successful test, they convinced the company to carry its line, which includes soaps, detergents, and cleaners (). Its quirky brand message helped land the account, as Target is a progressive and innovative retailer. The brand message that Method conveyed to them was that everything inside the cleaning bottles was plant-based, and no harsh chemicals were used in creating the product. The products were either as or more effective than leading brands. In this case, the brand message conveyed the mission of the company in all of its products by integrating all the aspects together in a simple manner through the use of clear bottles, quirky fonts, and (nontoxic) colored liquid.
The benefits of developing a good brand are several. A brand is the image of a product or service that conveys to customers who when they purchase from a particular brand, they will receive the value (quality, price, and experience) they expect. The next time they see that brand, they will choose it again because their previous expectations were met, simplifying their buying-decision process. New products must also break through crowded marketplaces and be visible to consumers who already have an attachment to other brands.
Trust in a brand can save the consumer time and may create an emotional connection to the company. However, not all benefits work for all brands and all purchase decisions. When a customer is purchasing low-commitment products and services, like cleaning products, the decision process can be quick and heuristic. When purchasing more expensive items such as electronics, vehicles, or vacations, the brand is just one of many attributes the consumer will consider.
### Defining and Developing a Brand
A brand should have a clear purpose derived from the company’s mission. If the purpose is to provide plant-based cleaners that are not harmful to people, pets, or the environment, as in the case of Method, then the brand must communicate this throughout all of its interactions with its consumers. The unique selling proposition, as described in Identifying Entrepreneurial Opportunity, benefits, qualities, and overall image should be conveyed throughout the marketing mix to tell a story. In addition, the brand should have a well-designed logo, the company/product name, merchandise, promotional items, location of the business (that also provides an image or tells a story), and any other tools that communicate with buyers.
Keep in mind that there are differences in branding regarding business size and type. When starting a business, it is likely that you will brand your entire business with one logo, one name, and matching promotional items, business cards, and product packaging. As your number of products grows, you would likely develop different packaging and different images for other product categories.
provides a checklist of items that help develop a brand for your venture.
### Promotion through Brand Advocacy
One way to promote your brand is to identify loyal customers who are willing to share positive feedback about it. A brand advocate is someone who is a fan of your products and passes on the word to others. Brand advocacy is a potentially inexpensive means of building a brand and one that entrepreneurs should explore. One simple way to motivate brand advocacy is by asking your best customers and fans to refer other customers to you, leave online reviews, and/or to blog or comment about your company and products online. Companies often offer discounts and promotional codes to encourage brand advocates to spread the word.
The key to effective brand advocacy is to know the goal of your advocacy campaign, look for ambassadors (there are many online and in-person events), ask them to perform a task, and reward them for doing so.
An example of advocacy branding is to create a contest to engage consumers who love your product so they can share pictures on social media. IKEA did this in 2016, when it started a contest to win a personalized wardrobe using the hashtag #JoyOfStorage to entice its most loyal fans to share their IKEA products online. The contest asked customers to post pictures of their IKEA products on Facebook (). This campaign allowed IKEA to engage and reward loyal customers in a fun way, while also using word-of-mouth marketing to expand their marketing reach.
### Summary
Branding gives an identity to the product and company to which the customer can identify. It is based on its mission, goals, and product benefits, and it must be integrated with the marketing mix for greater impact. Brands help communicate a message to the consumer about product quality, pricing, and overall benefits. When the communication strategy is not cohesive, the consumer may become confused by the different signals the company sends. The entrepreneur must work hard to create a unified message all the way through.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Hubspot’s Beginner’s guide to branding: https://blog.hubspot.com/agency/develop-brand-identity#.WgSASHcJI2E.mailto |
# Entrepreneurial Marketing and Sales
## Marketing Strategy and the Marketing Plan
### Learning Objectives
By the end of this section, you will be able to:
1. Distinguish between a marketing strategy, a marketing plan, and a pitch
2. Describe the elements of a marketing plan
Now that you have a better idea of what marketing is, you are ready to start developing a marketing strategy and plan. A marketing strategy describes how a company will reach consumers and convert them into paying customers. Having a solid-yet-flexible marketing strategy is a good business practice, no matter what kind of business you are in.
A marketing plan is a formal business document that is used as a blueprint or guide for how a company will achieve its marketing goals. A marketing plan differs from a business plan in that it focuses more on market research, attracting customers, and marketing strategies, whereas the business plan covers much more than that, as you will see in Business Model and Plan.
Marketing plans are important tools because they act as roadmaps for everyone involved in an enterprise. Writing a marketing plan forces you to specify goals and develop strategies to reach them, and encourages you to research markets and competition. A strong marketing plan will encourage entrepreneurs to think deeply about their business and profit potential, helping them make better business and marketing decisions. Additionally, a marketing plan can create greater involvement and cohesiveness among employees by clarifying goals and expectations.
A variety of marketing plan templates are available that can be modified to fit your business’s product and/or services. One thing to consider is why you are writing your plan and who your audience is. In addition to planning for your venture, will it be used by employees or potential investors? Different audiences will require different kinds of information. If it’s an employee, then you must include extra details about the operation of the business. If the plan is geared toward acquiring an investor, be sure to highlight the value that will be gained from investing.
Keep in mind that the various parts of a plan do not need to be written in a certain order. Plans should also be seen as flexible guides rather than absolute rules. All good marketing plans are living, breathing documents that help you measure success while allowing for course corrections when necessary. provides the standard components of a marketing plan.
### Executive Summary
The executive summary is just that—a clear and concise summary of the major points of your marketing plan. Though it is placed first, it is generally written last because it is based on the information presented in other subsequent sections.
The executive summary is typically one or two pages long and includes key indicators of success for the business and its stakeholders, which may include company owners, managers, consultants, investors, and banks. Your goal is not merely to summarize everything in your plan but to highlight why people should be interested in your venture. Whether the reader is an employee or a potential partner or investor, the executive summary should seek to not only inform but to excite.
Focusing on the opportunity at hand, what makes your business model special, and the potential financial reward is a good way to capture a reader’s attention. For example, if your business’ strengths include a great marketing team and a significant competitive advantage, you should highlight them as reasons for success. Some readers may only read this section, so make sure you highlight what makes your company special and how you plan on turning that into profit.
### Situation Analysis
In many ways, the basis of your marketing plan is found in your situation analysis, which is an examination of the internal and external circumstances relevant to your business and product. A good analysis will provide the logical support for the strategies you choose. For example, the research you conduct here explains why you will develop a certain product, how you will price it, and what you will do to reach your target market.
Good situation analyses often include a SWOT analysis, which looks at a company’s strengths, weaknesses, opportunities, and threats. They also look at future and current competitors, and include market validation research that has surveyed potential customers. This information is critical because it proves that you have done your due diligence on your product and market.
### Marketing Opportunity
Assuming your background research has led you to determine that there is a business opportunity, this is where you explain what and where that opportunity is. For example, if your research led you to discover a gap in the market for educational children’s toys, this is where you explain the depth of the opportunity. Here you use your research as evidence to prove to your reader that there is a market gap and that you know how to fill it. If your goal is to get an investor interested, this is where you would let them know what they stand to gain and when they would gain that.
### Business Model
In this section, your job is to marry the opportunity you saw with the solution you have created. Here you articulate how your competitive advantage and points of differentiation (nature of the solution and its key features and benefits) will provide value to customers and earn profits that will sustain your business into the foreseeable future. What will you do to create value that attracts customers? How will you generate sales? Who is your target market? If you were opening a gym, this is where you would lay out how you will capture customers, the value they will receive, what types of membership contracts will be available to them, and so on.
A great tool for capturing this information is the Business Model Canvas (), which is discussed in Launch for Growth to Success and Business Model and Plan. The nine building blocks of this model will help you to determine the targeted customer segment, value proposition that you will present each of your segments, channels for the distribution of the proposition or touchpoints, type of customer relationship you will build with your target, types of cost structures and revenue streams based on pricing means, and key resources, activities, and partners that will help you to succeed.
The canvas also allows the entrepreneur to innovate and to change if something doesn’t work out. The point of this tool is to put the pieces of a plan together.“The Business Model Canvas.”
### Marketing Objectives
Here you present your specific goals and their tangible outcomes. It is not enough to say that you will be very successful without defining what exactly success means. The point of this section is to quantify your goals as units sold, sales/revenue, market share, or some other practical metric. Goals can also include creating measurable brand awareness and developing a certain number of distribution channels.
For example, good, measurable goals might be selling 300 units per month, selling $600,000 worth of product in a year, or gaining brand awareness of 10 percent of your target market in three months. Avoid goals that are unmeasurable or vague, as they won’t help you now or later.
No matter what your goals are, they should be reasonably achievable and as specific as possible. The reason for this is so that later on, you can determine whether you have been successful. If you haven’t, you will know something needs to change.
### Marketing Strategies
As mentioned earlier, having a good marketing mix will help your business succeed. As an entrepreneur, you want to segment the market and figure out if there are possible pockets of people whom you can serve. The process of segmenting, targeting, and positioning (STP) will help you figure out who is your best customer and allow you to allocate your resources effectively to serve that market.
After going through this process, you can look at the marketing mix, and depending on whether you have a product, service, or a mixture of both, which is usually the case, you will outline your approach to the 7Ps of the marketing mix.
### Action Plan
In the action plan, you detail how things will get done in your business on a day-to-day basis, when they will get done, and who will be doing them. Often, new business owners develop extensive strategies, but they don’t have the people power to implement them. Obviously, ensuring that you have the necessary human resources in place to execute your goals is important. This is the section where you make it clear that you do. For example, if you have a marketing team in place, highlighting their ability to execute your plans will help convince potential investors that you can put your plan into action.
### Financials
Here you include budgets, forecasts, and any other information that will give readers and potential investors a clear picture of your business’s financial situation. Being transparent and truthful will create trust and goodwill between your company and potential investors.
This section is also important because it will help you determine how profitable your business might be. One place to start is by determining your expenses and future profits. Since most entrepreneurs tend to overestimate these numbers, it is best to develop financial projections for best- and worst-case scenarios, as well as a projection for an average case scenario.
Many entrepreneurs develop one-, three-, or five-year projections to get a sense of future profits and to prove that their business model is sustainable over the long run. provides an example.
### Key Performance Indicators
Finally, you need to determine your key performance indicators, or how you will evaluate the effectiveness of your strategies, by looking at the progress you have made during a specific timeframe. These include the quantitative milestones that will tell you if you are on the right track, help you analyze your decision-making process and focus on specific strategies, and make changes if these don’t work.
For example, one of your milestones might be a sales goal of $50,000 within the first six months. If you are not on track by the time you hit this milestone, it can be an indication that you either overestimated your sales or your strategies are not working. In either case, you will need to make actionable steps to revise your projections or find more effective strategies.
### Summary
Once you have an idea of your marketing mix, the next step is to develop actionable strategies and write them down in a marketing plan. A marketing strategy describes how a company will reach consumers and convert them into paying customers. A marketing plan is a formal business document that is used as a blueprint or guide for how a company will achieve its marketing goals. A good marketing plan can be used to guide internal decisions and attract external investors.
### Review Questions
### Discussion Questions
### Suggested Resources
Business Model Canvas: https://strategyzer.com/canvas/business-model-canvas
Hubspot Marketing Plan templates: https://blog.hubspot.com/marketing/marketing-plan-template-generator
Small Business Administration: https://www.sba.gov/business-guide/manage-your-business/marketing-sales |
# Entrepreneurial Marketing and Sales
## Sales and Customer Service
### Learning Objectives
By the end of this section, you will be able to:
1. Explain the importance of sales strategy and provide an example
2. Explain the importance of customer service
A sales strategy is a plan that the entrepreneur uses to identify and engage a consumer, from prospecting to securing the sale. This strategy should keep in mind the core benefit or competitive advantage that the product or service has and make sure this information filters through the entire sales execution process. The strategy should include a six-step process that is an integrated sales system for how to prospect, pitch, handle rejections, and the like.
Setting objectives is important before reaching out to prospects and current customers because they allow the salesperson to detail the strategy, have an end goal, and measure the results. For example, a salesperson may have a goal of closing one client out of ten prospects he or she sees per week (or through a sales cycle). So the detailed strategy would be:
1. doing research about prospective clients and creating a list,
2. calling them to set up an appointment to talk about your product or service,
3. meeting with them to present a proposal,
4. handling objections,
5. closing the deal, and
6. nurturing the relationship after close.
The end goal would be to gain a prospect as a client and develop a good relationship for future business. And the salesperson would measure the results by looking back at goals and outcomes.
There are many methods, tools, and techniques to sell, and there is no perfect set of strategies for a business. It depends on the goals and resources of the entrepreneur, as well as on the type of product they are launching. When selling to customers who are going to be spending a substantial amount on a product or service, like a piece of equipment, a luxury yacht, or an expensive software program, there must be a sales system in place to take consumers from prospects to customers. The preceding six steps are general stages in this system. Let’s take a look at each step.
### Sample Six-Step Sales Strategy
outlines an example of an effective sales system or strategy using a six-step approach.Stephen Castleberry and John Tanner.
### Prospecting and Preparing
Prospecting focuses on finding potential new customers for the product or service. This helps acquire new customers, replace customers lost to attrition, and expand sales from current customers. In essence, prospecting allows salespeople to collect information about potential customers and identify any who are not a good fit for the company. It is important to get as many prospects as possible to secure a few customers, as the pool of prospects diminishes through successive steps of the sales process.
You may need to have a list of twenty prospects to secure one or two customers. Prospecting also tends to be more important in certain industries such as financial advising or business-to-business industries. To determine whether a person or organization is a qualified prospect, the salesperson must consider several issues, such as whether this person/business needs my product or service, and if they can afford it.
### Making the Sales Call
The next step of the sales system is to prepare for a sales call, contact, or meeting with a prospect. Effective sales people usually prepare well in advance of contacting a prospect. A salesperson can look for information regarding the company’s demographics, its competition, clients, and other companies they purchase from. Information can be gathered from online sources or referrals. It is also helpful to set objectives before contacting the prospect. Some of those objectives can include securing an appointment for a presentation, understanding the prospect better, scheduling a second call/contact, or perhaps starting a sale.
### Presenting the Proposal
Once the salesperson has made a connection with a prospect and understands the prospect’s needs, the next step is to meet with the prospect for a sales presentation. A presentation is a great way to expand the prospect’s understanding about the offering. Strong presentations include good communication skills with strong visuals and testimonials. In this step, the salesperson can make a better case for the value proposition, citing the strengths of the product and how those strengths would help the prospect in their life or how it would help a company’s objectives. The presentation can also include the cost of the investment and a projection of the return on investment. In the case of a financial advisor, a presentation at a prospect’s home would show the potential products that the prospect might invest in, such as a variety of retirement accounts, life insurance, a college savings plan, or long-term care insurance, along with the costs and benefits of each. In the case of a business, the presentation could take place at the prospect’s office, and the meeting could include a slide presentation about a piece of equipment, with video showing how it is used and how it can benefit the company, including cost savings.
### Handling Objections
During or after the presentation, a salesperson will likely encounter objections or questions from the prospect. This is a good way for the salesperson to gain feedback and respond to concerns from the prospect. Objections can arise during the appointment setting, during the presentation, or while trying to close the sale. The salesperson must be proficient at dealing with these in a truthful manner so the relationship that is established is based on trust. Some of those objections can include cost concerns, credit capabilities, product benefits, or plain rejection of the product. In this case, the financial advisor could answer questions about the potential benefits of one type of insurance over another, or handle objections on the monthly payment plan. If dealing with a company, these questions can take the form of credit opportunities and amount of cost savings in comparison to a competitor.
### Closing the Sale
Once the presentation and objections are handled, the next step is to close, or ask for the sale. This is as important as being prepared to present and handle objections because it signals to the prospect that the product is a good fit and the relationship can be created. A good closing includes a trustworthy and logical process. Doing a trial close by asking “How is this so far?” or “Can I answer anything else?” can help the customer feel more at ease with making a decision. The customer will help set the pace for a final closing. Then, the salesperson can set up the next steps or ask the following questions: “Can I place the order for you?” “Can we open the life insurance account for you?” “Can you come see the demonstration at our office?” “Can we meet next week for the financial terms?”
### Fulfilling Orders, Fostering Relationships, and Asking for Referrals
Finally, the salesperson must fulfill the order and make sure that the customer is satisfied with the product or service. The salesperson, in the end, is the one who is the main contact for the customer and therefore is responsible for the fulfillment of a correct order. The order needs to be closely monitored in case there are any delays or issues with it, so the customer can be immediately notified. The process of the order fulfillment has to be monitored until it is fulfilled. Software has now made it easier to keep track of these orders, so the salesperson can spend more time selling and less time on the order process. Customer relationship management tools such as Salesforce (https://www.salesforce.com/crm/) can help a small entrepreneur or a larger business keep track of its customers, their orders, troubleshooting, and strategies for cost effectiveness.
Building a direct relationship with the customer is also important; therefore, calls or emails to check in consistently is important to assess customer satisfaction and t build the relationship bridge to ask for referrals. Customer retention is more important than ever, as even a small percentage of customers can make up the majority of your sales. Wooing new customers is 5 percent more expensive than keeping your current ones, and in the long run, those who are your VIPs will generate most of your sales. Matt Mansfield. “Customer Retention Statistics: The Ultimate Collection for Small Business.” Research shows that retaining even 5 percent of your current customers can generate anywhere from 25 percent to 95 percent of your sales.Jia Wertz. “Don’t Spend 5 Times More Attracting New Customers, Nurture the Existing Ones.”
### Customer Service
One of the most important aspects of making the sale, and one that often wins or loses customers, is customer service. If you have ever stepped into a business where you have been greeted with a smile and treated kindly throughout the purchase process, you will probably want to come back and purchase from that store or salesperson again. However, if the sales associate is rude and doesn’t help you find what you need, chances are you will not return to the store a second time. For start-ups, customer service can be an advantage, as the business can focus on a few customers at a time in a more personal manner. The bigger a company is, the harder it is to manage many customers and sales associates on a personal level.
According to Hubspot’s top statistics on customer service, 70 percent of the customer experience or journey depends on how they are being treated. The majority of customers fall in love with a brand and are willing to pay a premium for amazing customer service, and they feel that great customer service is more important than price. They will also share positive experiences with other people—an average of eleven, according to Hubspot.Swetha Amaresan. “31 Customer Service Stats to Know in 2019.” When a customer has a negative experience, or feels unappreciated, they are more likely to switch brands, and a company has to work harder to counteract a negative experience. It takes twelve positive reviews to counteract just one negative, unresolved customer issue.Swetha Amaresan. “31 Customer Service Stats to Know in 2019.”
As an entrepreneur, focusing on customer service before and after the purchase is an effective reminder that the company is trying to build trust and have a relationship with its customers. This also helps with the process of branding, as you’ve learned. Even in business-to-business sales transactions, the most important aspect of the sales process is building that trust relationship so the customer purchases from a “friend” again. Often when companies lose accounts, it is due to a change in sales personnel and the loss of the associated relationship.
One effective way to ensure great customer service is to create an operating manual for your employees that includes proper techniques for customer service. These techniques can include how to greet a customer, how to listen and help them get what they need, the philosophy of your company, how far to go when insuring great service, and how to be creative with customer service. Employees can review the manual when they are hired, and every year after that to ensure they continue to follow the procedures. Training programs before starting work and during the year can be facilitated by the entrepreneur or a consultant to sharpen the skills of the employees. These programs are a great way to energize salespeople to be more people oriented and to develop the proper attitude and positive thinking that is required when helping customers. Sales training programs are a great way to learn more about customer service. Zig Ziglar and Dr. Cialdini programs are designed with the salesperson in mind.
Also, when hiring, focus on candidates who already have customer service experience and those who come with good referrals. Incentives for great customer service such as an employee of the month/year award or financial incentives can also encourage employees to provide great service. Finally, the entrepreneur and any administrators are the leaders of a company who must show the same customer service to their employees. Walk the talk! If they realize that they are there to serve their employees and enable them to create a great customer service atmosphere, then the employees will share the same enthusiasm and energy toward their customers. Happy employees turn into profitable customers. shows a quick checklist for beginning entrepreneurs.
Customer service doesn’t happen just in person or on the phone. Technology has enabled people and companies to connect through email and social media, taking the conversation and interaction online. Customers can now talk to the company employees, voice their concerns, and get issues resolve through these avenues. These technological advances have provided a bigger platform for customers to rave about companies or complain about them.Liz Greene. “Social Media Is a Customer Service Channel Whether You Like It or Not.” This love or dislike can translate into social media posts, tweets, pictures, videos, and reviews for thousands or millions of people to see and can help or tarnish a company.
### Summary
Sales drives profit. They may require a simple sales approach or a complicated sales system. An example of a sales system is a six-step sales strategy: doing research about prospective clients and creating a list; making an appointment to talk about your good or service; meeting with them to present a proposal; handling objections; closing the deal; and nurturing the relationship after close. When selling luxury and expensive items, the sales approach is usually more thorough and requires more sales training and finesse. Customer service is a component that is linked to this process and with proper training can really differentiate a company from the competition.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Cialdini online tools: https://www.influenceatwork.com/
Hoffman Sales Training: https://sellhoffman.com/
Neil Rackman: http://neilrackham.com/
Spin Selling: https://blog.hubspot.com/sales/spin-selling-the-ultimate-guide
Zig Ziglar: https://www.ziglar.com/
The State of Customer Service: https://offers.hubspot.com/state-of-customer-service?hubs_post-cta=anchor&hsCtaTracking=9c545446-aacf-47a3-bfb3-1998f78b79c8%7C4f98051f-03f6-4061-9a68-5de8fcbb40c1
Cialdini, R. B. (2001). Influence: Science and Practice (4th ed.). Boston: Allyn & Bacon: Explains some aspects of the sales process in a fun and fact-based manner. |
# Entrepreneurial Finance and Accounting
## Introduction
In 2015, Doug Monahan, the CEO and founder of iBackPack of Texas, Inc., introduced a revolutionary technology package encased in a typical backpack. The iBackPack boasted the capacity to incorporate WiFi/MiFi, a battery system, smart power transfer cables, and a car-charging system—while carrying four notebook computers and their accessories. Monahan promised that the iBackPack would be a “communication hub and corresponding electrical powerhouse for students and business professionals alike.”“iBackPack Planning Kickstarter Launch on Black Friday.” To bring the project to market, iBackPack sought crowdfunding through an Indiegogo campaign that raised $723,395 from 4,041 backers. An additional $76,694 was raised from 252 Kickstarter backers.
In 2016, iBackPack raised over $800,000 to fulfill investors’ orders, but the product never materialized. The only update from the company was a Facebook post alluding to issues sourcing “safe” batteries. By 2017, the iBackPack crowdfunding campaign failed to deliver the product promised to its investors.Lewis Leong. “Sorry, iBackPack Backers. You Got Scammed.” ,Kylie McGovern. “Hundreds Still Waiting for Bulletproof ‘iBackPack’ Delivery a Year Later.” According to an article on the website The Verge in August 2018, the founders of iBackPack were under investigation by the Federal Trade Commission.Ashley Carman. “The FTC Is Investigating a Crowdfunding Campaign That Disappeared with More than $700K.” Although crowdfunding can be a great option for startups, those who abuse the system may find themselves subject to legal action. |
# Entrepreneurial Finance and Accounting
## Overview of Entrepreneurial Finance and Accounting Strategies
### Learning Objectives
By the end of this section, you will be able to:
1. Distinguish between financing and accounting
2. Describe common financing strategies for different stages of the company lifecycle: personal savings, personal loans, friends and family, crowdfunding, angel investors, venture capitalists, self-sustaining, private equity sales, and initial public offering
3. Explain debt and equity financing and the advantages and disadvantages of each
The case of iBackPack demonstrates that entrepreneurial success is not guaranteed simply because a company can secure funds. Funds are the necessary capital to get a business, or idea, off the ground. But funding cannot make up for a lack of experience, poor management, or a product with no viable market. Nonetheless, securing funding is one of the first steps, and a very real requirement, for starting a business.
Let’s begin by exploring the financial needs and funding considerations for a simple organization. Imagine that you and your college roommate have decided to start your own band. In the past, you have always played in a school band where the school provided the instruments. Thus, you will need to start by purchasing or leasing your own equipment. You and your roommate begin to identify the basic necessities—guitars, drums, microphones, amplifiers, and so on. In your excitement, you begin browsing for these items online, adding to your shopping cart as you select equipment. It doesn’t take you long to realize that even the most basic set of equipment could cost several thousand dollars. Do you have this much money available to make the purchase right now? Do you have other funding resources, such as loans or credit? Should you consider leasing most or all of the instruments and equipment? Would family or friends want to invest in your venture? What are the benefits and risks associated with these funding options?
This same basic inquiry and analysis should be completed as part of every business plan. First, you must determine the basic requirements for starting the business. What kinds of equipment will you need? How much labor and what type of skills? What facilities or locations would you require to make this business a reality? Second, how much do these items cost? If you do not possess an amount of money equal to the total anticipated cost, you will need to determine how to fund the excess amount.
Once a new business plan has been developed or a potential acquisition has been identified, it’s time to start thinking about financing, which is the process of raising money for an intended purpose. In this case, the purpose is to launch a new business. Typically, those who can provide financing want to be assured that they could, at least potentially, be repaid in a short period of time, which requires a way that investors and business owners can communicate how that financing would happen. This brings us to accounting, which is the system business owners use to summarize, manage, and communicate a business’s financial operations and performance. The output of accounting consists of financial statements, discussed in Accounting Basics for Entrepreneurs. Accounting provides a common language that allows business owners to understand and make decisions about their venture that are based on financial data, and enables investors looking at multiple investment options to make easier comparisons and investment decisions.
### Entrepreneurial Funding across the Company Lifecycle
An entrepreneur may pursue one or more different types of funding. Identifying the lifecycle stage of the business venture can help entrepreneurs decide which funding opportunities are most appropriate for their situation.
From inception through successful operations, a business’s funding grows generally through three stages: seed stage, early stage, and maturity (). A seed-stage company is the earliest point in its lifecycle. It is based on a founder’s idea for a new product or service. Nurtured correctly, it will eventually grow into an operational business, much as an acorn can grow into a mighty oak—hence the name “seed” stage. Typically, ventures at this stage are not yet generating revenue, and the founders haven’t yet converted their idea into a saleable product. The personal savings of the founder, plus perhaps a few small investments from family members, usually constitute the initial funding of companies at the seed stage. Before an outsider will invest in a business, they will typically expect an entrepreneur to have exhausted what is referred to as F&F financing—friends and family financing—to reduce risk and instill confidence in the business’s potential success.
After investments from close personal sources, the business idea may begin to build traction and attract the attention of an angel investor. Angel investors are wealthy, private individuals seeking investment options with a greater potential return than is traditionally expected on publicly traded stocks, albeit with much greater risk. For that reason, they must be investors accredited by the federal Securities and Exchange Commission (SEC) and they must meet a net worth or income test. Nonaccredited investors are allowed in certain limited circumstances to invest in security-based crowdfunding for startup companies. Among the investment opportunities angel investors look at are startup and early stage companies. Angel investors and funds have grown rapidly in the past ten years, and angel groups exist in every state.
An early stage company has begun development of its product. It may be a technical proof of concept that still requires adjustments before it is customer ready. It may also be a first-generation model of the product that is securing some sales but requires modifications for large-scale production and manufacturing. At this stage, the company’s investors may now include a few outsider investors, including venture capitalists.
A venture capitalist is an individual or investment firm that specializes in funding early stage companies. Venture capitalists differ from angel investors in two ways. First, a venture capital firm typically operates as a full-time active investment business, whereas an angel investor may be a retired executive or business owner with significant savings to invest. Additionally, venture capital firms operate at a higher level of sophistication, often specializing in certain industries and with the ability to leverage industry expertise to invest with more know-how. Typically, venture capitalists will invest higher amounts than angel investors, although this trend may be shifting as larger angel groups and “super angels” begin to invest in venture rounds.
Private equity investment is a rapidly growing sector and generally invests later than venture capitalists. Private equity investors either take a public company private or invest in private companies (hence the term “private equity”). The ultimate goals of private equity investors are generally taking a private company public through an initial public offering (IPO) or by adding debt or equity to the company’s balance sheet, and helping it improve sales and/or profits in order to sell it to a larger company in its sector.
Companies in the mature stage have reached commercial viability. They are operating in the manner described in the business plan: providing value to customers, generating sales, and collecting customer payments in a timely manner. Companies at this stage should be self-sufficient, requiring little to no outside investment to maintain current operations. For a product company, this means manufacturing a product at scale, that is, in very large volumes. For a software company or app provider, this means generating sales of the software or subscriptions under an SaaS model (Software as a Service) and possibly securing advertising revenue from access to the user base.
Companies at the mature stage have different financing needs from those in the previous two stages, where the focus was on building the product and creating a sales/manufacturing infrastructure. Mature companies have reached a consistent level of sales but may seek to expand into new markets or regions. Typically, this requires significant investment because the proposed expansion can often mirror the present level of operations. That is to say, an expansion at this level may result in doubling the size of the business. To access this amount of capital, mature companies may consider selling a portion of the company, either to a private equity group or through an IPO.
An initial public offering (IPO) occurs the first time a company offers ownership shares for sale on a public stock exchange, such as the New York Stock Exchange. Before a company executes an IPO, it is considered to be privately held, usually by its founders and other private investors. Once the shares are available to the general public through a stock exchange, the company is considered to be publicly held. This process typically involves an investment banking firm that will guide the company. Investment bankers will solicit institutional investors, such as State Street or Goldman Sachs, which will in turn sell those shares to individual investors. The investment banking firm typically takes a percentage of the funds raised as its fee. The benefit of an IPO is that the company gains access to a massive audience of potential investors. The downside is that the owners give up more ownership in the business and are also subject to many costly regulatory requirements. The IPO process is highly regulated by the SEC, which requires companies to provide comprehensive information up front to potential investors before completing the IPO. These publicly traded companies must also publish quarterly financial statements, which are required to be audited by an independent accounting firm. Although there are benefits to an IPO for later-stage companies, it can be very costly both at the start and on an ongoing basis. Another risk is that if the company does not meet investors’ expectations, the value of the company can decline, which can hinder its future growth options.
Thus, a business’s lifecycle stage greatly influences its funding strategies and so does its industry. Different types of industries have different financing needs and opportunities. For example, if you were interested in opening a pizzeria, you would need a physical location, pizza ovens, and furniture so customers could dine there. These requirements translate into monthly rent on a restaurant location and the purchase of physical assets: ovens and furniture. This type of business requires a significantly higher investment in physical equipment than would a service business, such as a website development firm. A website developer could work from home and potentially begin a business with very little investment in physical resources but with a significant investment of their own time. Essentially, the web developer’s initial funding requirement would simply be several months’ worth of living expenses until the business is self-sufficient.
Once we understand where a business is in its lifecycle and which industry it operates in, we can get a sense of its funding requirements. Business owners can acquire funding through different avenues, each with its own advantages and disadvantages, which we will explore in Special Funding Strategies.
### Types of Financing
Although many types of individuals and organizations can provide funds to a business, these funds typically fall into two main categories: debt and equity financing (). Entrepreneurs should consider the advantages and disadvantages of each type as they determine which sources to pursue in support of their venture’s immediate and long-term goals.
### Debt Financing
Debt financing is the process of borrowing funds from another party. Ultimately, this money must be repaid to the lender, usually with interest (the fee for borrowing someone else’s money). Debt financing may be secured from many sources: banks, credit cards, or family and friends, to name a few. The maturity date of the debt (when it must be repaid in full), the payment amounts and schedule over the period from securement to maturity, and the interest rate can vary widely among loans and sources. You should weigh all of these elements when considering financing.
The advantage of debt financing is that the debtor pays back a specific amount. When repaid, the creditor releases all claims to its ownership in the business. The disadvantage is that repayment of the loan typically begins immediately or after a short grace period, so the startup is faced with a fairly quick cash outflow requirement, which can be challenging.
One source of debt financing for entrepreneurs is the Small Business Administration (SBA), a government agency founded as part of the Small Business Act of 1963, whose mission is to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”Small Business Administration (SBA). “Mission.” n.d. https://www.sba.gov/about-sba/what-we-do/authority The SBA partners with lending institutions such as banks and credit unions to guarantee loans for small businesses. The SBA typically guarantees up to 85 percent of the amount loaned. Whereas banks are traditionally wary of lending to new businesses because they are unproven, the SBA guarantee takes on some of the risk that the bank would normally be exposed to, providing more incentive to the lending institution to finance an entrepreneurial venture.
To illustrate an SBA loan, let’s consider the 7(a) Small Loan program. Loans backed by the SBA typically fall into one of two categories: working capital and fixed assets. Working capital is simply the funds a business has available for day-to-day operations. If a business has only enough money to pay bills that are currently due, that means it has no working capital—a precarious position for a business to be in. Thus, a business in this position may want to secure a loan to help see it through leaner times. Fixed assets are major purchases—land, buildings, equipment, and so on. The amounts required for fixed assets would be significantly higher than a working capital loan, which might cover just a few months’ expenses. As we will see, loan requirements made under the 7(a) Small Loan program are based on loan amounts.
For loans over $25,000, the SBA requires lenders to demand collateral. Collateral is something of value that a business owner pledges to secure a loan, meaning that the bank has something to take if the owner cannot repay the loan. Thus, in approving a larger loan, a bank might ask you to offer your home or other investments to secure the loan. In a real estate loan, the property you are buying is the collateral. In a way, loans for larger purchases can be less risky for a bank, but this can vary widely from property to property. A loan that does not require collateral is referred to as unsecured.
To see how a business owner might use an SBA loan, let’s return to the example of a pizzeria. Not all businesses own the buildings where they operate; in fact, a great many businesses simply rent their space from a landlord. In this case, a smaller loan would be needed than if the business owner were buying a building. If the prospective pizzeria owner could identify a location available for rent that had previously been a restaurant, they might need only to make superficial improvements before opening to customers. This is a case where the smaller, collateral-free type of SBA loan would make sense. Some of the funds would be allocated for improvements, such as fresh paint, furniture, and signage. The rest could be used to pay employees or rent until the pizzeria has sufficient customer sales to cover costs.
In addition to smaller loans, this SBA program also allows for loans up to $350,000. Above the $25,000 threshold, the lending bank must follow its own established collateral procedures. It can be difficult for a new business to provide collateral for a larger loan if it does not have significant assets to secure the loan. For this reason, many SBA loans include the purchase of real estate. Real estate tends to be readily accepted as collateral because it cannot be moved and holds it value from year to year. For the pizzeria, an aspiring business owner could take advantage of this higher level of lending in a situation where the business is buying the property where the pizzeria will be. In this case, the majority of loan proceeds will likely go toward the purchase price of the property. Both the high and low tiers of the SBA loan program are examples of debt financing. In Special Funding Strategies, we will look at how debt financing differs from equity financing.
### Equity Financing
In terms of investment opportunities, equity investments are those that involve purchasing an ownership stake in a company, usually through shares of stock in a corporation. Unlike debts that will be repaid and thus provide closure to the investment, equity financing is financing provided in exchange for part ownership in the business. Like debt financing, equity financing can come from many different sources, including friends and family, or more sophisticated investors. You may have seen this type of financing on the TV show Shark Tank. Contestants on the series pitch a new business idea in order to raise money to start or expand their business. If the “sharks” (investors) want to invest in the idea, they will make an offer in exchange for an ownership stake. For example, they might offer to give the entrepreneur $200,000 for a return of 40 percent ownership of the business.
The advantage of equity financing is that there is no immediate cash flow requirement to repay the funds, as there is with debt financing. The drawback of equity financing is that the investor in our example is entitled to 40 percent of the profits for all future years unless the business owner repurchases the ownership interest, typically at a much higher valuation—an estimate of worth, usually described in relation to the price an investor would pay to acquire the entire company.
This is illustrated in the real-life example of the ride-sharing company Uber. One of the early investors in the company was Benchmark Capital. In the initial round of (venture capital) financing, Benchmark invested $12 million in Uber in exchange for stock. That stock, as of its IPO date in May 2019, was valued at over $6 billion, which is the price that the founders would have to pay to get Benchmark’s share back.
Some financing sources are neither debt nor equity, such as gifts from family members, funds from crowdfunding websites such as Kickstarter, and grants from governments, trusts, or individuals. The advantages and disadvantages of these sources are discussed in Special Funding Strategies.
### Summary
Entrepreneurial financing is concerned with understanding the funding requirements for a new business and what sources of funds are available. Each source comes with different expectations and requirements. Equity financing provides the entrepreneur with maximum flexibility: Dividends are not required and can be made when cash flow is strong enough to meet all obligations of the firm. Debt financing restricts financial flexibility but can be cheaper under some circumstances. For example, SBA loans can be subsidized by the federal government. Financing is not a one-size-fits-all procedure.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Small Business Administration lending program: https://www.sba.gov/funding-programs/loans
“The Top Twenty Venture Capitalists Worldwide,” New York Times (March 27, 2017): https://www.nytimes.com/interactive/2017/03/27/technology/Top-20-Venture-Capitalists.html?_r=0
National Public Radio “How I Built This” podcast series (example episodes: Instagram, Airbnb, Spanx): https://www.npr.org/podcasts/510313/how-i-built-this
TED Radio Hour (example episodes: Big Data Revolution, Disruptive Leadership): https://www.npr.org/programs/ted-radio-hour/?showDate=2019-07-05 |
# Entrepreneurial Finance and Accounting
## Special Funding Strategies
### Learning Objectives
By the end of this section, you will be able to:
1. Identify funding strategies used by charitable organizations
2. Describe financing opportunities available to startups
3. Define bootstrapping
4. Describe the advantages and disadvantages of bootstrapping
It’s important to recognize that not all startups are Silicon Valley tech companies. These companies create high-profile products, such as applications and websites, which can take years to become profitable or even generate revenue. Much more common are the small businesses founded every day by entrepreneurs seeking to create value in their local communities. Moreover, not all startups are founded with a profit motive in mind.
Charitable organizations, or certain nonprofit companies, are often founded for altruistic purposes, such as advancing the arts, education, and science; protecting the natural environment; providing disaster relief; and defending human rights ().
These goals supersede the profit motive that a traditional company would have. As a result, the funding strategies of these enterprises often differ quite dramatically from those of standard for-profit businesses. Without the emphasis on profit, it can be difficult to provide for the cost of ongoing operations. Thus, these organizations must develop a sustainable strategy—one that can maintain the organization’s financial stability.
In the United States, such organizations can qualify for tax-exempt status, meaning that if there is a profit from operations, it is not typically subject to taxes. Organizations seeking this exemption must apply to the Internal Revenue Service for tax-exempt status and provide information about what kind of mission the organization carries out—charitable, scientific, educational, and so on.
Consider a museum. What is its purpose? Traditional companies provide a product or service to their customers in exchange for payment, and typically fill a need their customers have. A grocery store sells food because human beings need to eat food to survive. Although viewing paintings and sculptures is not a physical requirement for life, this experience arguably enriches our lives and helps educate and shape our society. That is why museums are founded. Consider the original mission statement of the Metropolitan Museum of Art (commonly known as the “Met”) in New York City ().Charter of The Metropolitan Museum of Art, State of New York, Laws of 1870, Chapter 197, passed April 13, 1870, and amended L.1898, Ch. 34; L. 1908, Ch. 219. https://www.metmuseum.org/about-the-met
This is a different goal than that of most small businesses (providing a product or service in exchange for a profit) and, as a result, requires different financing strategies, such as a combination of program services, donations, and grants.
### Program Services
Program services are the basic offerings that a nonprofit organization provides that result in revenue, although not typically enough to cover the overall cost of running the organization. These services most closely resemble the customer interactions of a traditional business. The organization provides a product or service in exchange for a customer’s money.
In our museum example, program services could take a few different forms. First, the museum likely charges a fee for admission to view the artwork and artifacts. The individual ticket price multiplied by the number of museum visitors equals the museum’s ticket revenue. An established museum will have a good sense of how many visitors it has on average and can use these data to create a budget.
Another source of program service revenue for a museum could take the form of hands-on educational activities or events with guest speakers or presenters. Often museums will host local artists, or their own employees might conduct art classes or special-topic tours. These events and activities typically have a charge (revenue) beyond the regular admission cost.
Despite these revenue-generating activities, nonprofit organizations still face many funding challenges in covering all the operating costs of a normal business, such as employee wages, facility costs, and advertising. Thus, they need many different sources of income. To illustrate, the Met’s 2018 program service income only made up 2.3 percent of its total revenue for the year.Calculated from the 2018 IRS Form 990 available on the Met’s website. https://www.metmuseum.org/-/media/files/about-the-met/990-forms/2017-irs-form-990-for-fy2018.pdf
### Donations
One benefit to a business with a charitable mission is inherent public support, which can foster community involvement above and beyond patronage. For nonprofits, this can translate into a willingness to donate money to the organization. A donation is a financial gift with no expectation of repayment or receiving anything in return. A traditional business must provide something valuable to create a customer exchange: Their customers demand value in exchange for their hard-earned money.
The benefactors of a charitable organization want to help further the mission of the organization. This type of entity—whether it’s a museum, a hospital, or the Red Cross—relies on the goodwill of community supporters. For the Met, with such a low percentage of revenue generated by program services, it’s clear that donations and charitable gifts are vital to the organization’s financial viability.
### Grants
Another source of funding for nonprofit organizations is grants. A grant is a financial gift given for a specific purpose by a government agency or a charitable organization such as the Bill and Melinda Gates Foundation. Like a donation, a grant does not have to be repaid. Unlike with donations, both nonprofit and for-profit organizations can compete for grants. Whereas donations are typically given without restriction to offset the general operating expenses of the organization, grants often specify how the funds are to be used. Most grant-providing entities have an agenda or purpose behind their funding. For example, the National Institutes of Health (NIH) provides grants “to support the advancement of the NIH mission to enhance health, extend healthy lives, and reduce the burdens of illness and disability.”National Institutes of Health. “Grant Basics.” February 21, 2017. https://grants.nih.gov/grants/grant_basics.htm This federal organization invests over $32 billion annually for medical research.
Grants can be very competitive, requiring a rigorous application process. Usually, multiple organizations apply for the same grant; the organization issuing the grant reviews the many competing applications to make its selection. Grantees generally must submit audited financial statements and are required to update the grantor subsequent to the grant award to ensure proper intended use. The NIH awards almost 50,000 grants annually, most of which are competitive. Although that is an enormous number of projects to fund, only 20 percent of applications submitted to the NIH in 2018 actually were accepted.National Institutes of Health. “Annual Snapshot.” n.d. https://nexus.od.nih.gov/all/2019/03/13/nih-annual-snapshot-fy-2018-by-the-numbers/ In other words, the NIH rejected four out of every five applications. For entrepreneurs, this means that when you identify a grant that is specific to your organization’s mission, you should weigh your chances of being awarded the grant when considering it as part of your funding strategy.
To understand grants in practice, let’s further examine the NIH. The NIH Small Grant Program provides funds for activities such as the development of new research technology. This specific grant can be awarded for up to a two-year period, with funds of up to $50,000 in direct costs per year. A grant like this could provide vital support to a nonprofit startup.
Some business ventures fall somewhere between organizations completely committed to charitable work and traditional small businesses with entrepreneurs focused on social entrepreneurship. Social entrepreneurs develop products and services as solutions to societal problems. For example, the TOMS shoe company was able to create a business model through which the company gives one pair of shoes to children in need in foreign countries for every pair of shoes that a customer purchases. This practice pioneered what they refer to as “One for One.”TOMS. “One for One.” n.d. https://www.toms.com/improving-lives
The company’s website describes the origins of both the company and this model, which are based on the experiences of its founder, Blake Mycoskie ().TOMS. “Blake Mycoskie.” n.d. http://www.toms.com/blakes-bio
Social entrepreneurship offers the ability to effect positive change in the world without simply relying on donations. It pairs a profitable, sustainable business model with a good cause. This combination often creates positive word of mouth. It gives potential customers a good feeling about the product beyond just its style or function.
### No-Loan Finance Strategies
As you’ve learned, many startups come into being through the extensive use of debt. Although borrowing is a legitimate source of funding, it can be risky, especially if the entrepreneur is personally responsible for repayment. In practice, some entrepreneurs max out credit cards, take out home-equity loans against their primary residences, or secure other high-interest personal loans. If the entrepreneur fails to repay the loans, the result can be repossession of equipment, home foreclosure, and other legal action.
We now examine funding strategies attractive to many startups that do not require going into debt or exchanging ownership of the business for financial support (debt and equity financing). The financing methods described here are more creative funding strategies, including crowdfunding, bartering, and other methods.
### Crowdfunding
Recall the story of iBackPack. This venture was originally funded by contributions through Indiegogo and Kickstarter. These websites are a form of crowdfunding, which involves collecting small sums of money from a large number of people. The people who contribute money are typically referred to as backers because they are backing the project or supporting the business idea.
Browsing these crowdfunding websites, you will see many different kinds of ventures seeking financial backing—from creating new board games to opening donut cafes. Each project identifies an overall specific funding goal in terms of a dollar amount. Some crowdfunding websites, such as Kickstarter, implement an “all or nothing” model in which projects do not receive any funds unless their overall funding goal is met. The amount can be exceeded, but if it is not met, the project receives nothing. For an entrepreneur utilizing this resource, selecting an attainable funding goal must be a core part of their strategy. The funding goal must also be appropriate to the scale of the project. For example, setting a goal of $50,000 may be reasonable for launching a food truck (which could be a prototype for a full restaurant), but it is a mere fraction of the cost of constructing an entire table-service restaurant, which would come closer to $750,000. An entrepreneur seeking to enter the culinary world should consider which target would be most achievable as well as most beneficial in meeting both short- and long-term goals. Also, remember that meeting the funding goal does not ensure success of the business, as was the case with iBackPack.
Entrepreneurs vying for crowdfunding usually employ some common tactics. First, they often post an introductory video that explains the project goal and the specific value proposition. (For example, a chef might seek $75,000 to open a food truck specializing in a relatively unknown cuisine.) Second, the entrepreneur provides a more detailed written summary of the project, often including specific items that the funding will pay for, such as $50,000 for a vehicle, $10,000 for graphic design and vehicle decals, and $15,000 for kitchen equipment for the truck. Last is the reward structure, which is what entices visitors to the site to fund the project, offering a return beyond their own passion for the venture. The reward structure establishes different levels of funding and ties a specific reward to each level. For example, for a contribution of $5, the chef might thank the backer on social media; for $25, the backer would get a t-shirt and a hat featuring the food truck’s logo; for $100, the backer would get five free meals when the food truck opens. Fees for these crowdfunding sites vary from 5 to 8 percent. Kickstarter now requires physical products or prototypes for some startups, as well as a short video to help represent and “sell” the product.
Although this financing source offers a lot of flexibility, businesses utilizing crowdfunding can run into trouble. Certain funding levels and rewards may have limits. For example, a reward structure might offer backers contributing $1,000 a trip to the grand opening of the food truck, including airfare and hotel. These top-tier rewards can generate a lot of excitement, but the expense of flying people around the country and providing accommodations could become unmanageable. One research study stated that 84 percent of Kickstarter’s top projects delivered their rewards late.Francesco Schiavone. “Incompetence and Managerial Problems Delaying Reward Delivery in Crowdfunding.”
The advantage of crowdfunding is that the business receives cash up front to launch. The down side is that the reward requires a future payment to the backers. This payment may be in the form of branded merchandise, meals, or even events or travel, so it is important for entrepreneurs to set aside part of the investment money to fund the rewards. Depending solely on generating the reward funds out of future sales is a risk that might result in upsetting the very fans who made the business possible. Since crowdfunding is managed online, another risk is upsetting the project’s vocal supporters. Crowdfunding usually provides only a “kick start” for a startup, so most seed-stage companies will need additional funding from other sources to get to their first commercial launch.
Although social media can backfire, entrepreneurs can take advantage of benefits too. Crowdfunding can allow an entrepreneur to build a community around a product before it is even sold. Like-minded fans of a product can connect with each other over the internet, in the feedback section of a website, or in shared social media posts. Additionally, backers of a project can become cheerleaders for it by sharing the idea—and their enthusiasm for it—with friends, family, and coworkers. Word-of-mouth marketing can lead to more backers or future customers after launch.
Dozens of crowdfunding portals exist, including WeFunder, SeedInvest, Kickstarter, and Crowdcube. Current SEC guidelinesSecurities and Exchange Commission. “Crowdfunding.” n.d. https://www.sec.gov/rules/final/2015/33-9974.pdf for issuing and investing limits granted for Title III Crowdfunding include:
1. A company can raise up to $1 million in aggregate through crowdfunding offerings over a twelve-month period
2. Over a twelve-month period, individual investors can invest in the aggregate across all crowdfunding offerings up to:
### Bartering
Startup companies often don’t have a lot of cash assets on hand to spend, but they often have offerings that can provide value to other businesses. Bartering is a system of exchanging goods or services for other goods or services instead of for money. Let’s consider the case of Shanti, a website designer who wants to start a business. She may want to have her business formally incorporated or may require other legal help, such as review of standard contracts. Hiring a lawyer outright for these services can be costly, but what if the lawyer needed something that a website designer could provide?
Whether the lawyer has just started their own business or has been established for several years, they may need a website created or have an old website redesigned and updated. This website overhaul could prove costly for the lawyer. But what if there were a way that both the lawyer and the web designer could get what they wanted with a resulting net cost of zero dollars? Bartering can achieve this. It should be noted that there are accounting and tax implications involved with bartering that can prevent a net zero offset of costs.
In a barter scenario, Shanti could create a website for the lawyer at the expense only of her time, which in the startup phase is often more abundant than actual cash. The lawyer could provide incorporation services or contract review in exchange, requiring no cash outlay. For many entrepreneurs, this type of exchange is appealing and enables them to meet business needs at a lower perceived cost. Although more mature firms can also use bartering, the opportunity cost is much higher. If a mature company is unable to take on a new paying client because it is doing too much free (barter) work, it may lose out on future revenue, which could potentially be a big loss. Startups, in contrast, often have excess capacity while they develop a customer base, so taking on barter work is often a low-risk, beneficial funding strategy.
### Other No-Loan Funding Options
Beyond crowdfunding and bartering, startups have other options to help them get off the ground, such as funding competitions and pre-orders (). Many organizations hold entrepreneurial finance contests provide financial awards to the winners. These prize funds can be used as seed money to start a new venture. For example, the New York City Public Library holds an annual business plan competition called the New York StartUP! Business Plan Competition.New York Public Library. “New York Startup! 2019 Business Plan Competition.” n.d. https://www.nypl.org/help/services/startup Applicants must complete an orientation session, attend workshops that develop skills related to the creation of a business plan, and submit a complete business plan. The first-place award yields $15,000 in prize money, which can be a great start toward turning an entrepreneurial idea into a business reality.
Another way for startups to gain financial traction is to solicit pre-orders. Consider the launch of a new book or video game. Retail stores will often solicit pre-orders, which are advance purchases of the product. Customers pay for the desired item before they even have access. For example, the entrepreneur Mitchell Harper raised $248,000 in funds before his product launched.Mitchell Harper. “How I Got $248,000 in Pre-Orders before I Even Had a Product.” This approach is not limited to existing, well-known franchises—startups can use it as well. Although established novel and video game franchises have big fan bases and often large advertising budgets, startups can still find effective strategies in this space.
Companies with a prototype model of their product or a first manufacturing run can showcase the new product to potential customers, who may be interested enough to place an order. The company can use the funds received from these pre-orders to pay for the inventory. In addition to having sales staff make sales calls, new companies can attend trade shows and exhibitions to garner interest in the product. Many new products are launched in this fashion because it allows access to many potential customers in one place.
### Why Bootstrapping Hurts, Then Helps
The process of self-funding a company is typically referred to as bootstrapping, based on the old adage that urges us to “pull ourselves up by our bootstraps.” It describes a funding strategy that seeks to optimize use of personal funds and other creative strategies (such as bartering) to minimize cash outflows. In recent years, this strategy has been the fodder for shows like . These shows may make entrepreneurs think that being on TV is glamorous, or the shows may glorify the financial backing of millionaires and billionaires. We have seen that for many entrepreneurs, the reality is that there are drawbacks to bringing in outside investors to launch your venture. These drawbacks include loss of future profits and possible loss of control of the company, among others. Potential business owners must weigh the advantages and disadvantages—both short and long term—for funding their specific dream.
You’ve learned about financing strategies predicated on finding a willing investor or lender, but many small businesses simply don’t have access to large amounts, or any amount, of capital. In these cases, aspiring business owners need lean business strategies that will yield the greatest benefit.
Bootstrapping requires entrepreneurs to shed any preconceived notions of the popular-culture image of startups. Most startups don’t have trendy downtown offices, foosball tables, or personal chefs. Bootstrapping reality looks more like late nights spent clipping coupons. It involves scrutinizing potential expenses and whether each cost is really worth the investment. It can be a difficult and trying process, but without any angel investors or wealthy family backers, bootstrapping is often an entrepreneur’s only option. The good news is that this approach can pay substantial dividends in the long run.
### The Basics of Bootstrapping
When entrepreneurs risk their life savings, they must stretch every dollar as far as possible. Having a limited amount of capital to work with requires optimizing creative strategies to get the business launched and keep it afloat. This creativity applies to bringing customers and sales in the door as well as to managing expenses.
Understanding the ongoing costs of the business is key. In an interview on NPR’s show , Barbara Corcoran, one of the investors on Shark Tank, shares her humble beginnings in real estate brokerage.National Public Radio. “Real Estate Mogul: Barbara Corcoran.” One of things she touches on is being constantly aware of how long her money would last, given her monthly expenses. If she had $10,000 in the bank and the cost of her rent and employees was $2,500 per month, she knew that the money would last her four months. Such constant information and vigilance are required when bootstrapping a business for success.
Employee costs are typically one of the largest expenses facing a business. Hiring traditional full-time employees can be costly; onboarding them too early can be fatal to a business’s bottom line. Creative approaches to minimizing labor costs can be enormously helpful. One strategy for controlling these costs is utilizing independent contractors (freelancers) and other part-time employees. They do not work full time for the business and may serve other companies as well. Their compensation is generally lower than that of a full-time, salaried employee, often in part because these positions do not usually come with any benefits, such as health insurance or paid time off. Using these workers to fill resource needs can help minimize costs. Once operations have begun to stabilize, it may be possible and ideal to offer full-time employment to these individuals.
Marketing is another key area for new business investment, but billboards, web ads, TV ads, and radio spots can be expensive. TV and radio ads can also be ineffective if they are aired during low-volume times, which is typically all that startups with lower budgets can afford. Fortunately, there are many low- or no-cost marking opportunities, such as word-of-mouth marketing. Doing a good job for one customer can easily lead to referrals for more business. Some social media efforts can also provide a strong return for minimal investment, although typically it is nearly impossible to gauge an effort’s potential impact or success.
A new enterprise that is bootstrapping must also carefully manage operational expenses. At the beginning of operations, an entrepreneur can often minimize unnecessary expenses—even if that means forgoing an actual business location. Working out of a home office or a co-working space (such as WeWork or Impact Hub) can lead to significant savings. Renting office space can cost hundreds or thousands of dollars a month, whereas a home office typically requires no additional investment. Depending on the location, co-working spaces can provide a single workspace and technology access for as little as $50 to $100 per month, yielding substantial savings over a dedicated office suite. In larger cities, or in locations with more amenities, the monthly costs can run between $100 and $500 per month.
The Boston Beer Company, which today produces the Samuel Adams line of beers, provides a classic example of minimizing these costs in its early days. When this company first started, it owned no office space—or even a brewery. It employed other breweries as contract brewers to manufacture its beer. Its founder, Jim Koch, invested most of his time in selling to bars and restaurants, working from his car and phone booths. (This was during the 1980s.) His lean strategy was a successful application of the bootstrapping mindset. From its humble beginnings, the Boston Beer Company has become one of the largest American-owned breweries—ranked second based on 2018 sales volume by the Brewers Association.Brewers Association. “Brewers Association Unveils 2018 Rankings of Top US Brewing Companies.” 2019. https://www.brewbound.com/news/brewers-association-unveils-2018-rankings-of-top-us-brewing-companies Whereas traditional thinking may dictate that a company must have an official office or headquarters, a bootstrapping mindset evaluates what the space would be used for and the trade-offs for its cost.
### How Bootstrapping Hurts
The process of bootstrapping is not an easy one. It is fraught with tight budgeting and sacrifice, which can take its toll on an entrepreneur. One of the simplest bootstrapping strategies is to start a business by moonlighting, or treating your business venture as a second job. Employing this strategy, the entrepreneur continues to work at their regular job, say from 9:00–5:00, and then dedicates the rest of the evening and weekends to working on the business. Whereas this strategy has the obvious benefit of maintaining a comfortable level of income, this approach has a few drawbacks (). Moonlighting entrepreneurs cannot dedicate 100 percent of their time and energy to their new business. The time they can dedicate to it may be less efficient. After working all day at another job, a person may feel tired or burned out, so it can be difficult to change gears and press forward with full productivity.
In addition to the exhausting time investment, moonlighting can exact tolls on personal relationships. This strategy is easiest when an entrepreneur is in a life stage with few commitments. It may have an adverse effect on friendships, but in other life stages, this impact can be more significant. For example, it can detract from relationships with a partner/spouse or children, in both a decrease in focus/investment in these relationships and day-to-day challenges in work-life balance and household management for all affected. Additionally, at some point, to attract serious investors, a founder will have commit to the project full time.
Other bootstrapping strategies include negotiating the terms for payments on expenses. Often when businesses sell to other businesses, the vendor allows the customer to buy on credit. This means that the buyer does not have to pay at the time of purchase. Although retail customers are required to pay at the register during checkout, purchases between businesses can work on different terms, sometimes extended up to thirty, sixty, or ninety days. This extra time to pay for purchases can be a real advantage for businesses. When a business buys inventory on credit, it has the opportunity to begin selling it before it has even paid for it. For example, a clothing retailer could sell its product in stores or online, and receive cash before it had to pay its vendors. Unfortunately, when a business’s cash becomes tight, an ethical dilemma can arise. When a business has more bills to pay than money to pay them with, the owner will need to make tough decisions. It can be easy to forget about or ignore amounts due to vendors, but this problem is compounded when it occurs with more and more vendors. Ultimately, it can get to the point where vendors will no longer sell to you on credit, or even at all. When a company can no longer buy inventory to sell to customers, it won’t be long until it’s out of business. An ethical entrepreneur will be alert to this concern and resolve it with aboveboard business decisions.
### How Bootstrapping Helps
Although bootstrapping can be painful in the early years of a business, it yields significant benefits for the business owner in the long term. One of the most valued benefits of bootstrapping a business is the fact that the founder can maintain control of the company and typically retain 100 percent ownership. Although it can be easy to give up ownership in an idea because ideas come freely and don’t require financial sacrifice, entrepreneurs who accept an equity financing opportunity and give up a significant portion of ownership of the business may not realize the potential detrimental outcomes. What seems glamorous on Shark Tank may cost a business owner more control than desired. Once you give up any amount of equity in a business, it can be difficult or expensive to get it back. Once the deal is accepted, the investor is entitled to that percentage of the profit every year the company is in business, even if that person never lifts a finger to support the enterprise. Entrepreneurs usually make those financing deals because of the benefits of the money and access to the investor’s contacts. It’s unlikely that Mark Cuban is going to roll up his sleeves in your food truck when things get tough. If you can avoid outside financing, you will maintain complete control and full ownership of the business, and you should weigh this benefit in your financing decisions.
Another benefit of bootstrapping is avoiding taking on debt. Whether it’s in the form of credit cards or personal loans, repayment of debt can take a serious toll on any business and can be especially burdensome for new businesses. Considering that some of the debt financing sources available to entrepreneurs can bear higher-than-average interest rates, digging yourself out from underneath this financial burden is no easy task. Also, delaying outside investments allows your business to grow not only in revenue and profit, but also in market value. When potential investors come along, they will consider a higher contribution for a smaller percentage in the business.
### Summary
For nonprofit organizations, achieving a sustainable funding strategy requires hard work, creativity, and a delicate balance of financial resources. These types of organizations need to create programs that will interest patrons who are willing to pay for activities. They also rely on the generosity of their benefactors beyond simple patronage in the form of donations, and they vie for extremely competitive grant funding.
Although loans and liabilities such as credit card debt can fund a new business, the repayment and additional interest charges are a real challenge to many entrepreneurs. Financing strategies that avoid loans, such as crowdfunding websites and bartering, offer opportunities for funding that are often more manageable.
Bootstrapping is the process of self-funding a startup business. Sometimes entrepreneurs will have no financial resources beyond their personal savings. This method of funding a business requires creative approaches to problem solving, generating business, and managing expenses. It can be a slower, more difficult process than a company with more funding might face, but in the long run, it can benefit the company’s strength and growth, and provide robust dividends to the founders.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Tax information for charitable organizations from the Internal Revenue Service: https://www.irs.gov/charities-non-profits/charitable-organizations
Information from the National Institutes of Health on grants and the application process: https://grants.nih.gov/grants/about_grants.htm
Small Business Administration, “How to Start a Non-Profit”: https://www.sba.gov/blogs/how-start-non-profit
Kickstarter: www.kickstarter.com
Indiegogo, “The Essential Guide to Crowdfunding”: https://learn.indiegogo.com/the-essential-guide-to-crowdfunding
Startupfest, “The $100K Investment Prize”: http://www.startupfestival.com/news/100k-investment-prize/
G-Startup Worldwide’s global startup competition: https://www.f6s.com/g-startupworldwide/
Extending Credit to Your Customers: https://fitsmallbusiness.com/invoicing-extending-credit-to-customers/
7 Ways to Bootstrap Your Business to Success: https://www.entrepreneur.com/article/254217
4 Must-Follow Tips for Moonlighting as an Entrepreneur: https://www.entrepreneur.com/article/298310
5 Ways Nonprofits Can Engage Donors: https://www.ama.org/publications/MarketingNews/Pages/5-ways-nonprofits-engage-donors.aspx |
# Entrepreneurial Finance and Accounting
## Accounting Basics for Entrepreneurs
### Learning Objectives
By the end of this section, you will be able to:
1. Explain the accounting equation and define its parts (assets, liabilities, and equity)
2. Define revenue, expenses, and income
Although financing and accounting complement and rely on each other, they are distinct. As we have seen, financing is the process of raising money. Accounting is the system of recording and classifying financial transactions related to a business, and summarizing and communicating those transactions in the form of financial statements. Accounting is essentially documenting what happens to money once a company receives it and thereby makes that information available for reporting to stakeholders and regulatory agencies, and informing business decisions.
At the most fundamental level, an accounting system accomplishes two goals:
1. It summarizes a business’s financial performance
2. It communicates that performance to owners, managers, and outside parties
The most common approach to accounting used in the United States, and around the world, follows the basic formula shown in .
This formula is referred to as the basic accounting equation. First, we’ll define each of these terms, and then we’ll look at an example of a simple transaction recorded using the equation.
Assets are items—such as equipment, cash, supplies, inventory, receivables, buildings, and vehicles—that a business owns and derives future use from. Potential investors want to know what resources a company has at its disposal. Business owners want to see where their money has gone. Let’s return to the case of Shanti, the website designer who starts her business by purchasing a new laptop computer. The computer is an asset that Shanti has acquired for her business.
A liability is a debt that a company has incurred with another party, as when it borrows money from a bank or purchases materials from other suppliers. The business is required to make a future payment to satisfy that debt. For accounting purposes, we want to be able to see what the business owns (assets) compared with what it owes (liabilities). For example, if Shanti does not have sufficient cash to pay for the laptop, she may have the electronics store charge her credit card for the purchase. In that case, the credit card company pays the store, and Shanti’s business now owes the credit card company for the amount of purchase (a liability).
Equity is the owner’s claim on the assets of the business, that is, the difference between what they own and what they owe. Essentially, equity tells a business owner or investor how much the firm is worth after all the debt is repaid. Returning to the example of Shanti’s website design business, let’s compare two scenarios of startup purchases to see the effects on the accounting equation. In both cases, Shanti contributes some of her own money to the initial purchase of a laptop.
In the first scenario, shown in , she contributes $1,000 to the new business.
Each element of the accounting equation has its own account in an accounting system or software package, and all changes are tracked within its account. The accounting equation must stay in balance after every transaction with assets equaling liabilities. In this case, Cash is an assets account, and Owner’s Capital is an equity account. The $1,000 cash contributed is a cash asset and becomes equity that is recorded as owner’s capital. At this point, Shanti can claim 100 percent of the assets of the business, which right now consist only of the cash.
If she uses all of her cash assets to purchase the laptop, the accounting equation will record this as shown in .
When the cash is spent, reducing the assets column to zero, a new asset account for the computer is created to record the dollar amount paid for the laptop. Again, because Shanti doesn’t owe another party at the end of the transaction (because she didn’t make any additional contribution), the balance of the owner’s equity account remains the same. The equation shows that Shanti still owns 100 percent of the assets.
Now consider how to account for a situation in which Shanti does not have a significant amount of cash to contribute to the business. She can afford to contribute only $100 and deposits the money into the business’s bank account. Fortunately, she also has access to a credit card that can be charged for business purchases, increasing her investment options.
The initial contribution to the business is recorded in the same way but with the new amount, as shown in .
The laptop still costs $1,000, but the business has only $100 in cash assets. Shanti purchases the laptop with a credit card, and the clerk finalizes the sale. shows the impact of the sale on the accounting equation.
In both examples, Shanti reports the computer as an asset of the business that is valued at its $1,000 cost. In the first scenario, she exchanged the cash for the computer. In the second, she exchanged a smaller amount of cash for the laptop and charged the remaining amount of the purchase on a credit card. This creates a liability for the business that Shanti will need to repay in the future. Since this is an equation, both sides must be equal to each other, and this proves to be the case in both scenarios. The total assets are $1,000, and the total liabilities plus equity are also $1,000.
### Summary
Accounting is concerned with how transactions are recorded in a way that helps entrepreneurs share information with stakeholders, including potential investors, and helps business owners make decisions about running their company.
### Review Questions
### Discussion Questions
### Suggested Resources
Small Business Administration Introduction to Accounting Course: https://www.sba.gov/tools/learning-center-view-course/364071
Accounting Coach free Accounting Basics Explanation: https://www.accountingcoach.com/accounting-basics/explanation
Khan Academy Accounting and Financial Statements Course: https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-financial-stateme |
# Entrepreneurial Finance and Accounting
## Developing Startup Financial Statements and Projections
### Learning Objectives
By the end of this section, you will be able to:
1. Understand the three primary financial statements: balance sheet, income statement, and statement of cash flows
2. Understand how financial projections are made and how to use the run rate and the burn rate
3. Understand how to create a break-even analysis
You have learned how an accounting system classifies transactions in terms of assets, liabilities, and equity; what those transactions mean in terms of the accounting equation; and what that information says about an entity’s overall financial health. Now we’ll examine how to summarize those transactions in financial statements that can be shared with stakeholders. Internally, these statements are used to make decisions about the management of the company and its operations. Externally, they provide existing and potential investors with data to inform their financial support of the venture.
The information entered into the accounting system is summarized in financial statements, which are the output of an accounting system. We will examine three basic types of financial statements:
1. The balance sheet
2. The income statement
3. The statement of cash flows
Each type of statement communicates specific information to its audience. Investors around the world use financial statements every day to make investment decisions.
### The Balance Sheet
The first financial statement is the balance sheet. The balance sheet summarizes the accounting equation and organizes the different individual accounts into logical groupings. As you previously learned, the components of the accounting equation are:
1. assets—items the company owns or will benefit from; examples include cash, inventory, and equipment
2. liabilities—debt or amounts the company must repay in the future; examples include credit card balances, loans payable, and so on
3. equity—the share of the assets due to the owners after debt is repaid
The accounting equation itself (assets = liabilities + equity) is spelled out on the balance sheet. It is shown in two portions. On one side, all of the assets are spelled out and their amounts totaled. This total is compared to the totals in the second and third portions, which show liabilities and equity. Just as the accounting equation itself must balance, so must the balance sheet.
shows the 2020 balance sheet for Hometown Pizzeria. This is the same kind of financial statement that real-life investors use to learn about a business. You can see the main aspects of the accounting equation in each half of the statement, as well as many detailed individual accounts. This financial statement gives the reader a quick summary of what the company owns and what it owes. A potential investor will be interested in both items. The amount of liabilities is an indicator of how much the business needs to pay off before the investors will see a return on their investment.
Unlike the accounting equation shown in Accounting Basics for Entrepreneurs, most balance sheets display data vertically rather than horizontally. But the vertical format still presents the two sides of the equation—except that liabilities and equity are on the bottom half of the statement. Note that the two sides still must equal each other, or balance—hence the name “balance sheet.”
A review of the Hometown Pizzeria balance sheet lets us see what kind of assets the company has. We see cash, ingredients, and restaurant equipment—all things that would be necessary to make pizzas and sell them. We also see some liabilities. Accounts payable is an account that covers many different vendors that the company buys from on credit, which means the vendors let the pizzeria pay them after they have delivered their goods. These vendors could be companies that sell flour, produce, or pizza boxes. “Credit card payable” is the balance due on the credit card, which could have also been used to stock up on supplies or pay other bills.
One of the first things an investor will do is compare the total assets of a company with the total liabilities. In this case, the pizzeria reports total assets of $27,182 and total liabilities of $5,649. This means that the pizzeria owns more than it owes, which is a good sign. It actually has several times more assets than liabilities. Although it does not have enough cash to pay off all the liabilities right now, other assets have value and could be sold to generate cash.
To recap, the balance sheet summarizes the accounting equation. It tells the business owner what the company has and how it was paid for. Investors also want to understand where the company has spent its money and where that money came from. If a company is laden with debt, any investment may be immediately spent trying to get caught up with creditors, with no real impact on helping operations. Ultimately, investors want to read these financial statements to know how their money will be used.
### The Income Statement
The second basic financial statement is the income statement, which provides the results of a company’s operations. At the most basic level, the income statement—also called the profit-and-loss statement—describes how much money the company earned while operating the business and what costs it incurred while generating those revenues. An investor wants to know how much money the company brought in from customers and how much it had to spend to get those customers. Revenue minus expenses results in net income, or profit if there are funds left over.
After identifying total revenue and expenses, a business can calculate its profit margin. The profit margin is the profit divided into the total revenue, described as a percent. For example, if we opened a pizzeria and generated $100,000 in sales our first year and incurred $90,000 in expenses, that would result in $10,000 of net income. If we divide that net income by our $100,000 in sales, the profit margin is 10 percent. So for every dollar of sales that was generated, ten cents remained as a profit. We could save this resulting profit for future renovations, an expansion, or payment to the owners as a distribution.
A pizzeria—or any business that sells a physical product—has costs that are specific to the product sold. For example, pizza requires flour and yeast to make the dough, tomato sauce, and cheese and other toppings. We refer to these expenses as the cost of goods sold. These costs are the primary driver that determines whether the company can be profitable. If the selling price of a pizza is $12 and our cost of ingredients is $12, the transaction nets to zero. The company wouldn’t make any money on a sale and is simply recouping the money paid for the ingredients. This is not a feasible business model because there are many costs in addition to ingredients, such as rent on the building, employee wages, and other items.
The selling price of an item minus its direct costs—or cost of goods sold—is the gross profit. In a product business, this is the most important operational figure. A business needs to know how much money it makes on each sale because that gross profit pays for all other expenses. If the pizzeria sells a pizza for $12, the cost of its ingredients might be $4, so the gross profit of selling one pizza is $8. Every time the company sells another pizza, the gross profit increases. If the business sells 1,000 pizzas in a month, its sales would be $12,000, the cost of goods sold would be $4,000, and $8,000 would be left for profit ().
### Results from Operations
As you learned earlier in this chapter, a business can create assets through debt or equity financing. After the initial investment, those assets can be employed to operate the business. For example, when Hometown Pizzeria opens, after the initial build out of the kitchen and dining area, the business can make and serve food to customers in exchange for money. This process creates new assets in the form of cash collected from customers and becomes a third way to generate assets in a business—from operations, which we call revenue. In an ideal situation, the business would require little outside investment once operations have begun.
The amount a business earns from selling a product or providing a service is referred to as revenue, or sales. The costs incurred in the normal course of operations are referred to as expenses. For the newly opened pizzeria, payments from customers for their meals are the business revenue, whereas the cost of food ingredients, beverages, dinnerware, and paper goods—such as napkins—are the operating expenses. The balance of business revenue minus operating expenses is the profit of the business, or net income.
Before moving on to visualizing operational income, let’s pause here to review some of the basic distinctions between these key terms. When a company gains new assets, those assets have to come from somewhere, usually from one of three sources. We will see these options on the right side of the equation, as we move from left to right. First, if we gain a new asset, but we have not paid for it, we have created a liability—something the business owes. This was the case when Shanti paid for her computer with a credit card. In the future, she will have to pay the credit card company, but this is different process from an expense, as we will see later. For right now, we are gaining something new and must repay someone later.
The second source of new assets is owner investments. This was the first example we saw when Shanti deposited money in the business’s bank account from her personal savings. In terms of the business, assets increased because she now had more cash than before, and on the right side of the accounting equation, we record the source of those assets—Shanti herself. So investments by the owner are another source of new assets.
The third way that the business gains new assets is from operations. When Shanti uses the assets of her business (a computer) to perform work for a customer (creating a website), this results in a sale, or revenue. Assets of the business increase because the customer pays for the work; thus, Shanti’s cash increases. Again, on the right side of the equation, we record the source of that asset: revenue. Revenue is an increase in assets from customers paying for goods and services.
To illustrate, let’s continue with Shanti’s website design business. She purchased a computer with her personal savings and has been hired to create a website for a local business. This client agrees to pay $5,000 for the website, due on completion of the site. Once the work on the website is complete, Shanti records the receipt of $5,000 cash as an increase to the cash account. On the right side of the equation, this is added in an account under equity for revenue ().
The total company assets have grown to $6,000 with the addition of the $5,000 earned and collected from this client. On the right side of the equation, equity has increased in a new column representing revenue and expenses, where revenues are positive amounts and expenses are negative amounts.
The accounting equation describes how transactions are classified within the context of balancing what a business has (assets) with how it paid for those assets (liabilities and equity). In the next section of this chapter, we will explore how this information is summarized in financial statements and how entrepreneurs and potential investors use that information.
### The Statement of Cash Flows
The third basic financial statement we will discuss is the statement of cash flows, which explains the sources of and uses of a company’s cash.
You may wonder how the statement of cash flows differs from an income statement. The short answer is that the income statement captures events as they happen, not necessarily when the company gets paid. It records certain items, such as sales, when the work is completed. Let’s return to Shanti, the website designer. As soon as she completes the client’s website, the accounting system will record the revenue, the amount that is due from that client; this second item is referred to as accounts receivable. If Shanti’s client is struggling financially or even goes out of business, she may never get paid for that work, but the income statement would show sales, and therefore possibly a profit. If the customer goes out of business, the business bank account will not have any evidence of a profit.
It is for this reason that the statement of cash flows was developed. It accounts for these differences, only showing activities that result in cash received or cash paid. To better understand the purpose and use of the statement of cash flows, let’s first look at this statement again in the context of a pizzeria ().
As we can see in the statement of cash flows for Hometown Pizzeria, although the basic operations generate positive cash flow, a major purchase was required. This is common at the inception of a business. Not every location will come equipped with a commercial kitchen and dining area, so the business may need to purchase items such as a pizza oven and dining chairs and tables. Note that although the income statement approximates the cash flow from operations, it would not show the large outflow resulting from the initial purchase of equipment. That purchase would have been treated as an asset within the context of the accounting equation and would have been recorded on the balance sheet. So from that large difference alone, we can see why some people say that the statement of cash flows is the most important of the financial statements. It bridges the gap between the income statement and the balance sheet.
As you can see in the figure, the statement of cash flows is broken into three sections. The first is operating activities, the day-to-day activities of the business, including purchasing supplies, paying rent, and receiving cash from customers. This section tells a reader how effective the company’s business model is at generating cash flow.
Investing activities include major purchases of equipment or facilities. For example, when Amazon develops its second headquarters, those billions of dollars spent will be recorded as investing activities. Additionally, if the company has an excess of cash, it may purchase securities such as stocks and bonds, which have a higher return on investment than a traditional bank savings account. This section tells a reader where the company spends money in terms of large acquisitions.
The third section of the statement of cash flows is financing activities. This section tells a reader where new infusions of cash come from. The owners of Hometown Pizzeria need to find a way to pay for the kitchen equipment and furniture. If they have such an amount in their personal savings, then they can simple contribute it to the company themselves. If they don’t have the money already, they will need to seek other sources, such as loans or the types of investors discussed in Overview of Entrepreneurial Finance and Accounting Strategies. Generally, any financing activity is also booked in the balance sheet as well. This section of the statement explains which sources the owners used to generate outside funds coming into the business. It always indicates future requirements as well. For example, if a bank loaned the pizzeria the money, then we know it will have to be repaid in the future. So the business will need to ensure it is setting aside money to make monthly repayments. If new investors contribute money, what manner of return on investment will they be seeking? If they decide to seek regular distributions of profit, they will have to factor that in.
### Projections
Among the most powerful tools business owners can use are projections. A projection is a forecast of the future operations of the business. It is a landscape for the business: What do the next few months look like? What about the next year? A projection would outline what level of payments are expected to come in and the timing of costs incurred. This lets the business owner understand what potential financing needs to be secured.
Two key concepts related to projections are the run rate and burn rate. The run rate helps extrapolate into the future. For example, if the pizzeria is generating sales of $10,000 per month, that translates into an annual run rate of $120,000 per year. Multiplying the monthly amount by twelve tells us the annual amount; if we wanted quarterly projections, we would multiply the monthly amount by three. This is useful for explaining to investors what the company will look like now that it has achieved traction in generating sales.
The burn rate is the rate at which cash outflow exceeds cash inflow, or essentially how much money the company is expending overall each month. Before generating revenue, or generating enough to just break even, startup companies will incur losses. Understanding the pace at which the expenses exceed revenue helps business owners plan accordingly. For example, if it takes six months to renovate the pizzeria and the monthly rent is $2,000, then the burn rate is $2,000 per month and forecasts that the business will need an additional $12,000 ($2,000 × six months) available in financing on top of the cost of renovations. The location’s rent must be paid, even if the pizzeria isn’t yet open for business.
During the seed stage of a company, projections can also be used to show potential investors how quickly the company will make money and hopefully inspire them to invest in the venture. Just as on , projections are used during the “pitch.” Investors and lenders want to see exactly how they can expect the business to perform and how quickly the company generates positive financial results.
### Break-Even Analysis
Another critical part of planning for new business owners is to understand the breakeven point, which is the level of operations that results in exactly enough revenue to cover costs. It yields neither a profit nor a loss. To calculate the break-even point, you must first understand the behavior of different types of costs: variable and fixed.
Variable costs fluctuate with the level of revenue. Returning to Hometown Pizzeria, we see that the cost of ingredients would be a variable cost. In a previous section, we also referred to these as the cost of goods sold. Variable costs are based on the number of pizzas sold, with the goal being to buy just enough ingredients that the business doesn’t run out of supplies or incur spoilage. In this example, the cost of making a pizza is $4, so the total variable costs in any given month equal $4 times the number of pizzas made. This differs from a fixed cost such as rent, which remains the same every month regardless of whether the pizzeria sells any pizzas or not.
The first step in understanding the break-even point is to calculate the contribution margin of each item sold. The contribution margin is the gross profit from a single item sold. Therefore, selling price minus variable costs is the contribution margin. Hometown Pizzeria’s selling price of a pizza is $12. The variable cost is $4, which results in a contribution margin of $8 per pizza. This $8 will go toward paying other expenses; when those are covered, the remainder will be added to the profit. Once we understand how much each item sold contributes to other expenses, we understand how those other costs behave ().
The other main category of costs is fixed costs. Fixed costs are a set amount and do not change, regardless of the amount of sales. Previously, we referred to rent as such a cost, but most of the business’s other costs operate in this manner as well. Although some costs vary from month to month, costs are described as variable only if they will increase if the company sells even one more item. Costs such as insurance, wages, and office supplies are typically considered fixed costs.
Once variable and fixed costs are determined, this information can be used to produce a break-even analysis. Calculating the break-even point is simply a matter of dividing the total fixed costs by the contribution margin. To illustrate, let’s assume that Hometown Pizzeria still sells pizzas with a contribution margin of $8 each. Let’s also assume that the only fixed cost is the rent of $2,000 per month. If we wanted to know how many pizzas the owner needs to sell each month to pay the rent, we divide $2,000 by $8. This results in a break-even point of 250 pizzas. Now we know that if the pizzeria sells 250 pizzas a month, its rent is completely paid. Any additional pizzas sold add to the company’s profit. If the business sells fewer than 250 pizzas, it will not generate enough income to cover the rent and will incur a loss. Whenever a business incurs a loss, the owners will need to contribute more of their own personal savings or potentially go into debt ().
Understanding the break-even point for a business provides a great deal of insight. At the most basic level, it demonstrates how many units of a product must be sold to cover the expenses of the business and not incur a loss. It may also help business owners understand when costs are too high and decide how many units need to be sold to break even. Realizing this up front can help entrepreneurs avoid starting a business that will result only in losses.
### Summary
Entrepreneurs can use financial information for multiple purposes. These projections can help plan a new business. By forecasting the income and expenses of the first year, an entrepreneur can have a reasonable idea of the level of financing that may be required. Second, these projections can also show potential investors what the business will look like in the future and how long it might take them to get a return on their investment. Break-even points help illustrate a minimum amount of sales to cover expenses.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
U.S. Small Business Administration: https://www.sba.gov/blogs/3-essential-financial-statements-your-small-business
U.S. Securities and Exchange Commission: https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html
Forbes, 5 Financial Reports You Should Be Running: https://www.forbes.com/sites/sageworks/2018/03/26/here-are-5-financial-reports-you-should-be-running/#183ae98d6548
Medium, 3 Phases of Financial Indicators for Startups: https://medium.com/@DanielleMorrill/3-phases-of-financial-indicators-in-startups-b18ddb97f5f0 |
# Launch for Growth to Success
## Introduction
Dropbox, a company founded in 2007 by Drew Houston and Arash Ferdowsi, has revolutionized the way consumers and businesses store and share electronic files. The idea came one day when Houston—on a commuter train—realized he left his thumb drive at home. This was not the first time he had forgotten that tiny electronic filing cabinet, and he was sure others forgot often as well. So he hit on an idea: storing his files on a “cloud” on the Internet that anyone could access from anywhere with any device.Sarah Buhr and Katie Roof. “A Brief History of Dropbox.” He wanted to manage file storage at faster speeds and in larger quantities than the few existing online storage systems, through an easy-to-use interface. Although Houston came up with the idea of cloud storage during his commute, cloud computing had been talked about in industry circles a few years prior.Johnson Hur. “History of Online Storage.”
Hopeful, he introduced his idea to Y Combinator, a venture capital firm in California that helps fund startups by hosting, training, and helping them define their pitches to investors. Even though they had rejected a business idea he’d presented earlier, they told him the new idea was promising and asked him to secure a co-founder before pitching. A co-founder would help to secure funding because it showed the idea had legitimacy, support, and the expertise of another person. Houston quickly found Ferdowsi, a fellow MIT student studying engineering and computer science.“How I Met My Co-Founder: Drew Houston, Dropbox.” From Together, they raised $1.2 million from investors, even though their prototype wasn’t fully functional. They then hired developers and engineers who created a more functional version that worked across most computer operating systems.
Dropbox was soon using lean startup principles, which meant releasing an early version to early adopters. Houston had a difficult time explaining the product to initial users, so he developed a video with a quirky narration to entice them. The early product release was a hit: In one day, their customer base increased from 5,000 to 75,000 users, who could also provide them with feedback for subsequent versions.
Thanks to its massive success, Dropbox was valued at $10 billion in 2014.Eliot Brown and Jay Greene. “Dropbox Files for IPO Three Years after $10 Billion Private Valuation.” However, some analysts believed the number was inflated as Dropbox’s competitors started gaining market share. The company continues to receive customer feedback to make the iterations necessary for better versions. |
# Launch for Growth to Success
## Launching the Imperfect Business: Lean Startup
### Learning Objectives
By the end of this section, you will be able to:
1. Describe how businesses use lean startup principles to develop products and test markets
2. Identify how the build-measure-learn method helps companies understand what potential customers want in a product
3. Determine what a minimum viable product (MVP) is and explain why companies don’t need to have a perfect product to launch
4. Explain why companies need to learn to construct a lean pitch to investors and potential customers
5. Explain what pivoting is and when it is necessary for companies to undertake
As you can see from the Dropbox example, businesses can function without being perfect. The company initially provided a short video description of the Dropbox product without even having it coded to the actual program first.“The Original Dropbox MVP Explainer Video.” This way, they could test the idea and receive customer feedback without losing time or money on products that wouldn’t work. If any changes were needed, they had the flexibility to make them because it was just an early prototype and no big investment on the product had been made yet. Many of the early changes were to the interface design that involved buttons and actions that could be taken, and storage capabilities that customers consistently gave feedback on.
New businesses need time to develop their identities, engage their target market, create and develop the right products, and sharpen their strategies. Startups don’t have fully developed and proven business models like established companies do. A business’s starting focus or idea may evolve into something else because the initial feedback from the prototype points in a different direction.
Houston (pictured in ) and Ferdowsi knew they did not have the perfect product, so they employed a system called lean startup, a methodology entrepreneurs use to help them innovate by continuously testing their products and getting feedback from customers in real time. This methodology calls for a product to be shared with early adopters in its beginning stages of development and gain immediate feedback. It ensures that people actually like a product and are willing to buy it. Tech companies primarily use this method because they have learned that too many years working on a product without measuring is highly risky, especially in a rapidly changing technological environment. Lean strategy, though, is applicable to almost every business and industry.
Even with Dropbox’s reported $1 billion in revenue and 500-plus million users, Houston’s journey still has its ups and downs. He learned that the CEO’s job changes as the venture progresses because the company’s needs vary across its lifecycle. The CEO has to shift focus, such as on building prototypes, testing users, exploring the best distribution channels, and managing cash flow. These hurdles need to be tackled when they arise.Scott Rosenberg. “Inside Dropbox’s Identity Overhaul.” Let’s take a closer look at lean startup, and how it got its own start.
### Lean Startup
Author and entrepreneur Eric Ries developed the lean startup methodology after spending much time, effort, and money when his first tech company had to close down. Fortunately, Ries’ frustration led him to study other successful companies and lean manufacturing programs, including the highly successful Toyota lean manufacturing process, which taught him how to be flexible and quick while building products. He learned that he didn’t need to have a fully designed product resulting from years of development; instead, he could have something imperfect that worked without the bells and whistles, something that people could test and provide feedback on over time.
He advocated a step-by-step approach on how to maneuver a startup, how to change course if necessary, persevere, and accelerate its expansion. This is also called the build-measure-learn loop, which means that a prototype is built, or at least the idea is written down, it is then pitched to customers who provide feedback so the company learns what to keep and what to change, then it makes the changes to the prototype, and starts all over again, repeating the process until the prototype is good enough to go to market. illustrates this loop. Even after it hits the mass market, this loop can continue to be used to enhance the product.
After his first startup proved unsuccessful, Ries created a second company called IMVU.Eric Ries. IMVU is an avatar platform, or “metaverse,” for people who want to shop for clothing, furniture, and accessories in an online community and keep their identity safe. Essentially, IMVU is a virtual reality world with an e-commerce engine, user-generated content, and 3-D characters. While Ries was building IMVU, he and his co-founders worked endless hours for six months to create a prototype of 3-D avatars that they later learned no one wanted. During their first month, they made a total of $300. The next month they made $400 after begging friends and family to try it.
After Ries saw their faithful first customers disappear, he and his co-founders decided to shift from feeling frustrated to talking to potential customers. They tested their product with teenagers and heavy users of technology, as well as with mainstream customers. The mainstream customers never knew what to do with the product. They thought it was too strange. But those that were more tech savvy and younger were happy to try it. They gave a lot of feedback that resulted in creating a better version of the avatar community.Eric Ries.
The initial platform was designed as a minimum viable product (MVP), which is a very early prototype of a product.Eric Ries. According to Ries, an MVP can be the bare minimum to help people understand what the product is about. A product doesn’t even have to be built to be an MVP; instead, it can be represented in sketches, videos, and explanations of how it might look. MVPs also can include a basic version of the product, just like IMVU’s website, which was not very good at first. The point is to have a basic product to show to potential users, with enough substance to elicit feedback on what people find useful and what attributes are important without having to invest a lot of money and time. There is no right or wrong type of MVP. It is up to the owner to decide how to showcase the idea and test it to find out what people like and don’t like, and how to take the idea to the next level.
Through this MVP experience, Ries (shown in ) realized that his first platform had bugs and issues that could crash users’ computers; however, in spite of the bugs, he was determined to get customer feedback without spending lots of cash or time. Once he and his co-founders had the low-quality platform running, they decided to charge a fee for the service. They would send dozens of changes to their loyal followers until they developed a product that would work for a larger customer base. These changes included adjustments such as adding new avatars, new avatar movements, choices of clothing, and new worlds for avatars to explore. IMVU pioneered this lean startup approach, which new ventures all over the world now use. Today, IMVU is a successful enterprise with over $55 million in revenue and 50 million users.IMVU Inc. “IMVU Inc. Celebrates Nine Years of Connecting People around the World, Expands Profitable Business to Mobile.”
A lean startup begins with the first stage of building a basic product (MVP) that has only its core benefits and no extra features. Houston and his developers created a basic platform for early adopters to test. Early adopters are people who like to try new products as soon as they come out. They don’t mind, for example, buggy software or cumbersome designs because they are innovators and like to test new things. Dropbox did not create a perfect product initially because the developers did not know what it would be until they got user feedback. After early signups and feedback on the first prototype, they were able to create the first version of the product. Later, they conducted iterations, or additions or changes to the version of the product, using customers’ ideas and suggestions.
Zappos is another example of an MVP development project. Nick Swinmurn, creator of the online shoe company, launched the idea in 1998 by creating a bare bones website to sell shoes and measuring traffic to the site.“Lean Startup Zappos: The Basics.” The idea started after he took a trip to the mall and could not find shoes in the styles or colors he wanted. He figured other people had equally frustrating experiences. His first hypothesis was that people were interested in buying shoes online, so he asked Tony Hsieh, current CEO of Zappos, to invest in this new project. Hsieh provided half a million dollars to get the company started. Swinmurn then created a plain webpage that started with basic photos of shoes and their prices. Swinmurn also ran ad campaigns, measured web traffic, and adjusted the webpage. Instead of spending so much time in building a detailed plan about his business, this method helped him make quick adjustments to the product, the target market, and strategies using the build-measure-learn loop and starting with an MVP, just as Houston did.“The Lean Startup Methodology.”
Going deeper into this build stage, we can see that the steps take an entrepreneur through a cycle or loop that begins with defining the problem at hand and building the MVP to show potential consumers a sample of the product and see how they react. In many cases, selling this low-quality product can also help measure user reactions. Metrics, or measurements, are developed to test the product assumptions of the engineers who created it. The goal is to test the MVP with its target market by asking questions about the design, usability, core or bundle of benefits, and other attributes that enhance the customer experience.
For example, different design attributes can be measured by asking customers if they like a feature or set of features of the product they are testing. The number of likes or dislikes can be tallied, and comments can be collected on what additional features should be added or deleted. Once the feedback comes in, entrepreneurs can make changes. Then, they can move into the next stage, which is to measure whether the changes to the product based on the feedback are actually helping make progress.
Along with a minimal product offering, Ries advocates using a minimal financial evaluation concept called innovation accounting to assess whether the changes made to the product are creating the desired results. This means that entrepreneurs should not look first to the basic financial measurements traditional to businesses—such as sales, profits, and return on investment—because these traditional measurements aren’t the most relevant metrics at this stage. Instead, they should measure progress in a different way. Measurements may include testing assumptions about the business, attributes that customers like, sign-ups, and retention rates that can be separated into cohorts and tested, say weekly, as changes to the products are made.
During the learn stage, the entrepreneur uses the feedback obtained to assess the progress of the product in an objective manner. The entrepreneur makes changes to the MVP and starts the cycle over again until the process has reached a point where it either accelerates or needs to pivot.Eric Ries.
As a learning component for the company, feedback is very important in the lean process. Feedback helps companies design better products and make iterations, or newer versions, which better serve the customer base. Companies will work with early adopters for a while before they expand their reach with a better product and entice more people to use it.
### Iterating, Pitching, and Pivoting
Many companies invest significant time and effort on projects that seem like great ideas in theory but flop when taken to market. The lean startup method is a new way to develop and manage products that people want in a shorter period of time. Companies are able to learn from customer discovery and validation that the offer or value of the product is not working and needs to be enhanced or changed.
After Ries experienced his first business loss, he recognized the problem of companies devoting time and money on projects rejected by consumers, and he wanted to identify a solution. As he started his new company’s avatar community, he enabled his teams to put the product through iterations—those small changes to the current version of a product to make it better fit consumer needs. At this phase, and using lessons from his first failure, he strove to create a bare-bones version of a product that worked well enough to provide core value to the customer, garner customer feedback, and make small adaptations around what users considered most essential. This allowed IMVU to enhance the product in a way that brought the company, step by step, closer to providing the best value.
One iteration that proved enormously successful was adjusting how the avatar moved through its virtual reality world. The original avatars didn’t have the ability to walk around like they do in, say, popular multiplayer video games. Even though he knew this was a disadvantage, he sent the version to early adopters and asked for feedback. Customers responded that the lack of movement suggested the software was low quality. Reluctant to make the major tech investment for this movement, Ries and his team decided to try a very small iteration as an alternative: They made the avatar disappear from its starting point and reappear in its new location. Customers responded positively, seeing this as superior to what existed and as a high- quality variation. The quick and low-cost iteration turned out to be the best path to success.Eric Ries.
In addition, while this process is ongoing, the entrepreneur is constantly pitching the idea to potential consumers and investors. Pitching can be intimidating for entrepreneurs, as they can get nervous speaking in front of people. However, pitching can be as important as building the right product for the right target: It needs to be practiced and mastered.
Pitching is the verbal delivery of an idea or business plan, and a request to a group of investors, customers, or potential business partners by an entrepreneur (Telling Your Entrepreneurial Story and Pitching the Idea). As an entrepreneur, knowing how to pitch your business concept to investors is one of the keys to success. However, if you’re using the learn startup approach, your pitch likely needs to be quite different from a regular pitch.
The lean pitch requires the presenter to craft an exciting and well-developed story about the company, its product, and what makes the product unique, with enough detail to show that the company is more than a story in the presenter’s mind. The lean approach is customer centric and tries to solve customers’ problems and resolve issues, and it measures its product over and over again until it is right. The story must show the process of understanding their customers as well as their problems and issues. Then, there must be an explanation of iterations, design tests, and learning from customer feedback that demonstrates the customer-centric approach. Experiments, data, and insights are shared to show the company’s progress. As you recall from Telling Your Entrepreneurial Story and Pitching the Idea, using a regular pitch approach, the presenter gives all of the details of the product and the future launch. This traditional pitch asks for an investment without having tested assumptions or having much data or experiments to show that the idea will work.Andy Cars. “How to Pitch to Investors Using a Lean Startup Approach.” Increasingly, successful lean pitching requires the presenters to have some sort of validation of their business model because this shows more truth to the vision. Many investors look for companies that have some time invested and a seed customer base under their belt. They are particularly interested in those who know their sales numbers, their costs, their sales projections, and have a track record of increased sales, customers, and profit. shows a step-by-step approach to pitching to investors and potential partners.
After carefully going through the build-measure-learn loop, there comes a point where the company either accelerates or realizes it’s time to pivot. Pivoting is a crucial and often difficult change done to test a hypothesis regarding the basic product, its growth potential, and business model. Once the product has been tested and retested for changes in consumer behavior, or any metric that the company sets itself to attain, if it’s not attaining growth, then the next step is to pivot instead of continuing down the current path.
This is a time for tough decisions: Should you continue working on the business, product, or project—or should you change? Is the company making progress toward its goals, or do the strategies need major adjustments? While measurable data, such as attribute likes and dislikes, or number of sign ups, are gathered during the measure stage, the lean startup process also has a component that is creative, intuitive, and visionary. Knowing when to change cannot be determined solely through number crunching. It also requires human judgment, which, when coupled with the build-measure-learn formula, can lift a company out of mediocrity.
If a business is not growing, it is shrinking or stagnating.Eric Ries, A pivot, just like in basketball, requires one foot down on the ground, and the other moving. This means that you keep what you have learned from customers as your grounding foot but test out a different direction in which to move. Here are examples of famous pivots:
1. Twitter transformed into a social media giant from a company called Odeo, a broadcast platform that was initially created to transmit video, sound, and podcasts. However, Apple beat them by launching iTunes podcasting, and it didn’t make sense for the founders of the company to pursue that path, so they decided to create Twitter instead.
2. PayPal (formerly Confinity) allowed people to send electronic payments or “beam” payments from their Palm Pilots (first personal digital assistants created by Palm Computing) as well as from other devices. At that time, PayPal users registered a card number, downloaded the beam application, and were able to make transfer payments from one device to another. As technology changed, it merged with X.com to become the preferred payment method on Ebay, helping the company go mainstream.
3. Avon was created by a traveling book salesman who would add perfumes to his sales as perks for his woman customers. Eventually, he realized that women were more interested in the perfumes than the books, so he started a new business from a small office in New York.
4. Fab.com, a design e-commerce website, was initially called Fabulis, and it started as a social media site to connect gay men. After the social media site failed, the co-founders took it into a new direction by selling their design picks for the best home goods, accessories, and clothing for everyone.Jason Nazar. “14 Famous Business Pivots.”
You may wonder, how many times can a company pivot? Ries likes to use a runway analogy: You must measure how long you have until your company can achieve its goals, and whether you fail to lift (burn through all your cash resources) or have a liftoff (generate sales, sign ups, add new customers). The runway can be calculated by taking the amount of cash that is in the bank and dividing that by how much is being spent or drained on that balance. So if your company has $550,000 in the bank, and it drains or burns $50,000 per month, then you have a projected time of 11 months (550,000/50,000). A way to slow down the cash drain—and to extend the runway—is to cut some costs or ask investors for additional cash.Eric Ries.
There are also different types of pivots for different needs. shows ten pivots an entrepreneur can make according to feedback.
### Summary
There is no such thing as launching a perfect business. A startup requires time to clarify its identity, market, product, and business model through the build-measure-learn loop, which requires businesses to describe or build a prototype of a product, ask for feedback from potential and actual early customers, measure their responses, and learn from that feedback and make changes to improve the product to something customers want. Older companies usually have a more stable and developed set of strategies because they have been in business for a while, but even they have opportunities to innovate and grow. The lean startup method provides an opportunity for companies to approach management in a measurable and provable way. Customer feedback allows the companies to make iterations and pivots that are necessary to get back on the right track. Pitching to investors can yield better results when using the lean approach, because investors like to see experience-gained data. The lean startup method is a tested way for new and old companies to stay in business and operate, even when there is a lot of uncertainty.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Lean startup: http://theleanstartup.com/#principles
Toyota’s Way: https://vimeo.com/44328452
14 Management Principles of Toyota: http://www.panview.nl/en/lean-production/toyota-way-j-liker-summary
Innovation accounting video: https://www.inc.com/eric-ries/entrepreneur-eric-ries-innovation-accounting-secret-to-fast-growth.html |
# Launch for Growth to Success
## Why Early Failure Can Lead to Success Later
### Learning Objectives
By the end of this section, students will be able to:
1. Determine several reasons for business failure and explore strategies to overcome them
2. Understand the root of fear of failure
3. Learn to spot signs of fear of failure and take steps to overcome it
Your goal in your venture is to achieve success—ideally, fairly quickly—but most successful entrepreneurs experience some failures along the way. While these setbacks can be discouraging, they provide lessons and experiences that can lead to eventual success. Whether a new business is a retail store, restaurant, hair salon, consulting company, tech firm, or manufacturing plant, the truth is that many businesses fail within the first couple of years. According to Bloomberg, only 20 percent of new businesses find success within their first eighteen months.Eric T. Wagner. “Five Reasons 8 out of 10 Businesses Fail.” Data from entrepreneur.com and the Small Business Administration suggest that only 30 percent of new ventures succeed to the ten-year mark.Patrick Henry. “Why Some Startups Succeed (and Why Most Fail).” ,“Frequently Asked Questions.” For women and minorities, the percentages are even lower. Success and longevity are possible, of course, but it takes a lot of work, and sometimes it takes a second or third try.
Entrepreneurs recognize that failure is part of the success of being a business owner. Business failure is the ending of a business due to the lack of goal attainment, which can mean low levels of revenue and profits, or not meeting investors’ expectations. Business failure can result in the loss of assets—such as revenue, equipment, and capital—and can cause trauma for the business owner. However, these failures often help entrepreneurs improve the outcomes for their next business, as they have now learned valuable lessons that can be applied to new projects.
As Jack Ma, billionaire founder of Alibaba (the biggest and most profitable online retailer in China) said, “No matter what one does, regardless of failure or success, the experience is a form of success in itself.”Zach Ho. “Jack Ma: If You’re Still Poor at 35, You Deserve It!” Ma experienced many failures—including being rejected from job opportunities and universities he wanted to attend, and having his pitch rejected by all but one person in a room full of friends. But he persevered, founded Alibaba, learned as he went, and today runs China’s largest online retailer with almost $24 billion in revenue.Zach Ho. “Jack Ma: If You’re Still Poor at 35, You Deserve It!”
Another company, Quirky, launched by Ben Kaufman in 2009, was an initial failure. Quirky was a platform that allowed inventors to submit their ideas to a panel of Quirky experts who would then manufacture the product at a low price and sell it to different markets. Initially, Quirky gained $185 million in funding and had support partnerships from Amazon, Bed Bath & Beyond, and Best Buy. Thousands of people flocked to the site and submitted their inventions to get seen and voted on. Unfortunately, Quirky struggled to sell many of the products at a sustainable profit margin and filed for bankruptcy in 2015 after investors stopped funding the venture. Fortunately, one of its businesses, the smart-home business section, was spun off and sold as Wink in September 2017. The company was rebooted by a new set of entrepreneurs with a better business model.Jessica Sylvester. “The Rise and Fall of Quirky: The Startup That Bet Big on the Genius of Regular Folks.”
### Common Contributors to Failure
There are some common reasons for failure that often combine to end a business. However, there are often ways to prevent these failures from happening. CB Insights, a company that mines and analyzes data for companies and uses machine learning to help them answer complicated strategic questions, researched the factors that contributed to the failures of 101 startups. shows some of the main factors they identified in their research.
In the following discussion, we expand on some of these reasons for failure and offer advice on how to avoid them. Considering the following failures will give you an idea of what may go wrong in a business but will also help you spot and correct them before you launch.
### Marketing Failure
Some of the most common failures result from marketing missteps.
1. Lack of differentiation of product or service. Creating or running a company with a me-too mentality and without a clear unique selling proposition or difference from other established businesses can be detrimental. Answering questions such as “Why should customers leave other companies to buy my product?” “What is a benefit I provide that no one else does?” and “If I open a yogurt parlor in a commercial area, what will help my business differentiate itself from all the other yogurt, ice cream, dessert, and fast food places?” can help create ways to be special rather than a me-too business. This also needs to be defined in your mission, within your products and their benefits, and a clearly defined competitive advantage that can be translated into a superior value proposition. The chapters on Entrepreneurial Marketing and Sales and Identifying Entrepreneurial Opportunity discuss competitive advantages and value propositions in more detail.
2. Missing the right customer. Not reaching the target market can lead to failure. Perhaps for your travel tour business, you targeted single people ages 18–34 who like to experience travel in a different way, but maybe your true target—the people who want to book your tours—are couples with children and those 50 and over. You would have sent out marketing communications to the wrong age group. Or, the right message is not being conveyed and your positioning is off, preventing you from connecting with your true consumer. Conducting market research as discussed in Entrepreneurial Marketing and Sales and testing your communication with various targets can help better define your customer.
### Management Failure
These are some typical management challenges that can prove detrimental.
1. Passion wanes or not the right business. Sometimes the reason a business fails is due to a simple reason: The founder has lost excitement over the business and is no longer interested in making it succeed. Other times, the problem may stem from not having the right focus or idea, which can come from a lack of awareness about trends in the market. Joel Delgado, a young entrepreneur who started El Paso’s first escape room called El Paso Disaster Room 915 in 2015, developed this business with three of his friends right after college. Although the business was very well received by young people who wanted this new form of entertainment, a few years later, he decided to close down the business and pursue a career in teaching. His passion had waned. Sometimes, entrepreneurs get bored with their startup, but there are ways to keep the business exciting by changing the product offerings.
2. Fighting founders. Not agreeing over the strategies and direction of a business can deter companies from moving forward. If the founders are not working together and disagree too much, this can help dissolve the business quickly. Differing points of view can be healthy for a business, as these can bring other complementing perspectives, but when conflict doesn’t get resolved, it can be difficult to continue moving forward. Some business partners have found themselves ousted by their business partners because the relationships have suffered a deep strain. This happened to Steve Jobs in 1985 when he was let go by his own company. Often, it is difficult to assess when conflict will arise, so it is recommended that business partners work with people who have the same love for the business and its core values, even if they bring different strengths and temperaments to the table. This may reduce fights and sustain relationships. Having a contract in place that defines who is in charge of what part of the business, their compensation, and what happens if anyone departs, is a good way to ensure that the investment won’t be lost if partners decide to part ways.
3. Lack of planning. One of the surest roads to failure is to not have a business plan or marketing plan. Even using the lean startup method requires some sort of planning before embarking on the process. Planning helps business owners flesh out ideas and understand the business better. Following the business plan in Business Model and Plan and the marketing plan in Entrepreneurial Marketing and Sales can help solidify where the business is headed, whether its viable, and what resources are required to make it work. For example, imagine a business owner who opens a restaurant in an already-crowded market only to realize how much competition existed in the area. If the owner had researched and planned ahead, the venture could have been differentiated through the type of food offered, the location, or different promotional tactics to build clientele. Failure to plan in a situation like this can result in struggling to keep afloat and can lead to successive challenges. For example, the owner might raise prices to compensate for lower-than-expected revenue, but higher prices may drive away an already fragile customer base, and the venture may not be sustainable.
### Financial Failure
Cash flow, debt, and capital are just some of the many financial factors that play a large role in startup success or failure.
1. Lack of cash. Lacking cash to operate the business can trample its operations and lead to a quick decline. If there is no cash flow, it can also indicate that perhaps the business model is not working. For example, consider our fictional restaurant owner. A lack of customers means a lack of cash flowing in as revenue. Loans can provide some assistance while working to build the clientele, but loans can go only so far. If the business doesn’t grow and develop a sustainable cash flow, its ability to operate will come to an end.
2. Too much debt. Significant debt can hurt a business because it needs to pay back its lenders. In the previous example, if the restaurant owner takes on too much debt, it may struggle to pay it back due to its lack of cash flow.
3. Lack of capital. Not having sufficient capital can deter the business from expanding or even from meeting customer demand. Having a clear business plan can help determine the financial requirements, which are the estimated sales and profits required for the successful attainment of goals. Financing for the business can come from an entrepreneur’s own savings, bank loans, investors, and even friends and family. Having the right funding to start or grow a business can make or break the business. For instance, our restaurant owner would need enough capital to invest in kitchen equipment, appliances, and furniture to start the business. Undercapitalization in a startup could shut the business down before it even gets up and running. Once the business is running, ensuring that financial goals are met through metrics such as sales and profits can help prevent shortages of cash flow, which is essential to keeping a business alive.
### Innovation Failure
Innovation can be tricky because it requires creativity, risk, and often some subjectivity, taking into consideration feelings and intuition in decision making. Lack of innovation and missteps in innovation can be obstacles to success.
1. Lack of innovation or failing to change effectively. Companies that don’t change their strategies, technology, or products run the risk of jeopardizing the business. Similarly, those that do change but not with the right adjustments risk failure. The build-measure-learn loop can help avoid these pitfalls by discerning what consumers really want and need by asking for their feedback.
Blockbuster, an instant hit out of the gates in the 1980s, failed to innovate, or pivot its business model, and went out of business. The video store revolutionized the media and movie industry by displaying empty boxes of its titles on shelves categorized by genre (the VHS tapes were kept behind the counter) and keeping late hours for night owls and last-minute weekenders wanting to catch a flick. Using a computer system to track videos as they were rented, most of its profit was made by the fees charged for late movie returns. In 1987, the company was bought by Wayne Huizenga, an American entrepreneur who owned several businesses in different industries and who developed Blockbuster into a successful business by modeling McDonald’s approach. The enterprise grew from twenty locations to over 9,000 locations. Blockbuster was then acquired in 1993 by media giant Viacom in an intricate transaction. As streaming and related technology entered the market, Blockbuster failed to innovate by not making necessary pivots to its delivery of entertainment and so could not compete with new technology. Over the ensuing decade, it became more common to see Blockbuster stores with “store closing” banners, as shown in , than it did to see a thriving store. There were other reasons why Blockbuster failed. Embedded with the lack of technology was the lack of fostering a culture of creativity from all of its employees, which hindered innovation. It lacked visionary leadership. It needed a culture of collaboration and teamwork to facilitate communication with stakeholders, such as employees, customers, and upper administration. Finally, it closed all but one of its stores in 2013.Jeanine Poggi. “Blockbuster’s Rise and Fall: The Long, Rewinding Road.” By then, Netflix had completely changed the landscape of digital streaming services and left Blockbuster without a ticket to the show.
### Fear of Failure
Even the fear of failure can be enough to lead a business to fail. Fear can freeze entrepreneurs and force them into a corner instead of advancing their businesses; it can freeze them from reaching potential clients and being profitable. When companies struggle, the owners may experience many emotions, such as pain, grief, shame, humiliation, self-blame, anger, and hopelessness. Business failure is hard to separate from personal failure, as the business is often associated with the identity of the entrepreneur. Managing these emotions can help business owners heal and continue moving forward to their next business. Reaching out for help to a trusted mentor or therapist can help provide guidance in dealing with these feelings.
There are likewise many stories of entrepreneurs who, despite their fears, continued working toward their goal and were successful. They kept going, determined that fear would not run their lives. Tony Robbins, author and serial entrepreneur, says that people are afraid of failure because it is painful, and people try to avoid pain and suffering at all costs. “Failure,” he says, “is the ultimate loss.”Team Tony. “Overcoming the Fear of Failure.” But overcoming fear doesn’t have to be painful if you understand it as a program or detrimental thinking running in your mind. People are hardwired to believe they are not good enough or can’t do it. These patterns can be embedded in people’s minds and can deter creativity and success. Some signs of fear of failure are listed in .
Fear of failure often stems from thoughts of inadequacy or a belief that you don’t have the experience and skills necessary to succeed, that you’re not smart enough, and so on. Thoughts like these can prevent a person from starting or advancing their business. Individuals with a high level of stress about failure tend to lack self-esteem, have anxiety, be perfectionists, and tend to avoid new or unfamiliar things at all costs.Mind Tools Content Team. “Overcoming Fear of Failure.” Fortunately, these traits and behaviors can be controlled and conquered.
Most entrepreneurs will tell you that, at some point, they had to fight their fears before they had any success.
Most entrepreneurs who succeed will tell you that behind every success there were many failures. Many people in general think that those who are great and successful were born that way. But that is simply not true.
Take Michael Jordan, for example. One of the most successful basketball players of all time, with five championship rings and thousands of points and assists, Jordan often said that he owed his success to failure. “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”The Greatest Team. “Quote: Michael Jordan on Success through Failure.” Michael Jordan, a kid who didn’t make the varsity team in his high school, got his act together and propelled himself to stardom because he didn’t give up when he failed. The same goes for entrepreneurs: Just because it didn’t work the first time, it doesn’t mean that they can’t try again.
James Dyson, founder and inventor of the Dyson vacuum cleaner, had failed 5,126 times before he came up with his Dual Cyclone vacuum cleaner in 1993, fifteen years after he created the first version. When asked about how failure helped him, he said, “Failure is interesting—it’s part of making progress. You never learn from success, but you do learn from failure. When I created the Dual Cyclone vacuum, I started out with a simple idea, and by the end, it got more audacious and interesting. I got to a place I never could have imagined because I learned what worked and didn’t work.”Nadia Goodman. “James Dyson on Using Failure to Drive Success.” Dyson also says that he continuously embraces risk and failure, and allows his employees to explore that: “Nothing beats the thrill of invention. Letting people go out and try their ideas, getting them totally involved, and unleashing new thinking. They’re not bound to any methodology—in fact, the stranger and riskier, the better.”Madison Malone-Kircher. “Dyson on the 5,126 Vacuums That Didn’t Work—and the One That Finally Did.”
### Fear of Failure around the World
According to research, fear of failure is influenced by people’s upbringing and cultural backgrounds. The Global Entrepreneurship Monitor (GEM), an organization that researches entrepreneurship around the world, has studied this topic. According to its 2018–2019 report, Americans are not as afraid to fail in business as people from many other countries are.Global Entrepreneurship Monitor. “Fear of Failure.” 2018–2019. This report includes those who would like to start a business but feel stuck because of fear of failure. Fear of failure is highest in Greece, Italy, Russia, and Cyprus, and lowest in Latin America and Africa. Usually, the fear is lowest in countries where there are few jobs and where people have to become entrepreneurial to survive.
GEM also reports that women are usually more afraid of failure than men and show less confidence in their abilities (). The research also shows that women tend to open ventures in consumer industries, whereas male-driven startups are often in manufacturing and tech sectors, and men receive more capital and incentives to open those businesses. This can be attributed to the lack of women in science and tech industries.Catherine Clifford. “Lack of Confidence, Fear of Failure Hold Women Back from Being Entrepreneurs.” Other studies corroborate GEM’s findings, showing that women are more afraid to start a business, they don’t receive as much funding, and feel they have to prove themselves more than men to be taken seriously.Ruth Simon. “Women Started Smaller Percentage of Businesses in 2014.”
### What Failure Teaches You
Some would argue that, in reality, failure does not exist. There is only perceived failure, or obstacles that can become steps up the ladder to a better outcome. The importance in failing lies in learning how to get back up again. As Eric Ries dove into failure with his first company and felt the deep pain and disappointment of having to let go of an unsuccessful idea, he applied his lessons to create his new virtual reality company IMVU. IMVU then became a very successful experiment from which he derived the lean startup method. He was able to pinpoint his shortcomings and find ways to better himself and his performance. With his new company, he was able to get the product to market faster without it being perfect and ask for much-needed feedback from customers that he hadn’t received before.
### Converting Lessons Learned to Success
Most successful business owners will tell you that success didn’t come to them easily. They had to persevere in pursuit of their goals to attain them. Converting their failures to lessons often led them to higher success than they had imagined. Entrepreneurs who can turn their obstacles into positive lessons can resurrect from failure.
Take Evan Williams, a visionary who launched a software tool to help users easily publish blogs. That venture, Blogger.com, was launched in 1999 and purchased by Google in 2003. The next year, Williams decided to establish Odeo, a platform for creating and sharing podcasts. Apple had been working on a similar platform and shared it earlier on iTunes to the demise of Odeo. Williams didn’t want to go head to head with iTunes, as this could potentially destroy his company, so he found a way to go in a different direction and establish a new way of sharing status updates and other data. Williams took that failure, and with a few friends, co-founded Twitter. We all know how that worked out: Twitter is one of the most popular microblogging tech platforms.Paige Cooper. “28 Twitter Statistics All Marketers Need to Know in 2019.”
Kathryn Minshew, shown in , also experienced failure but has learned from it. In 2010, she quit her job to create Pretty Young Professionals (PYP). She invested $25,000 of her own money to develop a networking platform for women who were smart and passionate about their careers. After a few months, she and the three other co-founders started to disagree on some issues, including their approach to advertising. As they hadn’t completely formalized the ownership of PYP, two of the founders lost their investments, including Minshew. After experiencing the loss of her investment, her friendships, and the original idea, Minshew persevered with a new opportunity and established The Muse. This platform is similar to PYP but added job listings, workshops, and advice. Currently, the site has over 4 million users and is a major competitor of LinkedIn. Minshew didn’t let her first disappointment prevent her from starting a new venture. She applied the lessons learned in building the original platform to the creation of a new one—with the right contracts and right people in place.Doria Lavagnino. “Muse CEO and Co-Founder Kathryn Minshew: Journey of an Entrepreneur.” Minshew now speaks at business conferences and events, sharing her mistakes and how she used them to lift herself up to launch a new venture properly. She hopes that her experience helps other entrepreneurs avoid the pitfalls she went through so they can be as successful.
Being able to learn from different types of failure is as important as experiencing success because you get to know your strengths and how to leverage them. Failures can be seen as stepping stones rather than embarrassments. Feeling comfortable takes practice. shares several tips on dealing with these dynamics.
### Coping with Fear
When coping with fear of failure, there are two strategies that entrepreneurs can use. The first way to reduce fear of failure is to modify your business strategy by changing the target outcomes for your business. Instead of aiming to make $50,000 in the first six months, you can be open to the idea of a leaner start, learning about your customers and how best to serve them. Learning/growth goals can be just as valuable as hitting a revenue target in terms of overall success and longevity. Also, if a goal is not met, don’t consider it a total failure: Refocus and ask yourself what you learned from the experience and how to apply that knowledge to a revised goal. More than likely you will find this experience has enhanced your toolbox to help you make changes within the business or start a new one.
A second way to reduce high stress is to practice some sort of meditation or breathing exercise that can help lower the anxiety created by fearful thinking. Reaching out to a mentor, support group, therapist, or counselor can also help alleviate fearful thinking.
### Summary
Failure is common in business creation, especially in the early stages. Only a small percentage of ventures make it to the two-, five-, and ten-year mark. Common reasons for this include mistakes and missed opportunities in marketing, financing, management, and innovation. However, there are steps the owner can take, such as making sure they are targeting the right customer, ensuring proper finances are in place to operate and grow the business, creating contracts when sharing the business with stakeholders, and innovating when needed. Fear of failure is also a major contributor to business failure. Some suggestions to manage fear include adjusting expectations and asking for help.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Global Entrepreneurship Monitor: http://www.gemconsortium.org/ |
# Launch for Growth to Success
## The Challenging Truth about Business Ownership
### Learning Objectives
By the end of this section, you will be able to:
1. Explain the pros and cons of business ownership before you launch
2. Understand current trends in entrepreneurship in the US
3. Determine the challenges women face in entrepreneurship and what resources they can use to overcome them
4. Determine the challenges minority entrepreneurs face and resources available for them
People usually have different reasons for starting a business. Some of the reasons—other than the idea they’ve hit upon—include the freedom to set their own hours, spend more time with family, be their own boss, and make money. However, in many cases, they will probably work more than planned, be challenged to find the work-life balance, face fears and doubts, and perhaps struggle to make ends meet for the first few months or years. Prior to launch, they will need the support of family, friends, and mentors to understand the limitations of time and the pressures they face.
### Pros and Cons of Business Ownership
lists the positives and negatives that should be considered prior to opening a business and throughout its operation. Positives of entrepreneurship include having the freedom and independence to expand your skills and develop your own ideas. Instead of working for another organization on projects and ideas that are not your own, you get to serve people in a way that feels right for you. You also have the opportunity to make a profit and have a better lifestyle. Having the freedom to set your own schedule and work at your own pace can be very satisfying as well.
On the opposite side, those “freedoms” translate into being in charge of the business and the significant responsibility that entails. You must resolve issues that arise every day, such as dealing with employees, customers, production, marketing, and financing, among others. Most of the time, you wear many hats, especially during the venture’s early lifecycle stages, and most entrepreneurs usually work more hours than anticipated. In addition, you must deal with losses and risk if things don’t go well. The important thing to keep in mind is that all of the negative aspects have solutions and can even be prevented if planning, mentorship, and a good support system are in place, which can alleviate many of the stresses that entrepreneurs experience. Also, having attainable goals in creating awareness of the business, number of clients, and sales or profit can be beneficial in alleviating some of that pressure.
### Entrepreneurship and Competition in the US
Entrepreneurs operate in an unbelievably competitive landscape. Although competition helps create better products and services, it also places many stresses on a business owner who must compete with new, more flexible businesses that may have lower prices and better products. As shown in , the number of new establishments that are less than one year old has increased over the past two decades from 1994 to 2015. There was a dip during the 2009 recession, but the trend continued after 2011, and the number of businesses increased again. This means more competition for businesses that are already established.
The number of jobs created by these young establishments has also decreased in this period, which affirms the likelihood that entrepreneurs are wearing many hats in their own businesses. charts this trend.
As you’ve learned, only about 20–30 percent of businesses succeed to the five- or ten-year mark. shows that only half of businesses survive to the five-year mark, and only 20 percent are sustained for two decades. Their failures may be due to a number of factors such as cash flow problems, lack of passion, lack of support, lack of innovation, difficulty adapting to new technologies or customer demand, and environmental factors that can influence a business as well, such as the economy, trends, regulations, or sociocultural changes. Therefore, it’s important for entrepreneurs to research their internal as well as their external environments before launching. The chapters on Identifying Entrepreneurial Opportunity and Entrepreneurial Marketing and Sales take a look at such research, as it pertains to both the entrepreneur and the marketing environment respectively.
### Challenges of Business Ownership for Women
Challenges for business owners can be many. Female entrepreneurs, however, can face additional hardships. These can range from not being able to secure financing for their businesses, having a hard time breaking into an industry, and dealing with fears of starting and growing a business, and not being taken seriously.
Current research shows that the importance of female entrepreneurship is key to economic success. Women own 40 percent of the country’s businesses,Bernard Meyer. “Business Woman Challenges, Examples and Opportunities in 2107 and Beyond.” generating over $1.4 trillion in sales.National Association of Women Business Owners (NAWBO). “Women Business Owner Statistics.” Women entrepreneurs are closing the gender gap, as their ventures have grown substantially in the past few years. In the past two years, women entrepreneurship rates have gone up by 10 percent each year, compared to men’s 5 percent growth. This surge has been spurred by increased available resources, including mentorship, funding, and programs to help women succeed.Elaine Pofeldt. “Why Women Entrepreneurs Will Be the Economic Force to Reckon with in 2017.” Nonetheless, there are still great challenges to overcome, as women move into the next generation of business ownership. Some of the main challenges are:
1. Difficulty gaining entry in certain industries. Women have made great strides in business, but they still face many obstacles, especially in certain industries. Women tend to be underrepresented in specific areas, notably in the tech industry, where they run only 9 percent of businesses.Sahil Raina. “Research: The Gender Gap in Startup Success Disappears When Women Fund Women.” Women tend to be underpaid in tech positions, they experience sexism, and they are often passed over for promotions, especially if they have families with young children. So, if there are no female role models, it is difficult for women to follow an entrepreneurial path that is already full of obstacles. Although young girls and women desire to study and expand their careers, historically, they have not been presented with the opportunities and encouragement to do so, especially in STEM. By the time they get into college, the number of women in these careers—which can be rich in entrepreneurial opportunities—is very small. However, more efforts are being made today to support young girls interested in scientific, technological, and mathematical careers.
2. Lower sales and fewer employees. Women overall tend to struggle more to keep their businesses afloat, as they have fewer employees,Michael J. McManus. “Women’s Business Ownership: Data from the 2012 Survey of Business Owners.” less revenue, and less profit than male-owned businesses. Only 2 percent of female-owned businesses make over $1 million in sales. Male-owned businesses, on the other hand, are 3.5 times more likely to hit that revenue target.Eilene Zimmerman. “Only 2% of Women-Owned Businesses Break the $1 Million Mark—Here’s How to Be One of Them.” Some of the reasons why women experience this is because women may enter entrepreneurship part time, often striving to sustain a decent family work balance, which is difficult when children, especially young children, are part of the equation. This set-up usually includes one employee, who is the entrepreneur herself, and she may have attained her goals without wanting to make millions. Time, flexibility, and work-life balance can be reasons women become entrepreneurs, and they are happy with their goals of making some money while taking care of their family and household. Lack of experience in business or managing a family business, and lack of access to capital are also reasons for the lower metrics.Robert W. Fairlie and Alicia M. Robb. “Gender Differences in Business Performance: Evidence from the Characteristics of Business Owners Survey.”
3. Less access to capital. Regardless of their success and prowess, women still have a harder time securing funding for their businesses. A recent Kauffman Foundation survey determined that more than 72 percent of women don’t have the access to capital they need.Elaine Pofeldt. “Why Women Entrepreneurs Will Be the Economic Force to Reckon with in 2017.” Nirupama Mallavarupu, founder of MobileArq says, “As a woman entrepreneur with a focus on helping non-profits and schools, it has been difficult to get investors. We have turned this around by pursuing customer acquisition organically and relying on direct revenues instead of investment growth.”Bernard Meyer. “Business Woman Challenges, Examples and Opportunities in 2107 and Beyond.” Women usually don’t ask for funding, or if they do but are turned down, they turn to funding from family and friends. They are more likely to finance their ventures this way than men.Elaine Pofeldt. “Why Women Entrepreneurs Will Be the Economic Force to Reckon with in 2017.”
4. Not taken seriously. Sometimes it’s not that women don’t have the opportunities, money, or mentorships to start a business: Sometimes, women are just not taken seriously. Research by Freshbooks Accounting and Software firm and Research Now asked 2,700 entrepreneurs about gender discrimination and the wage gap that exist today. Thirty percent of women pointed out that they are not taken seriously as business owners, as they must work harder than their male counterparts and have to charge less to get a client.“New Research from FreshBooks Discovers a 28% Wage Gap among Self-Employed Men and Women.” Emily Harsh, owner of Heart Move Collective, comments in her blog, “Because I am in the fitness industry and female, I am often not taken seriously as a professional. I think the number one most important thing you can do as a woman fighting to pave your own path is to continually stay authentic.”Bernard Meyer. “Business Woman Challenges, Examples and Opportunities in 2107 and Beyond.”
5. Resources. Fortunately, there are many resources that women can take advantage of. Organizations such as the Women’s Business Center of the Small Business Administration, the National Association for Women Owners, the Female Entrepreneur Association, Ladies Who Launch, Minority Business Development Agency, the National Association of Professional Women, and the Women’s Business Enterprise National Council strive to help women succeed in all industries by providing loans and programs that prepare them for a competitive landscape. Mentoring by other women has also proven to be effective in women’s success in entrepreneurship.Robin L. Laukhuf and Timothy A. Malone. “Women Entrepreneurs Need Mentors.” Having peers that can help and strong mentors can make a difference in the outcome of a business.
Other helpful tips to counteract the challenges facing women entrepreneurs include being assertive, being authentic, networking, and developing a thick skin for rejections and other challenges. Facebook COO Sheryl Sandberg, in her book Lean In, states that “being confident and believing in your own self-worth is necessary to achieving your potential” and she encourages women entrepreneurs to ask themselves: “What would you do if you weren't afraid?”Sheryl Sanders.
Women bring great qualities to entrepreneurship such as strong leadership, as well as management, time, multitasking, and listening skills. Women also have a collaborative approach to relationships that works well in many industries.S. Mohan Kumara, H.S. Chandrika Mohana, Vijaya C., and Lokeshwari N.
### Challenges of Business Ownership for Minorities
Entrepreneurs from minority groups encounter additional challenges. Minority groups are a strong force in the economy of the country, yet they still experience additional challenges that sometimes prevent them from succeeding in their businesses. These can range from having lower capital accessMinority Business Development Agency. “Access to Capital Is Still a Challenge for Minority Business Entrepreneurs.” due to little credit history, small or nonexistent business networks, and lower business knowledge.David Kiger. “Minority Entrepreneurs Face Challenges in Business Development.” According to the Census Bureau, minorities own about 29 percent of US businesses.Aleks Merkovich. “30 Insightful Small Business Statistics.”
Hispanic people“Of Hispanic or Latino Origin” as used in the 2010 Census refers to a person of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin regardless of race. https://www.census.gov/prod/cen2010/briefs/c2010br-02.pdf comprise 17 percent of the population and own approximately four million (13%) companies in the US with $661 billion in revenue. From 2007 to 2015, business revenue grew 88 percent for Hispanic people, which means that they have more power to employ more people to provide goods and services to a wider audience, and to purchase from other vendors. Given its growth and current size, this group is vital to the health of the economy.Geoscape. “Hispanic Businesses and Entrepreneurs Drive Growth in the New Economy: Third Annual Report.” Unfortunately, research shows that if measured by financial outcomes, Hispanic people still struggle to succeed in business ventures due to a lack of funding, less managerial/business education, and lack of mentorship.Denisse Olivas. A higher rate of foreign-born entrepreneurs can experience these challenges due to the lack of networks and financial history in the country.Geoscape. “Hispanic Businesses and Entrepreneurs Drive Growth in the New Economy: Third Annual Report.”
Black people make up 14 percent of the total US population, and their businesses represent about 7 percent of total businesses. Although they are opening businesses faster than their White counterparts, their businesses, as well as Hispanic businesses, tend to have higher failure rates than White- and Asian-owned businesses.“Race.” Similar to Hispanic people, Black people tend to lack funding, managerial/business education, and mentorship.
Asian Americans make up 5 percent of the population and own just over 4 percent of the businesses in the country. Although they are considered minorities, Asian Americans tend to be better educated and have more access to capital than Hispanic Americans and African Americans.“Race.”
Organizations such as the Hispanic, Black, and Asian American Chambers, the Minority Business and Development Agency (MBDA), and the Small Business Administration (SBA) have developed programs to help minority entrepreneurs succeed in various ways. These organizations hold workshops once or twice a month to provide helpful information and business plan templates so owners work through their preparation to launch a venture. Chambers are also helpful in matching companies with banks for loans based on their needs and industries. The 8a certification is also facilitated by the Chambers and the MBDA, and provides disadvantaged businesses with an assistance program.
Disadvantaged businesses are those that are small, owned by someone economically disadvantaged (a person who has less than $250,000 in personal net worth, which includes assets such as cash, home, car, and real estate minus liabilities such as mortgages, credit card debt, and car and bank loans), with an owner demonstrating that the business can be successful. This program helps minority business owners access finances, mentors, counselors, and management assistance, among other resources.Minority Business Development Agency. “What Is the 8(a) Business Development Program.” In addition to this support, some organizations, such as the SBA, provide certifications on various business topics on marketing, finance, accounting, management, and production that usually take the form of short classes for business owners to acquire business acumen. These programs help entrepreneurs gain needed knowledge, grow professionally, and connect with people as they go through their entrepreneurial journeys.
### Summary
Entrepreneurs operate in an extremely competitive landscape. This space has positives and negatives, including being autonomous, being able to expand one’s own ideas, and schedule flexibility. Serving people and employees well can be very satisfying as can the financial success of a strong profit. On the negative side, resolving constantly arising challenges, wearing many hats, dealing with challenges and issues, and having adequate time and cash flow can make entrepreneurship difficult. Women and minority entrepreneurs face additional challenges that can make the experience of being an entrepreneur much more difficult. These include lack of funding opportunities, lack of business education, not being taken seriously, lack of mentorship, and lack of resources. However, there are several organizations that provide the guidance and connections targeted to these groups.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Asian American Chamber of Commerce: http://www.asian-americanchamber.org/
Black Chamber of Commerce: https://www.nationalbcc.org/
Hispanic Chamber of Commerce: https://ushcc.com/
Ladies Who Launch: https://www.ladieswholaunch.org/
Minority Business Development Agency: https://www.mbda.gov/
National Association of Professional Women: http://womenforhire.com/company/national-association-of-professional-women-napw/
National Association for Women Owners: https://www.nawbo.org/
Small Business Agency: https://www.sba.gov/
The Female Entrepreneur Association: https://femaleentrepreneurassociation.com/
Women’s Business Center at SBA: https://www.sba.gov/tools/local-assistance/wbc
Women’s Business Enterprise National Council: https://www.wbenc.org/ |
# Launch for Growth to Success
## Managing, Following, and Adjusting the Initial Plan
### Learning Objectives
By the end of this section, you will be able to:
1. Explain the difference between a business plan and a lean plan
2. Know how to develop a lean plan quickly and accurately
3. Run the build-measure-learn loop
In this chapter, we’ve discussed how to start the imperfect business using the lean startup approach. We’ve looked at the build-measure-learn loop and how to test an MVP. We’ve also covered how to deal with fear of failure and how to overcome negative thinking. In addition, we’ve covered how minorities can tap into resources to help them be successful. Now it’s time to build the lean plan to help you launch your venture.
As you must realize, having a lean plan is important to executing its process. A lean plan follows the path of lean methodology. It is a brief business plan shown to potential investors and employees that is a fast and effective way to set, manage, and evaluate goals and strategies in a business. shows its components.
Traditionally, a business plan requires a detailed document of the company’s background, the target, objectives, financials, and marketing strategies. Developing this usually takes a long time, from a few months to a year, as you will see in Business Model and Plan. A full business plan requires robust information as it’s developed for internal purposes, for banks or investors who need proof that the business is a good investment, and for other stakeholders. In contrast, a lean plan is short and includes only specific information, sufficient to go through the build-measure-learn loop. This plan is where you clarify initial ideas about the product to help you work through the loop and to share with potential investors and employees who need only so much information to decide on their role in the project.
### Developing a Lean Plan
As mentioned earlier, a lean plan uses lean methodology. This type of planning begins by drafting a short living set of lists to guide you, meaning you can update it as you go.Tim Berry. “Business Planning for the ‘Lean Startup.’ ” The plan shouldn’t take months to develop; you can set it up in a few days. The plan focuses on the business core, so only important details about marketing, the business model, finances, the build-measure-learn loop, and the MVP are added to it.Noah Parsons. “An Introduction to Lean Planning.”
The following is a list of basic procedures and details to include in a lean plan.
1. Write a short and simple document.
2. Test your MVP through the build-measure-learn loop.
3. Review your results.
4. Revise your plan.
Once these steps are complete, the entrepreneur can start or continue the venture.
### Write a Short and Simple Document
This plan does not need to include an executive summary, a company background, or team information. It is literally a short pitch that you can use to share with investors and potential partners. Focus on what is important and include the following:
1. Basic strategies for product, price, place, promotion; add people, physical environment, and process if it is a service
2. Basic strategies for target market and positioning
3. Day-to-day tactics, which include specific tasks or actions that will get an objective done
4. A schedule with dates for acquiring needed licenses, launch date, and when to review and revise the plan
5. A business model that details how you will make money
6. A basic forecast of sales, costs, profit, and break-even analysis
This plan is just a bare bones list of things that need to get done and by whom. It also includes a timeline, a cost, and a reward. It is less like a traditional document and more a series of lists and bullet points. In this case, the entrepreneur is only writing down the essentials of the business to achieve the goal at hand. Later on, when a document is needed for outside stakeholders or bank loans, then a full plan can be developed with research and details about the market, the environment, trends, and strategies that are more fleshed out.
For example, an entrepreneur who is just opening a prosthetics company can start a lean plan by describing its main product, which can focus on creating custom prosthetics for children. Then it can add a basic price or range of prices for its basic product since it’s a custom product, and it will probably vary in price from customer to customer. Another strategy to keep in the plan is where to conduct the business. A central location would probably be a good idea, especially close to doctors and hospitals. Finally, basic promotional strategies used in reaching out to this market, which can include speaking to children’s hospitals and local doctors who can refer the patients to the company, can also be listed. In addition, the entrepreneur may decide to create a basic website, online ads, and simple brochures to give information to potential customers. Once all the strategies are laid out, then the timelines can be added from the inception until the launch date, which includes assignments for everyone who will be in charge of the activities in this new business. These can include an office manager, the prosthetist, and a marketer.
Next, the entrepreneur may detail how the money will be made. Will the new business charge the client directly for the product? How about accepting insurance and copayments? These are questions that need to be written down. Then a basic forecast of the market demand will help forecast sales, expenses, and profit.
### Test Your MVP through the Build-Measure-Learn Loop
Once the lean plan has been put into place, the next step is to execute it and test the MVP through the build-measure-learn loop. Here is where the rubber will meet the road, and all the assumptions that were made in the plan will be tested in real life.
1. Build your MVP.
2. Test your idea by sharing it with potential customers.
3. Measure results by talking to customers and recording feedback.
4. Ask questions such as: Are we building a product people want? What benefits do we need to add? Is this our target market?
5. Test different versions and cohorts of users.
In our example, the entrepreneur will have a chance to build the prosthetics and ask questions that will help create a better product over time. At this time, the entrepreneur might find out that the product can be expanded to include orthotics and not just prosthetics, and perhaps that adults can also be included in the market.
### Review Your Results
This step should be done at least once a month, where customer feedback, marketing, and outcomes are thoroughly reviewed. This is a great opportunity for the entrepreneur to assess if goals have been met and identify areas for improvement. However, many times, you will encounter that reviewing results can stir resistance from employees (if there are any), as they may become tired of planning, having meetings about planning, and demonstrating results. The reviewing process can inspire some fear or negative feelings over concerns of being blamed, but as a leader, you must always assure them that this process helps them get better at what they do and gives them the information and tools necessary to make the changes that will steer the business onto a more successful path. This is about managing the results and not being deterred by them.
1. Review customer feedback and go back to your plan to compare.
2. Review target market, 7Ps of marketing, features, and benefits.
3. Review numbers or outcomes, which may include sales, profit, customer signups, and even customer reactions to advertisements and product attributes.
In our example, if the prosthetics business is not bringing in enough customers to sustain it, then this is the opportunity to see where issues exist so changes can be made to the lean plan.
### Revise the Plan
Make changes to the plan as needed. Once metrics have been measured against results, marketing is tested and measured, and customer feedback is received, then it is time to revise the plan and make adjustments. This can take the form of adding a feature to the product, adding new products, changing promotional tactics, or communicating differently with customers and consultants.
If there aren’t enough customers to sustain the prosthetic business, here is where the founders can make changes to correct course. It may be that customers are not aware of the business, or there aren’t enough pediatric customers and perhaps adults can be added to the target market. Once the plan is revised and the resulting changes are made, the business can continue and the process of testing restarts. As you can see in , this is a continuous process. It requires constant updating and cooperation from everyone involved in the business. Once the process is set up, then it is easier to maintain it and see it as necessary within the business that helps it grow.
Tim Berry—entrepreneur, former Apple employee, writer, and now a lean startup guru—advises businesses on the art of lean planning, as he does not like long planning himself and has little patience for extensive plans and coding. For Berry, lean planning does not contain elaborate information and details that are unnecessary for the business to run. It is not a document per se, but an assortment of short bullet points, some lists, and tables. For Berry, the most important steps to lean planning are to have the following:
1. A lean strategy or plan in place
2. Execution of the plan (or run it like in the )
3. Review of the results and check against milestones
4. Revision of the plan—change what didn’t work and start the whole process againTim Berry. “Lean Business Planning Guide.”
### Summary
Having a lean plan is helpful in setting up expectations and measurements. This is a living document, so its creation and updating are a process. The process starts with building a short document that outlines the basics of product, market, and strategies, with a short schedule of tasks. After a trial run, where the prototype or actual product is tested with customers, the plan is reviewed and revised to incorporate the feedback.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Tim Berry’s Lean Business Planning Guide: https://leanplan.com/ |
# Launch for Growth to Success
## Growth: Signs, Pains, and Cautions
### Learning Objectives
By the end of this section, you will be able to:
1. Determine the lifecycle of a business
2. Identify strategies to manage the main needs of each lifecycle stage
3. Explain how businesses grow and adapt to changes in their cycles
The work of the entrepreneur is not over after the launch of a business. There are constant changes to manage. Sustained business growth requires a company to improve profits by increasing its revenue, cutting costs, or both. Increasing profit yearly indicates improvement and helps secure financing from banks, attract and reward investors, support opportunities for opening new business locations, and helps reinvest those profits in research and development. As a business matures and stabilizes, so do its revenues and profits, sometimes holding the company stagnant if changes aren’t made.
At the beginning of your startup, everything is new, exciting, and sometimes (or seems) less complex than it will be as the venture grows. Perhaps you have one or two employees, and you manage the operation’s day-to-day activities. Managing the business is still within your power, and the structure of the business is fairly straightforward. Once the business takes off and encounters the challenges of development, such as hiring more employees to keep up with demand, adding new products, or expanding to new locations, you will need more resources and a different strategic approach to managing the business. You must be aware of these changes and steer the business in the right direction to continue its growth. As you begin to understand the signs of growth, you can correctly assess the challenge and come up with solutions. Going through these changes is what is called the business lifecycle, a process of five basic stages: starting a business, growth (expansion to new markets and products), maturity, decline, and death or rebirth, as , shows.
### Lifecycle Stages
As companies reach new lifecycle stages, owners need to be on the lookout for change indicators. These may include rapid (growth stage), leveled (maturity stage), or diminishing (decline stage) sales. Or they may include the inability to keep up with demand without investing in capital, equipment, software, or technology. Other signs may be a need to increase staff and hire top- or mid-level managers to oversee an expanding workforce, or the need to grow by updating the product, introducing new products, or adding new markets.
### Startup/Birth Stage
This stage centers around acquiring the first batch of customers. Entrepreneurs are focused on being able to actually provide and deliver the product, grow their customer base, and have enough cash flow to keep up with demand. The major concern is to survive by at least breaking even. This stage is simple in terms of ownership because there are usually only a few employees, if any. The processes are often informal, and technology and systems can be minimal. The owner usually wears many hats to launch the operation.
For example, an advertising agency might start operations with the co-founders and perhaps one or two employees who work as art designers and/or account executives. At the beginning, the point is to gain clients and deliver the services and products promised—such as TV ads, radio commercials, print ads, or digital ads—while consulting and managing client accounts. The goal is to gain client trust and make sure clients are paying for the services rendered so the agency can pay its employees and vendors. Breaking even is the most basic goal, which means that costs are at least covered, but no profits are seen just yet. Many times, the owner or owners of the company will not take a paycheck for many months, sometimes years, to ensure the business takes off.
### Growth Stage
The growth stage, when sales rise due to higher demand, is full of change. There are increases in sales, profits, additional market/product penetration, and an expansion of professional staff. There is usually an increase in cash coming in and going out. A key factor in this phase is to avoid cash strain by paying close attention to costs and ensuring the payment from customers of product and services provided by looking at running reports on costs and sales daily, weekly, and/or monthly. At this stage, systems such as databases and software systems that help keep track of customers and sales, as well as formal processes, need to be put in place for marketing, technology, production, and human resources. Owners must also decide whether to continue with current strategies, sell, or perhaps merge with another company to continue growing. The owner will usually hire managers with experience to take the company to the next level. At this time, owners may need to take out loans and use equity power or shares of the company as capital to leverage further growth. The chapter on Entrepreneurial Finance and Accounting discusses these strategies in more detail.
At this point in our advertising agency example, there are more clients being served; the company is expanding as it adds new clients to the roster and hires more employees to keep up with demand. Revenue is higher, but costs are increasing as well. Processes need to be put into place so employees know what their tasks are and how to do them. Software that handles operations, such as accounting and project management, are put into place because the number of people and processes are increasing. Sometimes, the growth is so unprecedented that perhaps a merger with another company is necessary to be able to provide all the services that clients need.
### Maturity Stage
As the business continues, it could enter maturity, which means it has grown to the point where revenues and profits level off. There is adequate staff and more management engaged in maintaining operations. Systems are well developed in all departments and working efficiently, with larger financials and management. The key to remaining active and spurring new life into the business is to remain flexible and continue being a creative and entrepreneurial company. Apple offers a great example of a company that, although its size and power have grown tremendously, continues to innovate as if it were a small company. Other companies such as GE and Procter & Gamble, although they are big corporations with many resources, are now mature and well balanced because they have been in business for a long time. However, they too must continue to innovate and shift with trends, and this is where the lean startup methodology fits well in both small and large businesses because it allows them to be creative and entrepreneurial, regardless of size.
### Decline Stage
At this stage, as industries change or business owners fail to keep their offerings relevant, decline is imminent. Sales wane, and a rebirth or death of the business can be expected.
For example, Sears, Payless, Victoria’s Secret, and JCPenney have recently been hit by the new technological and fashion trends that are affecting brick-and-mortar retailers. The way customers shop has been shifting from spending time browsing and shopping in a physical store to adopting new technology to shop from computers and mobile devices. Today, Amazon and other online retailers have developed strategic ways to help customers shop for items they want at an affordable price from the comfort of their devices. Retailers must come up with new, experiential ways to engage the consumer. Interestingly, companies such as GoPro and Fitbit are also struggling with declining sales due to competition, lower demand for cameras, and pricing. GoPro and Fitbit are still good brands that can benefit from a buyout from a bigger company, so they could have a rebirth.
### Rebirth or Death Stage
When there are big changes in the decline stage that the company doesn’t evolve to meet, or the business owner doesn’t retain passion, focus, or ability for the venture, the business will end. Blockbuster failed to embrace the new era of video streaming and closed its stores in 2013. Similarly, small retailers, restaurants, tech companies, and manufacturers that fail to innovate cannot sustain a business and usually dissolve.
That is not to say that a rebirth is not possible. If a business innovates and changes to embrace new technology and ideas, it may restart the lifecycle. Polaroid, a pioneer in the instant camera market, saw its demise in the 2000s when the photography industry started to shift toward digital products. The company went bankrupt in 2001 and was sold to several holding companies (controlling companies that buy a stake in the business but don’t operate the business), which licensed the name Polaroid to various electronics manufacturers. Recently, the company entered into an agreement with a holding company that specializes in brand resurrection to develop photography products. These products include a new instant camera and the Polaroid Swing app that allows people to create moving GIF photographs, which are several pictures rotated in a way that show movements and resemble very short videos.Brian Mastroianni. “Polaroid Swing App Brings Moving Photos to Life.” Most recently, Polaroid has launched the camera OneStep+, which connects the camera to the phone through an app, allowing the photographer to use different filters and shoot and print instantaneously.“Meet the Polaroid OneStep+.” Polaroid. n.d. https://www.polaroid.com/onestep-plus This camera, along with other lines of Polaroid instant cameras, have helped resurrect the brand.
### The Pain of Growth
Expanding a business usually entails some growing pains. Professional stressors can include figuring out how to serve the customer in the best way possible, produce the right product, create a great brand, sell the right amount, manage cash, delegate tasks to others, and ensure the right people and systems are in place. And of course there are the personal stressors of managing a healthy work/life balance and meeting the demands of the venture.
In 2011, Jessica Thompson, owner of Johnson Security in New York City, felt the strains of growth. She had expanded from sixty to seventy employees and expected to hire ten to twenty more that year. News of her unprecedented business growth had catapulted Johnson Security into higher sales, thanks to better assessment of prospects (potential customers) and better written contracts, but it also heightened her concerns. She had to hire more people. She had to create the infrastructure needed to support the new positions. She had to make sure her liability costs were based on estimates of working hours, because if the number of employees grew, so did her costs. Her visible and public success also made her a target of the New York State Department of Labor, which audited the company to make sure she had classified her workers correctly as W-2 workers instead of as contractors. The audit results were fine and her growth proved organic, but the stress was something she had to go through to succeed as a business owner.Adrianna Gardella. “Growing Pains at a Growing Business.”
Victor Clark of Clarke Inc., a consulting company, also knows a little about the pain of growth. When asked about his experience as a business owner, Clark said, “My biggest lesson would be ‘profit is an opinion, cash is a fact.’” He says that he struggled many times with cash flow because he disregarded his checking account and because of late receivables. His advice is to pay attention to the checking account, never do a job that makes you lose money, know your costs, and review your numbers every single month.Andrea Lotz. “5 Entrepreneurs Share Their Business Growing Pains.”
### Strategies for Growth
What are some strategies for growth? Growth can mean increases in revenue and profits, and decreasing expenses. Here are various strategies that can help expand a business whether they are young or established companies.
### Product Improvement
An inexpensive and easy way to increase sales of a new product can be done by enhancing a product. This can be in the form of updating the design, making it more durable, changing its size, adding a new feature, or increasing its quality. It is easier to enhance a product than to completely start from scratch.
Take appliances, for example. Rather than creating a new machine to wash clothes, Samsung continually adds features to its washing machines. Recently, the company changed its technology to high-efficiency (HE) technology to save water and energy, and included a separate feature that helps wash items by hand.
Usually, creative fragrance and perfume manufacturing companies can easily adjust their current fragrances by adding a new ingredient or scent instead of developing an entirely new fragrance. Artisanal perfume startups such as Phlur and Pinrose have recently developed their own lines of perfumes that are environmentally conscious, not tested on animals, and good for the body. Some of their perfumes now have new versions of their signature perfumes. In addition to improving their products, they also created new ones out of their original scents by adding them to body sprays, lotions, lip shimmer, and candles that smell exactly like the original.
### Market Penetration
Market penetration entails selling more to current customers by showcasing new uses for an existing product. This is the least costly way to attract more customers from within the market. A great example is the versatility of the common pantry staple you see in , baking soda. Until the 1920s, baking soda was used only as a leavening agent for baking. The mid-century emergence of convenience foods, including premade baked goods, meant a decrease in demand for the product as people baked less at home. To boost sales, Arm & Hammer explored its other uses and began to sell it as a deodorizer, detergent, remedy for heartburn, and as an additive to other products such as detergents, toothpaste, and cleansers.“A History of Innovation: Our Timeline.”
### New Distribution Channels
Adding new distribution channels gives current customers more ways to purchase the product. For instance, the Internet has provided opportunities for companies to expand their reach by selling items online. Consider a bakery that, in addition to distributing its cookies in its store and through retailers, adds an online store. While a large number of companies have websites and apps that can sell directly to customers, entrepreneurs who don’t want or have an e-commerce function on their site can use portals such as Etsy, Amazon, and Ebay. A jewelry maker, for instance, can sell items through one of these websites without having to pay someone to create or manage a website for their business. Other more conventional ways of using different distribution systems include making products available in retail stores, kiosks, or grocery stores. Take for instance California Pizza Kitchen. It originally existed solely as a restaurant chain but now has created frozen pizzas that we can purchase at the grocery store.
### Product Line Extension
A business can extend its product line to appeal to different customers with different needs and budgets. It can start with a basic, no-frills product for the low-end consumer. Then, it can provide a higher quality, higher-price product with a few more features. A step higher would be a high-end product that is more luxurious or has additional benefits and capabilities that are higher priced. This strategy is often used with cameras, software, vehicles, and hotels. Tech companies will have their basic products and will increase their gadgets’ quality and benefits to make them more luxurious and capture different markets along the way. Uber, for example, offers its basic riding service to everyone who requests a ride. Drivers can pick them up in any type of vehicle they own. An upgrade to this service is the new Uber Black service, which gives the customer the ability to request a luxury car or SUV. These vehicles must be newer than five years old, and they must be in excellent condition. This service is more expensive than regular rides, costing three or four times more than a ride in a regular vehicle.
### Adding New Markets
Developing new markets is a riskier path to growth. A company that was catering to only local customers might open a second location in another town or region, or provide products online to reach distant clients in other cities, states, or countries.
Fast fashion companies have been at the forefront of this trend. These are retailers that design, manufacture, and distribute the product to customers quickly and cheaply by skipping the regular four seasons of the fashion year. Instead, they usually offer new designs every two or three weeks, and entice shoppers to purchase clothing at a faster rate. Retailer store Zara, (pictured in ), the fast fashion company from Spain, has seen unprecedented growth through expansion to other markets, for example.
### Born Global Companies
As mentioned earlier, entering global markets is a common method of expanding a business. Some companies will turn to global expansion during a growth or mature cycle, and some companies will seek global markets from the start, as born global companies do. A born global company is one that has as its goal to serve the world with its products. Companies that have new products that have never been created before—today mostly technological and medical products—usually benefit from this kind of strategy. Other entertainment and consumer products can be thought of as global as well, especially when it’s a new product category.
Red Bull is an example of a born global company that had its eyes set on the global stage, even before it started growing, because it had a new product that no other company had ever created. After Red Bull came up with its products, other companies followed suit, and a new product category of energy drinks was born. So far, the company has been around for 31 years, has more than 12,000 employees in 171 countries, and has sold more than 75 billion cans around the world.“Company.” The success that this born global company has experienced can be attributed to its grassroots marketing approach on college campuses, the sponsoring of events ( shows two examples), as well as a massive distribution approach that targets young people, extreme sports athletes, and professionals who need an energy boost.
### Licensing, Franchising, Joint Ventures, Mergers, and Acquisitions
Other riskier ways to grow include the integration of outside ventures through licensing, mergers and acquisitions, joint ventures, and strategic alliances.
Licensing is a contract in which one enterprise gives permission to another entity to manufacture and sell its products for a royalty, which is a payment in exchange for the use of property or an asset, whether intellectual or physical that can be used to generate revenue. Some of the property that can be licensed can be in the form of a design, a copyright, an invention, a patent, or formula.“Licensing.” Instead of investing directly in manufacturing and marketing additional items, many companies such as Disney, Mattel, NBA, and Warner Brothers lend their characters and copyrights to other companies to use on their merchandise. They then receive a royalty payment for their license.
Licensing can also occur in reverse: Small companies with a technology, medical solution, software, or product that cannot be manufactured by them can seek other companies to which they can license their intellectual property. The smaller company can also license from another company and create the product or service because that is its core competency.
Franchising is a form of licensing that allows the business (franchisor) to share its business model to expand the business through various distributors (franchisees) for a fee. In turn, the franchisor provides the training, marketing, know-how, management, and support to help the franchisee fulfill its sales objectives. Franchising is common in industries such as restaurants, automotive, hotel, cleaning, and home services, to name a few. Popularly known franchises are fast-food restaurants, such as Chick-Fil-A or McDonald’s, which have quickly expanded in the US—and around the world in the case of McDonald’s. Smaller local and national franchises include Fit4Mom, Mosquito Squad, Chocolate Factory, and Soccer Shots.
A joint venture is the creation of a new business in which two different enterprises share the expenses and profit to achieve certain goals of a project. This approach reduces the risk of investing directly in capital equipment, and it also allows them to share each other’s knowledge and expertise. You can see this done with small businesses that collaborate to save money and help each other out.
Larger companies do this as well to leverage a particular advantage and reduce risks and costs.“Joint Ventures.” Google and NASA joined efforts to bring NASA’s information about the weather, locations, and forecasting to the fingertips of people via a Google search. This joint venture proved fruitful, as they continue to collaborate on various projects including robotics and space exploration.“Google Moves into NASA’s Space.”
In mergers and acquisitions, two companies combine or one buys the majority stake of the other. The goal is to enhance profitability and reduce their risk by diversifying their portfolios, combining resources such as boards of directors, combining efforts to achieve efficiency (for example, being able to increase production and thereby reduce production costs), broadening market access, sharing technology, and increasing access to capital. Usually, mergers and acquisitions are conducted by larger companies such as Dow Chemical and DuPont, Anheuser-Busch InBev and SAB Miller, Heinz and Kraft, and CVS and Aetna, but smaller companies can also benefit if they both have an opportunity for synergy.
Strategic alliances are arrangements that two or more entities create to work on a project by sharing some of their strengths and resources, but not actually creating a new entity like in the case of a joint venture. In this alliance, both entities are still considered independent and only pool their resources to work on a specific project because it may be faster and more cost effective to work together. Both companies’ assets remain separate.Will Kenton. “Strategic Alliance.” An example of this is Star Alliance, a strategic distribution alliance between many airlines such as United Airlines, Lufthansa, Air New Zealand, Turkish Airlines, Croatia Airlines, and 22 additional airlines, to connect customers all over the world through a shared booking system.“Proud Member of Star Alliance.”
### Pros and Cons of Growth Strategies
Each growth opportunity has pros and cons, which are outlined in .
### Summary
A company goes through a lifecycle of birth, growth, maturity, decline, and death or rebirth. At each of these stages, there are opportunities and choices to make based on the owner’s personal and business goals. Business growth requires the owner to innovate through various means to survive and to thrive. These strategies are meant to increase sales, cut costs, or a little of both. Some of these strategies include making changes to the product, adding new products and markets, adding new channels, and acquiring other companies.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
International Franchise Association: https://www.franchise.org/
US Small Business Administration Licenses and Permits: https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits |
# Business Model and Plan
## Introduction
Michael Kirban and Ira Liran had no experience in their industry when they launched their business. After a chance encounter with Brazilian women in a bar who mentioned how much they missed having coconut water, Kirban and Liran decided to launch Vita Coco.
The Vita Coco founders promised to deliver a product they had not even created yet, and further, they had no experience in manufacturing, but they launched the business nonetheless in the early 2000s. The initial plan for the business did not work after the US Food and Drug Administration blocked shipments to the United States because they failed to register the business properly. The partners developed the business into a social movement with a specific mission: to make an impact on both their consumers and the people they work with and the communities in which they live. Things ultimately worked out for Kirban and Liran. Vita Coco became the market leader in this niche segment, as they turned their attention to putting customers first. Although customer-focused design is integral to the entrepreneurial planning process, you should avoid launching a venture with the attitude that if you build it, customers will automatically come, because it does not always work that way. There are tools available to entrepreneurs to use to plan their journey to make goals a reality rather than just a wish or a dream. |
# Business Model and Plan
## Avoiding the “Field of Dreams” Approach
### Learning Objectives
By the end of this section, you will be able to:
1. Understand the importance of planning
2. Understand the concepts of product and service innovation, and define and understand key business models
3. Describe and be able to construct a value proposition for a new business idea (product or service)
In the 1989 film Field of Dreams, Kevin Costner plays an Iowa farmer who hears a voice that tells him, “If you build it, he will come.” Inspired by this vision, Costner’s character turns his cornfield into a baseball field (of dreams), and eventually the ghosts of deceased baseball players such as Shoeless Joe Jackson appear on the field as younger versions of themselves. The movie coined the popular axiom that “if you build it, they will come,” just as the players appeared after the field of dreams was built. Although it’s a fun saying for film buffs and sports fans, this approach is one you will want to avoid in entrepreneurship. In fact, the entrepreneurial graveyard is littered with ghosts of startups that never gained traction with customers, never to be heard from again. (Seventy-five percent of venture-backed startups fail, according to one recent study.)Patrick Henry. “Why Some Startups Succeed (and Why Most Fail).” Thus, you don’t want to blindly build a product and hope that customers will come. Juicero is one recent example of product that conducted little-to-no customer discovery before launch. A cold press juicer made by this San Francisco startup cost $699 at launch. The juicer squeezed packs of cut up fruits and vegetables, but customers found they could just as easily squeeze the juice out of the packs by hand and avoid the hefty price of the juicer.
Customer acquisition and customer retention are not easy processes by any means. You have to work to gain a customer and work even harder to get her to return. One study by the data analysis firm CBInsights of why 101 startups failed found that 42 percent of them joined the “entrepreneurial afterlife” because there was “no market need,” which suggests a customer (or lack thereof) problem.“298 Startup Failure Post-Mortems.” Current trends in entrepreneurial thinking reflect a customer-centric approach: From the start, entrepreneurs infuse their insights into the planning process through a process called “customer discovery.” The entrepreneurial journey should begin with finding what the serial entrepreneur, author, and educator Steve Blank, one of the founders of modern entrepreneurship, calls the problem/solution fit.Steve Blank. “Driving Corporate Innovation: Design Thinking vs. Customer Development.” July 30, 2014. https://steveblank.com/2014/07/30/driving-corporate-innovation-design-thinking-customer-development/,Hayley Leibson. “How to Achieve Product-Market Fit.” In a complementary approach, the Mosaic/Netscape founder Marc Andreessen discussed the need to achieve product-market fit.Tren Griffin. “12 Things about Product-Market Fit.” In other words, don’t just build a baseball field and expect players to show up. This is an oversimplification, but if we extend the Field of Dreams analogy before blindly believing in the magic, you would want to talk to prospective players and fans to see if a field is needed, what type of field (corn-to-baseball?), why that field is needed, how that field would be used, and what features of the field would be most useful—before you go to bat ().Mike Pinder. “Innovation Reality Check: Are You Building a ‘Field of Dreams’?”
### Business Model
Although there are countless varieties of business models, the Scaling Lean author Ash Maurya offers three common types: direct, multisided, and marketplace. Direct businesses are the most common and involve one-sided actors—that is, users—becoming your customers. A coffee shop is a classic example; other examples include retail stores, software as a service (SaaS), many mobile apps, hardware stores, and stores that sell physical goods. In multisided models, users and customers—multi-actors—are usually different people. Ad-based models, big data, and enterprise are common examples where the products are free to users, and their value is monetized by a different customer base. Marketplace models are a more complex variant of multisided models made up of two different customer segments of buyers and sellers. eBay and Airbnb are well-known examples of marketplace models.Ash Maurya.
Although planning is important, adaptability within the planning process is equally important. That’s what the business model approach is all about: outlining an approach but changing that approach throughout if or when you discover that your assumptions and educated guesses were wrong. For each new iteration, or version, the entrepreneur makes a minor change to the current business model to better capitalize on market opportunities.
Successful entrepreneurs are often multidimensional: part dreamer, part pragmatist. Adam Grant, Wharton School of Business professor and author of the best-selling book Originals: How Non-Conformists Move the World, explores how entrepreneurs are “capable of recognizing a good idea, speaking up without getting silenced, building a coalition of allies, choosing the right time to act, and managing fear and doubt.”“Bio.” Adam Grant. n.d. https://www.adamgrant.net/bio Entrepreneur magazine tells the story of FedEx founder Fred Smith, who, while attending Yale University in the mid-1960s, wrote an economics term paper on the need for a new approach to overnight delivery in the computer age. His professor, unimpressed with Smith’s idea, graded his paper a C because the idea was not feasible.“Fred Smith: An Overnight Success.” After graduation, using innovative thinking, dogged determination, and hard work, Smith would turn his “unfeasible” concept into the world's first overnight delivery company, and in so doing, change the transportation industry forever. Smith embodied the entrepreneurial concept of being part dreamer, part pragmatist.
Sports metaphors offer important entrepreneurial lessons beyond insights on customer discovery and planning. In baseball and softball, you must field a team to enter the game. In boxing, you enter the ring alone to go toe to toe with your competitor (where some of the best-laid plans get thrown out after you get hit). The tides of entrepreneurial thinking have shifted from the twentieth-century economist Joseph Schumpeter’s early belief that it is “lone individuals who carry novelty” for wider market exploitation and benefit to society to the notion that it takes a team to innovate and back to the idea that individuals can enact entrepreneurial change.Joseph A. Schumpeter. “Solopreneurs,” for instance, are hard-working entrepreneurs who are comfortable working alone on all the requisite tasks of starting a venture.John Rampton. “4 Differences Between Solopreneurs and an Entrepreneur Working Alone.” At the same time, many successful investors preach the merits of teams in entrepreneurship. Venture capitalist Aileen Lee says that people are the second-most important factor behind addressable market when evaluating startups.Aileen Lee. “Investing and Business Lessons from Aileen Lee (Cowboy Ventures).” The cohesion, diversity, and makeup of the team all contribute to investable worthiness and potential entrepreneurial success (). Many successful accelerator programs have typically required teams in order to be considered for entry into their programs. The accelerator Techstars has said that what they look for in a startup is “team, team and team,”Michael Cohn. “Team, Team, Team: Welcome Tyler Scriven to Techstars Atlanta.” and the accelerator Boomtown requires at least two present founders for the duration of its accelerator program.The Farm. “Accelerator FAQs.” n.d. https://thefarmatl.com/about/faq/
Multiple shifts in sources of innovations and rapid business model exploration may reflect high startup failure rates. Lack of planning is also a major reason for failure. Most small businesses fail within the first few years because of cash-flow issues. With more people today willing to field a startup team or enter the entrepreneurial ring, failure is more often than not a part of the entrepreneurial journey. Serial entrepreneurs launch numerous ventures, many of which fail, before moving on to other efforts. Entrepreneurs are the modern-day equivalent of Hamilton: An American Musical’s Hercules Mulligan to the world: They get back up again after getting knocked down.
### Innovation
One of the fundamental theories of entrepreneurship is that it brings innovation, which can be a new addition to the market or a novel change to an existing product or service. The famed management guru Peter Drucker put it simply: “Entrepreneurs innovate.”Peter F. Drucker. Of course, we should note that not all entrepreneurial ventures involve innovation. Even for those that do, however, the term innovation can be ambiguous. Further complicating the issue, a plethora of different extensions (or “types”) has arisen surrounding the concept of innovations—such as radical, incremental, and disruptive—that have been used to describe and emphasize different innovations in different situations.Henri Simula. “Concept of Innovation Revisited: A Framework for Product Innovation.” Innovation can also refer to products or processes because there are differences between product innovation and process innovation. In other words, not all innovations are created equal.Salem Baer. “The 3 Types of Innovation: Product, Process, & Business Model.”
As it pertains to entrepreneurship, the creative destruction of old markets with inferior technology and the creation of new markets, as defined by Schumpeter back in the 1930s, occurs through disruptive innovation.Joseph Schumpeter.
The adjective disruptive also became a bit of a catchphrase in the 1990s during the first Internet era, largely due to the popularity of Clayton Christensen’s theory of incumbent failure in the face of what he first termed “disruptive technology” and later renamed “disruptive innovation.”C. M. Christensen.
As Christensen defines them, disruptive innovations are often more advantageous to new entrants than to incumbent firms. This is because once market uncertainty occurs as a consequence of the disruption around the disruptive product, established firms consider it irrational to abandon their existing paying customers for the smaller customer base of the new, initially small market for what they believe is inferior technology. New entrants challenge incumbent firms by either creating markets where no markets exist, turning nonconsumers into consumers, or by targeting overlooked segments of the market and later moving up market as the product improves. Leading firms’ decision criteria for developing new products and commercializing innovations are all biased toward supporting incremental innovations that build on their existing technology base and help maintain or grow revenue and profitability in established markets. This opens the door for startups to develop and introduce disruptive innovations and profit from them. lists some disruptive innovations.
In separate but related work, Christensen also developed the jobs-to-be-done theory, which aids companies in determining how to create products and services that customers want to buy by getting at the causal driver behind a purchase. Christensen uses the term job as shorthand for what an individual wants to accomplish in a given circumstance, often with social, emotional, and functional dimensions. For example, two jobs that a newspaper does for its readers are to inform and entertain, whereas the jobs to be done of a newspaper are completely different for another customer segment—advertisers. A newspaper’s jobs to be done for advertisers, for instance, may include promotions, attracting customers, or selling products. The jobs-to-be-done approach has also been incorporated into the development of business models in the form of customer empathy maps and value proposition canvases covered.Clayton M. Christensen, Taddy Hall, Karen Dillon, and David S. Duncan. “Know Your Customers’ ‘Jobs to Be Done’.”
Disruptive innovations are contrasted with sustaining technologies, which improve the performance of established products through characteristics that mainstream customers adopt. Disruptive technologies allow for new entrants in the market, often with simpler, more affordable, more convenient products. Entrepreneurs and marketers have difficulty predicting or projecting how the emergence of an innovation will occur, and anticipating how customers will react to the new offerings. Predicting who the early adopters will be can also be difficult during the early stage of an innovation’s emergence. The mainstream customer base initially fails to find value in the new product. New customer segments, however, see value in the new features and lower prices. Eventually, developments improve the new product’s features to a level that will satisfy mainstream customers and thus attract more of the mainstream market.Christian Hopp, David Antons, Jermain Kaminski, and Torsten Oliver Salge. “What 40 Years of Research Reveals about the Difference between Disruptive and Radical Innovation.”
Christensen prefers the term to disruptive technology because even in his original theoretical framework, technology was not the driving force disrupting existing markets, products, and models—rather, business models were.C. M. Christensen. The root of the tension in disruptive innovation is the conflict between the previously established business model for the incumbent technology and the new business model that may be necessary for exploiting the disruptive technology or process.
The efforts of incumbents to capitalize on a disruptive technology will fail in most instances because commercializing the new technology will require a different business model from the one that the incumbents currently use. When disruption occurs, incumbents struggle to commercialize, whereas new entrants take control through their mastery of the requisite new business models. Thus, a disruptive business model can fundamentally reshape profits within an industry because managers are faced with a technological disruption/innovation that alters their businesses, specifically their business models. This phenomenon is known as business model innovation.C. M. Christensen and M. Raynor.
Business model innovation, as defined by Professor Constantinos Markides of the London Business School, occurs when an existing business fundamentally changes their business model.Constantinos Markides. “Disruptive Innovation: In Need of Better Theory.” In order to be an innovation, the “new business model must enlarge the existing economic pie, either by attracting new customers or by encouraging existing consumers to consume more.” Disruptive innovations tend to require a business model that is not only different from but even in conflict with the traditional way of competing.Constantinos Markides. “Disruptive Innovation: In Need of Better Theory.” In contrast, radical innovations (see the preceding text) are new-to-the-world products that are disruptive to both consumers and producers.
In the context of disruptive innovation, business model innovation is distinct from open business model innovation, which leverages external ideas together with internal ones. We also can define a business model innovation as a reformulation of an existing product or service, including a shift in how it is provided to the end user. A business model innovation “leads to a new way of playing the game” and can consist of new performance attributes on price or distribution outlets.Constantinos D. Charitou and Constantinos C. Markides, “Responses to Disruptive Strategic Innovation.” Stitch Fix uses data to offer personal styling at scale and ships customized clothing boxes from its own in-house label and from 1,000 brands in its collection directly to customers who want to avoid the hassles of in-store shopping. Despite volatility from investors, which dropped its initial $5.1 billion valuation at offering by two-thirds over three months, the company continues to reinvent the $334 billion US apparel industry.Lauren Smiley. “Stitch Fix’s radical data driven way to sell clothes- $1.2 billion last year—is reinventing retail.”
### Value Proposition
Entrepreneurs play a key role in determining the value of their products. Of course, there are financial measures of value such as economic performance, job creation, wealth, and growth measures. But more often than not, value creation at the outset of a new startup venture lies outside these financial realms and addresses instead individual value to customers. The value proposition in a business model, for example, is a summary describing the benefits (value) customers can expect from a particular product or service. Your value proposition describes the benefits customers can expect from your products and services.Alexander Osterwalder, Yves Pigneur, Gregory Bernarda, and Alan Smith. The value proposition is an integral part of the business model canvas, which we will discuss in Designing the Business Model.
### Summary
Business models and business plans are tools involved in the strategic process of charting a path for your entrepreneurial venture. When starting a company, it’s best to avoid the Field of Dreams approach of building a business and hoping that customers will just show up. Innovation has been linked to entrepreneurship for at least nine decades. More recent theories suggest that disruptive innovations are disruptive because they disturb the underlying business model of the companies being disrupted.
### Review Questions
### Discussion Questions
### Case Questions
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# Business Model and Plan
## Designing the Business Model
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
### Learning Objectives
By the end of this section, you will be able to:
1. Define a business model and its purpose
2. Describe a business model canvas
3. Describe a lean model canvas
4. Describe a social business model canvas
According to Alexander Osterwalder and Yves Pigneur, the authors of Business Model Generation, a business model “describes the rationale of how an organization creates, delivers and captures value.” Nevertheless, there is no single definition of this term, and usage varies widely.Alexander Osterwalder and Yves Pigneur.
In standard business usage, a business model is a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a planning document used for operations.
Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. In non-jargon English, this means you want to address what your idea is, who will use it, why they will use it, and how you will make money off it.
A canvas is a display that would-be entrepreneurs commonly use to map out and plan different components of their business models. There are several different types of canvases, with the business model canvas and the lean canvas being the most commonly used. There are hard-copy canvases modeled after an art canvas as well as digital versions. The original physical canvases are meant to serve as visual tools, used with sticky notes and sketches.
As developed by Osterwalder and Pigneur, the business model canvas has nine components, as shown in .
Osterwalder and Pigneur wrote Value Proposition Design as a sequel to Business Model Generation. Their value proposition canvas is a plug-in that complements the business model canvas, going in depth on activities such as encouraging entrepreneurs to address and tackle customer pains, gains, and jobs-to-be-done trigger questions, and designing pain relievers and gains. The complementary and accompanying activities and resources can be useful for a deeper dive into and understanding of customer value creation in the form of value proposition, although there are other approaches to conceptualizing your value proposition. For Christensen, the originator of the disruptive innovation and jobs-to-be-done theories, a value proposition is a product that helps customers do a job they’ve been trying to do more effectively, conveniently, and affordably.
Finding the intersection of your customers’ problems and your solutions is how you create a unique value proposition, according to the entrepreneur Ash Maurya, the author of Scaling Lean and Running Lean. In Running Lean, Maurya offers the following formula for creating an initial value proposition in the canvas, as shown in .
Maurya deviated from the standard business model canvas to create the lean canvas. It overlaps the business model canvas in five of the nine components: customer segments, value proposition, revenue streams, channels, and cost structure (]. Rather than addressing key partners, key activities, and key resources, the lean canvas helps you tackle problems, solutions, and key metrics instead.
While the business model canvas and the lean canvas are similar in format, there are differences in how they are used. It is generally accepted that the lean canvas model is a better fit for startups, whereas the business model canvas works well for already established businesses. The lean canvas is simpler; the business model canvas provides a more complete picture of a mature business.
Both the business model canvas and the lean canvas are designed for constant iterations, allowing for multiple versions and changes throughout the entrepreneurial process. Part of that process involves customer discovery; thus, the canvases invoke customer-focused design. The target customer is integrated into the canvas from the start through the use of a customer empathy map and a number of design-thinking ideation activities.Charlene Perrin. “Create A Customer Empathy Map in 6 Easy Steps!” The customer empathy map is a portrayal of a target customer—the most promising candidate from a business’s customer segments—that explores the understanding of that person’s problems and needs (). Osterwalder and Pigneur used a customer empathy map as part of the design ideation phase of developing a business model canvas. There are differing versions of customer empathy maps, but most seek to answer common questions pertaining to the customer, such as:
1. With whom are we empathizing?
2. What do they need to do?
3. What do they see?
4. What do they say?
5. What do they do?
6. What do they hear?
7. What do they think?
Phillips, Proctor & Gamble, Microsoft, and Yeti are examples of well-known companies that make use of customer empathy mapping because, according to the journal Entrepreneur, every transaction can be turned into a meaningful and valuable customer interaction.Vineet Arya. “How to Infuse Empathy in Your Marketing?” Once a company analyzes the results of customer mapping exercises, it may very well lead to new products that serve customer needs and/or wants.
For example, Philips used empathy mapping to detect a high level of fear in young patients immediately before an MRI medical procedure, so it invented a miniature version of the CAT scan equipment used in the procedure called the “kitten scanner” along with toy animal characters that were used to dispel the fear of MRIs among children. Proctor & Gamble created a new advertisement that was released for the 2012 Olympics visualizing the trials and tribulations of mothers raising young athletes, demonstrating Proctor and Gamble’s awareness that some of its customers wanted or needed empathy for the sacrifices they had made to help their children succeed. Likewise, Microsoft has attempted to demonstrate empathy with customers’ privacy concerns by developing an interactive website that explains not only how data is stolen but also how we can better protect our own data.Vineet Arya. “How to Infuse Empathy in Your Marketing?”
On their company website, the now-famous Yeti cooler company publicly extols the value of empathy mapping, explaining that it leads to better products. Yeti doesn’t just create one on its own, it actually asks its clients to work with the company to create an empathy map.Mike Godlewski. “The Secret to Knowing What a Client Is Thinking? Empathy Maps.” Yeti. February 8, 2016. https://yeti.co/blog/the-secret-to-knowing-what-your-client-is-thinking-empathy-maps/ Thus, empathy mapping for Yeti is part of its product development process.
Customer empathy maps also strive to address customer pains (in this case, fears, frustrations, and anxieties) and gains (wants, needs, hopes, and dreams).Germán Coppola. “What Is an Empathy Map, and Why Is It Valuable for Your Business?”
### Business Model CanvasThis material is based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
As Osterwalder and Pigneur describe it, according to Media Innovation and Entrepreneurship, their business model canvas blocks include revenue streams, customer segments, value propositions, cost structures, channels, key activities, key partners, key resources, and customer relationships.
Early on, your greatest focus should be on the right side of the canvas because:
1. These are, in many ways, the most critical aspects of starting a new venture (customer segments, value propositions, channels, and revenue streams).
2. The most fluid (revenue streams, channels, and value propositions will likely differ for the differing customer segments and, as you iterate and adapt throughout the customer discovery process, could likely change).
3. These follow a logical temporal order (there’s no need to focus on the costs of building a company if you won’t have customers).
In a follow-up to business model generation, the Strategyzer team created a second canvas, the value proposition canvas: https://www.strategyzer.com/canvas/value-proposition-canvas. The value proposition canvas is a new tool that pulls out the customer segment and value proposition blocks of the business model canvas, and encourages more in-depth exploration of those blocks to achieve a good fit between the two. The value proposition canvas tool looks at customer pains, gains and jobs to be done on the customer side and painkillers, gain creators, and products and services on the value proposition side.Michelle Ferrier and Elizabeth Mays.
When you peel away the language used to describe business models, the early startup planning stages come down to a series of questions. When it comes to formulating a business model for a startup concept, another popular framework used in entrepreneurial circles is that of desirability-feasibility-viability ). This framework forces the entrepreneur to address broad questions about the startup concept:
1. Desirability: How desirable is the product? Who will use it and why?
2. Feasibility: How feasible is this idea? What are the costs of making it? How practical is the concept?
3. Viability: Will this idea remain viable? How will it make money? How will it be sustained over time?
These questions then begin to connect to form a narrative about where the startup concept came from, whom it serves, why it’s needed, how it will make money, and how it will be sustained in the future.
The value propositions, customer relationships, customer segments, and channels address the assumptions that will create customer value (desirability). The cost structure and revenue stream blocks are aimed at viability, or overcoming flawed business models. The key partners, key activities, and key resources are about execution and address feasibility. The risk of poor execution can undermine your assumptions that you chose the right infrastructure to execute your business model (feasibility). The risk of solving an irrelevant customer job (sometimes derisively labeled “a solution in search of a problem”) undercuts desirability in your business. The risk of a flawed business model would hamper the financial assumption that your business will earn more money than you spend (viability). Adaptability is about the assumption that you chose the right business model within the context of external factors such as technology change, competition, and regulation.
The business model canvas is not an exhaustive planning tool by any means.Jennifer van der Meer. "Do You Suffer from Value Proposition Confusion?" ,“The Value Proposition Canvas.” The risk of such external threats is not specifically addressed on the canvas blocks. The external threats not specifically covered by the canvas blocks can be designed for adaptability, that is, the business model canvas is a necessary but insufficient component of determining the viability of the business idea/concept. There are many elements not included in the canvas that entrepreneurs must address. Industry analysis, including a competitive analysis, for example, falls “off canvas” but is important nonetheless.
### The Lean Model Canvas
The lean model canvas is Ash Maurya’s adaptation of the original business model canvas. As we noted earlier, gone are the customer relationships, key activities, key partners, and key resources blocks. Instead, a problem block is added, because as Maurya explains, “Most startups fail, not because they fail to build what they set out to build, but because they waste time, money and effort building the wrong product. I attribute a significant contributor to this failure to a lack of proper ‘problem understanding’ from the start.” Maurya next added a solution block to the lean model canvas, which corresponds well with features on a minimum viable product (MVP), which you will recall was covered in depth in Launch for Growth to Success. The lean model canvas also adds an “Unfair Advantage” block, similar to the block for competitive advantages or barriers to entry found in a business plan.Ash Maurya. “Why Lean Canvas vs Business Model Canvas?”
### Social Business Model Canvas
As you’ve noticed by now, the core canvas components are common throughout the various versions. Many of the blocks of the social business model canvas are similar to those used in the business model canvas and the lean model canvas."Social Business Model Canvas.” A few differences, as developed by Tandemic, focus on areas unique to social entrepreneurship ventures. For example, the new areas added include measures of what kind of social impact you are creating or developing, measures of surplus to address what happens with profits and where you intend to reinvest them, and measures of beneficiary segments, and social and customer value propositions.“The Business Model Canvas Reinvented for Social Business.” These could be measures such as the number of trees planted, number of refugees housed and fed, jobs created, or investments made—depending on the venture. Social impact looks at an organization’s social mission beyond the bottom line. Measurement can differ among social entrepreneurs, but in terms of the canvas, impact measures are an effort to establish quantifiable metrics.
Social impact can be hard to measure, but nonetheless, many social entrepreneurs aim for long-lasting impact.Ayse Guclu, J. Gregory Dees, and Beth Battle Anderson. “The Process of Social Entrepreneurship: Creating Opportunities Worthy of Serious Pursuit.” A 2014 report by the think tank, consultancy, and member network SustainAbility lists cooperative ownership, inclusive sourcing, and the “buy one, give one” model as three forms of social impact.Lindsay Clinton and Ryan Whisnant. “Model Behavior: 20 Business Model Innovations for Sustainability.” In addition to the Tandemic social business model canvas, there are other versions of similar canvases used for social entrepreneurship. For instance, Osterwalder adapted the business model canvas for mission-driven organizations into a mission model canvas.Alexander Osterwalder. “The Mission Model Canvas: An Adapted Business Model Canvas for Mission-Driven Organizations.” There’s also a social lean canvas that adds purpose (explaining your reason for creating the venture in terms of social or environmental problems) and impact sections (describing the intended social or environmental impact).Social Lean Canvas. n.d. https://socialleancanvas.com/
### Summary
A business model, which is unique to a company, describes the rationale of how an organization creates, delivers, and captures values. A business model canvas is a popular tool used by entrepreneurs and intrapraneurs to map out and plan different components of a business model. The business model canvas addresses customer segments, customer relationships, channels (of distribution), revenue streams, value propositions, key partners, key activities, key resources, and cost structure. The lean model canvas and social business model canvas are derivations of the original business model canvas. They are designed more for tech/software/app endeavors and social entrepreneurial ventures, respectively.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Business model canvas and resources: Strategyzer.com
Lean canvas and associated resources: Leanstack.com
Social business model canvas and related resources: Socialbusinessmodelcanvas.com
Christopher Steiner and Brett Nelson. “The 20 Most Important Questions in Business.” Forbes. June 17, 2010: https://www.forbes.com/2010/06/17/most-important-questions-in-business-entrepreneurs-management-small-business.html#7975585a3e93 |
# Business Model and Plan
## Conducting a Feasibility Analysis
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the purpose of a feasibility analysis
2. Describe and develop the parts of a feasibility analysis
3. Understand how to apply feasibility outcomes to a new venture
As the name suggests, a feasibility analysis is designed to assess whether your entrepreneurial endeavor is, in fact, feasible or possible. By evaluating your management team, assessing the market for your concept, estimating financial viability, and identifying potential pitfalls, you can make an informed choice about the achievability of your entrepreneurial endeavor. A feasibility analysis is largely numbers driven and can be far more in depth than a business plan (discussed in The Business Plan). It ultimately tests the viability of an idea, a project, or a new business. A feasibility study may become the basis for the business plan, which outlines the action steps necessary to take a proposal from ideation to realization. A feasibility study allows a business to address where and how it will operate, its competition, possible hurdles, and the funding needed to begin. The business plan then provides a framework that sets out a map for following through and executing on the entrepreneurial vision.
### Organizational Feasibility Analysis
Organizational feasibility aims to assess the prowess of management and sufficiency of resources to bring a product or idea to market . The company should evaluate the ability of its management team on areas of interest and execution. Typical measures of management prowess include assessing the founders’ passion for the business idea along with industry expertise, educational background, and professional experience. Founders should be honest in their self-assessment of ranking these areas.
Resource sufficiency pertains to nonfinancial resources that the venture will need to move forward successfully and aims to assess whether an entrepreneur has a sufficient amount of such resources. The organization should critically rank its abilities in six to twelve types of such critical nonfinancial resources, such as availability of office space, quality of the labor pool, possibility of obtaining intellectual property protections (if applicable), willingness of high-quality employees to join the company, and likelihood of forming favorable strategic partnerships. If the analysis reveals that critical resources are lacking, the venture may not be possible as currently planned.Ulrich Kaiser. “A primer in Entrepreneurship – Chapter 3 Feasibility analysis”
### Financial Feasibility Analysis
A financial analysis seeks to project revenue and expenses (forecasts come later in the full business plan); project a financial narrative; and estimate project costs, valuations, and cash flow projections .
The financial analysis may typically include these items:
1. A twelve-month profit and loss projection
2. A three- or four-year profit-and-loss projection
3. A cash-flow projection
4. A projected balance sheet
5. A breakeven calculation
The financial analysis should estimate the sales or revenue that you expect the business to generate. A number of different formulas and methods are available for calculating sales estimates. You can use industry or association data to estimate the sales of your potential new business. You can search for similar businesses in similar locations to gauge how your business might perform compared with similar performances by competitors. One commonly used equation for a sales model multiplies the number of target customers by the average revenue per customer to establish a sales projection:
Another critical part of planning for new business owners is to understand the breakeven point, which is the level of operations that results in exactly enough revenue to cover costs (see Entrepreneurial Finance and Accounting for an in-depth discussion on calculating breakeven points and the breakdown of cost types). It yields neither a profit nor a loss. To calculate the breakeven point, you must first understand the two types of costs: fixed and variable. Fixed costs are expenses that do not vary based on the amount of sales. Rent is one example, but most of a business’s other costs operate in this manner as well. While some costs vary from month to month, costs are described as variable only if they will increase if the company sells even one more item. Costs such as insurance, wages, and office supplies are typically considered fixed costs. Variable costs fluctuate with the level of sales revenue and include items such as raw materials, purchases to be sold, and direct labor. With this information, you can calculate your breakeven point—the sales level at which your business has neither a profit nor a loss.In a preliminary financial model and business plan, startup costs should be allocated, as they are intended for one-time investments in development; pre-launch costs and other necessary expenses will not carry over once the product/solution has launched. Projections should be more than just numbers: include an explanation of the underlying assumptions used to estimate the venture’s income and expenses.
Projected cash flow outlines preliminary expenses, operating expenses, and reserves—in essence, how much you need before starting your company. You want to determine when you expect to receive cash and when you have to write a check for expenses. Your cash flow is designed to show if your working capital is adequate. A balance sheet shows assets and liabilities, necessary for reporting and financial management. When liabilities are subtracted from assets, the remainder is owners’ equity. The financial concepts and statements introduced here are discussed fully in Entrepreneurial Finance and Accounting.
### Market Feasibility Analysis
A market analysis enables you to define competitors and quantify target customers and/or users in the market within your chosen industry by analyzing the overall interest in the product or service within the industry by its target market . You can define a market in terms of size, structure, growth prospects, trends, and sales potential. This information allows you to better position your company in competing for market share. After you’ve determined the overall size of the market, you can define your target market, which leads to a total available market (TAM), that is, the number of potential users within your business’s sphere of influence. This market can be segmented by geography, customer attributes, or product-oriented segments. From the TAM, you can further distill the portion of that target market that will be attracted to your business. This market segment is known as a serviceable available market (SAM).
Projecting market share can be a subjective estimate, based not only on an analysis of the market but also on pricing, promotional, and distribution strategies. As is the case for revenue, you will have a number of different forecasts and tools available at your disposal. Other items you may include in a market analysis are a complete competitive review, historical market performance, changes to supply and demand, and projected growth in demand over time.
### Applying Feasibility Outcomes
After conducting a feasibility analysis, you must determine whether to proceed with the venture. One technique that is commonly used in project management is known as a go-or-no-go decision. This tool allows a team to decide if criteria have been met to move forward on a project. Criteria on which to base a decision are established and tracked over time. You can develop criteria for each section of the feasibility analysis to determine whether to proceed and evaluate those criteria as either “go” or “no go,” using that assessment to make a final determination of the overall concept feasibility. Determine whether you are comfortable proceeding with the present management team, whether you can “go” forward with existing nonfinancial resources, whether the projected financial outlook is worth proceeding, and make a determination on the market and industry. If satisfied that enough “go” criteria are met, you would likely then proceed to developing your strategy in the form of a business plan.
### Summary
A feasibility study is a tool in the entrepreneurs’ toolkit that can help determine whether to proceed on a venture early on. A feasibility study is usually more in depth than a business plan and focuses on analysis of real-world numbers and projections. The most common elements of a feasibility study include a market analysis, a financial analysis, and management analysis. Feasibility studies can be used to make a “go-or-no-go” decision for a new product or business, as well as help narrow the focus of what that venture should be (what the market would potentially support).
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Bruce Barringer, Preparing Effective Business Plans: An Entrepreneurial Approach, 2nd ed. (Upper Saddle River, NJ: Pearson, 2015).
https://bizfluent.com/how-8048004-prepare-financial-feasibility-study.html
https://thebusinessprofessor.com/knowledge-base/financial-analysis-of-business-idea-overview/ |
# Business Model and Plan
## The Business Plan
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the different purposes of a business plan
2. Describe and develop the components of a brief business plan
3. Describe and develop the components of a full business plan
Unlike the brief or lean formats introduced so far, the business plan is a formal document used for the long-range planning of a company’s operation. It typically includes background information, financial information, and a summary of the business. Investors nearly always request a formal business plan because it is an integral part of their evaluation of whether to invest in a company. Although nothing in business is permanent, a business plan typically has components that are more “set in stone” than a business model canvas, which is more commonly used as a first step in the planning process and throughout the early stages of a nascent business. A business plan is likely to describe the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives. An in-depth formal business plan would follow at later stages after various iterations to business model canvases. The business plan usually projects financial data over a three-year period and is typically required by banks or other investors to secure funding. The business plan is a roadmap for the company to follow over multiple years.
Some entrepreneurs prefer to use the canvas process instead of the business plan, whereas others use a shorter version of the business plan, submitting it to investors after several iterations. There are also entrepreneurs who use the business plan earlier in the entrepreneurial process, either preceding or concurrently with a canvas. For instance, Chris Guillebeau has a one-page business plan template in his book The $100 Startup.Chris Guillebeau. His version is basically an extension of a napkin sketch without the detail of a full business plan. As you progress, you can also consider a brief business plan (about two pages)—if you want to support a rapid business launch—and/or a standard business plan.
As with many aspects of entrepreneurship, there are no clear hard and fast rules to achieving entrepreneurial success. You may encounter different people who want different things (canvas, summary, full business plan), and you also have flexibility in following whatever tool works best for you. Like the canvas, the various versions of the business plan are tools that will aid you in your entrepreneurial endeavor.
### Business Plan Overview
Most business plans have several distinct sections (). The business plan can range from a few pages to twenty-five pages or more, depending on the purpose and the intended audience. For our discussion, we’ll describe a brief business plan and a standard business plan. If you are able to successfully design a business model canvas, then you will have the structure for developing a clear business plan that you can submit for financial consideration.
Both types of business plans aim at providing a picture and roadmap to follow from conception to creation. If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept.
The full business plan is aimed at executing the vision concept, dealing with the proverbial devil in the details. Developing a full business plan will assist those of you who need a more detailed and structured roadmap, or those of you with little to no background in business. The business planning process includes the business model, a feasibility analysis, and a full business plan, which we will discuss later in this section. Next, we explore how a business plan can meet several different needs.
### Purposes of a Business Plan
A business plan can serve many different purposes—some internal, others external. As we discussed previously, you can use a business plan as an internal early planning device, an extension of a napkin sketch, and as a follow-up to one of the canvas tools. A business plan can be an organizational roadmap, that is, an internal planning tool and working plan that you can apply to your business in order to reach your desired goals over the course of several years. The business plan should be written by the owners of the venture, since it forces a firsthand examination of the business operations and allows them to focus on areas that need improvement.
Refer to the business venture throughout the document. Generally speaking, a business plan should not be written in the first person.
A major external purpose for the business plan is as an investment tool that outlines financial projections, becoming a document designed to attract investors. In many instances, a business plan can complement a formal investor’s pitch. In this context, the business plan is a presentation plan, intended for an outside audience that may or may not be familiar with your industry, your business, and your competitors.
You can also use your business plan as a contingency plan by outlining some “what-if” scenarios and exploring how you might respond if these scenarios unfold. Pretty Young Professional launched in November 2010 as an online resource to guide an emerging generation of female leaders. The site focused on recent female college graduates and current students searching for professional roles and those in their first professional roles. It was founded by four friends who were coworkers at the global consultancy firm McKinsey. But after positions and equity were decided among them, fundamental differences of opinion about the direction of the business emerged between two factions, according to the cofounder and former CEO Kathryn Minshew. “I think, naively, we assumed that if we kicked the can down the road on some of those things, we’d be able to sort them out,” Minshew said. Minshew went on to found a different professional site, The Muse, and took much of the editorial team of Pretty Young Professional with her.Jonathan Chan. “What These 4 Startup Case Studies Can Teach You about Failure.” Whereas greater planning potentially could have prevented the early demise of Pretty Young Professional, a change in planning led to overnight success for Joshua Esnard and The Cut Buddy team. Esnard invented and patented the plastic hair template that he was selling online out of his Fort Lauderdale garage while working a full-time job at Broward College and running a side business. Esnard had hundreds of boxes of Cut Buddies sitting in his home when he changed his marketing plan to enlist companies specializing in making videos go viral. It worked so well that a promotional video for the product garnered 8 million views in hours. The Cut Buddy sold over 4,000 products in a few hours when Esnard only had hundreds remaining. Demand greatly exceeded his supply, so Esnard had to scramble to increase manufacturing and offered customers two-for-one deals to make up for delays. This led to selling 55,000 units, generating $700,000 in sales in 2017.Amy Feldman. “Inventor of the Cut Buddy Paid YouTubers to Spark Sales. He Wasn’t Ready for a Video to Go Viral.” After appearing on and landing a deal with Daymond John that gave the “shark” a 20-percent equity stake in return for $300,000, The Cut Buddy has added new distribution channels to include retail sales along with online commerce. Changing one aspect of a business plan—the marketing plan—yielded success for The Cut Buddy.
If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept. This version is used to interest potential investors, employees, and other stakeholders, and will include a financial summary “box,” but it must have a disclaimer, and the founder/entrepreneur may need to have the people who receive it sign a nondisclosure agreement (NDA). The full business plan is aimed at executing the vision concept, providing supporting details, and would be required by financial institutions and others as they formally become stakeholders in the venture. Both are aimed at providing a picture and roadmap to go from conception to creation.
### Types of Business Plans
The brief business plan is similar to an extended executive summary from the full business plan. This concise document provides a broad overview of your entrepreneurial concept, your team members, how and why you will execute on your plans, and why you are the ones to do so. You can think of a brief business plan as a scene setter or—since we began this chapter with a film reference—as a trailer to the full movie. The brief business plan is the commercial equivalent to a trailer for Field of Dreams, whereas the full plan is the full-length movie equivalent.
### Brief Business Plan or Executive Summary
As the name implies, the brief business plan or executive summary summarizes key elements of the entire business plan, such as the business concept, financial features, and current business position. The executive summary version of the business plan is your opportunity to broadly articulate the overall concept and vision of the company for yourself, for prospective investors, and for current and future employees.
A typical executive summary is generally no longer than a page, but because the brief business plan is essentially an extended executive summary, the executive summary section is vital. This is the “ask” to an investor. You should begin by clearly stating what you are asking for in the summary.
In the business concept phase, you’ll describe the business, its product, and its markets. Describe the customer segment it serves and why your company will hold a competitive advantage. This section may align roughly with the customer segments and value-proposition segments of a canvas.
Next, highlight the important financial features, including sales, profits, cash flows, and return on investment. Like the financial portion of a feasibility analysis, the financial analysis component of a business plan may typically include items like a twelve-month profit and loss projection, a three- or four-year profit and loss projection, a cash-flow projection, a projected balance sheet, and a breakeven calculation. You can explore a feasibility study and financial projections in more depth in the formal business plan. Here, you want to focus on the big picture of your numbers and what they mean.
The current business position section can furnish relevant information about you and your team members and the company at large. This is your opportunity to tell the story of how you formed the company, to describe its legal status (form of operation), and to list the principal players. In one part of the extended executive summary, you can cover your reasons for starting the business: Here is an opportunity to clearly define the needs you think you can meet and perhaps get into the pains and gains of customers. You also can provide a summary of the overall strategic direction in which you intend to take the company. Describe the company’s mission, vision, goals and objectives, overall business model, and value proposition.
Rice University’s Student Business Plan Competition, one of the largest and overall best-regarded graduate school business-plan competitions (see Telling Your Entrepreneurial Story and Pitching the Idea), requires an executive summary of up to five pages to apply.Jennifer Post. “National Business Plan Competitions for Entrepreneurs.” ,“Rice Business Plan Competition, Eligibility Criteria and How to Apply.” Its suggested sections are shown in .
### Full Business Plan
Even full business plans can vary in length, scale, and scope. Rice University sets a ten-page cap on business plans submitted for the full competition. The IndUS Entrepreneurs, one of the largest global networks of entrepreneurs, also holds business plan competitions for students through its Tie Young Entrepreneurs program. In contrast, business plans submitted for that competition can usually be up to twenty-five pages. These are just two examples. Some components may differ slightly; common elements are typically found in a formal business plan outline. The next section will provide sample components of a full business plan for a fictional business.
### Executive Summary
The executive summary should provide an overview of your business with key points and issues. Because the summary is intended to summarize the entire document, it is most helpful to write this section last, even though it comes first in sequence. The writing in this section should be especially concise. Readers should be able to understand your needs and capabilities at first glance. The section should tell the reader what you want and your “ask” should be explicitly stated in the summary.
Describe your business, its product or service, and the intended customers. Explain what will be sold, who it will be sold to, and what competitive advantages the business has. shows a sample executive summary for the fictional company La Vida Lola.
### Business Description
This section describes the industry, your product, and the business and success factors. It should provide a current outlook as well as future trends and developments. You also should address your company’s mission, vision, goals, and objectives. Summarize your overall strategic direction, your reasons for starting the business, a description of your products and services, your business model, and your company’s value proposition. Consider including the Standard Industrial Classification/North American Industry Classification System (SIC/NAICS) code to specify the industry and insure correct identification. The industry extends beyond where the business is located and operates, and should include national and global dynamics. shows a sample business description for La Vida Lola.
### Industry Analysis and Market Strategies
Here you should define your market in terms of size, structure, growth prospects, trends, and sales potential. You’ll want to include your TAM and forecast the SAM. (Both these terms are discussed in Conducting a Feasibility Analysis.) This is a place to address market segmentation strategies by geography, customer attributes, or product orientation. Describe your positioning relative to your competitors’ in terms of pricing, distribution, promotion plan, and sales potential. shows an example industry analysis and market strategy for La Vida Lola.
### Competitive Analysis
The competitive analysis is a statement of the business strategy as it relates to the competition. You want to be able to identify who are your major competitors and assess what are their market shares, markets served, strategies employed, and expected response to entry? You likely want to conduct a classic SWOT analysis (Strengths Weaknesses Opportunities Threats) and complete a competitive-strength grid or competitive matrix. Outline your company’s competitive strengths relative to those of the competition in regard to product, distribution, pricing, promotion, and advertising. What are your company’s competitive advantages and their likely impacts on its success? The key is to construct it properly for the relevant features/benefits (by weight, according to customers) and how the startup compares to incumbents. The competitive matrix should show clearly how and why the startup has a clear (if not currently measurable) competitive advantage. Some common features in the example include price, benefits, quality, type of features, locations, and distribution/sales. Sample templates are shown in and . A competitive analysis helps you create a marketing strategy that will identify assets or skills that your competitors are lacking so you can plan to fill those gaps, giving you a distinct competitive advantage. When creating a competitor analysis, it is important to focus on the key features and elements that matter to customers, rather than focusing too heavily on the entrepreneur’s idea and desires.
### Operations and Management Plan
In this section, outline how you will manage your company. Describe its organizational structure. Here you can address the form of ownership and, if warranted, include an organizational chart/structure. Highlight the backgrounds, experiences, qualifications, areas of expertise, and roles of members of the management team. This is also the place to mention any other stakeholders, such as a board of directors or advisory board(s), and their relevant relationship to the founder, experience and value to help make the venture successful, and professional service firms providing management support, such as accounting services and legal counsel.
shows a sample operations and management plan for La Vida Lola.
### Marketing Plan
Here you should outline and describe an effective overall marketing strategy for your venture, providing details regarding pricing, promotion, advertising, distribution, media usage, public relations, and a digital presence. Fully describe your sales management plan and the composition of your sales force, along with a comprehensive and detailed budget for the marketing plan. shows a sample marketing plan for La Vida Lola.
### Financial Plan
A financial plan seeks to forecast revenue and expenses; project a financial narrative; and estimate project costs, valuations, and cash flow projections. This section should present an accurate, realistic, and achievable financial plan for your venture (see Entrepreneurial Finance and Accounting for detailed discussions about conducting these projections). Include sales forecasts and income projections, pro forma financial statements (Building the Entrepreneurial Dream Team, a breakeven analysis, and a capital budget. Identify your possible sources of financing (discussed in Conducting a Feasibility Analysis). shows a template of cash-flow needs for La Vida Lola.
### Summary
The business plan is a formal document used for long-range planning of a company’s operation that typically includes financial information, background information, and a summary of the business. Business plans can be used as internal guiding documents early in the entrepreneurial process. They also can be presentation documents for raising funds from prospective investors later in the process, complementing an investor pitch and iterative canvases. A brief business plan functions somewhat like an extended executive summary that summarizes key elements of the entire business plan, such as the business concept, financial features, and current business position. A full business plan can range from ten to twenty-five pages. It includes a business description, industry and marketing analyses, and descriptions of management, marketing, and operational and financial plans.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
SBA Business Plan resources: https://www.sba.gov/business-guide/plan-your-business/write-your-business-plan |
# Building Networks and Foundations
## Introduction
US Route 1 in southern Florida connects 43 islands of the Florida Keys via 42 bridges. It is a bidirectional economic path from the US mainland to its endpoint at Key West and for all points in between. Without the bridges it provides, residents, workers, and tourists would be required to ferry to their destinations, sacrificing time, money, economic efficiency, market productivity, and recreation. The bridges ensure an unimpeded flow of economic activities that benefit residents and visitors, increasing tourism across the entire state, and ensuring Key West is not economically and socially isolated.
Every entrepreneur can learn a few lessons from US 1. First, independent market players are stronger and more stable when connected to other independent market players. Second, connections are not always easy to establish. The idea of connecting all of the keys met resistance, and engineers had to solve many challenges. Third, you must be prepared to repair connections whenever they are severed. A hurricane destroyed the original railroad that connected the islands, but replacing it with an automobile highway was a major improvement. Other lessons are that benefits should outweigh costs, and that it takes time to build new connections: The original railroad took seven years to build. Costs of ongoing repair and maintenance have exceeded $1.8 billionAlice Hopkins. “The Development of the Overseas Highway.” (adjusted for inflation) but produced $2.7 billion in annual economic activity for 2017.Chris Mooney. “The Race to Save Florida’s Devastated Coral Reef from Global Warming.” Today, no one in Florida would dream of doing without the highway.
How are businesses similar to Key West? Every business includes people who produce goods and services for customers to purchase. In turn, businesses and those who work for them need to consume the products and services provided by their own vendors. Finding and establishing relationships with vendors and customers, in addition to the support of community organizations and educational resources, facilitates the exchange of information, products, and services. The connection between a business and its vendors or its customers makes up a network. |
# Building Networks and Foundations
## Building and Connecting to Networks
### Learning Objectives
By the end of this section, you will be able to:
1. Define networking and describe its role in entrepreneurship
2. Describe networking opportunities
3. Describe local and trade organization networking opportunities
4. Identify nonprofit and governmental agencies offering networking opportunities
When you begin thinking about your new and exciting entrepreneurial venture, you may feel somewhat like the citizens of Key West did many years ago—isolated. No matter which way you turn, you eventually come to the end of your limited community, and what you have is not enough. You can either sit on the beach and dream about what could be or commence working on building personal and professional connections to broaden your scope and improve the depth of relationships with those individuals who will assist you in becoming a successful entrepreneur. Now is the time to start building bridges and connecting yourself with the greater business community. Networking is about building bridges not about collecting tolls.
For an entrepreneur, networking is finding and establishing relationships with business professionals with whom you can exchange information, ideas, and products; more importantly, you can claim these networks as trusted business colleagues. Be ready to use the networks you already have. Be intentional in seeking out established business professionals in your local chamber of commerce or at SCORE (see the following). Position yourself to contribute to the larger community. Be active in expanding your sphere of influence.
A good way to get started is to begin brainstorming a list of people who can help you along the entrepreneurial path. These potential trusted advisors will be beneficial to you as you develop your idea and start your business. In these early stages, you will encounter challenges and obstacles in many areas. Having a “go-to” list of dependable consultants can help you find solutions, reduce mistakes, and hasten your success in your new business. Anyone can be on that list—don’t exclude anyone, no matter how unlikely it seems that you will need their expertise. People you already know have knowledge and skills. They can be a valuable resource.
On the other hand, you too have knowledge and skills. You too can be a valuable resource. That is why you are starting your own business or developing a new product. Begin connecting with people who need you, perhaps even people who need you more than you currently need them. Present yourself as the expert, not the salesperson to be avoided at all costs. Become known as the “go-to” person: the person others will seek out and put on their list of experts. When you become respected as the professional expert, success will follow.
We begin developing personal connections—relationships with other people—early in our lives. (Later in life, these connections become our networks.) Typically, the first social groups we join are family, neighbors, and schoolmates. Playing with siblings and cousins, and learning to meet new friends in the neighborhood and at elementary school help us develop the social skills that we will need later in life when we meet and work with others in the professional world. As you enter adulthood, social connections that you establish and nurture become more complex and have longer-lasting benefits. You may establish some of those lifelong personal connections during your college years or perhaps in your first “big” job.
### Campus Connections
During your college years, you will have many opportunities to make connections with new people. Taking advantage of these opportunities allows you to perfect your skills in initiating and developing new and even lifetime connections. You can establish new friendships with roommates, classmates, social club members, special interest groups, academic organizations, competitive and intramural athletic teams, and many others. All of these groups not only encourage new social relationships but also foster opportunities for developing and improving leadership skills.
Chances to meet and work with new people abound on college campuses. The diagram in shows some of the many social networking opportunities on college campuses.
Your college or university is usually where you make the transition from student to professional. One method of learning to become a professional is through membership and leadership roles in academic or professional clubs. Leadership positions usually rotate annually. Academic clubs are formed around disciplines, departments, or professions. Professors, alumni, or industry professionals serve as sponsors and may provide connections to other industry professionals. Members learn the value of being active participants, discussing relevant topics. Fundraising or other special activities provide opportunities for developing leadership and organizational skills. Friendships and personal connections made in an academic club may become lifelong professional connections.
Honor societies are another type of academically oriented group, established to recognize the outstanding academic performance of students who have achieved a specific grade point average. Membership in an honor society brings with it the prestige of membership, opportunities for leadership roles, and access to professionals in many industries. Some honor societies offer scholarships for future studies in graduate school or study-abroad programs, which introduce members to students from other universities and countries with similar backgrounds and interests. Some honor societies open doors to conference memberships and presentations, and important access to other industry professionals.
Another type of collegiate organization is the special interest group. These groups may focus on social causes, promote and advance interests in the arts or other hobbies, or encourage participation in political, religious, or athletic events. Students from all disciplines and social backgrounds join special interest clubs. With such a broad spectrum of members, you have the opportunity to learn from many people from multiple backgrounds, expand your self-development, learn how to work with people who have different viewpoints, and potentially establish firm personal relationships.
Some clubs offer members the opportunity to perform or showcase their talent in a more relaxed and supportive atmosphere, or are centered around a personal interest. For example, a drama club for students not majoring in theater can offer a forum for participating in musicals and plays without the rigor demanded by the more structured academic program. Other groups that bring in nonacademic members include choral groups, visual arts gatherings, astronomy clubs, and gaming societies. These groups provide opportunities for the maturation and perfection of the interpersonal skills you need for success in the professional world. You can develop key interpersonal attributes among friends and colleagues while enjoying a common activity or interest.
Social clubs—sororities for women and fraternities for men—provide other opportunities to expand your circle of friends, as these organizations focus on social activities. Although many social clubs concentrate strictly on “get-together” activities, you can learn and perfect acceptable public-protocol behaviors at formal events as well as mastering skills in organizational negotiations and compromise. A few colleges and universities are beginning to formalize clubs for online students, including access to and membership in campus-based Greek life. One of the first online Greek clubs is Theta Omega Gamma, founded in 2009 at the Florida Institute of Technology.
College groups have high turnover rates in their membership and involvement. This can make it easier for you to learn and perfect the skills necessary for establishing social and professional connections through constant repetition of introducing yourself to new people, learning their backgrounds, and describing your own. Learning how to introduce yourself and become acquainted with strangers is a soft skill that you can learn more easily early in life than in later years, and knowing how to develop a personal relationship with others will benefit you for many years to come. One unintended benefit is that mistakes can be quickly forgotten. If you make a social blunder one semester, many in the group will soon forget your faux pas, and new members will never be aware of it.
Perhaps the largest university club is one whose membership extends beyond graduation—the alumni association. Membership in alumni associations is higher among students who earned an undergraduate degree than among those with a graduate degree. Furthermore, members of the alumni association are more dedicated and loyal to their alma mater than nonmembers. Because of their commitment to past and current students, members of alumni associations have an automatic connection to other members. Loyalty is an important characteristic of active members of the alumni association, so bonding with them links you to established professionals who can help you in your new business. One way to connect with alumni is through LinkedIn, a social network of business professionals.
The campus setting—either traditional or virtual—is one of the earliest multifaceted environments to which you as a young adult will belong. Learning how to maneuver on the college campus and within the parameters of university culture prepares you for your future environment.
Nontraditional and virtual students also can benefit from their college campus experience. These students come from a variety of industry and professional backgrounds, and they are exposed to diverse operational methods and strategies during class activities or assignments. Furthermore, becoming personally acquainted with project team members opens opportunities for building connections that might be professionally beneficial in the future.
Institutions of higher learning have become fundamentally self-contained communities. Each one functions almost like a small city, with students mingling throughout the day with people at all stages of life, from multiple backgrounds, and in various roles. It is a great place to start building a foundation of personal contacts or enhancing your current portfolio of contacts before entering a competitive world.
### Local Organizations
Every community includes groups of individuals who have something in common. People group themselves together around shared beliefs, objectives, responsibilities, goals, or situations. Joining a local organization can place thousands of potential connections within your reach. Before seeking acceptance into a specific group, consider the type of group that fits your own personal and professional goals, and what you can contribute to the group’s continuity.
An open group has a fluid membership; people may freely join or separate at any given time. Open groups tend to be informal, operate around a loose structure, and frequently focus on a personal or social cause. Open-membership groups include activities-oriented groups such as bridge clubs, scrapbooking groups, or photography clubs. Some open groups, such as Mothers Against Drunk Drivers (MADD) or People for the Ethical Treatment of Animals (PETA), focus on a specific topic or cause.
A closed group typically has either formal or informal criteria that you must meet before you can become a full member. Some organizations require sponsorship by a current member. Examples of closed groups include religious organizations, homeowners’ or renters’ associations, community performing arts groups, or sports groups.
Some community groups have features common to both open and closed groups. These hybrid groups have barriers or criteria that you must meet prior to joining, but those barriers are low, and prospective members can easily meet the criteria. Frequently, low barriers are an administrative feature to distinguish between participants who are serious about the group’s activities and those who have an impulsive interest with no long-term commitment to the cause. shows the differences among open, closed, and hybrid groups.
Groups that have a formal legal structure, an oversight board, and a professional management staff are more effective than those groups that are impulsively formed around a good idea. Professionally organized groups have skilled employees who set long-term goals and handle day-to-day activities. With the increase in structure and management, costs increase. To cover employee wages and benefits along with operational expenses of the group, many professional groups have membership dues and revenue-generating activities that members are expected to participate in. Some professional groups are self-supporting, whereas others are joint efforts among local and regional governments, universities, and the private sector.
One of the most successful private-public partnerships is the chamber of commerce arrangement. Local business entities establish a chamber of commerce organization to enhance the local community while expanding their own businesses. In some instances, the local government provides some type of monetary support for the chamber, but the chamber is neither an agency nor a function of government. For major community events, business members of a local chamber of commerce may provide their employees as volunteer staff who use their professional skills to organize and plan the event’s activities. The community benefits, because a professionally managed event is held with minimal labor costs. The company receives publicity and exposure to potential customers within the local community at nominal costs. A close working partnership between the local chamber of commerce and government can produce outcomes that are mutually beneficial to local businesses and community citizens.
Trade associations are formed within specific industries and concentrate their efforts on issues and topics particular to one trade, profession, or philosophy. Functional trade associations include auto mechanics (Automotive Maintenance Repair Association, amra.org), architects (the Association of Licensed Architects, https://www.alatoday.org/), and marketing professionals (American Association of Advertising Agencies, aaaa.org). Education groups, such as the Association of American Educators, focus on defining competencies and qualifications for teachers and publicly advocating for standards and regulations that affect teachers. Specialized groups also form associations, such as the National Association for the Education of Young Children. Entrepreneurs who are looking for a franchise opportunity might consider an association that caters to franchisees, such as the International Franchise Association (franchise.org) or the American Association of Franchisees and Dealers (aafd.org). Companies interested in “going green” can join the Green Business Network at Green America (greenamerica.org/gbn/). The American Retirement Association (usaretirement.org) or AARP (formerly the American Association of Retired Persons, aarp.org) target retired individuals. Whatever the profession or industry, a trade association is certain to emerge to provide standards, training, support, and services to industry professionals and to be the industry’s collective voice to legislatures and government officials in establishing regulations, laws, and licensure qualifications.
Businesses need a steady supply of new customers to replace former customers who no longer have an active relationship with them. The main purpose of is to help entrepreneurs gain new customers. These groups come in all kinds and sizes. Business Network International (BNI, www.bni.com) is dedicated to providing qualified referrals to members. BNI limits its membership to only one person per industry or profession. Members are expected to exchange contact information regarding a qualified potential customer.
Meetup (meetup.com) is a platform where people can meet others with similar wants and interests in an electronic or face-to-face engagement. Meetup’s groups are social or professional, business or entertainment, or relational or transactional. Anyone can start a Meetup group if one doesn’t already exist for their needs or interests. Each group’s founders or members make the rules.
Whether a new entrepreneur needs a lot of support and guidance during the early stages of firm development, or a mature organization needs new potential customers, local organizations can provide an avenue to close connections and professionals who are committed to the local community and its businesses and people. As with all decisions, you must assess each opportunity in terms of the cost of membership and involvement in relation to the benefits you will receive over time.
### Business Incubators
Business incubators are normally associations established by a consortium of local organizations such as a chamber of commerce, local banks and other traditional businesses, and universities to provide complementary support to startup businesses and those in the early stages of development. Services provided may include office space for rent at nominal charges; simple business expertise in accounting, legal matters, and marketing; and management support. Some incubators function as independent organizations, each with its own board of directors, whereas others may be stand-alone units of a university program. One of the best byproducts of being associated with business incubators is the communal contact with all the members’ connections. Business accelerators function much like business incubators. A key difference between incubators and accelerators is equity investment. Business accelerators usually make some type of equity investment in their members’ companies. Because the financial commitment raises the stakes for accelerators, these organizations carefully screen their prospects and select only those businesses that have a reasonable chance of financial success. An entrepreneur who joins an accelerator can expect to receive a lot of support in exchange for a commitment to the organization and a share of the profits. illustrates the differences between business incubators and accelerators.
### Service Corps of Retired Executives (SCORE)
The Service Corps of Retired Executives (SCORE) is a nonprofit organization based in Herndon, Virginia. SCORE partners with the federal Small Business Administration (SBA) and with retired executives from private businesses to offer education, training, and mentoring to small business owners. According to the SCORE website, it is the largest network of volunteer and expert business mentors, with around 350 chapters. Small business owners can attend a workshop or view training videos available on the website. Templates of financial statements and business and marketing plans are also available on the website. Perhaps the most valuable service SCORE offers is a one-to-one mentoring program that can align a mentor with the specific skills that the business owner needs the most.
### Government Agencies
Economic stability over the long term depends on a continual supply of new companies and organizations. A business entity will close when the owner decides to cease operations or achieves the goals of starting the business. Sometimes a business is unable to sustain operations or is forced into closure by regulatory agencies or licensing requirements. Regardless of why businesses close, new businesses must continually arise to replace them and grow the economy. Governments at the federal, state, county, and municipal levels have established agencies and programs to encourage new business development, support new businesses in the early years of operations, and help young businesses mature to the point of self-sustainment. These include the SBA, Small Business Development Centers, Women’s Business Centers, and HUBZones. illustrates some of the government agencies that assist small businesses.
### Small Business Administration
One of the most popular agencies that helps businesses in the startup and early operations stages is the SBA. The SBA was established as an agency of the US federal government in 1953. In 2012, the SBA merged with the divisions of the Department of Commerce, the Office of the US Trade Representative, the Export-Import Bank, the Overseas Private Investment Corporation, and the US Trade and Development Agency. At that time, the leadership of the SBA became a cabinet-level position.
The purpose of the SBA at the macro level is to assist and safeguard small businesses, protect and defend a competitive environment, and fortify the national economy. At the micro level, the SBA helps individuals “start, build, and grow” their businesses and companies through direct counseling, educational seminars and webinars, and public-private partnerships with institutions of higher education and foundations with similar goals and objectives.
Some of the most important activities of the SBA revolve around finances for small businesses. The SBA provides education in finance and money management, and guarantees loans through private lenders for capital, inventory, and startup costs. A business must meet the SBA’s qualifications for funding, but the application and approval of the loan is handled at the local level by officers of a local bank or other SBA-approved financial vendor.
Once a business is established and operating, ongoing activities are necessary to generate the cash flow to sustain the business. The SBA supports the ongoing operations of small businesses by being the liaison between small businesses and the federal government on bids and contracts. For fiscal year 2017, the federal government purchased a total of $105 billionSmall Business Administration. www.sba.gov in products from small businesses.Robb Wong. “New SBA FY17 Scorecard Shows Federal Agencies Award Record Breaking $105 Billion in Small Business Contracts.” However, becoming a vendor to the US government is not like selling to a private business or the general public. Free education and training materials are available from the SBA to introduce new businesses to the types of products that the government buys, the government’s purchasing process for products and services, and the technical terms the government uses.
The SBA helps small businesses to maneuver through government purchasing processes through education, training, and support. Furthermore, the SBA has programs and funding operations that help economically disadvantaged individuals. These programs are self-contained within the SBA. Public-private partnerships or partnerships with universities or with other nonprofit organizations are also possible.
### Small Business Development Centers (SBDCs)
Over one thousand SBDCs are funded through state grants with matching funds from the SBA.America’s SBDC (Small Business Development Centers). n.d. https://americassbdc.org Most SBDCs are located on the campuses of local colleges or universities. Others are located in entrepreneurial hubs or are connected with business incubator programs.US Small Business Administration. “Find Local Assistance.” n.d. https://www.sba.gov/sbdc The coordinator of a local SBDC may be an employee of either the university or the organization that provides the office space. SBDC coordinators provide advice and information to small business owners at no charge because their fees and salaries are covered by the grants. Mostly, the coordinators provide information, steer business owners to other sources of information, and provide a context for making operational or strategic decisions.
### Office of Women’s Business Ownership
The Women’s Business Center (WBC) is a program funded in part or in whole by the SBA to focus specifically on helping women start and operate their own businesses.US Small Business Administration. “Office of Women’s Business Ownership.” n.d. https://www.sba.gov/offices/headquarters/wbo Women business owners face the same challenges that men encounter, but women normally must add the role of business owner to their list of other personal responsibilities. Also, women have more limitations in access to capital and other financial resources than men typically experience. The WBC can provide support and access to resources that are unique to women. The WBC is operated through independent and educational centers in most states.
### Veteran’s Business Outreach Center (VBOC)
The SBA operates twenty VBOCs that focus on helping veterans and their families start and operate a new business.US Small Business Administration. “Office of Veteran’s Business Development.” n.d. https://www.sba.gov/offices/headquarters/ovbd A popular program of the VBOC is the Boots to Business program, which assists veterans making the transition from the military to the owner-operator role. Another program dedicated to veterans is the Service-Disabled Veteran-Owned (SDVO) Small Business Concern (SBC) program, administered through the Office of Small and Disadvantaged Business Utilization. To qualify for the SDVO SBC program, the disabled veteran must directly own and control, at minimum, 51 percent of the business and have input into the day-to-day operations as well as a long-term strategy. Requirements vary according to the legal structure that is chosen. Title 13, Section 125 of the electronic Code of Federal Regulations lists other requirements and restrictions to be recognized as an SDVO SBC.Electronic Code of Federal Regulations. n.d. https://www.ecfr.gov/cgi-bin/ECFR?page=browse
### HUBZone
A HUBZone is a geographic location that has historically experienced low employment.US Small Business Administration. “Office of the HUBZone Program.” n.d. https://www.sba.gov/offices/headquarters/ohp Many are also low-income areas because of limited transportation or educational opportunities. Through the HUBZone program, the SBA certifies and supports HUBZone businesses in acquiring government contracts and buying opportunities. Businesses that qualify may receive preferences in pricing. Qualifications for HUBZone designation are explained on the SBA/Government Contracting webpage. As of 2018, the federal government’s goal is to award 3 percent of all federal contracting dollars to certified HUBZone business.
### Summary
Entrepreneurial networking is interacting with other people who have a common interest that eventually leads to the exchange of goods and services for payment. You must be comfortable approaching, talking to, and working with other individuals in order to build the circle of associates, colleagues, and professionals that you will need to start and operate your business. Likewise, you must be willing to offer your expert knowledge and professional skills to others. A good networker supports others in the community through sharing information and passing along personal introductions to expand everyone’s networks.
People do business with those they know and trust. Connecting with people in face-to-face meetings through group membership is valuable but so is the power of social media avenues dedicated to professional connections, exchange of information, and support, such as LinkedIn. Networking is not easy or free. Some of the costs other than money include time, fear, and dedication. Because entrepreneurs are willing to invest the money, spend the time, take the risks, and stay with it, economic success for communities and individuals is possible.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Association of Chamber of Commerce Executives: acce.org
BNI: Business Network International: https://www.bni.com
HUBZone: https://www.sba.gov/offices/headquarters/ohp
Service Corps of Retired Executives (SCORE): https://www.score.org
Small Business Administration: https://www.sba.gov
Small Business Development Centers: https://www.sba.gov/sbdc
Women’s Business Centers: https://www.sba.gov/offices/headquarters/wbo
Veteran’s Business Outreach Centers (VBOC): https://www.sba.gov/offices/headquarters/ovbd |
# Building Networks and Foundations
## Building the Entrepreneurial Dream Team
### Learning Objectives
By the end of this section, you will be able to:
1. Understand key resource needs for entrepreneurial ventures: accountant, attorney, banker/financial institution, insurance agent, and industry expert
2. Understand the value of developing a cross-functional team
Over the weekend of July 4, 1970, Casey Kasem started , a radio broadcast that played songs listed in magazine’s top 100 singles. What started as a simple compilation of popular songs that were played in ascending order of popularity ended thirty-nine years later on the July 4th weekend of 2009. When Kasem signed off for the final time, he gave credit to those with whom he worked. “Success doesn’t happen in a vacuum. You’re only as good as the people you work with and the people you work for. I’ve been lucky. I’ve worked for and with the very best.”Cord Himmelstein. “Casey Kasem’s Final Sign-Off.”
Jay Samit, a vice chairman at Deloitte Consulting LLP, specializes in exponential technologies, a revolutionary method of creating and manipulating information and data for learning, planning, and communicating. Working with multiple clients who each have their own unique limitations and face a wide variety of challenges, Samit and his colleagues at Deloitte devise tailored solutions that resolve each client’s problems while overcoming each client’s constraints.
Two professionals, two eras, two industries, and two vastly different technologies, but one concept: Entrepreneurial success is sustained by those around you. The concept that teamwork leads to individual success is evident in many other areas. All the great National Football League quarterbacks will tell you that they depend as much on their linemen as on their receivers. Pitchers in Major League Baseball need a very close relationship with their catchers, but the fielders are the ones who make most of the outs in the game and can make a pitcher look very good. Surgeons need nurses and anesthesiologists, police officers need good partners as well as dispatchers, ground troops need air support, and airline pilots need fantastic ground crews and maintenance crews, and so on.
In reality, no one works alone. As an entrepreneur, you have the luxury of searching, soliciting, and selecting your own team (). Entrepreneurial success depends on who is included on that team, and who is excluded from the team. In this section, we discuss advisors and cross-disciplinary teams.
### Advisor: Accountant
One of the most important decisions that a business owner will make before beginning a new venture is hiring a good accountant (). Businesses and their owners must be in sound financial health, or the company risks being closed because of financial difficulties. Just as doctors are trained to diagnose and treat health issues and symptoms, accountants are trained to recognize and treat symptoms and issues associated with the financial health of a company. And just as doctors can determine the health of an infant before birth, accountants can determine the likely financial health of a business before it begins.
In the early stages of planning a business, the entrepreneur’s personal financial history is the only financial picture that investors, creditors, vendors, or lenders can review. Therefore, it is essential to have a professionally prepared tax return in hand before you approach anyone about opening a new business. Having a professional accountant prepare and file personal tax returns establishes credibility and confidence in an aspiring business owner’s financial decision making. Furthermore, when a business owner is willing to let someone else see all of their finances, it indicates to other professionals that the owner is willing to expose a very personal and sensitive realm—money management.
A highly skilled accountant will help any small business owner set up proper procedures that track cash transactions and record financial activities. Accountants assist in creating a pro forma, a financial statement that shows how much and where monies will be collected and spent in the early stages of business creation. For an income statement, many of the figures used in a pro forma are hypothetical, a mere guess, but still are loosely based on historical industry or market data. Documenting debt service (explained in the following text) and other fixed expenses can be a simple task. However, projecting future sales with variable costs can clearly become complicated. Many times, approval for a loan or a building lease will depend on reasonable and sound projections of future sales and expenses. Too often, entrepreneurs overestimate income and underestimate expenses. An accountant frequently brings a reality check to the entrepreneur’s wishful thinking and keeps income and expense projections credible.
Tax payments, especially payroll taxes, must be made on time to avoid large, costly penalties. Annual income tax for both a business—whether a sole proprietor, a partnership, or a corporation—and the individuals involved can become very complicated. Tax laws constantly change, but a good accountant will know how these changes will affect the company and how the company should respond. Often, the accountant’s fees are lower than any penalty and fine assessed by tax authorities.
Besides tracking tax obligations, accountants can help identify trends within the financial picture. Many new business owners focus on profitability of the company and not cash flow. However, cash flow is far more important to the existence of a new company. Cash flow includes money collected by the business through revenue and funding versus money disbursed by the business through expenses. In other words, cash flow equals money in minus money out.
It’s true that profitability can be affected by depreciation of assets, and an accountant can apply different depreciation rules to reduce profits and tax liabilities. However, the business must maintain positive cash flows to pay its weekly or monthly obligations. Although today’s accounting software can easily generate cash flow reports, the expense of paying a professional pales in comparison to the money and time a business owner would spend in purchasing an accounting package, maintaining yearly upgrades, and learning how to run reports.
When a small business needs to expand or make capital improvements, major repairs or improvements that add to the life of an asset by improving its longevity, increasing its value or productivity, or extending its usefulness, it may be necessary for the business to take out a loan. Banks expect and require the company to have a professional accounting service prepare and file federal and state tax returns. Without the impartial eye of a professional accountant reviewing the financial health of the company, lenders may consider the business to be high risk and therefore would be unlikely to offer any loans. Expansion may be delayed or halted because lenders want to know if the company has properly managed its existing business before they are willing to finance additional operations and larger financial transactions.
Bankers will want to see not only income statements, balance sheets, and tax returns, normally for the past three years, but also cash flow statements over the same time period. If the company is functioning as a sole proprietor, LLC, or S-corporation (see Business Structure Options: Legal, Tax, and Risk Issues), the bank may require all individuals with management authority or ownership to submit copies of both federal and state individual tax returns plus personal net worth statements. Any investments outside the entrepreneurial company will need to be disclosed as well. All of these requests from lending officers at the bank indicate that they are looking for something. An experienced accountant will be able to interpret their requests, create documents that provide the information they ask for, and advise the entrepreneur on how to address the bankers’ concerns.
Inventory management and debt service are other key financial areas where accountants can quickly identify problems that need attention and then offer advice to the entrepreneur. Inventory management consists of business operations that include managing the quantity of inventory units in stock, scheduling and cataloguing replacement inventory, organizing shelf location for unit storage, paying for inventory received, and processing, fulfilling, packaging, and shipping customer orders. Debt service is repayment of a loan, including principal and interest.
Some vendors will require the same professionally prepared financial documents as bank loan officers do. Creditworthiness, or a lender’s assessment of how reliable a company is in repaying a debt, is a valuable asset for a business. Being able to buy inventory on credit can greatly improve a company’s marketing and overall performance. However, creditors have a different concern about a company’s financial health. A vendor that sells inventory on credit may not be able to recoup a loss once the inventory is delivered to the new business. Banks can seize a building, equipment, land, and cash deposits, but creditors are not afforded that luxury. Therefore, creditors are skittish about releasing inventory to financially unstable businesses. Additionally, some businesses may owe inventory or personal property tax on inventory that is in stock.
### Advisor: Attorney
If hiring an attorney to keep you out of trouble is expensive, hiring one to get you out of trouble will be exorbitant. Getting an attorney involved with a business in the very early stages, even in the idea development stage, can be a very good investment that will save a lot of legal expenses and protect the company’s income. Areas of expertise and the ability to practice in certain areas of the law will vary among attorneys. Entrepreneurs must first determine what legal issue they need help with. Then, they would determine the cost of getting legal help as well as the cost of not getting legal help.
Hiring an attorney can be similar to hiring someone to do construction work on your home. Hiring a general contractor who can do most of the work will be cheaper than hiring a general contractor who subcontracts everything out to specialists. Some attorneys are generalists, with a practice that spans many areas in which the entrepreneur or small business owner will need help. Other attorneys are specialists who limit their practice to a few specific areas of expertise and refer clients with needs outside those areas to other specialists. Generalists are frequently less expensive than specialists, who charge higher fees for their in-depth knowledge of particular areas. In many situations, the entrepreneur or small business owner will not need a high level of legal expertise. When in doubt about hiring an attorney, the new entrepreneur can visit with a few members of their established network to get their input before making a decision.
One of the important questions to ask up front is how the attorney bills for services. Some may charge a flat rate for specific services, whereas others will bill at an hourly rate. Attorneys may add any additional costs and expenses to the client’s bill. For example, when filing papers at the county courthouse to register a new company, the attorney may charge for copying, tolls to drive to the courthouse, parking, and mailing fees in addition to completing the actual registration papers. Knowing how the attorney calculates the bill—what fees will be charged and what additional costs will be added—is very important in deciding which attorney to hire.
Attorneys may be associates or partners of a firm. A large firm may have several equity partners and junior associates who are supported by paralegals. Larger firms offer a wider range of expertise and support for your attorney, but that extra help and larger resource pool are available at a higher price. On the other hand, an attorney who is in a stand-alone or small boutique firm may be less expensive but has fewer resources to tap into if necessary and may be unavailable for extended periods of time when actively working for other clients.
An attorney in your specific geographic area or community could be a valuable source of uncommon knowledge. Another consideration to think about when selecting an attorney is the location of their office. Office location may seem trivial, but attorneys in large office buildings probably have higher fees because they have higher office expenses. However, they are more likely to know other business professionals in their building, and those connections may be helpful at some point. Moreover, attorneys are often keenly aware of major developments in markets, such as real estate transactions and development, new roadways, and regulations.
Law practices can be divided into broad categories and specific areas. If you look at the landing pages of many of the country’s prominent law schools, you will find only one commonality among all of them—they include specialized areas in their programs. Five broad categories of law that are relevant to the entrepreneur are administrative, civil, corporate, criminal, and family law. For the entrepreneur, corporate and family law are probably the most important, because entrepreneurs may have family investors and personal assets at risk. An attorney who is skilled in family law would know how to protect the entrepreneur as well as family members if the startup business fails. If you are considering starting a business in a regulated profession, such as electrical repair, HVAC, or childcare, you will want an attorney familiar with the state’s administrative code. Hopefully, a startup entrepreneur will not need a criminal defense lawyer. One of the first areas where you should consult an attorney is in determining the type of business structure. Any business structure has both legal and tax ramifications. A business attorney should help the entrepreneur select the legal structure that is best for the business, the industry, and the entrepreneur. Each legal structure—sole proprietorship, partnership, or corporation—has its advantages and disadvantages (see Business Structure Options: Legal, Tax, and Risk Issues). The attorney, in collaboration with the accountant, should help advise the entrepreneur about which legal form the business should take and why, not only for tax purposes but also for liability protection for the entrepreneur’s personal assets and for ease of operations.
Other issues may arise during the startup stage that would require legal advice. These include branding, patents, trademark registration, and contracts. Will the entrepreneur be leasing a space or purchasing a stand-alone building? If leasing, who is responsible for the safety and well-being of employees and for protection of the equipment and inventory? In the excitement of getting started and making money, entrepreneurs may consider such questions to be unimportant. However, discussing these issues and making decisions before an adverse incident occurs can save the new business a lot of time and money. A good attorney will help keep the focus on important issues before they become catastrophic ones.
Another volatile area for new businesses involves employees and employment law. New business owners may also be new to management. Ignorance of employment laws can be very costly, especially if a disgruntled ex-employee seeks protection from state and federal agencies. Formulating company and employee policies is very important. Having an attorney help develop and use appropriate phrases will be a blessing that you will recognize long after the attorney has cashed your check.
Attorneys are professionally trained and educated to argue for their clients and to destroy the arguments of their opponents. Having a good attorney who confronts and debunks the naive beliefs and behaviors of the nascent entrepreneur can help that entrepreneur mature into a professional. As a new entrepreneur, you may not find it easy to leave behind the “employee” mentality and enter the “owner” mindset. The entrepreneurial lifestyle, responsibility, position, status, authority, and so on are foreign to the employee population. Therefore, you may need to undergo a trial by fire. A good attorney, like a good marine drill sergeant, has to destroy the old mindset and develop a new mindset within the new entrepreneur: It’s all mine.
Although a good attorney is necessary to many aspects of a business, the entrepreneur also needs to set limits and not allow the attorney to tread into the owner’s domain. Attorneys should focus on legal issues, not operational, strategic, or—under any circumstances—financial issues. Attorneys may be tempted to go beyond their realm to help out a client, but in reality, they should stay within the areas of law and regulation, and out of operational or strategic decisions. A good attorney will provide information, insight, and recommendations for managing risks, but will not bully a client by insisting on eliminating risks. An entrepreneur should always be ready to terminate the relationship with anyone, including an attorney, who seems to be interfering in areas beyond their domain.
Hourly rates for experienced accountants and attorneys can be frightening. Even if you readily acknowledge that the information and guidance provided by these two professionals is valuable, having the funds to pay for their work in the pre-startup stage of the business can be impractical. Successful entrepreneurs are known for solving problems, and at the very beginning of your own business, you can start solving your own business problems. The question is: How can I get professional advice at discounted rates?
Often, young lawyers and accountants who have just completed their education or received their license to practice will have very few clients. Likewise, those individuals who have been junior partners in larger firms and are branching out to start their own business will have limited clients. Those two scenarios are ripe for seeking discounted billing rates. Both the entrepreneur and the budding professional have a common need but few, if any, paying customers. Therefore, other business professionals or small business owners whose businesses are in the fledgling stage may be willing to offer special rates or payment terms.
### Advisor: Banker or Financial Institution
All banks are not the same. Entrepreneurs need to select a bank or financial institution that can meet their current and future needs (). Local banks that target a small geographic area are an excellent choice for small, locally centered businesses. Officers of the local bank may personally know local business owners, employees of the local businesses, and other key members of the local community. When a small business has a financial need, officers of the company may make decisions based on the reputation of the entrepreneur and the business. Sometimes a local bank will make loans and provide financial assistance with less scrutiny than an entrepreneur would face at a larger bank. For the small entrepreneurial business, banking is personal. Bankers like to see businesses in their backyard succeed.
Large banks with multiple branches in numerous cities, states, or countries may be a better choice for banking services if your company will have broad geographic and financial needs. With employees, customers, and vendors scattered over a large market, a large company is better off having a bank that mirrors that broad reach. For example, if an entrepreneur starts a business in Hutchinson, Kansas, and banks with a local bank in Hutchinson, that intimate relationship between the business and its employees in Hutchinson probably works great. However, as the business grows into the Wichita and Kansas City markets, its banking services should expand too. Likewise, expanding a business across state lines should initiate a thorough review of banking arrangements to ensure that banking services will match the needs of the expanded business.
Large companies with multiple branches or employees over a larger area have bigger demands in banking products and services. They will be better off with larger banks that can respond faster and more effectively to market shifts or individual needs.
### Advisor: Insurance Agent
Having insurance is a necessity for every business. Entrepreneurs, however, should not overlook the advantages of an insurance agent’s knowledge and industry insight. Insurance agents ought to be in the entrepreneur’s portfolio of industry professionals. Furthermore, insurance agents likely have other clients who have been successful business owners for many years and may well introduce a new entrepreneur to seasoned veterans.
The insurance industry is a trove of data regarding almost every aspect of any industry or profession. All of that information is at the fingertips of your insurance agent. Agents can obtain information about any industry by running liability reports according to numbers compiled by the North American Industry Classification System (NAICS), a standard used by US federal agencies to collect, analyze, and report statistical information about businessesExecutive Office of the President Office of Management and Budget. ; the government provides a searchable database related to the codes as well (https://www.census.gov/eos/www/naics/). Every business in the United States is assigned a NAICS number, and insurance premiums are determined by the risk associated within each classification. You can obtain your NAICS number from your federal income tax return form 1120S or 1040 Schedule C. Knowing your business classification and the risks associated with it, your agent can assist you in reclassifying your business and lowering your insurance premiums, a potentially big financial savings.
### Advisor: Industry Expert
Studies show industry expertise and skills are vital to successfully launching and operating one’s own business. However, a lack of industry skills is not an impenetrable barrier to entrepreneurship. In fact, about 15 percent to 20 percent of successful entrepreneurs have no industry experience or have limited knowledge about an industry before entering entrepreneurship.Dawn R. DeTienne and Gaylen N. Chandler. “The Role of Gender in Opportunity Identification.” In the service professions, the entrepreneur’s lack of skill is hardly noticeable, but technical industries have a higher success rate for entrepreneurs who already possess the skills needed in the industry.Paul D. Reynolds and Richard T. Curtin. “Business Creation in the United States: Panel Study of Entrepreneurial Dynamics II Initial Assessment.” Even if you do have those skills, you are more likely to succeed if you select industry experts who know the ins and outs of your profession ().Jeen Wei Ong and Hishamuddin Bin Ismail. “Human Capitals Make Entrepreneur More Entrepreneurial? An Empirical Data from Small and Medium Enterprises in Malaysia.”
With the industry professional doing the work, the new entrepreneur can focus on the business aspects of the operation while gaining industry experience and insight through hands-on exposure. As many first-time entrepreneurs find out in their first year, they will spend less time on the technical aspects of working in the business and more time managing and working on the business itself. Good collaboration between a technician and an entrepreneur increases the chances of long-term success.
As you begin searching for and interviewing professional advisors such as attorneys, accountants, or industry experts to make your team (), you should follow a few fundamental principles. First and most important, you—the business owner—are the decision maker. Business owners, not members of the advisory team, reap the benefits of good decisions and bear the cost of poor decisions. Advisors inform, explain options and risks, share knowledge about others with similar situations and their outcomes, and make recommendations. An advisor’s role is neither to make decisions nor to “sell” one particular viewpoint. Second, expectations and fees should be discussed before any actual work is done. Often though, a brief visit with a professional may be conducted at no charge so that each party can determine what is needed, whether the professional has the time and skills to meet the client’s needs, and whether the client can afford the fees.
Another consideration is that all professionals have limitations. Licensed professionals such as attorneys and accountants are experts in their respective fields, but they are not necessarily experts in general business operations or strategy. Industry experts may be very knowledgeable in many aspects of the business, but they too have boundaries. Last, shopping for experts to advise you on crucial matters should be based mostly on competence and compatibility, not strictly on fees. Securing the services of a professional is a serious matter and should be treated as such. Yet, it is a business arrangement subject to traditional market factors such as service quality, affordability, accessibility, and change over time.
### Building a Cross-Disciplinary Team
Rarely does an entrepreneurial venture start or function due to the effort of only one person. “Birds of a feather flock together” may be a popular saying, but it is a very poor organizational strategy for building a team to start a successful business. Diversity is a key feature of successfully managed organizations. Compatibility and collaboration are also important, as each employee is duty-bound to work with, support, and assist other employees when necessary. Having staff with complementary skills and who get along improves the likelihood of success for a new business.
A new restaurant provides a great example of how employees with assorted talents, expertise, and responsibilities are assembled to make a bustling organization profitable. For a new owner, the first hire is a manager. Hiring a good manager with experience means a larger payroll expense but produces better financial dividends over the long term. A good manager oversees all staff as well as all operational functions such as scheduling, buying, pricing, marketing, health code compliance, and business support functions. Perhaps the second key hire is the chef, who is responsible for creating the menu, distinguishing the restaurant from its competitors, and creating repeat customers who want high-quality, tasteful meals.
Front-house employees—the hosts/hostesses, servers, and bussers—play critical roles as the faces and voices of a restaurant. The first experience in a restaurant will leave a lasting impression, so those at the front are obliged to appear and act professional at all times. Servers, who have the most direct contact with customers, are the sales force of the business and the liaison with the chef. Servers’ incomes depend on tips and turning tables, so it is essential for them to have tables cleared quickly and properly prepared for the next group. Servers, therefore, rely heavily on the bussers for those important tasks. In many restaurants, bussers receive a portion of the tips left for the servers, establishing a codependency between those two key positions.
Other positions in a restaurant are the bartender, dishwasher, custodian, payroll clerk, bookkeeper, and so on who must perform their duties accurately and efficiently. Subpar service in any one of these functions jeopardizes the viability of the restaurant. Every employee at each and every level is crucial, individually as well as collectively.
A very common organizational structure for a new venture is the flat organization, consisting of family members, friends, or professional colleagues who take responsibility for different tasks. The bond that brings this group together in launching this new business is unlikely to bring to the table all of the skills, talents, personalities, perspectives, and viewpoints that can lead to long-term success. Therefore, expanding the team’s human resources beyond the founding members who also manage the business is crucial. Although they do not have to become employees, access to them is as vital as having key personnel on your payroll.
An entrepreneur with a creative or big-picture mindset may not want to be bothered by day-to-day activities. If that is the case, then someone else in the business needs to be the analytical, linear-thinking individual who can process information and data to make sound decisions. After carefully considering a situation, collecting information, and studying all relevant facts affecting the business, a problem solver can recommend what action the entrepreneur should take, to whom should the tasks be assigned, when to implement the solution, and how much money to dedicate to solving the problem. In other words, the problem solver becomes a lead advisor to the entrepreneur, the manager. If the creative entrepreneur is one side of the coin, the problem solver is the other side. When those two minds work in tandem, good things can happen.
In contrast, an entrepreneur may be a functional expert or licensed professional who is obliged to perform the tasks personally—for example, an HVAC technician, dentist, or professional driver. In that case, a business manager is needed to run the business side of the company. Rules, regulations, and deadlines for business activities are beyond the functional entrepreneur’s scope of interest, but they must be complied with accurately and in a timely manner, or the business may close. Like the creative founder who hires a day-to-day manager, a performance entrepreneur needs to hire someone dedicated to business functions.
Successful business owners keep careful track of metrics. They categorize and track expenses and analyze profit margins, production performance improvements or declines, employee attendance, and other measurable activities. Accurately interpreting the financial and operational performance of the company by the numbers provides the management team the information they need to make sound decisions. Having someone on the team with an aptitude for working with numbers is critical. The numbers must speak for themselves. Personnel must remain inside the box when they draw conclusions from data.
However, solutions to problems are not always inside the box. Nonlinear thinking, also known as creativity, or “thinking outside of the box,” is sometimes needed to solve problems (see Creativity, Innovation, and Invention). Creativity is the source of many new ideas, products, and processes. With companies facing shorter times of competitive advantage, the entrepreneur needs to be constantly reinventing both self and company.
Over time, as the business grows, the entrepreneur makes the transition from owner-operator of a startup through the small- business phase to being the owner-operator of a mature business. Entrepreneurs eventually need to make the cognitive shift from working in a state of ambiguity to performing methodically in a predictable environment. A business model where routine, repetitiveness, and predictability occur is more appropriate for established businesses because it brings stability and confidence to employees, customers, lenders, and investors alike. Using time-tested business methods and learning from previous experiences, an entrepreneur may avoid pitfalls that could doom a startup company in the early stages.
Every organization—whether a for-profit, not-for-profit, political, religious, or social organization—relies on revenue. For-profit businesses rely on sales as their main source of revenue. Nonprofit organizations, such as community organizations, political groups, or religious groups, depend upon donations, contributions, gifts, and grants. Some nonprofits, such as youth sports leagues, community performing arts groups, or scouting groups, bring in cash through fundraisers or through ticket sales for events. Governments customarily depend on various taxes as sources of revenue. Some local governments receive funds through block grants from their state and federal governments. Having multiple revenue streams improves cash flow and increases the prospects of long-term success.
Recruiting the person who will generate income for the organization should be a high priority during the earliest stages, perhaps even before formal operations, of the business. For a salesperson, grant writer, donor coordinator, or any other title referring to an income-generating position, a startup organization may have to offer a sweeter-than-normal compensation package. If the person can produce revenue and generate cash flow in excess of their total cost of employment, then he or she is worth the costs of higher commissions and bigger bonuses.
Trying to improve short-term financial performance and increase profits by reducing a key employee’s compensation is likely to be detrimental over the long term. Losing a good sales rep may make the company vulnerable to losing very important and profitable customers. Failing to retain an effective grant writer could be the beginning of the demise, or at least a major downfall, for a nonprofit. Smart entrepreneurs pay their revenue producers appropriately, even if it means paying them more than the entrepreneurs pay themselves. As the old proverb states, “Never bite the hand that feeds you.”
### Summary
The idea that entrepreneurs are isolated loners and solo performers in the market, doing everything themselves, having absolute self-reliance, is a myth. Successful entrepreneurs quickly seek outside advice, rely on professionals in supporting areas, and are very good at establishing and maintaining personal relationships with key individuals. Perhaps their essential skill is their ability to identify, connect, and trust those individuals who can help them succeed in their personal entrepreneurial journey.
Whatever the entrepreneur can do best is what they should focus on doing. Other required tasks can be assigned to employees, service providers, or consultants. However, it is very important that the functions having a direct effect on customers and sales are performed proficiently, because that is what generates revenue for the company. Entrepreneurs must assess their own skillset and willingness to execute tasks, then identify employees and outside professionals to fill in any gaps.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Traits: Personality and Instinct
Cattell’s 16PF: https://openpsychometrics.org/tests/16PF.php
Kolbe Conation Index: http://www.kolbe.com
Typical Traits & Characteristics of Entrepreneurs:
https://smallbusiness.chron.com/typical-traits-characteristics-entrepreneurs-18325.html
Good Characteristics of an Entrepreneur:
https://smallbusiness.chron.com/good-characteristics-entrepreneur-18385.html
Attorney: State Bar Associations for attorneys in specific states:
New York: http://www.nysba.org
California: http://www.calbar.ca.gov
Texas: https://www.texasbar.com
Florida: https://www.floridabar.org
Accountant: National Association of State Boards of Accountancy (All fifty states Accountancy Boards are here with active links): https://www.nasba.org
Team Building Activities:
Three Teambuilding Exercises: http://www.entrepreneur.com/article/224212
Seven Team Building Ideas: http://www.entrepreneur.com/article/330594
Success Factors for Entrepreneurs:
Fifteen Entrepreneurial Key Success Factors:
http://www.entrepreneurshipinabox.com/852/entrepreneurial-success-factors/
Ten Qualities of Successful Entrepreneur:
https://www.under30ceo.com/10-qualities-of-a-successful-entrepreneur/ |
# Building Networks and Foundations
## Designing a Startup Operational Plan
### Learning Objectives
By the end of this section, you will be able to:
1. Identify the major areas of operations management (money, methods, machines, people, and leadership)
2. Develop a checklist of operational needs
From the start, every entrepreneur needs a business plan. Your business plan will keep you focused on the very early stages of the business, when it is easy to be distracted. A written business plan can help redirect you back to your original idea.
Business plans can be divided into four different types: operational, strategic, tactical, and contingency. In this section, the focus will be on the operational plan, the activities that an entrepreneur-owner absolutely needs to do. The core business activities and how those activities interface with customers are key to a business’s long-term success. Business plans are discussed in more detail in Business Model and Plan.
### Operational Business Plan
In the early 1900s, the mechanical engineer and management consultant Frederick Taylor introduced techniques into manufacturing industries. Since then, operational planning has evolved into a major component of successfully managing a business. An operational business plan details the what, when, who, how long, with what, and how much of company activities. This type of plan may list specific functions: What the activities of the business are, when those activities occur, who is responsible for various tasks, how long each activity will occur, what tools or equipment are required, and how much time and funding are needed.
Operational business plans should be flexible enough to allow for challenges that will occur. Some changes must be made on a daily or even an hourly basis. Other changes may be necessary only occasionally throughout the year. However, the purpose of the operational plan is to provide direction and guidance. This way, everyone in the business knows their specific assignments, who is responsible for individual tasks, and when major events occur.
Creating a table or chart in an Excel or other spreadsheet format can help your planning and scheduling. illustrates how work station scheduling for a grocery store can be displayed in an Excel spreadsheet. Functional activities, specific job tasks, work shifts, or work stations are listed as column headings. Hours of operations are listed as row headings. Employees’ names are entered into individual cells, showing who is assigned to each specific task or station. The table doesn’t show every position, but enough positions are listed to give you an idea of how to use the same format for your own business.
This type of schedule displays every functional position, the hours that each position has to be covered, and which employee is assigned to that function at what time. The manager can look at this schedule and know that each function has been assigned to an employee during a definite time period. If the work is not being completed, this type of schedule can help a manager make an informed decision about whether to hire more employees. Furthermore, if a problem occurs, the manager knows which employee(s) were working at that station when the problem occurred and can go directly to the employee(s) for information. When an employee is unable to fulfill a shift, the manager can change the schedule quickly to ensure that every task is being completed and every position is attended to.
Individual schedules and assigned work stations can also be displayed in a worksheet (). This allows the manager to schedule an employee for the proper number of hours per week and helps budget payroll expenses. Employees know where they are expected to be and when they are scheduled to take lunch or dinner breaks, and the manager knows where the employee should be. When operational questions arise, the manager knows who was scheduled to be at the site and can go directly to that employee.
Using tools such as spreadsheets for scheduling and managing day-to-day operations brings organization and stability to daily operations. Managers know that each task has a person assigned to it, and employees know where they should be or what they should be doing throughout the day. Complex businesses with many employees and many functions need more planning and structure. Businesses with very few employees can be less structured. However, a written plan should list most tasks and activities that need to be accomplished, who will do them, and when.
For tasks requiring attention on a monthly, quarterly, or annual basis, a simple organizer/calendar can be an excellent tool to help organize and remind you of what needs to be done and when. Tasks that you must complete on time throughout the year include payroll tax deposits and reports, insurance renewal applications, permits and license renewals, employee training and recertification requirements, and account billing to certain customers. A calendar also can help you schedule advertising and marketing activities. Some events occur regularly each year at the same time or within a known time frame. This can help remind you when to start your advertising and marketing campaigns.
You can plan for major maintenance and repair in advance or keep track of scheduled price increases, pay raises, adding or removing menu items, rearranging shelving for seasonal products, and major cleaning or maintenance activities.
As you start your business, you may need to make some adjustments to your operational plan. An entrepreneur might overlook factors that occur regularly. Or a new entrepreneur may have considered some factors to be minimally influential when in fact they may be significant. Entrepreneurs might give high priority to influences that never materialize. Once the business is open, customers and competitors may not behave as expected. Employees may have skill sets that were omitted from the written plan, or they may lack needed skill sets. Even a well-written operational plan will most likely need to be tweaked shortly after operations start. But if you formulate your plan correctly at the beginning, your functional operational plan should rarely need a complete overhaul.
### Control
One element that should be included in every operational plan is control. In an operational plan, a marketing plan, an employee development plan, or any other type of plan used in business, control refers to the measurement of outcomes and an evaluation of the activities that led to those outcomes. The control element of a business plans answers the questions, “Have we accomplished what we wanted to accomplish?” and “Have we met our goals within the time frame that we wanted?” Without measuring performance outcomes, the entrepreneur does not know if the business is operating as expected, worse than expected, or better than expected.
If a business performs better than expected, the entrepreneur must consider if the original expectations were too low or if some other factor contributed to the better-than-expected performance. On the other hand, if the business performed worse than expected, two reviews must be conducted. First, why are outcomes less than expected and what can be changed to improve performance? Second, how do lower outcomes affect the viability of the business?
Comparing actual outcomes with expected outcomes is a form of internal comparison called baselining. Baselining is important because the entrepreneur must conduct a self-evaluation on what the business has done versus what it can or should do. An entrepreneur can decide to adjust a business’s capability after conducting a baseline study. However, internal comparisons should be coupled with an external analysis, called benchmarking. By comparing your business with a close competitor’s or with the industry average, you can get a better idea of how your business fits into the larger market.
### Industry Benchmarks
If a basketball team scores sixty-eight points, do they win? If a baseball team scores four runs, do they win? If a soccer team scores five goals, have they lost? The answer to all three questions is simple: We need more information. Without knowing the other team’s score, we don’t know if a team has won or lost. There must be some other score for comparison; otherwise, the points scored are meaningless.
Similarly, businesses need to compare their individual performances with some external performance measurement. The comparison with an industry average, a leader within the industry, or a market segment is called benchmarking. Benchmarking allows a direct comparison of your company with the collective whole of the industry or market, or with an industry leader. By looking at several performance measurements, you can see if your company is performing at a level that will sustain itself over the long term or if your company’s local market is atypical compared with another company’s market. If the performance level of a startup company does not match the industry average or the industry leader, that does not mean that the company is poorly managed or cannot be profitable. Underperforming industry leaders indicates only that your company is not the same as those leaders. Frequently, benchmarking against a local market area is better than benchmarking against national leaders or the industry as a whole.
### Operations Management
Operations management can be summed up in three words: Get it done! The foundation of operations management is the theory of scientific management. As we have seen, Frederick Taylor developed scientific management to introduce organization, scheduling, coordination, standardization, and cooperation among workers into the production process. Taylor saw a production plant as a large, multifaceted organization with many interrelated activities that should function as one large machine. The activities of each worker within one group had to be coordinated with other workers’ activities within that same group. Each worker group had to be coordinated with other worker groups. Worker groups were clustered into larger cohorts. To keep materials moving through the manufacturing process, activities had to be planned, scheduled, and monitored.
Whether you are working in a manufacturing environment in which raw materials are converted into finished products or in a service environment in which customers receive experiences, these five components of operations management—organization, scheduling, coordination, standardization, and cooperation—must be the foundation your firm’s activities. To have productive outcomes, the firm must have important inputs: money, methods, machines, people, and leadership (). If any of these essential management elements are deficient or lacking, the company is probably functioning inefficiently and could be at a higher risk of failure.
### Money
Three terms—money, cash, and currency—are often used interchangeably, but each has its own distinct meaning and application. Money is any legal instrument that can be used in the exchange of goods and services. Money includes paper money or coins, but it also includes checks or money orders. In developing countries, money might be any physical item that is considered valuable to people wanting to exchange some goods or services. Most money, though, is in the form of cash.
Cash typically refers to physical money or currency, but it also includes deposits in an account (checking, savings, or certificate of deposit) at a financial institution. For example, customers can pay for their purchases with paper money, coins, checks, debit cards, or credit cards. The paper money and coins are taken to the bank for deposit. The debit card and credit card transactions are debited to the business’s checking account by its bank. The cash balance of the business increases by the amount of the deposits, regardless of the form of the deposit. The cash balance is shown on the company’s balance sheet and is the amount of money the company has available to pay its debts and obligations.
Currency is paper money or coins printed or minted, issued, and backed by a national government. Currency is divided into denominations or units in both paper and coin formats. With the expansion of international trade, along with the expansive movement of people among countries, it is important for an entrepreneur to know how global markets affect the value of money. Each national government decides what denominations of currency to produce. The value of a national currency is determined by the ability to exchange it for another national currency. Raw materials and supplies that originate in another country may increase in price significantly because of a decline in value of the US dollar or an increase in value of the country of origin’s money. Likewise, raw materials and supplies may have a price decrease because of shifts in the value of money.
Knowing and understanding how international monetary policies and activities affect a local entrepreneur can be critical to long-term growth and survivability. You must have a clear understanding of projected costs of materials as well as enough funds available at the right time to meet your financial obligations.
Liquidity is a measure of a company’s ability to meet its immediate and short-term (i.e., due within one year) debts and obligations. It’s a way of describing how well you can cover your current liabilities using your current assets. When a company is liquid, it can meet its financial obligations on time, typically on a very short timeline. If the company pays its bills on time, the risk to lenders is lower, so lenders charge lower interest rates; insurance companies may set lower premiums; and vendors may offer cash discounts for early payments. Maintaining liquidity is vital to the success of a small business, as it may have limited access to other financial options.
Other sources of cash include credit accounts such as a line of credit, a company credit card, accounts payable, loans, or your own reputation and goodwill. A line of credit (LOC) is an agreement between a bank and a depositor in which the bank makes available a maximum amount of money the depositor can borrow at any time during the term of the loan. The borrower pays a fee during the term, whether or not there is an outstanding balance, and also pays interest when there is a balance on the loan. All of these sources of cash are more cumbersome and involve more planning and preparation than liquid accounts. However, these nontraditional money sources are typically necessary for a new business owner in order to pay for business activities before the company begins collecting money from its own paying customers. Mismanaging these short-term debt accounts can easily become a burden on a small business. To better manage the financial obligations of the business, the entrepreneur needs to know which financial tools are available, how to use them, and which tool to use for which purpose. Financing is the use of money to conduct company activities. Payment sources for business activities and resources should match the life expectancy of the resource. Long-term debts—such as for land, buildings, equipment, and machinery—should be paid off through long-term financial instruments that are known as secured debt. Ordinarily, a loan used to purchase long-term assets will have a shorter life than the assets. For example, a machine that is expected to be useful for ten years should be financed with a loan that is paid in full in less than 120 months (ten years × twelve months). The purpose of long-term debt is to create revenue that exceeds the loan payment and interest. In this arrangement, the asset pays for itself by generating more cash than is needed to pay the principal of the loan, interest on the balance, costs to operate the equipment, and any additional insurance required or taxes assessed against the equipment.
Short-term or current liabilities, such as payroll, taxes, insurance, and all other operational activities, should be paid for through short-term cash resources. Most short-term payment obligations occur each week (payroll) or at least each month (insurance, rent). Short-term cash resources include sales, accounts receivables, down payments, and line of credit. Confusing long- and short-term financing strategies jeopardizes the financial stability of the company. Mismanagement of finances could create a situation in which the company is unable to pay its bills on time. When a company cannot pay its short-term obligations, it may not be able to operate much longer.
Managing cash collected and spent is one of the two most important responsibilities of the entrepreneur. A positive cash flow exists when cash received exceeds cash spent. A negative cash flow occurs when cash received is less than cash disbursed. All companies and organizations will experience a negative cash flow at some time. However, good managers will have a savings account or access to other cash in order to meet current financial obligations. What is important, though, is to have a positive cash flow over the long term.
Paying bills is not fun, especially when you have little cash to work with. Three popular methods of paying bills include credit, cash on delivery, and deposits on account. An entrepreneur’s vendors may use all three payment methods. Likewise, the entrepreneur can use all three to collect monies from customers.
When bills are due and the company does not have enough cash to pay the bills or the timing is inconvenient, the company must use credit. Credit is the promise to pay later for something already acquired. Short-term credit may come with no interest charges or fees, such as accounts payable Entrepreneurial Finance and Accounting. Vendors will routinely allow established customers to take possession of inventory or products without paying for them at the time of delivery. Payment for products is due on a specific day or after a defined period of time.
Often, a vendor will offer terms of payment at the end of the billing cycle. For example, if the terms are net thirty, purchases that a small business makes during one month are expected to be paid for in full at the end of the next month. Payments made after the due date are subject to a penalty and interest. Sometimes a vendor will offer an incentive to pay early, such as a 2 percent discount if the payment is made in less than fifteen days.
Many startup businesses must make payments at the time of delivery, a form of transaction known as cash on delivery (COD). When the delivery is made, the delivery driver or the online agent will release the product to the customer once payment has been received. This payment method can burden a startup that does not have liquidity. On the other hand, a startup business can reduce its losses by requiring COD payments from its new customers, as it receives payments and has the funds to pay its own obligations.
For unique or specialized products, some vendors will require a deposit from the customer before the product is made. This deposit reduces the financial risk to the vendor for a custom product that may be difficult to resell if the original customer backs out of the purchase. It also provides cash to the producer, who needs to buy raw materials to make the finished product. For the startup entrepreneur, paying for products beforehand could strain the cash available for ongoing operations. However, if the entrepreneur’s customers provide a down payment before the product is produced, the entrepreneur secures a noninterest loan from the customer.
All three of these payment methods are used in business transactions. Cash generated during each financial cycle must equal to or exceed the expenses paid during each cycle. Otherwise, the company may find itself without any money and be unable to afford to stay in business.
### Methods
The study of how work is performed is called ergonomics. It involves designing, arranging, and coordinating tools and equipment so that the movement of workers who use them is safe and efficient, and products flow through the appropriate work stations in a timely and efficient manner.
Work methods are perhaps most important when complex machinery and equipment are involved. A progressive movement of products from one stage to the next should reduce the employees’ time and effort, which reduces costs. Raw materials should be delivered to the location nearest where it will be used. Moving and storing large inventories at each point of assembly is easier and more efficient than storing parts at another location and moving them to work stations when they are needed. Timely delivery of inventory is equally important. Delivery of materials at the moment they are needed is called the just-in-time strategy. If component failure is detected, the point at which the part was assembled can be identified, and the deficiency quickly corrected.
Service industries also apply the assembly line approach.F. Abdi, K. S. Sohrab, and S. J. Seyed Mohammad. “Gleanlean: How to Use Lean Approach in Service Industries.” When workers become proficient at their tasks, they can perform the minimum actions needed to complete a task without sacrificing quality.T. Levitt. The assembly line approach has given birth to another ergonomic philosophy, lean project management.G. T. Passwater. “Industrialization of the Industry.”
Many fast-food restaurants, such as McDonald’s and Subway, use the assembly line approach to prepare food quickly and correctly. For example, in making hamburgers, one employee selects the bun, puts the appropriate meat patty on it, and then pushes it to the next worker, who may add onions, cheese, tomato, and lettuce before passing the order to the next station. Once the hamburger is complete, it is passed along to the last worker, who wraps the food and places it in a bag or on a tray.
When employees’ tasks are limited to very few functions, repetition of movement makes their work quicker. This specialization results in higher quality. Specialization allows each worker to increase productivity, improve efficiency, and reduce mistakes. This division of labor has become a major component in Western economic models. Adam Smith first explained it in his work (1776), using pin makers as his illustration. Smith theorized that reducing the number of tasks required of each pin maker would enable each worker to improve his efficiency of motion, resulting in both uniformity in quality and higher production levels.
This increase in quality and quantity of work increases the productivity and profitability of the worker. Collaboration among workers who work in close proximity occurs naturally. A weakness that materializes with one worker may be canceled out by an increase in another worker’s efforts. However, human labor continues to be replaced by machinery and electronic instruments developed during the Industrial Revolution and the modern technology revolution. Nevertheless, human labor is essential on the production line, whether in creating or assembling products or performing services.
### Machines
Beginning in the late eighteenth century, the Industrial Revolution shifted work from muscular power to mechanical power. Ever since, humans have used machinery to perform tasks greater than what they could achieve by themselves or using large animals. Machines provide consistency of work and higher volumes than human workers at lower costs per unit made. However, the initial outlay of cash for machinery can be large.
For a startup entrepreneur, purchasing machinery can be a difficult, time-consuming, and complicated task. First, one must look at the total costs of ownership (TCO), which is the comprehensive cost of owning large capital items, including initial direct costs, operating direct costs, and indirect costs. Maintaining and repairing operational equipment is difficult, especially when production schedules demand the machine to be operational. Poor planning can be very costly, especially for a startup business, because your ability to produce and deliver products on time reflects on your reliability to both your customers and your employees.
When making equipment purchase decisions, you should consider all the costs associated with the purchase plus the machine’s ability to produce income or lower costs. Such expenses include not only the purchase price but also delivery, installation and setup, calibration, and operational expenses. You should also consider the interest paid on the loan as part of the cost of acquiring the equipment, a factor that many new business owners overlook, but one that a good accountant should be aware of.
Hidden costs to major purchases periodically involve certain operating costs. Too often, new business owners focus on the purchase price, sometimes referred to as the sticker price, rather than on the total costs associated with equipment. Major equipment may require special delivery methods and other shipping costs. Once it is delivered to the site, it may have to be installed by skilled technicians. In some situations, the site flooring may need reinforcing to carry the new weight load, or the electrical supply may need to be upgraded to handle the necessary current. Local, state, or federal inspections may be required to obtain a permit to operate the equipment. Sometimes, liability insurance policies require inspections and permits in addition to government permits. All of these extra expenses add to the overall costs of acquiring the equipment. Many times, these expenses are considered sunk costs, never to be recovered in resale of the equipment or in producing more units.
Purchasing machinery and other major equipment is classified as a capital purchase or capital expense. A capital expense is a major purchase of a functional asset that is expected to last longer than three years or that still has financial value after being fully depreciated. Capital items, which include buildings, equipment, machines, and furnishings, are best purchased using borrowed funds so that the business can use its cash to pay for operational expenses, which are those associated with daily, ongoing activities of the business, such as inventory, office supplies, wages, insurance, and utilities. When an asset is used as collateral for a debt, the lender places a lien on the asset. The debt then becomes a secured debt, backed by the resale value of the asset. To ease the financial burden of major purchases, depreciation, a reduction in the value of an asset, is calculated as an expense on the income statement, which reduces taxable income and lowers taxable liability.
As a general practice, the payment schedule of a capital expense should be equal to or less than the life expectancy of the equipment. For example, a business may purchase an offset printer that is expected to last twenty years and then finance it through a loan to be paid off before the twenty years are up. Although having the debt paid off before an asset is fully depreciated is ideal, in some instances terms of the loan may extend beyond the depreciation schedule.
Machines have limits to their performance. Absolute capacity is the highest volume of units that a machine can produce within a specified time period. Operational capacity is the number of units you can reasonably expect to be produced within a specified time period. The difference between the two is operational reserve. Because machines may need to be warmed up, materials loaded and unloaded, moving joints lubricated, belts and hoses checked and repaired, or other operational functions performed, machines cannot operate at absolute capacity for an extended length of time.
In calculating production levels, it is easy to overestimate the number of units produced. For an offset printer to work properly, paper has to be loaded, the rollers must be inked, feeder clamps may need adjusting, and one or two test sheets need to be printed to check for ink coverage and crispness of the image. All of these necessary activities take time, but they actually are unproductive. Because each business will have unique requirements and influences upon capacity, the best method is to track your own performance over time and calculate the average. Otherwise, getting input from one of your advisors or a friendly competitor would be sufficient for planning and budgetary purposes.
Machines cost money to operate. Improvement in efficiencies and in production volume is a major motivation in purchasing new equipment. You should consider the increase in units produced, operational costs per unit, decrease in waste, and improvement in quality of products. A grocery store owner who has an old freezer that still keeps food at the required temperature may decide it is worth replacing. Buying a new freezer, with all of the associated costs and improvements in efficiency, has no impact on the number of food items taken out of it and sold. Only the difference in actual cost of electricity between the two units can be considered. However, a die machine that reduces waste and improves the number of molded pieces produced per hour may be worth the investment.
All machines break down, usually at an inconvenient time and place. Trying to repair equipment when it is needed is like a road crew trying to fix potholes without shutting down traffic. Therefore, scheduling production time, the amount of time that a machine is actually producing products that are to be sold (also called ), and down time, the time when production is not occurring due to repair, restocking inventory, or unscheduled work, are critical areas for management. A schedule of regularly planned maintenance that includes preventive repairs and inspections will reduce unexpected down time and equipment failures. Scheduling repairs before they are necessary keeps equipment running efficiently and smoothly, helps reduce costs over the long term, and allows for better management of expenses. Unexpected equipment failures not only interrupt operations but can delay delivery of products and services to customers. This can diminish your reliability and negatively affect customers’ confidence in your trustworthiness, potentially affecting future sales.
Every machine will become obsolete at some time and will need to be replaced. Having the latest, greatest piece of equipment may be a temptation that your bank account cannot afford. Replacing equipment, whether major industrial equipment that needs professional installation or office equipment that can be set up by employees, is a critical decision. Too often, the criteria for selecting new equipment are the same criteria used to describe the old equipment’s ability. Using old job requirements for new equipment may be acceptable in an industry that undergoes very few changes over a very long time. However, most industries change drastically and need up-to-date equipment.
Customer demands within an industry also may change significantly over time, just as a company’s specific needs may shift appreciably. To meet external customers’ new wants and the company’s new internal needs, machinery with new technology and more advanced construction may be mandatory. You should plan three to five years into the future for major purchases of equipment, machinery, tools, facilities, and skill levels. The question is not “What do I need today?” but “What will I need five years from today?”
Trading in outdated equipment may have value that is not always recognized in financial documents. When sales representatives of major manufacturers need to meet quotas, they may be willing to offer a very positive financing plan to place their equipment in your business while removing a competitor’s machine. But you should avoid making the mistake of ignoring your current vendor. Your current machine supplier may be very eager to keep customers and may offer to take your old equipment as a trade-in, which lowers the purchasing price of new equipment. Or your current supplier may be able to offer better terms than competitors or provide supplies as a reward for loyalty. All of these choices eventually lower both purchase and operating costs of new equipment.
To upgrade or keep the old machinery, to buy or lease, to sell or trade in, these are just a few of the questions that business owners contend with in making major purchases. Paying for big ticket items through vendor financing might be easier than borrowing from traditional banks. But when making major equipment purchases, always keep the professional sales representatives close. Their industry insight and knowledge could be more beneficial to you than the equipment itself. People are more flexible, more knowledgeable, and especially more valuable than machines.
### People
Searching, recruiting, hiring, and supporting a workforce can be some of the most rewarding and frustrating interactions that a new business owner deals with (see the discussion on human resources in Fundamentals of Resource Planning for more information on hiring the right people for a business). Selecting the right people at the beginning can be the difference between succeeding or failing in the early years of a business. Many experienced business owners will say that waiting to hire the right person is better than hiring the wrong person now.
For the new entrepreneur, hiring people you know is appealing because it is easy, they are typically very amenable in the startup stages, and they share in the excitement of the new business. Nepotism is the hiring of family members and close friends, usually based on their relationship to the entrepreneur rather than on their ability to perform the job. Spousal support and involvement are important in the early stages of a business. Spouses routinely become employees of the new business, and there may be a difference in the outcome based on gender. Many times, a wife is an unpaid employee if her husband starts the new company.B. Ndemo and F. W. Maina. “Women Entrepreneurs and Strategic Decision Making.” Her commitment may vary from a sporadic involvement to a few hours per month or per week. Women entrepreneurs, however, are less likely to have their husbands participate in the business, especially if the husband is unpaid.J. Kirkwood. “Spousal Roles on Motivations for Entrepreneurship: A Qualitative Study in New Zealand.” ,L. Philipps. “Silent Partners: The Role of Unpaid Market Labor in Families.” ,B. R. Rowe and G. Hong. “The Role of Wives in Family Businesses: The Paid and Unpaid Work of Women.”
Hiring other family members or friends because of their availability and personal commitment is enticing. Yet hiring family and friends just because they are willing and available can backfire and may produce more long-term harm than good. Sometimes hiring people close to you may discourage qualified candidates from seriously pursuing employment with your new business. Seeing that previous hiring decisions were based upon personal relationships is a discouragement to skilled personnel. Terminating employment of a family member can be truly difficult, especially if that family member is an immediate family member such as parent, spouse, child, or sibling. Difficulties within the family and the business are possible if the situation occurs. Moreover, failing to terminate a family member for cause will predictably destroy morale among nonfamily employees, especially skilled employees.
As a business is getting started, having someone is sometimes better than having no one. At other times, having no one is better than having the wrong one. Eventually, however, the ability to do a job supersedes who the employee is. Furthermore, traditional employees hired from the marketplace eventually will resent seeing more favoritism and leniency granted to family members than to nonfamily members. There is a stark difference between the integration of family and non-family members in a startup environment. The career path is usually short, with favoritism towards family members or longtime friends.Dan Mcconaughy. “Family CEOs vs. Nonfamily CEOs in the Family-Controlled Firm: An Examination of the Level and Sensitivity of Pay to Performance.” A delicate balance between family and nonfamily employees is difficulty to achieve, and new entrepreneurs do not need the additional distractions caused by rifts between family and nonfamily staff members.
Friends from previous employment, college, high school, or the old neighborhood are also popular sources for employees. In the early stages, the entrepreneur has so many issues to tackle and tasks to complete that hiring people they know seems like an easy solution. People build personal relationships through social and personal interactions, outside the needs of the new business. They establish friendships along personal commonalities such as attending the same school or being in the same club or on the same team, not along the subordinate-supervisor spectrum. A sure way to end a good friendship is to hire a friend who is unqualified for the job and place them in a supervisory role. Hiring a friend as a subordinate could lead to a confrontation that could cost the new entrepreneur the support of friends and family.
Every new owner must be willing to move past the startup phase and into the growth stage, where skills become more important than personal relationships. This natural progression in business maturity requires skilled workers to perform their tasks effectively. Those skills come at a price that may be difficult to match in the early stages of the business, but in the long run, skilled workers will produce more revenue than it costs to employ them. Also, customers expect more from established businesses than they do from an initial startup business.
Entrepreneurs must hire employees who complement them, not only in skills but also in personalities. In all of its various phases—from inception through startup, growth, and expansion—every business faces situations and obstacles that require an assortment of skills and talents to resolve. Some situations demand a strong, direct, or even confrontational approach, which can be comfortable for an extrovert. Other situations may need to be handled more softly and indirectly. An introverted employee who naturally is slow to react may take a passive approach that would be more appropriate in some settings.
A small business can strengthen its staff by hiring people with an assortment of backgrounds and experiences. The collective experiences of the whole staff benefit the business in ways that may not always be easily identifiable. Employees who fit together make a nice place to work and an enjoyable experience for customers.
### Sales Force
In Building the Entrepreneurial Dream Team, the sales rep was discussed in the context of the value and importance of generating revenue and cash flow for the business. In this section, the discussion will be focused on the sales force as a component of the personnel working in a for-profit business. However, nonprofit organizations that are also dependent upon sales revenue, as discussed earlier, could apply the concepts as described as well.
Decisions involving a sales force may be some of the most critical decisions made, perhaps even more important than organizational structure and tax status. The sales force triggers the activities that generate revenue, which brings the business to life and sustains it. Without the sales spark, the business becomes a lifeless organization doomed to closure.
A sales force must fit within the overall operational and marketing strategy of the business. The product must be fully developed, its benefits to the customers clearly defined, and the primary target market selected before a sales force is needed. Furthermore, company goals of minimum production levels must be established, and a target revenue high enough to cover expenses needs to be calculated. It is imperative that each of these goals is patently understood and achievable for both the sales force and the company before the sales force is assembled.
The first consideration is identifying the stage of the company. Some entrepreneurs have a true startup business beginning from scratch, whereas others enter entrepreneurship through the purchase of an existing business with established customers and cash flow. The organization, structure, and role of the sales force will depend upon whether the business is in the startup, growth, mature, or decline stage). As the business progresses through each stage, requirements and abilities of the company change as does the external environment of the market.
Deciding whether to self-perform sales or outsource the sales function should be done very carefully and should include research into the tax implications and benefits of using employees versus independent contractors.C. Stephen Tobin, The Tobin Firm. “Understanding the Differences between Independent Contractors and Employees.” Greater Houston Builders Association (GHBA). June 23, 2016. https://www.ghba.org/understanding-the-differences-between-independent-contractors-and-employees/ Self-performing involves the employees doing most of the work in a business. Outsourcing is the hiring of an outside company or third party to perform a specific task, job, or process, or to manufacture goods. Each option has benefits and limitations. The entrepreneur must consider many factors, ranging from financial strength to market knowledge to sales support capabilities. Hiring sales personnel as employees means the entrepreneur must use time and money to recruit, hire, train, supply with equipment and office materials, and regularly pay the sales force. Outsourcing the sales function to independent contractors may be a viable option, as the entrepreneur would have minimal upfront investment and they would be paid a commission only when they make a sale. Outsourcing is a preferred selection for businesses that are financially straining under cash flow, while self-performing sales is preferred for established, growing companies.P. M. Madhani. “Managing Sales Force Compensation: The Strategic Choice between Direct Sales Force and Independent Reps.” ,P. M. Madhani. “Managing Sales Compensation: A Sales Force Configuration Approach.”
Pay is always a touchy topic. Determining a person’s compensation and income gives the entrepreneur a great deal of power and control over the sales force. It is a very important responsibility that ought to be handled with great care. Issues regarding pay affect not only the employees’ or contractors’ livelihood, but also the company’s financial health and reputation. Furthermore, there are numerous laws and regulations, at both federal and state levels, that place the burden of doing it right upon the employer.
Sales force personnel who are employees must be paid with regular wages. Sometimes, a commission or bonus is paid if sales quotas are met. Regular wages, along with employer-matching payroll taxes and employee benefits, increase fixed expenses to the business. This arrangement may not be sustainable for a startup business. Yet the entrepreneur-employer can benefit from this arrangement by retaining control over employees’ schedules and routines, earning loyalty from staff, and receiving immediate market feedback from the employee.
Outsourced or independent contractor sales reps are paid on commission. This arrangement adds a variable expense to the business, an expense that should only be recognized after a sale is made. In most situations involving outsourced independent contractors, the employer is not responsible for payroll taxes. A word of caution, though, to all beginning entrepreneurs: Determining whether someone is an employee or an independent contractor can become complicated. The burden of doing it right is on the employer. And not doing it correctly can add significant expenses to the business in the form of fines and penalties.
An important factor to contemplate when deciding what type of sales force to have is knowing your position in the market and your market’s characteristics (). If you are selling to other businesses, business to business, you will have to understand their decision-making processes and buying criteria if you expect to make any sales. On the other hand, selling direct to the consumer, business to customer, has a wholly different marketing strategy. For the nonmarketing entrepreneur, learning about marketing basics ought to be placed on the “to do” list so that conversations with sales force personnel will be productive.
An additional market consideration is the sales territory. If you define territories by geographic markers, does each territory have the same potential number of customers? What is the variance in size and the distance from the home office? A similar set of questions arises if the sales force is established along product lines. How are the product lines alike? How are they different? When sketching out the sales force organization and responsibilities, it would be highly advantageous to receive input from potential sales reps or more experienced entrepreneurs who already know how to setup this division of your business.
Agreements made with the sales force must be honored, so make any agreement only after very carefully thinking through scenarios and obtaining insight from trusted advisors. The reputation of the business with employees and customers alike is at stake when employers do not honor agreements with employees, especially those employees who are the face and voice of the business to the market. If a sales rep, employee, or independent contractor decides to separate from your business, they could take their customers’ business with them to their next place of employment. Although you could take legal action against a former employee who does this, the bottom line is that you have lost a sales rep and a customer. Avoiding that situation is best for everyone, especially you, the entrepreneur.
Getting the right sales people in place is critical. Having them work in a positive and effective environment is a necessity that cannot be ignored.
### Leadership
Terms commonly associated with a leadership position include owner, manager, supervisor, team lead, leader, and boss. Many of these terms are used interchangeably, even though they have some minor differences in meaning, but normally one person will function as both leader and manager in a small business. Some entrepreneurs may be able to switch between these two roles flawlessly and fluidly, so that their followers and even they themselves are unaware that the roles are being filled simultaneously. Nevertheless, some traits and behaviors are associated more closely with leadership than with management.
A key difference between leaders and managers is their role in initiating action. Management is typically concerned with administering and directing an organization’s activities. This includes planning, scheduling, coordinating, overseeing, and inspecting tasks performed by staff. The manager ensures that employees who have been hired to perform duties perform those duties as expected and at a level of quality and quantity acceptable.
A leader, on the other hand, instills within others a desire to perform. This is more of an internal motivation, a psychological approach, which the leader develops via words and actions. Like the results of the manager’s approach, the results of motivation will be evident in the employees’ performance. The difference lies within the minds and souls of employees.
Employees will work for their manager because they are obligated to on the basis of assigned roles and positions of authority. Employees will work for a leader because they want to achieve the same goals and accomplish tasks to satisfy themselves as well as their leader.
You can find many lists that describe either characteristics or qualities of a good leader. Only a few have been included here. Descriptions of good leadership can be divided into the following categories: personality, competencies, locus of control, and style.
Personality describes the characteristics of a person as shown by their actions and words. Effective leaders typically are easy to get along with, have a positive attitude, engage others, and display self-confidence in their skills. When entrepreneurs begin looking for employees, working very closely together necessitates that they get along and enjoy each other’s company.
Working for someone who does not know what they are doing can be very difficult, if not impossible. Therefore, good leaders know what their competencies are and are very good at what they do. Employees as well as competitors and regulators recognize high job-performance skills. Sometimes, a very skilled leader becomes an industry expert with a reputation throughout the industry and gives training at conventions, conferences, and trade shows. Good leaders are also keenly aware of the skills they lack and readily admit their incompetence in those areas. Hiring a skilled employee who compensates for your shortcomings is a high priority.
Locus of control is the belief that you have or do not have control over events that occur in your life. If you have an internal locus of control, you believe you have significant control and influence over events that occur in your life. An external locus of control—the opposing view—means you believe you have very little control, if any, over events that occur in your daily life. Effective leaders have an internal locus of control and feel certain that they influence and control events, situations, and people in their lives and, specifically, in their business. When crises arise, effective leaders take charge and begin making decisions to get control of events. Employees, customers, and others connected to your business will rally around you if they are confident that you can take control of the situation and directly deal with the challenges.
The three common leadership styles are autocratic, democratic, and laissez-faire. Each of these approaches to leadership is effective but can also be ineffective. The approach that works is best determined by the industry, structure, environment, and requirements of the job.
Autocratic leaders make decisions by themselves and view employees as subordinates who must follow instructions without hesitating or questioning. Autocratic leaders are necessary in situations where decisions are needed quickly, the leader is highly trained and skilled in the work requirements, and the outcomes can be very serious. Democratic leaders engage their staff and seek input before making decisions. This approach works well if the organization or industry is complex, many different departments or employees are affected by the decisions, and a broad range of information is needed to make good decisions. Laissez-faire leadership allows staff to work independently, mostly without supervision or direct input from the leader. This approach works best when the employees are highly educated and skilled, tasks among employees are not closely interrelated, and staff are self-motivated.
Leadership has been studied for many centuries, and the debate continues. You can find examples of good and bad leadership in many organizations including the military, sports, government, and business. Leadership traits are like hands in a poker game—they are all good and bad. The difference is the situation. For an entrepreneur, knowing the industry, the market, the competitive environment, the customer base, and the employee pool are starters for determining which leadership traits and style would be effective. If you decide you are not matched to the environment or situation, then you could engage someone who does possess the traits and skills that better match your current needs.
### Operational Needs
When starting your business, the first question you need to ask is whether anyone wants to buy your product or service. Creating a new product or service is easy. In fact, 70 percent to over 95 percent of new products introduced every year are classified as failures.M. Emmer. “95 Percent of New Products Fail. Here Are 6 Steps to Make Sure Yours Don’t.” With more than 30,000 new products introduced every year, you could reasonable guess that between 21,000 and 27,000 are failures.J. Schneider and J. Hall. “Why Most Product Launches Fail.” On the contrary, only 5 percent to 30 percent of new products are successful. So the question is valid: Will anyone buy my product or service?
With such a low success rate, you will need to conduct careful research and small trial runs to determine the viability of your new products. You need to know not only whether anyone will buy your products but whether customers will pay your price, so that the business can make a profit, or at least break even. You need to ask these two very important questions up front, because if the answer to either one is “No,” you have no need to do anything else.
A second series of questions that you need to address focus on the location of the company’s operations. Where will you locate your business? Will you rent or buy a building or facility? Does your facility need to have easy access in a high-traffic area? Or can it be in a quieter area, where costs are lower? In addition to access and costs, will your business be located within a competitor’s influence? It would be unfortunate if you negated all the positive factors of your great product and viable business plan by selecting the wrong location.
Besides deciding on a proper location, you also need to consider the size of your facility. Selecting a structure that is too small from the very beginning may handicap any growth in the early stages of your business. Having to move to a larger facility soon after beginning operations could be detrimental to your operations. On the other hand, selecting a facility that is too large puts pressure on cash flow, as you will pay rent or a mortgage for an unproductive building space. Finding the balance between “big enough to grow into” and “small enough to afford with low sales” is a predicament faced by many business owners, whether new entrepreneurs or seasoned veterans.
You will need to make similar decisions about furniture, equipment, and furnishings. These items are available for purchase or lease. Sometimes a lease is better, as the initial payments may be lower but over time, buying equipment and furniture can help improve cash flow once the items are paid for. However, deciding on how much, what quality, and what size can be difficult. Good equipment sales representatives can be a big help in making equipment decisions.
To get started, you will need to determine the proper inventory levels. How long is the shelf-life of your inventory? Some products have a long shelf-life, whereas others may perish quickly. Ask yourself “How much do I need?” and “When will I need it?”
Before beginning a business, you may need licenses and permits. Buildings must be inspected and approved prior to occupation for business activities. Building permits may require electrical, plumbing, HVAC, and structural inspections of building systems and physical features. Accounts for water, gas, and trash pickup must be made prior to occupying a facility. summarizes the operational needs you should consider when launching a venture.
Set the grand opening several days to a few weeks after the actual opening of business. Invited guests may include investors, city officials, family members, special customers, former employers, business neighbors, and competitors.
### Summary
Success is best defined as achieving what you want. Without some kind of plan, you can never be successful. Whether they are entrepreneurial owners or management employees, business managers need to have a written plan so that everyone can be certain of what tasks are needed, who is assigned those tasks, and when those tasks are scheduled. Recording and tracking financials is imperative in any business. Knowing where money is coming from, to whom it was sent, how much, and why are crucial to being a responsible business professional.
Without a business plan that encompasses all major aspects of your business, you may find yourself without a business. If that happens, you may very well ask, “How did I end up here?” Unfortunately, the answer is likely to be, “I don’t know.” On the other hand, a successful business professional can look back and say, “I did this, and this is how I did it.”
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
American Customer Satisfaction Index: https://www.theacsi.org/
North American Industry Classification System: https://www.census.gov/eos/www/naics/
US Census Bureau: https://www.census.gov/
US government contracts: https://www.sba.gov/federal-contracting/contracting-guide/basic-requirements
US Department of Commerce Homepage: https://www.commerce.gov/
US Department of Commerce, Bureau of Economic Analysis: https://www.bea.gov/
US Department of Labor Homepage: https://www.dol.gov/
US Department of Labor, Bureau of Labor Statistics: https://www.bls.gov/bls/blswage.htm
Yahoo Finance: https://finance.yahoo.com/
Scheduling programs and templates:
https://getsling.com/blog/category/scheduling/
https://wheniwork.com/features
https://schedulebuilder.org/
Employer hiring costs of employee: https://gusto.com/tools/employer-tax-calculator
Payroll program: https://onpay.com/payroll-calculator-tax-rates |
# Business Structure Options: Legal, Tax, and Risk Issues
## Introduction
Entrepreneurial businesses are the heart of the US economy. Small businesses—those with fewer than 500 workers—employ almost one-half of the US workforce (47 percent according to the US Census Bureau’s Annual Survey of Entrepreneurs)US Census Bureau. and are responsible for offering thousands of new products and services each year. The information in this chapter can help entrepreneurs successfully start and operate a business. Startups function best when the owners have a strong understanding of the legal aspects of entrepreneurship. Important legal issues such as business structure (entity selection), incorporation process, taxation, capital acquisition, and employment policies require that entrepreneurs obtain good advice and make sound decisions before they commence operations. They must make additional decisions that relate to the role of the business in the community, which is a key component of corporate social responsibility. The combination of good advice and sound decisions will help entrepreneurs successfully navigate a complex matrix of considerations. |
# Business Structure Options: Legal, Tax, and Risk Issues
## Business Structures: Overview of Legal and Tax Considerations
### Learning Objectives
By the end of this section, you will be able to:
1. Understand why a business’s purpose is an important role in the initial business structure decision
2. Identify major types of business structures (corporation, LLC, partnership, sole proprietorship, joint venture)
3. Distinguish between for-profit and not-for-profit purposes and structures
The structure of a new business creates the legal, tax, and operational environment in which the business will function. In order to choose a business structure, entrepreneurs need to have a clear understanding of the type of business they seek to establish, the purpose of the business, the location of the business, and how the business plans on operating.
For example, a business that plans to qualify as a nonprofit—Section 501(c) of the Internal Revenue Code—will be treated differently from a business that aims to earn a profit and distribute the profits to its owners. Therefore, the first step in any entrepreneurial endeavor is to establish the nature and purpose of the business ().
One of the most important initial decisions an entrepreneur must make, from a legal perspective, is the legal organization of a business, called the business structure or . The choices are varied, with several basic entities, each with several variations, resulting in multiple permutations.
Many business ventures, regardless of humble beginnings, may have the potential to evolve into significantly larger business ventures. This is what makes the initial decisions so important. The founders should think through every step of business development, beyond the inception or formation, and consider the possible paths of the business. How an entrepreneur organizes the business, or which business structure they choose, will have a significant impact on both the entrepreneur and the business.
Business structure options include traditional choices such as corporations, partnerships, and sole proprietorships, and hybrid entities such as limited liability companies (LLCs), limited liability partnerships (LLPs), and joint ventures (JVs). Each structure carries different requirements to set up, different requirements to fulfill (such as taxes and government filings), and varying ownership risks and protections. Entrepreneurs should consider these factors as well as the expected business growth in selecting a structure, while being aware that the structure can and should change as the business venture grows.
For example, if you think you want to share authority, responsibilities, and obligations with other people, your best choice would likely be a partnership, in which other people contribute money and help manage the business. Alternatively, if you prefer to manage the business yourself, a better choice for you might be a single-member LLC, assuming you can borrow money from a lender if needed. Conversely, if you think your idea is so popular that you may grow rapidly and want the ability to raise capital by selling interests in your business through equity or debt, then a corporation would be your best choice. You should obtain legal and tax advice about your structure.
### Establishing a Business Purpose
A clear understanding of the business purpose helps direct the entrepreneur toward the most appropriate business structure. The business purpose is the reason the entrepreneur forms the company and determines who benefits from it, whether it is the entrepreneur, customers, or some other entity. (The business purpose is different from a business mission or vision.) Drafting the expectations of the entrepreneur and how the business will operate, with a careful analysis of how the business will generate cash flows, realize profits, and to whom the business will owe its primary obligations, is the start of determining the appropriate business structure. A written business plan (see Business Model and Plan) will help the entrepreneur develop the best legal structure in which the business is to operate because the legal structure of the business should be tied to the nature of the business.
Once the entrepreneur is clear on the nature and purpose of the business, consideration of the business structure follows. The first consideration is whether the entity is being created to produce a profit for its owners or shareholders, or whether it will be structured as a not-for-profit entity. A second factor is the state of incorporation, as state law defines each business’s creation, with different states permitting different types of entities and various legal protections. Additional considerations include how the structure facilitates bringing in new investors, allows the owners to transfer profits out of the business, and supports a potential subsequent sale of the entity. Taxation is also a crucial aspect of business success, and the business structure or entity directly affects how it is taxed.
### For-Profit versus Not-for-Profit Businesses
Owners form businesses for one of two purposes: to make a profit or to further a social cause without taking a profit. In either case, there are multiple options in terms of how a business is structured. Each structure carries its own tax consequences determined by the owners’ financial requirements and how the owners want to distribute profits. The structure, in turn, determines the appropriate income tax return form to file.
### Characteristics of For-Profit Businesses
A for-profit business is designed to create profits that are distributed to the owners. There are multiple entity structures used in for-profit business entities including corporations, LLCs, partnerships, and sole proprietorships. Many for-profit business owners seek some form of limited liability, and thus form a corporation or an LLC, each of which carries with it specific legal attributes. Additionally, for-profit business entities are subject to a variety of local, state, and federal taxes and filings. Liability and tax issues will be discussed later in this chapter.
For-profit businesses are commercial entities that generally earn revenue through the sales of products or services, whereas nonprofits are organized for social purposes. Nonprofits are allowed to provide assets or income to individuals only as fair compensation for their services. For-profit businesses can be either privately owned (such as an LLC) or publicly owned and traded (such as a corporation). Publicly held and traded corporations sell stock or interests, and must abide by special rules to protect shareholders, whereas privately owned businesses may be less regulated. Regulations may vary by state and by type of incorporation.
### Characteristics of Not-for-Profit Organizations
A not-for-profit organization (NFPO) is usually dedicated to serve the public interest, further a particular social cause, or advocate for a common shared interest. They must follow particular regulations regarding eligibility, government lobbying, and tax-deductible contributions. In financial terms, a not-for-profit organization uses its surplus revenues to achieve its ultimate objective, rather than distributing its income to the organization’s shareholders, partners, or members. Common examples of not-for-profits include educational organizations such as schools, colleges, and universities; public charities such as the United Way; religious organizations such as places of worship; foundations; trade organizations; and issue-advocacy groups. Other organizations also considered NFPOs include nongovernmental organizations, civil society organizations, foundations that provide funding for various activities, and private voluntary organizations.International Center for Not-for-Profit Law (ICNL). “What Is the Difference between ‘Non-Profit’ and ‘Not-for-Profit’?” 2013. http://www.icnl.org/contact/faq/index.html#difference
Nonprofits are usually tax-exempt as categorized by the US Internal Revenue Service (IRS), meaning they do not pay income tax on the money they receive for their organization. These types of organizations are created under state law (but also subject to federal and local laws) and are typically created for the common good.
To operate as a not-for-profit business, most states require that the entrepreneur create a corporation that has the specific purpose of acting in the public interest. This type of corporation does not have owners but has directors charged with running the organization for the public good, subject to bylaws. Some states only require a minimum of one director, whereas other states may require three or more directors. This is an important consideration for an entrepreneur because the nonprofit corporation will need the approval of all of the directors, and not just one person for its creation. Careful vetting of the directors is the best policy of any entrepreneur since directors have a duty to the corporation.
Because state laws vary, a not-for-profit corporation created for the common good in one state needs permission from another state to operate in that state. The permission is typically an approval from the other state’s secretary of state memorialized in the form of official documents or permits. When operating in different states, the entrepreneur needs to make sure that the business follows all laws, rules, and regulations for each state.
Another issue to consider is the creation of a not-for-profit business organization for a particular purpose. One example of a special-purpose organization is an alumni organization, usually incorporated as a 501(c)(3) nonprofit, which incorporates to raise money for a college or university for a specific reason, such as student scholarships. Alternatively, a booster club may incorporate to receive donations for a single function, such as the women’s soccer team. These organizations may need additional approvals prior to the creation or start of operations, depending upon state and local legal requirements. Each state typically has different requirements; depending on the federal tax regulation under which the entrepreneur is attempting to qualify, there may be additional federal regulations. This is why the entrepreneur needs to fully understand the purpose of the business they are starting and the legal operating environment before selecting the business structure. While NFPOs play an important role, most entrepreneurs form for-profit businesses; therefore, the remainder of this chapter will focus primarily on for-profit business entities.
### Summary
Being an entrepreneur carries with it the responsibility to make significant decisions, the first of which is to decide the business purpose: For example, who should benefit from the creation of the entity? The second important decision to make is whether you are going to be a for-profit or not-for-profit business. This decision is closely related to the business’s purpose and is not necessarily controlled by how much revenue you think you might have but rather by who is going to “own” the entity and what it does with the profit it makes. A third decision to make is the type of business entity or structure. Choices include corporation, LLC, partnership, and sole proprietorship.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
The Small Business Administration (SBA) has a great “tool box” for entrepreneurs. Tools include information on how to create a business plan and how to qualify for government contracts. It also has free online training classes and a list of networking events. Go to this link, and then click on “Create a Business Plan” and get started. SBA: https://www.sba.gov/tools |
# Business Structure Options: Legal, Tax, and Risk Issues
## Corporations
### Learning Objectives
By the end of this section, you will be able to:
1. Distinguish between C Corporations, S Corporations, and B Corporations
2. Distinguish between privately and publicly held corporations
3. Explain how corporations are taxed
A corporation is a complex business structure created by filing the appropriate documents with the state of incorporation (). They are created when the original incorporators (owners) file a formal document called the articles of incorporation, or other similar documentation, with a state agency, often the secretary of state’s office or the state division of corporations. Corporations operate as a separate legal entity apart from the owners. The owners are called shareholders and can be individuals, other domestic or foreign corporations, LLCs, partnerships, and other legal entities. Corporations may be for-profit or not-for-profit, as discussed previously.
Incorporating a company means that the corporation operates as an entity that has some of the same rights as an individual. For example, individuals and corporations can sue and be sued, and corporations have the rights to own property, to enter into and enforce contracts, to make charitable and political donations, to borrow and lend money, and to operate a business as if the corporation were an individual. Most states require a corporation to be registered in that state in order to conduct business operations and to enter into and defend lawsuits in that state, especially if the business was incorporated in a different state. Registration is not the same as forming the initial corporation; it is simply the process of filing informational documents by entities that have already been incorporated in another state. States also tax the operations or sales a corporation makes in the state in which it has certain operations.
### Overview of Corporations
Corporations are the only type of entity that the law allows to sell shares of stock. No other entity, like an LLC or a partnership, may do so. Those individuals or other entities that buy stock become shareholders and own the corporation. Some corporations have millions of shareholders, and others have as few as one. State incorporation laws vary: Some require at least three shareholders, but others allow a one-owner business to incorporate. Thus, an entrepreneur may start a company as the sole owner of the company and later incorporate and sell shares of stock or bonds to other investors in the company.
Corporations sell, or issue, stock to raise capital, or money, to operate their businesses. The holder of a share of stock (a shareholder) purchases a piece of the corporation and has a claim to a part of its assets and earnings. In other words, a shareholder is now an owner of the corporation. Thus, a share of stock (also called equity) is a type of security that signifies proportionate ownership in the issuing corporation. Stocks are bought and sold predominantly on stock exchanges, although there can also be a private sale between a seller and a buyer. These transactions have to conform to a very complex set of laws and government regulations (e.g., the Federal Securities Acts of 1933/34), which are meant to protect investors.
Use of a corporation allows the entrepreneur to shield themselves, and other owners, from personal liability for most legal and financial obligations. The benefit of limited liability is one of the primary reasons entrepreneurs incorporate. However, the administration of a corporation requires more formality than other types of entities, such as sole proprietorships and partnerships. A corporation must follow the rules for such entities. The requirements include maintaining bylaws, holding annual shareholder and director meetings, keeping minutes of shareholder and director major decisions, ensuring that officers and directors sign documents in the name of the corporation, and importantly, maintain separate bank accounts from their owners and keep detailed financial and corporate records. A failure to follow the rules could lead to the loss of limited liability, known as “piercing the corporate veil.”
Most corporations use a three-part (or tripartite) approach to ownership and management (). After the corporation is created and operations start, the shareholders typically elect a board of directors, and the board has oversight responsibilities for the operations of the company. The board then appoints officers who are responsible for the day-to-day operations of the corporation.
For small organizations, state law allows shareholders to directly manage a company without using a board of directors. This type of corporation is a closed corporation or a closely held corporation, and is common for entrepreneurial startups. State incorporation law, coupled with federal tax law under the IRS, regulates the formation and operation of a closely held corporation. The basic rules state that, generally, a closely held corporation is a corporation that has more than 50 percent of the value of its outstanding stock owned (directly or indirectly) by five or fewer individuals at any time during the last half of the tax year.US Internal Revenue Service.
### C Corporations, S Corporations, and B Corporations
The categorization of corporations as either C corporations or S corporations is largely a tax distinction. An S corporation is a “pass-through” entity, where shareholders report and claim the business’s profits as their own and pay personal income taxes on it. Alternatively, the government taxes a C corporation at the corporate level, and then levies taxes again on the owners’ personal income tax returns if corporate income is distributed to the shareholders as dividends.
Conversely, the distinction between B corporations and C or S corporations is not one based on taxes at all, but rather on purpose and approach. A certified B corporation is a business that meets a very high standard of social and environmental performance, public transparency, and accountability to balance profit with social purpose. B corporations can also be C corporations or S corporations. summarizes these types of corporations.
### The Unique Nature of B Corporations and/or Benefit Corporations
A new form of nontraditional, for-profit corporation is the benefit corporation, which may or may not also be a B corporation. While B corporations and benefit corporations share some common goals, B corporations go through a certification process. Becoming a certified B corporation is a formal process that involves compliance with various standards and an audit of this compliance (managed by the B corporation organization).Certified B Corporations. n.d. https://bcorporation.net/ The essence of these new B corporations is that “they recognize the imperative to do no harm and create positive impact throughout the value chain.”Network for Business Innovation and Sustainability. “B Corporations, Benefit Corporations, and Social Purpose Corporations: Launching a New Era of Impact-Driven Companies.” October 2012. http://nbis.org/wp-content/uploads/2012/10/ImpactDrivenCompanies_NBIS_Whitepaper_Oct2012.pdf According to the B corporation organization, these certified businesses are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. As of 2019, there are approximately 3,000 certified B corporations in sixty-five countries, covering 150 different industries.Certified B Corporations. n.d. https://bcorporation.net/ The B corporation certification is somewhat like a seal of approval for businesses voluntarily trying to be socially responsible. A benefit corporation is a corporation recognized by a governmental agency under state law (about thirty states now recognize benefit corporations with legal requirements of higher purpose, accountability, and transparency) but does not carry the certification of a B corporation. However, in terms of purpose as related to corporate social responsibility, the two entities are very similar.
The benefit corporation’s objective is directed toward maximization of benefits for all stakeholders, meaning that the company benefits any person with an interest or concern in the business. It does not only maximize stockholder profits. Maximization of stakeholder benefits is directed through the corporate charter of a benefit corporation. The state of incorporation directs how benefit corporations are created, but generally, this “new governance model broadens the perspective of traditional corporate law by incorporating concepts of purpose, accountability, and transparency with respect to all corporate stakeholders, not just stockholders.”Morris, Nichols, Arsht, and Tunnel. This means that the use of this type of business structure needs to be carefully considered by the entrepreneur because the responsibility of the business will include consideration of the stakeholders outlined in the corporate charter, not just the profit maximization for the shareholders.
### Privately Held versus Publicly Held Corporations
Terminology relating to whether a company is publicly or privately owned can sometimes be confusing. For example, large corporations such as Exxon or Amazon are private corporations, but their stock is publicly held. This means that any member of the investing public can own stock in the corporation. A true public corporation is, in reality, a quasi-governmental entity, an entity owned or sponsored by the government. Government-owned corporations include the US Postal Service, the Corporation for Public Broadcasting, AmeriCorps, and Amtrak. Government-sponsored corporations include Freddie Mac and Fannie Mae, mortgage-related entities. A privately held corporation, common in Europe, is a company that does not allow members of the investing public to own stock. The founder’s family or friends, or perhaps a private group of investors such as a venture capital firm, may hold it. Examples include Facebook before it went public in 2012, or Cargill or Mars.
### Publicly Traded Corporations
A publicly held corporation is, as described, an entity in which members of the investing public own the stock. A term commonly applied to such corporations is a , meaning that the stock can be bought and sold in the public marketplace, such as the New York Stock Exchange. A publicly traded corporation has more access to investors and thus more capital, but it must operate under a formal set of rules established by the Securities and Exchange Commission and Congress, assuming the shares are sold publicly in the United States. Audits of publicly traded companies also have to follow the rules of the Public Company Accounting Oversight Board (PCAOB). “The PCAOB oversees the audits of public companies and broker-dealers in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports.”PCAOB. “Protecting Investors Through Audit Oversight.” n.d. https://pcaobus.org/ Following the SEC and PCAOB rules emphasizes investor protection but can be complex, as it increases both startup and operating costs for the venture due to increased regulation and reporting.
A publicly traded company is required to have a board of directors with a dual mandate to both consult with management regarding the strategic direction of the company and oversee company performance. The board of directors does not manage the company, and the members are separate from management.Stanford Business Graduate School: Corporate Governance Research Initiative. The board will have numerous committees to assist in its functionality, and one of the committees is the audit committee. The audit committee of a publicly traded company must hire an outside auditor approved by the PCAOB to audit the books of the publicly traded company. Further, the chief executive office and chief financial officer of the publicly traded company must sign a certification of earnings report, guaranteeing their truthfulness. The rules and regulations with which compliance is required are more demanding for a publicly traded company than for a privately held or closely held company.
### Closely Held Corporations
A closely held corporation, also known as a close corporation, is the same as a privately held corporation for the purposes of securities laws. However, the concept has a secondary meaning related to management structure. A close corporation is also a management structure for a corporation that is often selected by small companies that use the less-formal management style of a general partnership yet retain the limited liability of a corporation. In essence, there are fewer formalities for a close corporation, and it allows greater control for the small group of shareholders.
A close corporation is required to have an annual shareholder meeting and keep corporate minutes. All of this detail is required to be recorded in the corporate records, even if there is just one shareholder. Sole proprietors using a corporation as a business structure must follow the rules regarding corporations in the state in which they were incorporated. Some states may even dissolve a corporation that does not have an annual meeting or keep proper corporate records. When a corporation is dissolved, the shareholders become personally liable for corporate debts, and shareholders’ limited liability is lost. Managing a closely held company requires the entrepreneur to follow state guidelines while operating the corporation accordingly.
The shares of a closely held corporation are not traded on the open market and typically have just a few shareholders. Closely held corporations have fewer reporting requirements than publicly traded companies and typically are not required to have audited financial statements, unless the corporate charter says otherwise. Audited financial statements are costly and are required for publicly traded companies. The audited financial statements help investors buying and selling stock in the stock market value shares and are not necessarily needed for a closely held corporation. However, it is difficult to value a closely held corporation because there is no ready market for the ownership shares.
### Not-for-Profit Corporations
Nonprofit corporations are created in one a state but may operate or solicit donations in other states. A nonprofit corporation operating or soliciting donations in multiple states needs to register to operate as a nonprofit corporation in every state in which it operates.
Not-for-profit corporations are organized in a similar fashion to for-profit corporations, with a board of directors and officers, but they have no shareholders, stock, or owners. The stakeholders of a non-for-profit corporation play an important role, monitoring overhead and allocation of funds. Since most of the funds are donations and are tax deductible, public watchdogs may monitor the financial statements of federally tax-exempt organizations. The fact that the Internet provides easy access to financial data related to federally tax-exempt nonprofits provides watchdog organizations easy access to financial data and the ability to analyze the operations and compensation for the nonprofit’s organizers and employees.
### Overview of Corporate Taxation
All for-profit corporations are subject to income tax at the federal level, and usually at the state level as well. Regardless of tax elections, both C- and S corporations are subject to taxation.
Tax planning is a major issue for most corporations and may explain some key decisions, such as where they are located. That could involve decisions about which state the corporate headquarters are in, or even in which nation the headquarters are located. This is because tax laws may vary significantly by both state and nation.
The current federal income tax rate for corporations in 2019 is 21 percent, down drastically from 35 percent, which was the rate prior to 2018. Many states add a state-level income tax, ranging from 2 percent to 12 percent, while some states such as Texas do not have a corporate income tax in an effort to attract corporations to the state.Tax Foundation. “State Corporate Income Tax Rates and Brackets for 2019.” 2019. https://taxfoundation.org/state-corporate-rates-brackets-2019/
### Taxation of C Corporations
C corporations pay corporate income taxes on profits made. Individual shareholders are also subject to personal income taxes on any dividends they receive. Most attorneys and accountants refer to this concept as the double taxation disadvantage. However, the historical tax disadvantage has been recently reduced because of the decrease in the income tax rate paid by C corporations by the Tax Cuts and Jobs Act.US Internal Revenue Code of 1986. 131 Stat. 2054. This decrease, in turn, reduces the double tax disadvantage. Further, the ability to retain and reinvest profits in the company at a lower corporate tax rate is an advantage.
A C corporation does come with a degree of added formality, or as some may refer to it, red tape. According to most states’ corporation laws, as well as federal tax and securities laws, the corporation must have company bylaws and must file annual reports, financial disclosure reports, and financial statements. They must hold at least one meeting each year for shareholders and directors where minutes are taken and maintained to display transparency. A C corporation must also keep voting records of the company’s directors and a list of the owners’ names and ownership percentages.
Despite the tax implications, the C corporation structure is the only one that makes sense for most large US businesses because it allows for the wide-scale sale of a large amount of stock to the general investing public without limits. A C corporation can have an unlimited number of shareholders that are individuals or other business entities, and are either US citizens or foreign nationals.
### Taxation of S Corporations
As previously discussed, the S corporation is a corporate entity in which the firm’s profit is passed through its stockholders (shareholders), usually in proportion to their investment—this is known as pass-through taxation. Essentially, this amounts to tax management by the corporate owners. The IRS taxes the corporate profits at the personal income tax rates of the individual shareholders. S corporations (S stands for “small”), also called subchapter S corporations, must comply with several important restrictions with which entrepreneurs must comply.
S corporations have a limit on shareholders. Unlike with C corporations, the Internal Revenue Code limits the number of S corporation shareholders to 100 or fewer, and owners can only be individuals, (or estates and certain types of tax-exempt entities). Additionally, the individual shareholders must also be US citizens or legal permanent residents. Furthermore, S corporations may only have one class of stock, whereas C corporations may have multiple classes. For example, in a C corporation, there might be voting shares, nonvoting shares, common shares (the type most people buy), and preferred shares (which are repaid first in the event of bankruptcy).
### Summary
When forming a corporation, there are numerous choices. One choice is whether to form a C- or S corporation. This is primarily a tax decision, with C corporations being taxed as corporations, and S corporations being taxed as partnerships. Which one is the best for you depends on a number of variables, including how many shareholders you aim to have and how much of the revenue you want to leave in the corporation versus take out of it in the form of dividends, considering possible double taxation issues. Another choice is whether you want to go through the process of becoming a certified B corporation through adherence to a number of social/sustainability guidelines. Finally, you must decide if you eventually want your equity (stock) to be publicly held, as it is in most large companies, or privately held, which may give you more control but limit access to capital.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
A cost-effective solution for obtaining business counsel is the Service Corps of Retired Executives (SCORE), which provides free advice for small businesses and entrepreneurs. The SCORE organization is the nation’s largest nonprofit network of volunteer, expert business mentors, with more than 10,000 volunteers in 300 chapters. You can find them at: https://www.score.org/ |
# Business Structure Options: Legal, Tax, and Risk Issues
## Partnerships and Joint Ventures
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the ownership structure of a partnership
2. Describe the ownership structure of a joint venture
3. Summarize the advantages and disadvantages of partnership and joint venture structures
A partnership is a business entity formed by two or more individuals, or partners, each of whom contributes something such as capital, equipment, or skills. The partners then share profits and losses. A partnership can contract in its own name, take title to assets, and sue or be sued.
A joint venture is, in essence, a temporary partnership that two businesses form to gain mutual benefits, such as sharing of expenses and to work toward shared goals and the associated potential revenue. Joint ventures share costs, risks, and rewards. A joint venture, for example, can help speed up expansion of your business by gaining access to additional equity, new markets, or new technology. Partnerships and joint ventures share many similarities, but they do have some important differences.
### Overview of Partnerships
State law governs the formation and operation of all partnerships. It would be too lengthy to cover the laws of all fifty states; therefore, this section contains some generalizations that may vary according to jurisdiction. Federal law has very limited applicability to partnerships, primarily in the area of federal income taxation. A general partnership is created when two or more individuals or entities agree to work together to operate a business for profit. A partnership generally operates under the terms of a written partnership agreement, but there is no requirement that the agreement be in writing. In many instances, the only requirement is that two or more parties come together to operate a business for profit.
Entrepreneurs need to be careful because a general partnership can be informally created by the actions of two or more people or entities pursuing a business for profit while sharing management duties. State courts may deem these actions the creation of an informal or even formal partnership. For this reason, if two entities or people come together to purse a joint business operation or strategy, the parties should document the pursuit of the business venture in a written agreement. Many state laws require that some forms of a partnership use a formal written partnership agreement or articles of partnership. If the venture is of a shorter duration, it might be better to enter into an agreement documenting a joint venture. In either case, the entrepreneur needs to have a clear understanding of the exact business relationship before embarking on a new venture, and a partnership agreement can and should outline those details.
A partnership agreement addresses many important topics, including the monetary investment of each partner, their management duties and other obligations, how profits or losses are to be shared, and all the other rights and duties of the partners.
Partnerships can take many forms, including general partnerships (GPs), limited partnerships (LPs), limited liability partnerships (LLPs), and, in some states, limited liability limited partnerships (LLLPs). All states require the registration of any limited liability entity. In GPs, liability of the owners is considered “joint and several,” meaning that not only is the partnership entity liable, so too is each general partner.
The liability of partners, therefore, may be limited by the creation of an LP. A limited partnership requires at least one general partner and one or more limited partners. A limited partner’s liability is typically capped at their investment, unless they take on the duties of a general partner. The general partner is personally liable for all of the operations of the LP.
LPs have been around for many years and allow investors to provide funding for a business, while limiting their investment and personal risk. LPs are commonly used in businesses that require investment capital but do not require management participation by LP investors. Examples include real estate where the LP buys commercial real estate, making and funding movies or Broadway plays, and drilling oil and gas wells.
Some states have relatively recently started to allow variations on the LP structure and offer businesses the option of forming a related type of partnership entity. These limited liability partnerships are common with businesses such as law firms and accounting firms. The partners are licensed professionals, with limited liability for financial obligations related to contracts or torts, but full liability for their own personal malpractice. The primary difference between LLCs and LLPs is that LLPs must have at least one managing partner who bears liability for the partnership’s actions. An LLP’s legal liability is the same as that of an owner in a simple partnership. Entities that are formed with a founding partner or partners—commonly law firms, accounting firms, and medical practices—often structure as an LLP. In this situation, junior partners typically make decisions around their personal practice but don’t have a legal voice in the direction of the firm. Managing partners may own a larger share of the partnership than junior partners.
The final type of partnership is a limited liability limited partnership (LLLP), which allows the general partner in an LP to limit their liability. In other words, an LLLP has limited liability protection for everyone, including the general partner who manages the business.
### Advantages and Disadvantages of General Partnerships
The GP is a very common business structure in the US. It is created when two or more individuals or entities come together to create, own, and manage a business for profit. A GP is not technically required to have a written agreement, or to file or register with the state government. However, GPs should have their business structures described in writing, so that the entities working together have an understanding of the business and the business relationship.
When a GP is created, one partner is liable for the other partner’s debts made on behalf of the partnership, and each partner has unlimited liability for the partnership’s debt. This creates a problem when one partner disagrees with the source or use of funds by another partner in terms of capital outlay or expenses. Each partner in a GP has the ability to manage the partnership; if something negative happens such as an accident (called a tort) that injures people and produces liability—like a chemical spill, auto accident, or contractual breach—each of the partners is personally liable with all of their personal assets at risk. Also, the partners are liable for the taxes on the partnership, as a GP is a pass-through entity, where the partners are taxed directly, but not at the partnership level.
It should be noted that GPs may be a useful structure in certain situations because they are relatively easy and inexpensive to form. The expanding use of LPs, LLPs, and LLLPs is discussed in the preceding text, but the popularity of GPs has been on the decline. However, as long as the business does not have a high likelihood of liability-producing accidents or situations, a GP can work. An example might be two partners offering graphic design or photographic services. However, due to the different risks associated with them, GPs are often not the best choice of business entity. Other types of entities offer the protection of limited liability and are thus better choices in most circumstances.
### Taxation of Partnerships
Partnerships are considered pass-through entities, whether they are GPs, LPs, or LLPs. Therefore, the partnership’s profits are not taxed at the entity level, like with a C corporation, but the profits are passed through to the partners, who claim the income on their own tax returns. The partners pay income taxes on their share of distributed partnership profits (disclosed on a Schedule K-1 form from the partnership to the individual partners). Thus, there is no such thing as a partnership tax rate.
If the entity is a joint venture that is organized and run as a partnership, then it is taxed the same way, even if the partners are corporations. The profits are distributed, and each corporation pays its own taxes. If, in the alternative, the joint venture formed a separate distinct corporation, then it pays taxes as a corporation.
### Joint Ventures: Business Entities Doing Business Together
A joint venture occurs when two or more individuals or businesses agree to operate a for-profit business venture for a specific purpose. A joint venture is similar to a legal partnership but different in terms of purpose and duration. Usually, joint ventures are used for a single purpose and a limited period. One example of a joint venture involved BMW and Toyota working together to research how to improve the batteries in electric cars, a single purpose, over a period of limited duration, envisioned to be ten years.
Companies enter into a joint venture often to avoid the appearance of the creation of a partnership, because partnerships tend to create long-term obligations between the partners, while a joint venture is a limited business enterprise. Typically, two business entities operate a business together on a joint project. The joint venture agreement allows the entities to pursue a specific business objective while keeping their other business operations and ventures separate.
A joint venture is not recognized as a taxable entity by the IRS. The entrepreneur can use a joint venture agreement to develop a business enterprise, and if the business enterprise is successful, a new entity can be created to take over the operations of the joint venture and move the business to the next level. For this reason, a joint venture can be a good way test a business concept. If successful, then the operations and assets can be rolled into another entity that supports investment from outside investors. The use of a joint venture also allows the parties to test drive the relationship between the entities: to develop a business venture with less risk.
Joint ventures can involve parties that are large or small, or from private or public sectors, or they can involve a combination of types of entities, most often resulting in a joint venture that is formed as a corporation or LLC. For example, the public company Google and the private entity NASA formed a joint venture to improve Google Earth. Likewise, a joint venture might be something smaller, such as an arrangement between a freelance IT engineer, a graphic designer, and a social media consultant to create a new cell phone app. summarizes the relationships of the businesses in a joint venture.
### Summary
Partnerships are a popular form of doing business. Within the structure of partnerships, there are multiple entities or structures. Making the choice can be rather complicated because an ill-informed choice could result in legal problems. Choices include a GP, LP, LLP, and LLLP, each with a different set of circumstances that might make it the right or wrong choice. The factors that would play a role in selecting which type of partnership to form include business purpose, management structure, taxation, and liability. In addition to partnerships, a related type of entity is a joint venture. Joint ventures can be combinations of two or more business entities that decide to come together for a limited period of time for a specified purpose.
### Review Questions
### Discussion Questions
### Suggested Resources
The IRS website has a clear explanation of partnerships with regard to taxation, regarding both income tax and employment/payroll taxes. You might find enough information here to help reduce the time you spend with a CPA, saving your company a lot of money: https://www.irs.gov/businesses/small-businesses-self-employed/partnerships |
# Business Structure Options: Legal, Tax, and Risk Issues
## Limited Liability Companies
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the ownership structure of a limited liability company
2. Explain how limited liability companies are taxed
3. Summarize the advantages and disadvantages of the limited liability company structure
A limited liability company is a hybrid of a corporation and a partnership that limits the owner’s liability. The big advantage that LLCs have over GPs is in the protection of owners from personal liability. Thus, an LLC is similar to a corporation in that it offers owners limited liability.
The advantage that LLCs have when compared to corporations, especially for entrepreneurs, is that they are easier to form and less cumbersome to operate because there are fewer regulations and laws governing LLC operations. Although LLCs tend to be easier to create, they still require a filing of articles of formation with the state and the creation of an operating agreement. Owners of an LLC can be individuals and other business entities. The entrepreneur can use the flexibility of an LLC to create a business structure suitable to the operational and tax needs of the business.
In 1977, Wyoming was the first state to allow the LLC format—most states started allowing them in the early 1990s. In contrast, corporations have been around since the early nineteenth century. LLCs now significantly outnumber corporations, with some estimates indicating that four times as many LLCs are formed as corporations,Scott A. Hodge. “The U.S. Has More Individually Owned Businesses Than Corporations.” with the total number of LLCs nearing 20 million compared to about 2 million corporations. Each state may permit varying types of LLCs, with different types of formation agreements and operating agreements.
When evaluating the use of an LLC as the structure for your business, it is important to know that there are some constraints on the use of an LLC. In most states, a nonprofit business cannot be an LLC. Additionally, most states do not permit banks or insurance companies to operate as LLCs.
### Overview of LLCs
The owners of an LLC are called members. The owner (if a single-member LLC) or owners often run the company themselves. These are called member-managed LLCs. The daily operations of the LLC can also be delegated to a professional manager, which is called a manager-managed LLC. If the original organizer of the LLC chooses, they can organize an LLC in which the owners (members) will have little or no management responsibility because it has been delegated to a professional manager. These options when drafting an LLC’s operating agreement allow an LLC to operate in different ways, so that an entrepreneur can develop a business structure best suited to the needs of the business.
As long as the members (owners) do not use the LLC as an alter ego and/or commingle personal funds with LLC funds, the LLC provides the corporate shield of limited liability to the investors. If the LLC is operated to protect a sole proprietor, this might become an issue if the sole proprietor commingles funds. Commingling funds or assets gives rise to the sole proprietor or other members of a multi-owner LLC being liable for all of the debts of the LLC. Generally, the ownership of an LLC is represented by percentages or units. The term shares is not used in operating agreements because LLCs cannot sell shares of stock like a corporation can; thus, owners are not technically shareholders.
### Taxation of LLCs
Entrepreneurs are able to make decisions regarding the taxation of LLCs. The government can tax the business as a corporation or as an individual. This choice may involve more than simply a tax rate decision; it might involve ownership and management issues, as well other financial considerations. However, this section will focus on the tax decision aspect of the issue.
A multi-owner LLC’s default taxation is as a partnership, meaning profits pass through and are taxed on the owner’s federal tax return. However, LLCs can elect to be taxed as either a partnership or a corporation. Single-member LLCs can also be taxed as a sole proprietorship or as a corporation. The fact that an LLC can select its method of taxation as either a C corporation, S corporation, or partnership allows the entrepreneur flexibility in creating the business structure of their choosing. Note, however, that tax laws change. For example, the Tax Cuts and Jobs Act of 2017 may make formation as an S corporation more attractive to some entrepreneurs than formation as an LLC, at least as far as taxation is concerned. You should seek advice from a tax accountant to ensure that you are able to make decisions based on the most current regulations.
### Summary
LLCs have become, over the past twenty-five years, one of the most popular business entities for new startups. The phenomenal growth in LLCs is due to a straightforward equation: easy formation + easy operation + limited liability = popularity. LLCs offer entrepreneurs several qualities that they seem to like: They are low cost, low maintenance, protect the owner’s personal assets from liability, and offer flexible taxation choices.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
The SBA has an excellent website for LLC owners. It has information about multiple topics including comparisons with other structures, and links to other websites that offer good advice: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure |
# Business Structure Options: Legal, Tax, and Risk Issues
## Sole Proprietorships
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the ownership structure of a sole proprietorship
2. Explain the advantages and disadvantages of operating as a sole proprietor
A sole proprietorship is a business entity that is owned and managed by one individual and has very little formal structure and no mandatory filing/registration with the state. This type of business is very popular because it is easy and inexpensive to form. The owner, called a sole proprietor, is synonymous with the business and is therefore personally liable for all debts of the business. Sole proprietors do not pay separate income tax on the company, instead reporting all losses and profits on their individual tax returns.
### Overview of Sole Proprietorships
Entrepreneurs solely operating their own businesses are called sole proprietors. According to the Tax Foundation, there are more than 23 million sole proprietorships in the US, far more than any other type of business entity.Scott A. Hodge. “The U.S. Has More Individually Owned Businesses Than Corporations.” This statistic means that the sole proprietorship is by far the most common business structure, even though the business is not legally separate from its owner. The primary reason that many entrepreneurs choose the sole proprietorship format is that they do not have to make a choice, get professional advice, or spend any money. An entrepreneur who just starts doing business is automatically a sole proprietorship unless they elect to become a different type of entity and file that paperwork. An entrepreneur who becomes a sole proprietor does not necessarily have to go to an attorney or an accountant, or file any documents, making a sole proprietorship quick, easy, and cheap to form and operate.
Another development related to the decision to be a sole proprietor is the rapid growth of the gig economy. Some individuals prefer to work on their own rather than become a full-time employee. Being a gig worker falls somewhere between being a business owner and being an employee, so many gig workers, ranging from drivers for a ride-sharing company to instructional designers, operate as de facto contractors who are sole proprietors.
However, there remains a debate about whether these gig workers should be deemed sole proprietors. Recently, California passed a new law, signed by Governor Gavin Newsom, which extends wage and benefit protections to many thousands of workers who were previously self-employed sole proprietors working in the gig economy. The new law is based on the presumption that when workers are misclassified as independent contractors rather than as employees, they lose basic benefits such as a minimum wage, paid sick days, and health insurance.
The sole proprietorship is the simplest method to operate a business—often under the owner’s name—and the owner is typically taxed directly by the IRS by attaching a Schedule C (Profit or Loss) form to the owner’s individual tax return. In order to document one’s income, instead of being provided a Form W-2 from one’s employer, many self-employed individuals receive one or more 1099-MISC (Miscellaneous Income) forms from clients, which typically demonstrate that the taxpayer is operating a sole proprietorship. Sole proprietors are allowed to deduct their business expenses related to their income and, as both employer and employee, are required to pay the full amount of employment taxes for Social Security and Medicare.
An owner can also operate under a DBA or “doing business as” filing. A DBA is filed at the relevant state or local government office where the sole proprietor wants to operate under an assumed name. Technically, this is not a new organization: It is just a different name. Any business entity may file for a DBA to operate under an assumed name, and many individuals operate under a DBA to indicate the type of services they are providing, such as Smith’s Roofing Company. It is not uncommon for an individual to name a sole proprietorship using LLC or Co. in its name; however, an individual operating under a DBA or assumed name is not provided any of the protections provided to a corporation of LLC, even if Inc. or LLC is used in the assumed name. A sole proprietor needs to consider the impact of using an assumed name prior to creating a DBA.
### Advantages and Disadvantages of Sole Proprietorships
The sole proprietor is personally liable for everything. A sole proprietor is the investor, owner, and manager of the business enterprise. The sole proprietor is personally liable for all of the taxes and any unpaid debts of the business venture. The sole proprietor also has no business to sell and can sell only assets related to the business. The sole proprietorship is the easiest business to start but has almost no differentiation from the individual starting the business.
### Taxation of Sole Proprietorships
A sole proprietorship is not taxed as an entity. All profits pass through to the owner who pays individual income taxes on all profits earned. It does not matter whether the owner takes the money out of the business or leaves it in the business; all profits are taxed to the individual owner. This is an area that requires significant planning and may be a potential disadvantage, depending on how the individual owner’s personal rate compares to the corporate rate.
### Other Low-Risk Entry Structures in Entrepreneurship
Over the past decade, various alternatives to traditional employment have become popular, leading many to become entrepreneurs rather than employees. The US Bureau of Labor Statistics reported that, in 2019, there are 55 million people in who are “gig workers,” which is more than 35 percent of the US workforce. That percentage is expected to increase to 43 percent by 2020.Quora. “What Are the Pros and Cons of the Gig Economy?” This offers both an opportunity and a challenge. There is a modicum of security when one is an employee of a company, which may not exist in the same way for someone who is freelancing or working as a contractor. There are many examples today of people becoming small entrepreneurs. This process goes by a variety of names, such as the sharing economy, the gig economy, the peer economy, or the collaborative economy. Maybe it means driving for a company such as Lyft, Uber, or GrubHub, or perhaps offering services through TaskRabbit, UpWork, or LivePerson.
Offering your services in this new manner is not controlling of what type of entrepreneurial enterprise you want to be. You can do most of these types of things as a sole proprietor, an LLC, or an S corporation. According to the Tax Foundation, over the past thirty-five years, the number of C corporations has declined significantly, while the total number of pass-through businesses including LLCs, S corporations, partnerships, and sole proprietorships has tripled to over 30 million. According to estimates, there are only 1.7 million C corporations, whereas there are 7.4 million LLCs, partnerships, and S corporations, and a whopping 23 million sole proprietorships.Scott A. Hodge. “The U.S. Has More Individually Owned Businesses Than Corporations.” The explanation for these statistics is really quite simple. LLCs have quickly become one of the most popular business structures due to ease of formation and operation. Likewise, sole proprietorships are quick, easy, and low cost compared to corporations, which are more difficult and expensive to form and operate. The choice is open and depends on the variables discussed in this chapter.
### Summary
The sole proprietorship structure or entity is the most common form of doing business in the US. It is easy and inexpensive to form, is directly managed by the owner, and is subject to minimal regulation in terms of its formation and/or operation. However, with these good points are also some drawbacks. The owner has unlimited personal liability for all business-related obligations, which makes using this form of business very risky. Additionally, the only way a sole proprietor can remain that way and get access to capital is to borrow money from the bank or a perhaps a family member. Sole proprietorships cannot sell stock like a corporation can nor can they take on more partners as in a partnership or LLC.
### Review Questions
### Discussion Questions
### Case Questions
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# Business Structure Options: Legal, Tax, and Risk Issues
## Additional Considerations: Capital Acquisition, Business Domicile, and Technology
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the capital acquisition opportunities available to different types of business structures
2. Explain how the advantages and disadvantages of where a business is registered should inform the decision of where to create a business domicile
3. Understand the role technology considerations may play in selecting a business structure
In addition to the main entity selection topics already discussed, such as ownership structure and taxation, there are other considerations that entrepreneurs might want to consider. For example, when choosing a business format, a founder would be interested in how to raise capital to use in the business.
Another issue to consider includes where to form a new business, since formation is largely a state issue, and there are fifty different states from which to choose. This has the potential to affect multiple aspects of one’s business, including income and sales tax issues, government regulation, and litigation situs (location). For example, some states, such as Wyoming and South Dakota, have no corporate income or gross receipts tax at all; other states, such as California and New York, do have a state corporate income tax. For more information on the variation between all 50 states, see the following website operated by Cornell Law School: https://www.law.cornell.edu/wex/corporations.
### Capital Acquisition
Once an entrepreneur has created a business plan, the next requirement is to capitalize the business venture. If the entrepreneur wants to start out small, a sole proprietorship is all that is needed, although even for small businesses, this structure carries a high degree of risk. Basically, the entrepreneur can simply start working on the business venture. If the entrepreneur’s business venture is larger, raising capital becomes a major issue. This can be done though bank loans or investors.
Entrepreneurs eventually need capital to grow their business. Capital typically comes in the form of cash. Entrepreneurs need to consider the business structure they select for raising cash in the future if they plan to grow their business. Banks, family members, friends, or others can lend cash to an entrepreneur. These types of loans may not give the lenders ownership rights in the company. The lenders may take a lien on the assets of the business venture but do not necessarily have the right to run the business. Management is typically left to the owners when borrowing funds, but when a company receives investment funds, the investor also receives an equity share in the business and may be involved in management.
Owners and investors may want to have the right to operate the business or may want the investment structured in such a fashion so that the investors only participate in the profits or losses of the business, but do not operate the business. Depending upon the type of the business and the expectations of the entrepreneur and possible owners, this needs to be considered before creating a company. An entrepreneur raising capital needs to consider what participation is desired from investors and the timing of the needed capital. Remember, investors become owners, whereas lenders are not owners.
Capital is required at every step of a business. There can be lines of credit to finance operations as receivables are collected, and there can also be long-term borrowing for purchases of big-ticket assets required to operate the business. The difference between a loan and an investment is that the loan principal and interest must be paid back. However, an investment allows the investor to participate in the profits and losses of the business, but does not need to be repaid because investors can get a return on their investment by selling their interest in the business. Finding a good balance between how much ownership the entrepreneur wants to relinquish versus how much of the profits need to be paid to finance the business is key. The entrepreneur needs to determine this balance as the company grows. For example, Amazon started as a Washington state corporation named Cadabra, Inc., operating out of Jeff Bezos’ garage, and then through several transactions became the world’s largest online retailer incorporated as a Delaware corporation with its ownership shares AMZN traded on the NASDAQ.
Growing companies will have different rounds of outside investment. Never consider that the first outside investment received will be the last investment. There will be more than one round of financing in most companies. As the investment and financing changes, there will be changes in the corporate structure of the business venture. Just like Amazon, a company can start in one’s garage and then go on to be a company listed on a major stock exchange with a worldwide reach. Each step of the way takes careful planning (see Entrepreneurial Finance and Accounting).
Legal and tax issues are directly related to the agreements between entrepreneurs and their investors. The written agreements should spell out the corporate structure with specific details of the arrangement between the two. The business structure will drive the tax circumstances of the investment, business, and owners. This may change with new investors, so agreements should be flexible. Many times, a new investment in the same business may be created in which the new business structure purchases the assets of the old business structure. This event will change all of the agreements evidencing the structure of the venture.
Agreements describing how the owners share in profits and losses, and how the owners share in making decisions about the business venture can and do change. Many owners and entrepreneurs desire that their company become a publicly held corporation. This is a company with its ownership shares traded on a public exchange. The ease of buying and selling shares on a public exchange typically increases the value of the company. Therefore, many investors desire that shares ultimately become publicly traded. A company may start as a sole proprietorship, become an LLC, and then be converted into a corporation with its ownership shares traded on a public stock exchange. In the circumstance where the company is growing, the business structure will change over time.
Many publicly traded companies start as a privately held corporation before going public through an initial public offering (IPO). A recent example is Spotify, which in a 2018 IPO raised $9.2 billion.Samuel Stebbins. “The Top 26 Largest Company IPOs of the Year.” A closely held corporation, which is essentially the same as a privately held company, has no public market for its stock. The owners, as members or shareholders, have more control over the directions of the company, until the company is taken public.
The assets of a closely held company can be sold to a company that is publicly traded, such as a reverse merger, or can be used to create a company that will pursue an IPO. Both of these are complicated endeavors that require audited financial statements, the assistance of lawyers and outside accountants, and the use of an investment bank. Each step of the way, the entrepreneur gives up some equity and control in the company in exchange for investment money to help the company grow. Most small companies becoming public will (but are not required to) list on a stock market like the Nasdaq SmallCap market or the Nasdaq National Market System. This development provides the company direct access to international capital markets and many new investors.
The issues that investors tend to look at include transferability or sale of their ownership interest, ability to raise additional capital, and protection of the investors’ assets outside of the investment. If the entrepreneur is unconcerned about investment from outsiders, these considerations are not as important. Another issue is the ability to raise capital through banks or by using the SBA to guarantee a loan through a participating bank. The first step in getting an SBA loan is determining that the “business is officially registered and operates legally.”U.S. Small Business Administration. “Funding Programs.” n.d. https://www.sba.gov/funding-programs/loans This means that the borrowing business is a company that is registered in a state to do business. An entrepreneur can borrow up to $4.5 million (the SBA limitU.S. Small Business Administration. “Loan Fact Sheet: The SBA Loan Guarantee Program: How It Works.” October 2011. https://www.sba.gov/sites/default/files/SDOLoanFactSheet_Oct_2011.pdf), to fund operations. However, the first step is to create a proper business entity to which the bank can loan the money or in which an investor can invest. The typical entities to which banks lend money and investors invest money are partnerships, LLCs, or corporations. To create these entities, an entrepreneur needs to file the appropriate paperwork within a given state.
In addition to traditional sources of funding, including borrowing, taking on partners, and selling stock through an underwriter, there is a relatively new source of capital for small business entrepreneurs that is an important addition to the capital acquisition options for startups. Equity crowdfunding involves a startup raising capital through the online sale of securities to the general public.
In 2012, Congress enacted new legislation called the Jumpstart Our Business Startups (JOBS) Act, which amended US securities laws to enable small businesses to use a variation on a technique known as crowdfunding (see Entrepreneurial Finance and Accounting). Crowdfunding is already in use as a way to donate money to consumers and businesses through web portals such as GoFundMe, but those sites do not offer SEC-compliant sales of securities in a business, as the JOBS Act now permits. Emerging growth companies (EGCs) seeking capital are now able to raise equity capital more easily and at a lower cost. This new type of funding should help level the playing field for EGCs and is viewed by many as a way of democratizing access to capital.
An example of success using this new method of financing for entrepreneurial startups is Betabrand. This San Francisco-based retail clothing company doubles as a crowdfunding platform. The company facilitates the use of its platform for crowdsourcing clothing concepts and prototypes, and their conversion into actual products by raising capital through their website.
### Business Domicile: State and Local Considerations
There are multiple reasons why an entrepreneur may want to consider geographic location when forming and operating a business. Of course, one practical consideration is where the entrepreneur lives, at least in terms of operating a small local or regional business. However, there are other important considerations, such as differing formation/incorporation laws, widely varying levels of regulation, different types of permitting, and other relevant factors. As a rule, a corporation is considered a citizen of both its state of incorporation and the state of its principal place of business.
The state where a person lives is not necessarily the state in which they must form and/or operate the business. For example, if a person lives in the New York City metro area, they might well have a choice of New York or New Jersey, or even Connecticut, Delaware, or Pennsylvania. The same may be true for the metro areas of other large cities. Additionally, even if a person lives in the middle of North or South Dakota, they might choose to start a business in another jurisdiction, such as Delaware, Alabama, or Wyoming, due to favorable formation regulations. The following section discusses the issue of choice of jurisdiction when forming a limited liability entity such as a corporation or an LLC.
### Choice of State When Incorporating/Registering Your Business
Business entities seeking the protection of limited liability must be registered with a state. This typically includes corporations, LLCs, and LPs. Additionally, if a corporation seeks to sell stock to investors in a specific state (called an intrastate offering), it must be registered in that state. The first step is to select the type of entity to be created and then file the appropriate paperwork with the state. Each entity is typically created through the office of the secretary of state (or, in the case of Kentucky, Massachusetts, Pennsylvania, and Virginia, the secretary of the commonwealth), with each state having a different process for creating the entity. The Balance, a small business resource website, lists all state government offices in which to file the appropriate paperwork (https://www.thebalancesmb.com/secretary-of-state-websites-1201005).
Forming a business in the state where the entrepreneur is physically located is generally the easiest way to create the entity through which the entrepreneur will conduct business. Some entrepreneurs choose to create their business entity in other states for privacy reasons or for tax savings. The entrepreneur will still have to file and pay taxes in every state in which the business operates and will have to register its presence in the state in which it is physically located. Some investors might prefer out-of-state incorporation, and the entrepreneur needs to remember that the corporation will be subject to taxes, filing requirements, and other fees imposed by each state of operation and the state of incorporation.
Delaware is a particularly popular state in which to incorporate due to the ease of regulations regarding ownership structure and business-friendly laws; Nevada and Wyoming are popular as well for the same reasons. The reason these states are popular is that initial fees are cheap, there are little or no renewal fees, and the states emphasize asset protection. While Delaware, Nevada, and Wyoming offer good reasons to incorporate, they are not best choice for every business. If a business incorporates in one state but does business primarily in another, in all likelihood, it may very well have to pay the second state’s fees and/or taxes in addition to those of the first state. Entrepreneurs need to consider cost and ease of operations when determining the state in which to create their business entity.
### Multistate Taxation
Most businesses have a website and are glad to sell products to any buyer, regardless of where the buyer is located. Amazon is an example of a company that capitalized on the concept of Internet sales. Amazon collects sales tax from all forty-five states that have a statewide sales tax because it owes tax in every state and city in which it operates.
Multistate taxation is not something that most small businesses consider, but it is an issue that can arise in many different circumstances. For example, professional basketball players may be taxed by the state, or even the city, in which they play. This means that an NBA player could owe taxes in over 20 states if he went to every game. Just sitting on the bench in 20 different states could trigger multistate taxation, and, if the team plays in other countries, foreign taxes could also be owed. This is true for every sport and every business that operates in multiple states or other countries. It is not only multibillion-dollar corporations that are affected, but small businesses and individuals as well.
Most online multistate businesses now collect and pay sales taxes in those states with a sales tax. This was not always the case, however. For years, Amazon and other online retailers sold products without collecting any state or local sales taxes at all. The legal requirement that companies did not have to collect sales taxes in a state unless they have a “physical presence,” such as warehouses, offices, and/or employees, gave online companies carte blanche to ignore state and local taxes for many years.”“Amazon’s Local, State and Federal Tax Issues Explained.” n.d. https://itep.org/amazons-local-state-and-federal-tax-issues-explained/ Until the 2018 US Supreme Court decision in South Dakota v. Wayfair, states generally did not require online sellers to collect and remit sales tax to the state. However, this case changed the rules by creating the concept of an economic nexus, a virtual connection with a state based on sales volume or number of transactions. This now means, in most states, that if your business meets a threshold of $100,000 in sales in that state, it may now require you to collect sales tax on online transactions. Therefore, your online business may have to collect and remit sales tax to as many as forty-five states (five states do not have a sales tax). All entrepreneurs need to develop an understanding of how the Internet and the related tax laws and regulations will affect their planned business operations. Creating a company in another state will no longer automatically avoid multistate taxes and regulations.
### Technology Considerations
Most new entrepreneurs have some familiarity with technology, whether something as basic as social media or more advanced as extensive website development skills. However, most small businesses face challenges in the areas of information technology security and compliance with legal and regulatory requirements.
Not all small businesses face these challenges. They are most common in companies that handle private information, such as health records or credit card data. The storage and protection of this type of information must comply with government regulations. For example, a small government IT contractor that deals with any type of classified governmental information would need to ensure classified information was protected per regulations and not at risk of exposure. In the healthcare field, recent hacks of patient health data, some of which are handled by small businesses such as a solo practice physician’s office, demonstrate the challenges of data protection. It is a significant challenge for companies with relatively small budgets to protect data. Technology security adds large costs and requires skilled personnel, for any business, large or small. summarizes the choices of business structure discussed throughout this chapter.
### Summary
Multiple considerations play a role in the selection of the best business structure for each entrepreneur. This decision flows from the entrepreneur’s vision of how the proposed business will operate and affects all aspects of business operations. The decision includes issues related to legal liability, taxation, and the ability to raise capital. This process may also include consideration of the best state to form and operate in, as a result of taxation, regulation, and other related matters.
### Review Questions
### Discussion Questions
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# Business Structure Options: Legal, Tax, and Risk Issues
## Mitigating and Managing Risks
### Learning Objectives
By the end of this section, you will be able to:
1. Explain Enterprise Risk Management and how a company uses it
2. Describe litigation and financial risks
3. Describe common insurance needs
Risk management is key to operating any business in a profitable fashion. There are many risks facing an entrepreneur when starting and operating a new business venture. The trick is to eliminate risks that will hurt the venture, while taking on risks that will provide for long-term profitability. The risks facing the entrepreneur need to be initially identified as part of developing a business plan and revisited regularly in ongoing operations. Preparation for adverse events affecting a new business venture is necessary, but being too pessimistic or allowing fear of adverse events to stop an entrepreneur from taking any risk will keep a business venture from achieving it greatest potential and profit.
It is important that an entrepreneur develop an understanding of the risks of the business environment. The risks include liability risks stemming from contracts and torts, sometimes referred to as operating risks, regulatory compliance risks, financial risks, and strategic risks, including taxation. Understanding how the business structure is used to operate the business venture allows the entrepreneur to develop a plan to manage business growth and understand business risk.
### Enterprise Risk Management
Profitable ventures develop a strong enterprise risk management program, which is an integrated, cross-disciplinary approach to monitoring risk. An organization needs to look at both long-term and short-term risks at all levels of the organization, and these risks need to be evaluated from all stakeholders’ perspectives and developed into an entity-wide program.
Enterprise risk management attempts to address the specific risks discussed in the preceding section by implementing a risk program that enables a business to identify and manage risk. Specifically, a business will go through a process that involves a multistage process of risk identification, risk assessment, and risk abatement. Examples of risks that businesses face include those from natural causes, economic causes, and human causes.
Natural causes of risk include disasters such as hurricanes and flooding, as well as earthquakes or other catastrophes that result in loss of life and property, as well as business interruption. For example, a business in New Orleans could be flooded by a hurricane. This results in damage to facilities and products, and threatens the lives of workers. In order to counter such causes, businesses need to plan ahead for business continuity, take out comprehensive insurance coverage, and have an evacuation/shut-down plan in place.
Economic causes of risk include global events leading to rising prices of raw materials, currency fluctuation, high interest rates, and, of course, competition from other companies in the same industry. An example of this would be unpredictable trade wars with China, leading to tariffs.
Human causes of risk refer to actions by employees, contractors, and those persons over which a company has control. These events can include torts stemming from negligence at work, labor strikes, shortages of qualified trained workers, and corporate mismanagement. An example of this type of risk would include embezzlement of money by an internal financial executive.
The use of a comprehensive approach allows a business entity to review and combine all risks into a functional perspective that allows the entrepreneur to evaluate risks and integrate new risks as different opportunities become more important to the business venture. Businesses sometimes use a risk matrix to assess or characterize the probability and impact of risk (). The use of such a tool can help a business quantify risk and decide whether to undertake an activity based on its level of risk.
Risk appetite is important for a business venture to consider, both when creating its business structure and during ongoing operations. shows an overview of the considerations a business venture should entertain in both its creation and operation.
This is the basic approach to evaluating a new venture’s appetite for risk. Determining and understanding the risks facing a new venture should start during the preparation of the business venture’s written business plan and should continue through the operations of the venture.
### Legal Risk and Protection
Business operations of any sort need to follow business regulations and laws. The failure to follow business regulations may lead to fines, lawsuits, or even criminal penalties. Legal risk stems primarily from a breach of contract and/or the commission of a tort. Common examples of this type of risk includes product liability lawsuits. These lawsuits are frequently very expensive class action lawsuits or regulatory investigations of dangerous products. There are many famous case examples including automobiles, asbestos, pharmaceutical drugs, breast implants, and airplanes.
Other lawsuits stem from contracts, including borrowing money from a bank. The business has an obligation to pay it back, or it breaches a covenant within a contract. Other common types of contracts are those used in selling services and products, leasing real estate, and other similar contractual obligations.
Due to liability risks, business owners and investors are always looking for ways to limit their personal liability. Incorporation is a standard risk protection strategy for this potential problem, as are the use of other types of limited liability structures such as LLCs. This is one of the main advantages of properly operated corporations and LLCs, which allow for limited personal liability of owners and investors. Partners in GPs and sole proprietors are personally liable for all of the debts of the business, even beyond their own investment in the business.
However, a particular challenge for small business entrepreneurs is that even when they form a corporation or LLC, many lenders, landlords, and other entities providing credit to a small business circumvent the limited liability protection by requiring owners and investors to personally guarantee the debts of the business operations. This means that the owner who personally guarantees the credit will have to pay back the obligation if the business cannot. An owner can obtain insurance or borrow money for such guarantees. LLCs and corporations do protect their owners, shareholders, and members from a number of different tort claims, such as personal injury lawsuits and claims made directly against the organization.
### Financial Risk and Protection
An entrepreneur needs money to launch a business, whether that comes in the form of loans from family, their own savings, or investors. The founder will be expected to put their own money at risk, whether in the form of a loan to their own business or equity in their own business. If they do not have any “skin in the game,” then others will not be interested in loaning them money. This means that if the business fails, it will have repercussions for the owner, even if they operate as a corporation or LLC. This is the essence of financial risk: starting a new business with insufficient funds to sustain operations over an extended period of time.
Any new business owner needs to have a sound financial strategy as a part of the overall business plan. This should show income projections, the liquid assets that will be required to break even, and the expected return on investment for all investors in the first five-to-ten-year timeframe. Failure to accurately plan could mean that the entrepreneur risks business closure and bankruptcy, and investors get nothing.
### Insurance Protection
Risk management and protection are enhanced with the purchase of different types of insurance, which involves spreading risk over a large number of people (policyholders). If a company is a corporation, it may need directors’ and officers’ liability insurance to indemnify the directors and officers if they get sued. Another insurance policy many companies get is called errors and omissions insurance, and this insurance coverage protects employees in negligence claims and cases if employee theft. Other types of insurance policies that most businesses carry include automobile insurance, health insurance, property insurance, and cyber/data breach insurance. Insurance coverage for a business venture needs to be specific to the business structure and its operations. Keep in mind that not all risks can be insured against—for example, a bad economy that leads to a loss of business or a bad decision by the owner to enter a market that does not work out.
### Information Technology/Cybersecurity for Small Businesses
According to the SBA, the risk of hacking, ransomware, and customer privacy are equally as significant for most small businesses as for larger ones. The SBA has set guidelines related to cybersecurity for entrepreneurs. The SBA recommends the ten-step action plan shown in .
The Federal Communications Commission joins the SBA in the preceding recommendations. For more information, see the following website: https://www.fcc.gov/general/cybersecurity-small-business.
### Summary
Risk is part of the equation for any startup business. There is no way to protect against every risk. However, there is a way to identify risk, plan for it, manage it, mitigate against it, and protect against it to an extent. The key to understanding and dealing with risk is not to take a utopian approach to a business startup, thinking that it will never happen to you. Risk is omnipresent. Statistically, some unexpected things will happen. Thus, the best approach to risk is to consider and implement strategies to help you and your business deal with it such as incorporation, insurance, and monitoring.
### Review Questions
### Discussion Questions
### Suggested Resources
North Carolina State University, Poole College of Management, has an excellent enterprise risk management initiative. It has a wealth of helpful information for entrepreneurs on this topic: https://erm.ncsu.edu/library/article/coso-erm-framework |
# Fundamentals of Resource Planning
## Introduction
New Story, a forward-thinking social enterprise, set out to solve a global issue that affects more than one billion peopleJoseph Chamie. “As Cities Grow, So Do the Numbers of Homeless.” worldwide: homelessness and lack of adequate shelter. The organization has impressed many investors by revolutionizing homebuilding techniques. Its founders—Brett Hagler, Alexandria Lafci, Mike Arrieta, and Matthew Marshall—share a passion for “improving lives through safe homes and a shared vision to change the traditional charity model.”New Story. “Founding Story.” n.d. https://newstorycharity.org/about/ When its founders realized the global need for proper shelter, many people having been displaced by natural disasters, they decided to take advantage of an alternate charity model by connecting with other building organizations and using crowdfunding. These four innovators combined their skills to create an organization that emphasizes building sustainable homes at a quick pace and affordable price. New Story’s business model includes an innovative approach to home building and design by incorporating the needs of each family, local partners and workers, and crowdfunding campaigns to pay for construction.
At their start, New Story knew they needed the support of great mentors and an accelerator to raise funds for overhead costs, so they applied to one of the most prominent accelerators in the United States—Y Combinator, a community of founders that funds startups in an accelerated three-month development process. Optimizing this opportunity, New Story built 113 houses through their “100 Homes in 100 Days” campaign in Haiti, a challenge that Y Combinator posed to them. This experience enabled the New Story team to identify global partners that extended their reach to developing communities in Bolivia, Mexico, and El Salvador.
One of the best technological advances that New Story has leveraged in its collaborations with companies is the 3-D printer by ICON, which allows a home to be printed in as little as twelve hours for only $6,000. The 3-D printer uses three main components to build a house: robotics, a special mix of materials that dry quickly, and a tablet that runs the software needed to design the home.
By securing funding and finding local community partners, New Story has built sixteen communities, with more than 2,200 homes in four countries.New Story. “Our Impact.” n.d. https://newstorycharity.org/impact/New Story. “Founding Story.” n.d. https://newstorycharity.org/about/ |
# Fundamentals of Resource Planning
## Types of Resources
### Learning Objectives
By the end of this section, you will be able to:
1. Distinguish between tangible and intangible resources
2. Determine the venture’s tangible and intangible resource needs and how to attain them
3. Describe the various funding resources available to entrepreneurs and discuss the pros and cons of each
You have learned about many opportunities for entrepreneurs to explore and the processes that ensure their success. This discussion focuses on the various resources that entrepreneurs need to start, maintain, and grow an enterprise, and, in general, how to procure those assets. Many entrepreneurs make the mistake of moving forward in their business endeavor without taking enough time to research their industry and determine what resources are required to help their business not only get off to a positive start but also the resources needed for its continued operation. Entrepreneurial Marketing and Sales covered primary and secondary sources of information and how to make use of the information gleaned from them for marketing purposes. Much of that research also applies to questions surrounding resource allocation. But before we delve into allocation, let’s examine the general categories of resources needed in just about every new venture: tangible, intangible, and financial.
### Tangible Resources
As you can imagine, resources needed for the enterprise are varied and can have different attributes. These assets are essential in the operation of the business enterprise. Assets (see Entrepreneurial Finance and Accounting) are property or resources that create a benefit to the person (or company) who owns them. They can be tangible or intangible. Tangible resources are assets that have a physical form. They can be seen, touched, and felt. Tangible resources differ between product-based and service-based businesses. A product-based business uses tangible resources in the production of goods sold to customers, such as raw materials, land, facilities, buildings, machinery, computers, supplies, and vehicles. The warehouse shown in () would be considered a tangible resource for a tire (product-based) company.
Tangible resources for a service-based business include buildings such as a doctor’s office, bank, movie theater, amusement park, retail store, or restaurant, which are enterprises that include both products and services (). Facilities and resources that the business needs to provide its services and run operations may include computers, office equipment, furniture, and technological resources. As shows, the equipment and décor need to be taken into consideration because they becomes part of the product offerings, even if the core product is a service.
### Place of Operation
Your facility needs will depend on the type of product or service you are offering and vary in scope from office space to a food truck to a manufacturing facility to a storefront for sales. Knowing the limit of your budget (discussed in the next section) should help you focus on locations that you can afford. Experts recommend that you allocate only a certain percentage of your sales to your lease or purchase; some businesses use industry averages as guidelines. Factors to assess are location, visibility, foot traffic (how many potential customers walk by), how well the building has been maintained, the maintenance it will need in the future, how long you would want to stay in that location, and the insurance, property tax, and renovation costs, or the cost to build a new building. One approach is to make an assessment of your sales per square foot and compare those to sales of similar companies in the same industry or market. These data can be found through local commercial realtor offices, city or county government offices, and local associations.
### Machinery/Equipment
Machinery and equipment are critical assets to helping launch a business. For service businesses, such as restaurants, dry cleaners, print shops, etc., the equipment can be expensive. In recent years, however, a larger reseller market has emerged for many types of equipment that are still serviceable. It is important for tax purposes to report the current asset value of used equipment and have an accountant confirm its useful life for your income statement and tax returns. (See Business Structure Options: Legal, Tax, and Risk Issues for more information.)
For companies that manufacture products, you may have to order customized tooling and assembly equipment. Again, if you must acquire new equipment, you will need to understand what its useful life is and determine whether you must procure or acquire the equipment from a supplier who charges a “piece price” on top of each component or finished product they supply to you. If you choose this second approach, your supplier may insist on a long-term manufacturing agreement to manage their risk.
### Vehicles
For some businesses, vehicles are necessary equipment to run day-to-day operations. You can use your own, which can be cost effective, or you can purchase or lease one. If purchasing a used vehicle, it is best to check the Kelley Blue Book (www.kbb.com), a reference guide that lists market prices, before purchasing it from a dealership; make sure that there are no defects or negotiate a lower price if you find them; and make sure to secure documentation on warranties. Other reliable valuation sources are carfax.com, nada.com, and edumunds.com.
Many small business owners are undecided as to whether buying or leasing a business vehicle nets better benefits. Let’s assume for the purposes of this discussion that the vehicle is primarily a business vehicle and is not used a majority of the time for personal use. Relevant considerations include both tax and cost-related issues.
One difference between the purchase and lease of the vehicle relates to the tax deduction for depreciation. When you own a business vehicle, you can deduct a depreciation value over the life of the vehicle. Generally, you are not eligible to deduct depreciation on a leased vehicle. However, there is a corresponding difference with regard to the deductibility of monthly payments. With a leased vehicle, the monthly lease payments are tax deductible, whereas if the vehicle is purchased with a car loan, only the interest on the car loan is deductible as a business expense. Ultimately, the decision to lease or buy is one that an entrepreneur should make in concert with a tax advisor.
### Technology
No matter what business you are in, you must invest in technology to support your day-to-day operations. This typically includes computers and software, as well as Internet service and intranet/network functionality. The following list includes most of the basic investments you will need to make for your business:
1. Computers: Laptops, desktops, and tablets are an obvious necessity for day-to-day tasks, communication, and even production of products or services. Think about the performance and attributes needed to operate the business for insight about what brand and quality to buy. A good operating system that can process calculations and requests faster can make your business operations smoother and more efficient.
2. Internet: Every business must have strong and reliable Internet service to ensure connectivity of computers, routers, and peripherals. Communication in today’s environment cannot happen without this technology, and there are many providers that have good packages for businesses to get the bandwidth necessary to operate a business and/or to provide connectivity to customers.
3. Router: If you are using multiple computers, laptops, and printers that need to be connected to each other, you will need a wireless router. A wireless router will help you keep documents and printers accessible from anywhere in your office, even if it’s a small home office. You can also have a hard-wired router, which blocks outside signal interference.
4. Printer: Most businesses need a good quality printer for printing documents, marketing materials, and forms. Most printers now use color ink and come with the ability to scan and copy documents. They also vary in quality, so you will need to consider your printing needs and the costs of toner/ink to determine the level of quality you need.
5. Server: If you need to store and retrieve data—such as customer profiles, emails, and sales information—you will likely need a server. The server is a hardware system with software that performs various functions that cannot be done from one computer.
6. Cloud computing: Cloud services have emerged as a cost-effective way to process, store, and use data for company operations. Rather than host your data and systems on your own hardware services, many large companies like Amazon, Verizon, and Microsoft offer web services hosted on a network of computers. This option provides ongoing data integrity and security, while lowering the cost of IT services and equipment.
7. Software: There are many software applications and tools that are essential for business operations. These tools support day-to-day tasks. Common software needs include accounting and billing software like QuickBooks, customer relationship management tools such as Salesforce or Marketo, word processing and spreadsheet software like Microsoft Word and Microsoft Excel, presentation software such as Microsoft PowerPoint, diagram tools like Draw.io, email marketing tools like Constant Contact or Mail Chimp, file management systems like Dropbox, online phone/meeting apps like Skype and Zoom, social media management systems such as Hootsuite, project management tools like Bootcamp, and more. Some of these tools are free. Others carry a cost but may have free trial periods if you need to test them before investing. Most offer easy subscription payment schedules that can be set up monthly or yearly, and include ongoing software updates.
### Supplies
There are many other supplies needed to operate the business, mostly basic items that you might take for granted but that need to be expensed: paper, toner, files, staplers, writing utensils, cleaners, and so on. You will likely need basic office furniture too. You may also want to invest in certain amenities that create a working environment and set the stage for your envisioned company culture—whether that’s a coffeemaker, a dartboard in a break area, or whiteboards for meetings and brainstorming.
### Licenses and Permits
What types of licenses might be required to operate your business? You may need a basic business license or permit provided by the government for the business to be valid, such as registering as an LLC, partnership, or company (Business Structure Options: Legal, Tax, and Risk Issues discusses these business structures in more depth). These licenses let the government know what kind of activities the business performs and ensure taxes are collected properly. They also make your business a legal entity and prove that it exists in case you need funding or permits. Some businesses require a sales tax license for products and services, whether they are tangible or digital.
Other considerations include professional certifications that pertain to the industry you are working in, such as certifications in accounting (CPA), financial advising, cosmetic services, or healthcare. Many industries require licenses before you can begin to operate; such industries include healthcare, financial services, construction, real estate, insurance, transportation, and engineering. If you will be receiving customers in your home office or storefront, you may be required to undergo a home inspection, especially from the health department if you are in a foodservice industry. Signage outside your business location may also require a permit or compliance with local regulations.
Other permits that may be required for a building include a certificate of occupancy, fire, electrical, HVAC, plumbing, and hazardous materials such as gasoline, diesel, oil, or compressed gas cylinders. Check the laws and regulations of your local and state governments to ensure your business meets the legal requirements for licensing and permits. You can do this by contacting the secretary of state in your state and also by contacting your local chamber of commerce. Importantly, these licenses and permits often carry a cost and should be part of your startup costs with renewals included in your operational budget.
### Intangible Resources
Intangible resources are assets that cannot be seen, touched, or felt. Intellectual property—which includes creative imaginings such as formulas, designs, brands, and inventions—is an intangible resource, and so are the patents, trademarks, and copyrights that protect the intellectual property. For example, if you are a small business owner, you might want to protect your logo, company name, website, slogan, new product prototype, or maybe a newly developed manufacturing process that allows you to shorten production time.
In our current technological era, intellectual property has become more important than ever. The Ethical and Social Responsibilities of Entrepreneurs introduced you to intellectual property protection as an important measure to safeguarding creativity. Entrepreneurs must protect their ideas for as long as possible to sustain a competitive advantage. A competitive advantage for a business could be a formula for a product, like the recipes Kentucky Fried Chicken or Coca-Cola use for their food and beverage products. They protect their formulas so other companies do not replicate them and profit from them. Smaller companies can also invent new products, methods, and branding that will need to be protected. Patents, trademarks, and copyrights are three protections for this type of intangible resource.United States Patent and Trademark Office. “What Are Patents, Trademarks, Servicemarks, and Copyrights?”
### Patents
As Creativity, Innovation, and Invention discusses, a patent grants the owner the right to claim the ability to exclude others from making, selling, using, and importing a product or process to the United States for a period of time. This time is usually twenty years from the date the application was first submitted to the US Patent and Trademark Office (USPTO). This allows the inventor to recuperate the costs of researching and developing the novelty before competitors can copy it. Types of patents include utility, business process, design, and plant patents.
A utility patent is granted to an individual who invents or discovers something novel and purposeful such as a machine, a process, a product, an improvement to any of these, or even a composition of matter. Most patents awarded to inventors are utility or plant patents. The USPTO receives more than half a million applications each year.United States Patent and Trademark Office.
The application and approval process can take several years and can involve a substantial investment that can range from a couple thousand dollars to over $15,000, depending on the complexity and type of patent, as well as the fee for a patent lawyer. Lawyers can help with conducting a patent search and ensuring that the invention doesn’t yet exist, while providing guidance on the application process. Patent attorneys are often expensive, charging between $200 and $800 an hour, but they can make the process easier.
Usually, the first application an inventor files is for provisional twelve-month patent protection, which covers the invention for the first year while the inventor waits for the approval of a final, nonprovisional patent. A patent examiner processes the application and determines whether to award the protection or not. Having the help of a patent lawyer is not necessary, but it usually makes the process easier and increases the odds of receiving the patent. Not having a lawyer can delay the process or prevent the inventor from getting the patent, especially if the inventor is not familiar with the process, or if the invention is complex. Choosing a lawyer carefully is important, as experience and knowledge of the process matters. If the patent is awarded, the final patent goes into effect retroactively to the filing date of the provisional patent, and the inventor has twenty years of protection against other companies copying the design. shows an example of a patent for the well-known 3-D printer, which was awarded in 1986 to its inventor Chuck Hull.Joseph Flynt. “A Detailed History of 3D Printing.”
A business process patent is a type of utility patent granted to someone who develops a new business method, and just like a tangible product, the method must be new and nonobvious, and it must employ an equipment or type of technology to be valid. Nonobviousness is a legal requirement for a patent acquired under federal law (35 U.S.C. § 103), and generally means something that is not readily apparent. A proposed invention is obvious if someone of ordinary skill in a relevant field could easily make the invention based on prior art and thus would not be patentable, whereas a nonobvious invention is capable of being patented. The application must include a description of how the method works with the technology or equipment, and it must have a real-world application and not just be an idea. An example is Amazon’s 1-Click shopping cart that enables people to store credit card and shipping information to enable speedy purchases.
A design patent is granted to an individual who creates something original and novel as an ornamental design. A design patent involves the actual design of an invention. For example, Apple has hundreds of design patents for its iPhone, and Samsung has hundreds of patents for its various products. () shows a patent granted to Apple in 2011. Read the “Abstract” portion. Does it describe something familiar? Every design element, like the LCD screen, the width and length of the phone, and many of its other features that are added to each of its generations, requires a new patent.
A plant patent is as it sounds—it’s granted to someone who creates or discovers a new type of plant, as in the living organism, not facility. The patent applies to a plant or its contents, which must be innovative and nonobvious, and must have utility.
### Trademarks
A trademark provides the owner the ability to use a name, symbol, jingle, or character in conjunction with a specific good. A service mark is, according to the USPTO, a word, phrase, symbol, or graphic that identifies the origin or source of a service.“Trademark Basics.” United States Patent and Trademark Office. n.d. https://www.uspto.gov/trademarks-getting-started/trademark-basics Both marks prevent others from using those same assets to sell their products. A trademark can be the most valuable asset a company owns. Customers will often pay more for a product or service if it comes from a specific brand with a good reputation. Customers view brands as a promise of the experience they will have: Brands promote confidence in the product and the benefits that the consumer may enjoy. Successful businesses create brand loyalty through these efforts, creating a relationship with customers. When users see themselves in the brand, they will choose that brand to create their own identities.
Protecting the name of the company and its products, jingles, logos, and even social media is therefore necessary to gain and protect a competitive advantage, because among competitors, the trademark is often the only way to distinguish among products. Can you think of a brand you are loyal to—perhaps your Apple iPhone, your Starbucks coffee, or your local entertainment spot? Consider what that company has done to earn your loyalty.
Usually, once the business begins to use its name, logo, character, and other assets, they are informally protected by trademark law and can use the ™ symbol. However, if a business wants extended protection, they should file for legal trademark protection.
Trademarks can be registered at the state or federal level. As the names imply, state trademark registration protects the business’s mark within its own state, and federal trademark registration protects the business’s mark across the United States. Once the registration has been filed and accepted at the federal level, the business can use the ® symbol after the protected item. Examples of trademarks include the Apple name and logo, the McDonald’s logo, the talking GEICO lizard, and Nike’s “Just Do It” slogan.
If you are opening your own candle and soap company, for example, you might want to register your company name and logo initially to prevent others from using it and benefiting from your reputation. If you decide to create a jingle, a slogan, a character, or another branding asset, you can do it while you develop and grow your business, as it can become cumbersome and expensive if it’s done all at once. Getting a trademark itself is not as difficult as getting a patent, but just as with a patent, getting a lawyer’s help can prove beneficial. Trademarks are not as costly—it may cost a few hundred dollars to file the application—but attorney fees can vary, depending on the type of project and the length of time it takes to process the application. This can range from a few hundred to thousands of dollars. This type of intellectual property can provide an opportunity for your company to be sustainable for years to come and avoid other businesses copying or using your ideas to promote themselves.
### Copyrights
A copyright is provided to an author of an original work, including artistic, dramatic, architectural, musical, literary, and software works. Copyrights are granted by the Copyright Office, which is a part of the Library of Congress.“What Does Copyright Protect?” Copyright.gov. n.d. https://www.copyright.gov/help/faq/faq-protect.html summarizes the types of US intellectual property protection.
The US Copyright Office’s website offers a variety of publications that further explain what works are or are not eligible for copyright: https://www.copyright.gov/help/faq/faq-protect.html. While filing with the Copyright Office is not required for copyright (the rights exist when the work is created), the process provides more formal legal documentation to protect your business interests. Registration requires a fee (basic registrations are under $100), and other services or specialty requests may add additional expenses.“What Does Copyright Protect?” Copyright.gov. n.d. https://www.copyright.gov/help/faq/faq-protect.html
Trade secrets are oddly similar yet completely different from traditional intellectual property (patents, copyrights, and trademarks.) Trade secrets derive their legal protection from their inherently secret nature, not from a grant of exclusivity by the government. In fact, patents and copyrights are required to be made public, whereas trade secrets are not.
Examples of trade secrets range from the formula for Coca-Cola to the Google search algorithm. An inventor has a choice: patent the invention or keep it as a trade secret. Some advantages of trade secrets include the fact that a trade secret is not limited in duration/time (patents generally only last for twenty years). A trade secret may therefore continue indefinitely as long as the secret is not revealed to the public. However, a trade secret is more difficult to enforce than a patent because the level of protection granted to trade secrets is generally considered weaker when compared with the protection granted by a patent. Additionally, a trade secret may be patented by someone else who developed the relevant information by legitimate means.
### Determining Your Resource Needs and How to Attain Them
As you begin your entrepreneurial plan, start by developing a list of the basic tangible and intangible resources you will need and determine their availability. For example, let’s say you are starting a solar panel manufacturing company called Helios Panels. Your new manufacturing plant will require you to have a 10,000 square foot factory, where you will need two or three specialized machines to build your solar panels. Unfortunately, the area of town that you like does not have buildings available. You will probably need to look for another location where there’s a facility that fits your needs that is easily accessible for transport vehicles. If you don’t make your list first, then you run the risk of ending up in a facility that is not suitable. and provide starting points for thinking through the tangible and intangible resources needs for your venture.
Business owners are constantly faced with difficult decisions about resources. A decision tree is a beneficial tool that Business News Daily describes as a “flowchart graph or diagram that helps explore all of the decision alternatives and their possible outcomes.”Chad Brooks. “What Is a Decision Tree?” In other words, it uses a logical framework to help us make decisions. First, you determine what your different options are for use of resources, and then you can calculate the return for each option, using mathematical models that help estimate the probability of successful outcomes.
For example, let’s say that you must decide which piece of expensive equipment to use in the manufacture of your solar panels. You can create a decision tree to determine the best course of action ().
Working through these questions can help you be prepared prior to opening the business and identify additional resources you will need in the future. This takes time and effort, but the payoff is worthwhile in having a clear understanding of needs to support a path to success. Furthermore, the risk of expensive and unrecoverable mistakes can be mitigated when one uses management tools such as the decision tree tool. Creating a checklist with answers and details () can help sort through and organize your thoughts and your action steps.
### Funding Resources
Funding resources are the monetary resources necessary to start and operate a business and are usually the biggest challenge that entrepreneurs face. If you don’t have funding, you are not able to secure your basic resources—that is, to buy the raw materials to make a product, hire employees, purchase inventory, or secure facility space, furniture, or equipment. Entrepreneurial Finance and Accounting covers these funding sources in depth. Here, we consider how these can be best leveraged to acquire the other resources needed for your business.
### Personal Savings
Most entrepreneurs start their business by tapping into their personal savings. Many entrepreneurs will work another job while setting aside some savings money for their venture. Using personal savings can be a good idea if the business requires low startup costs (marketing material, software, equipment, products, and materials) and low maintenance costs for the first year. This can include businesses that don’t require as much capital, such as professional services (engineers, accountants, and business consultants). Saving for major expenses like equipment can also help avoid paying fees and loans, but it may tie up the money in assets and will prevent you from covering payroll or other operational costs. Having cash reserves on hand can ensure that your basic business needs are met. The positive aspect of using your own savings is that you have the opportunity to use the funds as you see fit: You decide how you want to spend the money. A potential negative with this freedom is that if the business fails, your investment will be depleted as well.
### Bootstrapping
Bootstrapping literally means to pull yourself up by the bootstraps with tenacity and “sweat equity” using the bare minimum resources.Alejandro Cremades and Barbara Corcoran. This means that you do things as cheaply as possible until you start earning revenue that you can reinvest in the business. For example, entrepreneurs starting out might work from home to save on rent and utilities, might create a website and marketing materials themselves, and might use social media to promote the business. Once a customer base is established, the entrepreneur may explore options for outside-of-the-home office space and invest in professional services from a website designer and marketing printer.
Using credit cards can be an option to help the entrepreneur bootstrap and not take out loans. This can be risky, but if you are disciplined and only use them for the essentials of the business, such as production or marketing, they can really help get the enterprise off the ground. Paying off the balance every month and using credit cards that provide rewards and cash back can help develop healthy habits, while reaping the rewards to use on items that are highly needed.
An example of the savvy use of a credit card comes from Johnny Cupcakes, a “t-shirt bakery” in Boston, created by Johnny Earle, who started selling witty cupcake t-shirts, as shown in , out of the back of his ’89 Toyota Camry. He used his parent’s credit card to charge the materials for his t-shirts and bootstrapped his operations out of his home with family help until his clever shirts started selling so well that he had to open his first retail store. Fortunately, Earl was smart enough to use the credit card only for production of his t-shirts, and once they sold, he used the revenue to pay off the credit card completely so as to not incur any more debt or interest charges. Eventually, his business started to flourish and he didn’t need to use credit cards to operate. Today Johnny Cupcakes brings in millions of dollars. The company has expanded to locations in Los Angeles and London, and Earle speaks to entrepreneurs all over the world.Johnny Cupcakes. n.d. https://johnnycupcakes.com/pages/about
### Bank Loans
Bank loans are another funding option with different banks that focus on various industries and different interest rates available. Usually, these loans can be secured by some sort of equity. This can take the form of personal assets, such as the owner’s home, cash, vehicles, other commercial property, or business assets like equipment, inventory, or cash. Rates can be high, especially for startups that don’t have any credit history. The paperwork required can also be cumbersome, and the payments have to be made on time regardless of how much revenue the business is earning. Organizations such as the Small Business Association (SBA) and local chambers of commerce can be helpful in providing guidance and loans (see Entrepreneurial Finance and Accounting).
Bank loans are most helpful when the business does not have enough money to fund a particular part of operations, such as expanding production by means of buying new equipment. Although loans may be difficult to attain, there are local banks and large banks that provide help to small businesses and startups. Interest rates may range from 5 to 8 percent, and the loans can be used for the purchase of capital equipment or assets that are necessary for the business to take off, such as land/facilities, working capital, or marketing. Once a business has established making payments on the loan, it also establishes good credit. It may then qualify for larger loans or a line of credit, which is an amount of money that a bank allows a business to borrow on demand to expand a business or to have cash flow for required expenses. Usually, there is an interest rate attached to the line of credit that will have to be paid back within agreed terms, and often an annual fee for an open line of credit. Entrepreneurs with good credit ratings can access amounts around $25,000–50,000 without taking a term loan.
### Friends and Family Members
Friends and family can be a great way to get quick funding because they usually believe in your skills and ideas, and they want to see you succeed. Entrepreneurs should have a specific strategy for asking friends and family for the amount they need to open a business. This can range from a few hundred to thousands of dollars. You will want to determine whether to ask many people to help you with small investments or have one or a few people provide larger amounts. It depends on the strength of your relationships and how much stress you’re willing to introduce into the relationship. Many entrepreneurs have persuaded friends and family members to give small amounts, and some have persuaded a few to give large amounts of money. Regardless, it is important to have a strategy for asking and a plan for how to pay them back. You will also need to be prepared to discuss their expectations regarding the use of their money. Are they expecting to be part owners of your company? Is this a loan that must be repaid? Is it a gift? It is always best to keep communications about funding the business professional. If they are investors, the expectation is that they will have a say in how you run your business.
Once you have figured out what interest you are willing to give up in return for the investment, make it professional by giving a presentation about the business and signing a contract to ensure that they will get paid back, whether in money or shares of stock. This safeguards the relationship by holding you accountable for paying back the money.
There are many contract templates available online, such as those at Loanback.com, Lendingkarma.com, Exilend.com, and Zimplemoney.com. These contracts should include the amount of money you’re asking for, the interest rate, timeframe of payback, installment information, and any other necessary terms. If the money is a gift, it is recommended to get a statement in writing that those funds are a gift in case you need proof of where that money came from and whether payback was expected.
### Angel Investors
Angel investors are usually professionals who have accumulated wealth and are open to sharing their wealth in exchange for some sort of equity. Many are former entrepreneurs who have harvested their business and enjoy providing guidance and support to new entrepreneurs. Others have worked in large corporations and have an abundance of knowledge and interest in new technologies. The name given to this type of investor began with those “angels” who helped fund Broadway shows in the last century.Alejandro Cremades and Barbara Corcoran. The name stuck, and now they fund many industries, not just the arts. Many of these angels belong to groups of investors such as private equity groups, while others look for opportunities on their own. They also can range in their lending capabilities, as they are private individuals with differing amounts of wealth.
An example of an angel investor is Natalia Oberti Noguera (), the CEO and founder of an organization called Pipeline Angels that helps provide capital for women and nonbinary entrepreneurs. She is not the typical angel investor, as she focuses on empowering minorities through her business coaching and providing capital opportunities for women.Natalia Oberti Noguera. n.d. www.nataliaobertinoguera.com
### Venture Capitalists
Venture capitalists are usually large private or public firms that are interested in pooling funds to invest in high return, high-risk startups or growing firms. These investors want high payouts in an average span of three to five years, so they will likely fund promising businesses in technology sectors, pharmaceuticals, media and entertainment, and biotechnology.Rachel Hallett. “These Are the Industries Attracting the Most Venture Capital.” The business must give up some of its equity to gain those funds. Usually, venture capitalists not only provide the funds necessary to start or grow the business, but will also provide guidance and expertise. More than likely if you are seeking funds this way, you will probably deal with an established venture capital firm, but occasionally, an individual may work alone as a venture capitalist.
For example, Birchbox received $90 million from their first rounds of funding from venture capitalists. This allowed them to fully develop their business model and grow to be valued at over $500 million. Most of the funds went to creating the technology that fueled their website, hiring customer representatives, and creating distribution systems.
### Crowdfunding
Just like in the case of New Story (Introduction), there are instances where businesses rely on crowdfunding, which is a good vehicle for collecting large amounts of money made up of small donations. That’s the beauty of crowdfunding: You can receive various amounts of money from many people through an online platform, with a request that can be shared not only with family and friends, but with many other people who are passionate about your idea. New Story created a new business model that allows them to crowdfund its home building projects entirely. This model, together with New Story’s partnerships, has helped them create many communities in different countries, thanks to the donations from people who care about this cause. There are many types of online platforms that focus on specific industries. The most common platforms include Kickstarter.com, Indiegogo.com, CircleUp.com, and Fundable.com, among others. In 2012, Congress passed the JOBS Act to allow startups to raise money from people who were not professional investors. Crowdfunding was born from the ability to raise money without having to create an IPO.
### Grants
A tougher way to get funding for your venture is by applying for grants from the government at the federal, state, and local levels.Priyanka Prakash. “Small Business Grants: 107 Ways to Get Money for Your Business.” Most require a match of funds by the entrepreneur and may have many more requirements, but they can be a good way to launch. You can start by looking up federal grants and work your way down to your local city level. Federal grants are broken down by industry. Usually, they focus on fields that have innovations in technology, science, or health. Some of those grants such as the Small Business Innovation Research Program or the Small Business Technology Transfer Program focus on these disciplines and can range from $150,000 to $1 million. Other governmental entities offer grants, such as the National Aeronautics and Space Administration, the National Science Foundation, and the Departments of Energy, Health, Defense, and Education; these grants focus on their fields, and their amounts and requirements vary.
State grants, on the other hand, generally focus on economic, educational, or social issues. These can be smaller and easier to acquire since competition can be lower. Each state has its grants posted on the https://www.grants.gov/ website and includes requirements and funding opportunities. These focus on areas of growth and needs such as green technology, education, environmental initiatives, tax incentives, job retention, historic preservation, and tourism, among others.Priyanka Prakash. “Small Business Grants: 107 Ways to Get Money for Your Business.” Grants are also discussed in The Ethical and Social Responsibilities of Entrepreneurs.
### Resource Funding Considerations
When evaluating resource needs, you can consider these questions:
1. How will I obtain the money needed to operate the business on a daily basis?
2. When might I need to hire staff, and how much would their wages and benefits cost?
3. Where are these sources of money I can tap into for both immediate and long-term needs?
4. Would a line of credit be a better option for my business or should I pursue a term loan?
5. Is borrowing from friends and family a practical option?
6. Are there angel investors who fund businesses in my industry who I can investigate?
7. What will I need in terms of assets and financial reserves to open my business and keep the doors open for at least six months? One year? Five years?
Based on your needs, you will be able to choose from the type of funding that best suits you. expands on the pros and cons of these different funding resources.
### Summary
Determining which resources a venture needs is essential to its success. Assets are types of property that benefit the person or company in possession of them. They can be tangible or intangible. Tangible resources can be seen, touched, and felt. They may include raw materials, land, facilities, buildings, machinery, computers, supplies, furniture, information technology, and vehicles.
Intangible resources cannot be seen, touched, or felt. They include intellectual property such as designs, formulas, art, written work, brands, and inventions that can be protected by patents, trademarks, and copyrights.
Entrepreneurs oftentimes have novel ideas about how to provide a service or how to create a better product. These ideas are important to safeguard so other competitors don’t copy those same characteristics of a product, process, machine, piece of writing, or any other of the works cited earlier. A way to protect them is to ensure that you have a patent, trademark, or copyright so others cannot benefit from your work. It is always beneficial to do a check before applying for one of the protections and make sure that the invention hasn’t been created before. Searching the USPTO website and hiring an attorney will ensure you are the first one to register your idea and help you through the lengthy and often expensive process of protecting a new idea.
Funding sources are essential to starting and scaling a business. These include an entrepreneur’s own savings, bank loans, venture capitalists, angel investors, crowdfunding, and friends and family. It is important to consider the pros and cons of your financing options in relation to your resource needs in order to plan for short- and long-term needs.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
The Business Journals company profiles: https://www.bizjournals.com/profiles/company
Circleup: http://circleup.com
Exilend: https://www.exilend.com
Fundable: http://fundable.com
Indiegogo: http://indiegogo.com
Kickstarter: http://kickstarter.com
LendingKarma: http://www.lendingkarma.com
LoanBack: http://loanback.com
NewsLink: http://www.newslink.org
Society of Human Resources Management: http://shrm.org
US Small Business Administration: https://www.sba.gov/
US Securities and Exchange Commission Regulatory Actions: https://www.sec.gov/rules.shtml
Trade Show News Network: http://www.tsnn.com
US Census Bureau: http://www.census.gov
Copyright Office: https://www.copyright.gov/
US Chamber of Commerce: https://www.uschamber.com/
US Patent and Trademark Office: https://www.uspto.gov/
ZimpleMoney: http://www.zimplemoney.com
SEC Information on crowdfunding portals: https://www.sec.gov/divisions/marketreg/tmcompliance/fpregistrationguide.htm
Link to SEC (FINRA) crowdfunding portals: https://www.finra.org/about/funding-portals-we-regulate
New York University, Stern School of Business: https://www.stern.nyu.edu/
Link to data on margins by sector: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html
Loopnet: https://www.loopnet.com/
Bizstats: https://www.bizstats.com/ |
# Fundamentals of Resource Planning
## Using the PEST Framework to Assess Resource Needs
### Learning Objectives
By the end of this section, you will be able to:
1. Describe the components of the PEST framework (political, economic, sociocultural, and technological factors)
2. Apply the PEST framework to assessing resource needs
3. Understand how to assess typical resource costs at startup
As you venture into planning the resource allocation for your enterprise, you will learn that there are a variety of tools that can help you. It is important prior to launch to identify the minimum resources needed for startup. Some businesses will require more capital equipment (such as production machines); some require more technological resources, such as software (or software designers); some companies may require a lot of funding at the beginning of their quest, whereas some will require only a small investment of money. The level of resources needed for an enterprise changes over time, as well.
As the entrepreneur goes through the brainstorming process to identify the feasibility of the idea, they can simultaneously begin to think practically about what they will need to make this business operational: What raw materials are needed to manufacture the product? How many employees are needed at each phase? Will a physical site be necessary, and, if so, where will it reside?
Narrowing down the minimum resource needs of the enterprise in response to some or all of these questions is essential to a successful business launch. The entrepreneur can gather information and make an informed decision on what needs have to be covered at the beginning of the venture. This information can be condensed into the business plan, marketing plan, or pitch that can be shared with stakeholders. The information gleaned from the stakeholders’ responses to the plans informs not only the entrepreneur and stakeholders internal to the business, but external stakeholders such as banks, investors, suppliers, vendors, and partners. The information is essential for the decision-making process. One tool that can help ensure that planning is comprehensive and well thought through is the PEST framework.
### PEST Framework
The PEST framework is a strategic assessment tool that entrepreneurs can use to identify factors that may influence access to essential resources. PEST is an acronym for political, economic, sociocultural, and technological factors ().
### Political Factors
Although you may hope to be your own boss, make your own schedule, and follow your own rules, you must still work within the realities of outside factors that affect your business. Political factors stem from changes in politics, such as the policies of a new presidential administration or congressional legislation. Such policies can affect access to capital, labor laws, and environmental regulations. Moreover, these political changes can take place on federal, state, and local levels. lists several political factors that can influence a business. Tax reform law, for example, could influence the amount of taxes a business owes, while actions by the newly appointed chair of the Federal Reserve could affect how much capital may cost the small business owner because of interest rate changes.
Recently, the 2017 Tax Cuts and Jobs Act changed corporate tax rates, as well as the payments businesses make quarterly to the Internal Revenue Service (IRS). Other changes included the expansion of certain deductions and tax credits (including which specific business expenses can be deducted), and a new method to depreciate assets, as well as other rules related to employees who help businesses receive credits and minimize taxes.Internal Revenue Service. “The Highlights of Tax Reform for Businesses.” October 2018. https://www.irs.gov/newsroom/the-highlights-of-tax-reform-for-businesses
Businesses must also follow environmental laws, such as those from the Occupational Safety and Hazard AssociationOccupational Safety and Health Administration, United States Department of Labor. n.d. https://www.osha.gov/about.html and the Environmental Protection Agency (EPA).US Environmental Protection Agency. n.d. https://www.epa.gov/ For example, these government agencies require businesses to train employees about materials that may be hazardous to people and provide notices and reports on these matters. The EPA also has regulations on air and water emissions that businesses must follow, as improper disposals can harm the environment. Smaller businesses may be exempt from some of the regulations under certain circumstances.
Imported products are regulated by the federal government through quotas and tariffs. Tariff laws have been used as political instruments to manage the flow of goods between countries. Tariffs are taxes or duties that are added to imported goods from another nation. Quotas, a limit on the number of items entering a country, are also used to restrict the volume of goods entering a country. For example, the US government in 2019 imposed tariffs on $550 billion of Chinese products, while China has imposed tariffs on $185 billion worth of US products. While it is likely that this ongoing trade dispute will be resolved, free trade remains an ongoing source of international economic competition.Dorcas Wong and Alexander Chipman Koty. “The US-China Trade War: A Timeline.”
For example, business owner Daniel Emerson, CEO of light manufacturer Light and Motion, described in a National Public Radio (NPR) interview that the latest round of tariffs on materials from China might push him to open a manufacturing plant overseas. Light and Motion manufactures lights for bicycles, headlamps, drones, and media production. According to Emerson, in order to get his parts from China, he has to pay the US government for importing them. He states that these tariffs might destroy his company, as his main competitors in China and other countries don’t face those tariffs; therefore, his prices are forced higher. Emerson might have to move his company to the Philippines, which has no tariffs. He’ll have to build them there and ship the completed lights to the United States.National Public Radio. “U.S. Tariffs on China May Force California Company to Move Production Overseas.” As an entrepreneur, you should remain aware of political issues that may impact your operations and planning.
### Economic Factors
Entrepreneurship has a direct impact on the economy by providing employment opportunities to many people. However, economic factors can also affect the success of a business. For example, they can deter customers from purchasing goods and services due to an economic downturn. On the other hand, when the economy is expanding and growing, people tend to feel confident about their jobs and income, and they may spend more than usual. Economic factors—which include inflation rates, interest, currency exchange (if the business operates or engages globally), state of the economy (growth or decline), employment rates, and disposable income—can impact the business owner’s pricing of goods or services, the demand for such services, and the cost of production.
Taking the state of the economy, for example, when the economy is down, restaurants will see a decline in clientele as more people prepare meals at home to save money, or they will switch from fine dining restaurants to more casual or fast-food restaurants. In weak economies, consumers tend to purchase store (often called “private label”) brands more often than national brands to reduce their grocery bill. When the economy is healthy, consumers spend more on entertainment and restaurants, which can be considered luxury items. The restaurant will need to adjust its resources to meet the economy-driven fluctuating demand. When demand is high, it is likely that the restaurant will need more supplies and more employees. These needs, in turn, result in the restaurant needing additional financial resources to buy more supplies and to pay employees. When demand is low, the opposite is true.
### Sociocultural Factors
Knowing about your customers is key to delivering what they really want. Additional factors that need to be taken into consideration include changes in how society is moving and the direction of that movement as it relates to your customer base and potential new markets. These sociocultural factors include population growth rates, changes in where people live, social trends such as eating healthier and exercising, education levels, generational trends (millennial, baby boomer, or Gen X and Y), and religious culture. These factors can affect not only the seven Ps you learned about in the Entrepreneurial Marketing and Sales chapter, but also resource assessment more specifically. It is necessary to look at these factors closely in order to allocate marketing resources optimally. For example, if you are opening a restaurant and you see an increasing trend in healthy food, you may want to allocate your resources to fresh ingredients or more vegetarian and vegan options.
One far-reaching sociocultural factor is the impact that digital shopping has had on brick-and-mortar retailers. This online shopping trend has forced long-established companies such as JCPenney, Payless, Gap, Victoria’s Secret, Radio Shack, Macy’s, and Sears, to close thousands of stores, file for bankruptcy, or shut down the business altogether. These companies have faced enormous competition from entities such as Amazon and smaller businesses such as ModCloth and Birchbox that interact with customers virtually and stay on top of societal trends. Younger generations such as the Y and Z generations have triggered these social changes, as they are technologically savvier and expect to find exactly what they want, where they want it, and when they want it.
### Technological Factors
In the case of technological factors, the enterprise needs to be sure it has equipment that allows it to operate efficiently. There are different types of technology that help with marketing, finances, productivity, collaboration, design, and production.
Being able to use technology to meet the needs of the customer, such as having an informational or an e-commerce website (so the customer can purchase from the comfort of home) is a “must” these days for most ventures. Digital marketing has allowed entrepreneurs to promote their businesses in many different ways, through e-mail marketing, digital ads on search engines such as Google or Bing, websites, social media groups, YouTube videos, and blogs. These tools are easy to use, available, and can be affordable, even on a shoestring budget.
Other technology can also be helpful in managing payments from customers, billing, human resources payments, and keeping the books. QuickBooks is a popular software program that a starting entrepreneur can purchase and use to manage the company’s financials. Other products are available too—ZOHO Books, FRESH Books, GoDaddy Bookkeeping, and Kashoo—each has pros and cons.
Other types of software such as UAttend help small businesses keep track of their employees’ time and productivity, and Basecamp helps entrepreneurs keep track of the projects that everyone is working on, while allowing them to collaborate with each other and keep track of what is happening. These tools can make it easy for an entrepreneur to manage a project with contractors or employees.
Other technology that needs to be taken into consideration if you are manufacturing a product includes the tools and equipment that will create goods and services. Some examples are CAD (computer-aided design), 3-D printing for developing quick prototypes (), CAM (computer-aided manufacture), robots, and new materials that allow faster and cheaper production of goods. 3-D printing, for example, is a manufacturing process that uses a technique of adding layers of material to create rapid prototypes. It can be used to create prototypes of products, toys, architectural models, prosthetics, tools, fashion, automotive parts, and even final products like homes, as in the case of New Story.“What Is 3D Printing?” The use of prototyping allows for creativity, and these newer technologies allow users to create many prototypes. Nike, for example, uses 3-D printing to make their prototypes because it is faster than waiting for a full prototype to go through the manufacturing process. Using these technologies for prototyping can also avoid the expense of building the actual product, allow for the final product to be refined quickly, and help in the reduction of manufacturing errors.
The drawback is that some of these technologies can be expensive to purchase, and it can take a long time to recuperate the cost. (However, when wages and benefits costs rise quickly, they can pay for themselves rather quickly.) Entrepreneurs must be sure to acquire only those tools and materials that will help them get started. Then, as the business thrives, more funding is available for more expensive equipment and software Entrepreneurs then need to have the skills and knowledge to operate specific software and consider upgrades and replacement costs. Questions include: What about support services? How long will support last? If the entrepreneur updates the PC, will the old software run on the new operating system? Can the data be easily copied to the new operating system or software program?
### Assessing Resource Costs for Startup
Starting a business can be an exciting event, and one that requires thoughtful planning. Resource planning can help determine start-up costs, which helps determine an estimate of breakeven sales, profits, what types of funding to use, and how to plan for future expenses like tax payments. According to the SBA business guide,US Small Business Administration. “Calculate Your Startup Costs.” n.d. https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs#section-header-6 there are several steps you should take to determine startup costs for different types of businesses.
First, figure out the type of business you want to open: brick and mortar, online, or services. Brick-and-mortar businesses have physical locations where a customer may purchase a product in one or several locations. Online businesses operate through e-commerce websites and sell products and services virtually. These may or may not also have a physical location. Service businesses provide services rather than a tangible product. Also, consider the type of business structure you will have (see Business Structure Options: Legal, Tax, and Risk Issues).
Next, make a cost list like the one in . There could be additional costs based on the resource needs identification discussion in Types of Resources. Many of the costs will be easy to determine, but others—like salaries, insurance, and improvements—might be more difficult to estimate. You can consult research sites, local business resources (such as the chamber of commerce), or speak to mentors or consultants (such as SCORE) for more guidance on how to estimate these numbers. Also see Building Networks and Foundations to see how industry professionals can help determine startup costs ().
Determine the estimated cost for each item. Once the list has been developed, finding out what each of those items costs will allow you to make an estimate of your basic needs. A good source of information is the US Bureau of Labor, which publishes a list of occupations and their wages and benefits by location and profession. Some costs may have a range to consider, and a decision tree such as the one shown in may be helpful. Many state governments have a labor and workforce department that tracks wages and employment data for specific industries and professions on an annual basis.
After you have identified all of the costs, determine which ones are one-time costs (pre-launch costs) and which will be ongoing costs (typically monthly, quarterly, or annual). Pre-launch costs include everything you must have before opening the door of your business to the public. These include licenses and business permits, marketing materials, equipment, and inventory. Ongoing costs, on the other hand, are recurring. These may include rent, utilities, certain ongoing marketing costs like digital ads, and salaries. It is suggested to have at least one to two years of saved monthly expenses to make sure you give the business time to create a brand and a customer base. Add up your total pre-launch costs and your monthly costs to identify of how much capital you will need to start your business.
You should include this information in the financial section of your business plan. This data can help provide a clear picture of expenses and future revenues that banks and venture capitalists may find useful in making decisions about investing in your business.
### Summary
Business owners need to know what resources they need before launching. The PEST framework can help you become aware of outside forces that affect the procurement of resources you need to succeed. PEST looks at the political, economic, sociocultural, and technological factors that affect resource costs and availability. Different businesses require different resources, so going through a checklist of basic needs, finding the associated costs, splitting them into one-time costs and ongoing costs, and adding them up will ensure the entrepreneur is aware and ready to document for an investor or bank the resources needed.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
SBA calculation of startup costs: https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs#section-header-6
US Department of Labor: https://www.dol.gov/general/topic/statistics/wagesearnings
https://www.businessnewsdaily.com/5-small-business-start-up-costs-options.html |
# Fundamentals of Resource Planning
## Managing Resources over the Venture Life Cycle
### Learning Objectives
By the end of this section, you will be able to:
1. Explain how resource dependence theory helps a venture grow
2. Understand typical resource needs through the life cycle
3. Describe the basic steps in securing human resources
4. Understand the importance of educational and personal resources to the entrepreneur
The evaluation of needed resources does not end with the startup phase. This is an essential activity that the business owner must engage in throughout the life cycle of the business. Many entrepreneurs have failed to re-assess how their needs have changed as industry, technology, economic, political, or social changes emerge in the marketplace. This lack of timely assessment of operational needs can result in business struggles or even failure. Business owners need to be engaged in ongoing research, monitoring of the external environment, ensuring they have the ability to easily respond to changing circumstances.
When Birchbox, a business covered in Entrepreneurial Marketing and Sales, first entered the cosmetics sales market through an innovative business model, the founders (Katia Beauchamp is pictured in ), were able to fund their startup through venture capitalists who saw a great opportunity to tap into a new model of selling cosmetics. After it had been in business for a while, Birchbox grew not only in customers and employees, but also in competitors. The company struggled with cash flow as it grew its customer base and struggled to keep a healthy profit due to its tight margins from selling other brands’ items. After talks of selling to QVC and Walmart, Birchbox sold its ownership to an internal investor who provided the cash for the company to continue to innovate its products and digital processes, and to add more cosmetic partners.Jason Del Rey. “Birchbox Has Sold Majority Ownership to One of Its Hedge Fund Investors after Sale Talks with QVC Fell Through.”
As we can see from the Birchbox example, business operations are impacted by various internal factors such as increases in the customer base, employee growth, as well as changes in marketing needs and external factors, which include fierce competition that can curtail the venture’s productivity, impact competitive advantage, or limit its access to key resources. In the case of Birchbox, cash flow was necessary for product innovations and digital marketing changes to combat their competition.
To counteract some of this, dependencies can be formed with others in a network of enterprises. This can aid in circumventing the impact of external factors such as an increase in competition in their respective market, limited ability to obtain credit for capital resources, shortages of the raw materials needed to produce their goods, or human resources to meet demanded service and production levels.
For example, many businesses within a particular industry are dependent on the same purchasers, vendors, raw materials, or other environmental resources. The resource dependence theory (RDT) model posits that forming networks such as mergers, vertical integrations, and joint ventures, or engaging in joint political activities, can help mitigate dependencies among member groups.Pfeffer and Salancik. This classic model remains relevant today.
As Launch for Growth to Success discussed, mergers occur when two companies have the same specific goal and create a contract to become one company, with the shared goal usually of gaining new customers, growing market share, improving purchasing power, or reaching new markets.
In vertical integration, a company acquires members of its supply chain, which helps gain economies of scale, improve deliveries of inventories, reduce costs, and may also stifle competition.
A joint venture (see Business Structure Options: Legal, Tax, and Risk Issues) can be less taxing to the companies involved, as each of them retains their identities and management teams while pooling their assets to create synergy through a new project or engagement in political activities. Being able to gain control over their external environment through these alliances is essential to aid a small business toward growth and sustainability.
In the case of Birchbox, there could be a time when a cosmetics brand and Birchbox could merge to create a new line of products, or Birchbox could acquire one of its cosmetics brands in vertical integration. However in more recent years, cooperative (“coop”) arrangements have emerged to help small businesses share resources collaboratively based on a common interest and trust. For example, Community Supported Agriculture is a popular way for farmers and other commodity growers to gain selling power through their combined efforts.“The Growth of Community Supported Agriculture. In particular, Red Hen Bakery, a small artisanal cheese making company in Ontario, has supported its business by partnering with both local pig farmers and craft breweries to help manufacture their cheeses. They also sell vouchers to customers in advance to help manage seasonality.
In another example, farmers have turned to commercial aerial drones to help assess their crops’ viability and optimize their use of fertilizers, irrigation, and other resources. Consulting firms have emerged to provide these monitoring services, despite the constraints that the Federal Aviation Administration (FAA) imposes on commercial drones. These common interests have helped them lobby the Farm Bureau and other trade associations to accelerate FAA permits for this type of commercial use.
### Resources Needed Based on Life Cycle
Entrepreneurs need to identify and plan for their resource needs () and costs for all stages of the venture’s life cycle, which is shown in . Evaluating the cost of the enterprise at each phase for both a good and a service helps the entrepreneur assess its feasibility (see the discussion on funding at various life cycle stages in Entrepreneurial Finance and Accounting).
### Startup Phase
The startup phase is an exciting and exploratory time for the entrepreneur. In this phase, ventures are defining their identity, growing their customer base, learning more about their target market and how best to serve it, how to develop the products that will meet demand, and how to hire the people that will make it all happen. At this time, resources are often scarce, and the entrepreneur may be bootstrapping to keep costs low. This means that the entrepreneur might be working from home to save on rent and utilities, and may have only a part-time employee or none at all. The product may be created on a single piece of equipment that can produce on only a small scale. When a product is first developed, there are also costs to consider. These include costs of raw materials, production, packaging, and personnel for the production, or what is commonly known as . Recall that the cost of goods sold is the accumulated costs of creating a product (materials, direct labor) or a service (direct labor). At introduction, there is packaging, marketing, promotions, and shipping, and, if inventory is maintained, warehousing.
Any sales revenue is immediately re-invested into the business with the aim of developing a cycle of growth. The entrepreneur at this point may forgo a salary while the business takes off and may also wear many hats to keep the ball rolling instead of hiring employees.
Advisory boards are crucial during this phase, as they bring current information to the table to inform entrepreneurs of trends, changes, or regulatory adjustments within the industry that could affect their enterprise. An advisory board is a group of knowledgeable people who aid an organization to make strategic decisions about the business and its issues without having the power to vote or make any legal decisions. Having access to key contacts, networks of professionals, and public resources are key to having a current toolkit from which to draw information to inform decision-making and resource management.
In the case of Christina’s Confections, she started baking goods at home with her own oven. She did quite a bit of bootstrapping and used her savings to buy ingredients, utensils, packaging materials (boxes and containers), marketing materials (flyers, brochures, business cards), and a basic website, and to pay a part-time employee. For two years, Christina didn’t collect a salary so she could save money for the next phase, which is growth.
### Growth Phase
During the growth phase, the business has been around for a few years, its identity has been developed, its customer base has grown, sales are accelerating, and there is a need for more resources to sustain this growth. Resource needs can take the form of cash to invest in new equipment, new materials, more marketing, or new personnel. Additional equipment may be needed to help with a higher output, or perhaps the current location is too small to produce at a larger scale. The location might not be big enough for customers, or to welcome guests, so a new building may be required. More material might also be needed to create more products due to higher demand, and more people may need to be hired for production. There may be a need for management and administration to expand as the organization grows, too. Departments may now evolve and require processes to coordinate efforts between functions such as production, human resources, and marketing.
During the growth phase, the entrepreneur might need to change marketing strategy, advertising, production, or even packaging to keep up with demand.
Let us revisit Christina’s Confections bakery. Two years into operations, she needs to identify a larger location for her bakery. She now has ten employees and has several corporate accounts she services for special events. She recently partnered with a neighborhood catering company and has been retained to provide the baked goods for their catered events. These changes mean that Christina will need to obtain funding for the expansion, locate a space near her existing location, or expand on the location she is currently leasing. Part of her consideration at this point is determining if it is feasible for her to purchase a location, which would allow her to gain all the benefits of facility ownership as she often works long hours and needs flexibility for access. The ideal location would be one in which she could reside above the storefront so she can incorporate living expenses into her monthly expenses.
### Maturity Phase
In maturity, when the product has perhaps saturated the market and there may be lower-cost alternatives, the entrepreneur has to deal with competition as sales level off and more companies are fighting for customers’ dollars. At this point, spending resources in branding becomes very important, as customers have many choices available to them and having a reputable image and uniqueness as well as a brand that inspires brand loyalty helps businesses attract them.
As needs change with this growth, the entrepreneur must reconsider the resources, operationalize how these are used, and determine what efficiencies may be gained by retaining certain resources and outsourcing others. Outsourcing is the activity of hiring an outside company or third party to perform a specific task, job, or process, or to manufacture goods. This is common in human resources, where many companies outsource their workforce to reduce costs and focus on retaining tasks they excel at.
For example, if you are a digital marketing company and have several web design projects you are working on, outsourcing can help you pass some of the most challenging tasks in the design or coding process to another company, while your venture focuses on the steps in the process that are your company’s strengths. Similarly, another company could seek to use your company’s resources if they believe your company has a greater proficiency for specific tasks.
### Decline/Rebirth Phase
During the decline phase of a business, if there is to be rebirth, resources must account for making changes to the product so it can have its renaissance. In Christina’s case, if the traditional bakery industry were to decline, she could decide to use different ingredients and equipment to make a new kind of cake that uses only fruit and vegetables, or something completely different that would ensure the business would still be unique enough to come back to the life cycle. Most companies that have lasted many years in business have gone through this cycle several times and have been able to reinvent themselves. Small bakeries, clothing chains, and car manufacturers have been able to “come back” within industries that are easy to fail in due to their decline. Also, many tech companies such as Apple, Nintendo, and Polaroid were once in the decline phase, but their ability to shift allowed them to have a rebirth.
### Human Resources
As you begin your entrepreneurial journey, you will realize that you cannot do everything on your own. You will need people to help. In the beginning, you may need office assistance or production assistance, and, initially, they could be part-time hires. As you grow, though, you will realize that you need to have a more sophisticated understanding of how to build a skilled workforce. Human resources are the people needed to support the current and future growth of the venture, and help the company increase production and the provision of services, as well as help with the administrative tasks required to operate the business. Employees add value to the enterprise in that they help the business generate revenue. Having the proper staff is a constant process that must have procedures in place and starts with having a plan set out to recruit and hire the people with the skills that match your venture’s needs. In addition to hiring, a small business owner can consider getting human resource help through partner firms, outsourcing, and even outside consultants who are not actual employees of the company but provide support or specialized services for the company. Building Networks and Foundations discusses building a team. Here, we focus on the essentials of the human resourcing process.
First, figuring out why you need the help is an important step in assessing the needs of the company. Usually, entrepreneurs will need some sort of part-time help managing an office, manufacturing a product, or producing a service. The need and the outcome must be greater than the cost of hiring someone. This assessment ensures that current revenue can cover the addition of another person’s compensation. For example, you may need to hire a part-time assistant who would cost $15,000 to $30,000 a year. If having that part-time assistant frees you up to sell $50,000 of product, then it is financially worth hiring that person. In addition, if you hire a salesperson at $40,000 to $50,000 per year, including benefits, and they sell $100,000 a year for you, then it is worth hiring that person because they are generating profit. Keep in mind that many entrepreneurs start with virtual assistants, bookkeepers, designers, web developers, or managers who can vary in price and only work when you need them. Using sites such as UpWork to hire freelancers to cover a portion of your business allows you access to dozens to hundreds of choices to find a resource that works for you, often at lower costs than hiring someone on staff.
Once you establish that hiring new employees is a need and a smart financial choice, you need to create a job description to attract the right candidates. This contains a statement of the employee’s tasks and responsibilities, the processes used, and the desired outcomes. It will also include the parameters of how the job will be done, the environment, the hours, and the skills and experience necessary to perform well.
In preparation for determining your hiring needs and creating job descriptions, the following steps will guide you on topics and decisions to consider. After determining your resource needs, the remainder of the steps can occur in varying order depending on your specific situation.
### Step 1: Determine Resourcing Needs
Understanding the needs of your business in terms of job functions is the first step to hiring. Defining the work that needs to be done based on your business strategies can help guide your business needs. If you are a business consultant and need help managing the office, you can make a list of all the needs of the upkeep of the office. This can include answering phones, setting appointments, attending customers, making copies, paying bills, and ordering materials.
You will also need to determine whether you need full-time or part-time people, and what the budget is to clarify the direction of your hiring. Making a list of the tasks or goals for the business and estimating the time that it will take to finish them can help decide to hire a part-time or full-time person.
Keep in mind that needs may change, so even if you made a plan, the execution may vary, and you may need to make changes. By determining your costs and the benefits of those costs, you can figure out how many people you can bring on to accomplish the goals set in your business plan or marketing plan. If your plan calls for having sales of $100,000 the first year, you might want to hire one part-time employee at $25,000 who can help you achieve that goal. If your goal is to have sales over $1 million, then you likely might need more employees.
Figuring out what skills and experience your team should have is a good starting point for developing the job description, and setting the salaries and benefits you will offer. Once you set your descriptions and post them, whether online, at a job fair, or in a newspaper, you will see the applications coming in. If your industry calls for more sophisticated experience and skills, you may also want to hire a staffing agency to help you with the hiring.
### Step 2: Hire a Team
Hiring a team of employees can be a daunting task, but if you first focus on understanding the needs of your business and the amount of time required to perform those tasks, this step will be a lot easier (). It involves setting up the job description, deciding on a salary and benefits to pay, posting it on various job websites such as Indeed.com, careerbuilder.com, or monster.com, and any industry job portal that may be important to reach qualified people. Oftentimes professional networking—such as online sites like LinkedIn or local groups like your chamber of commerce—may result in additional leads. The alumni center at your local university or community college may also be a place to connect with qualified candidates. Technology schools or trade schools are excellent sources to find skilled workers looking for that first full-time job after earning certification or licensing.
Once posted, you must decide how long to advertise the position. Also consider that the interview process can take a few days, weeks, or months, depending on how many people you are hiring and the quality of your prospects. If you are satisfied with the process, then you select the employee(s) and inform them of your selection. But before you extend an offer, you might want to conduct a background check first and then offer and welcome them into your team. Conducting background checks, including criminal checks, should be a routine procedure in the hiring process. A formal job offer should never be made until the results of the background checks have been received and reviewed. If a potential candidate accepts a job offer and you are then required to withdraw that offer because results of a background check disqualify the candidate, many problems will be unnecessarily created.
### Step 3: Create an Employee Handbook
If you’re starting your business from scratch with no sales, it is likely that you will only need one or two part-time people to help you with your business. An employee handbook at this time may not be necessary; however, once you have ten or more employees, and your business begins growing, you will want to create company employment policies and rules for all employees to follow. You could also create this handbook at the inception of your business. This handbook is a road map that may include rules about how to act as representatives of the business, attire expectations, hours required to work, proper etiquette, legal and regulatory compliance for full- or part-time employees, and sanctions for when these rules are not followed. Most companies today also need to create policies around social media use and statements made online via social media. Listing any benefits such as earned vacation, paid time off for jury duty, holiday pay, personal time off, and price discounts for employees and family members should also be included. Sometimes in filings for unemployment, the state workforce commission will require a copy of the employee handbook to help determine what the former employee is entitled to receive. Having written policies in a handbook and following them can save a lot of time and protect against conflicts with employees.
### Step 4: Secure Independent Contractors, if Necessary
As covered in Building Networks and Foundations, sometimes looking outside of your business to get help can be a good idea while building or growing your venture. Independent contractors are people who provide work without being part of the payroll for the contracting business. They may perform work similar to employees, but they are not employees of the company; therefore, the business does not have to pay for benefits or withhold taxes. However, these workers set their own time for work, can come and go as they need to, use their own equipment to complete assigned tasks, and can perform the work in their own way, as a service provided. You may want to consult with an accounting expert in tax issues before beginning work with independent contractors.
### Step 5: Establish Benefits
When designing a position and hiring people, another important consideration is the benefit plan you will offer. Common benefits include contributing to or providing health insurance costs, paid vacation time and sick days, providing access to 401K retirement accounts and contributing to them on the employee’s behalf, and insurance—including life, long- and short-term disability, and accident insurance. In addition, you might want to offer stock options to provide employees with a piece of your business and entice them to work for a company that they own. Each of these benefits is subject to state or federal regulations, or both. Seeking advice from professionals on these issues would be a valuable use of the entrepreneur’s time and money. Getting these employee benefits wrong can doom a company quickly.
Once employees are on board, there is an ongoing process of training, promoting, and managing them, as well as developing relationships that will be key to the success of the enterprise. In the evaluation of human resources, you may need to consider these questions:
1. Are the skill levels that I need available in the region where I plan to operate?
2. What is the prevailing wage for the human resources I need?
3. How much can I afford to pay employees at this phase in my business?
4. Are independent contractors the best option or are employees a better fit?
5. Will I need to provide ongoing formal training or maintain certifications or licensures for my staff or are employees responsible for these items themselves?
6. How can I be competitive with other business to attract the talent I need?
7. Will I need to provide benefits such as vacation, retirement plans, health insurance, or life insurance?
### Educational, Support, and Mentorship Resources
Entrepreneurs need to be mindful not only of the resources needed to operate the business, but also of the resources needed to support them in their challenging role of being an entrepreneur. Ongoing education and mentorship are key supports. When entrepreneurs are asked what topics they need learn more about when starting and growing a business, often they request more educational support in management, leadership, communication, financial, and marketing education. Many owners are experts at their craft but don’t know how to manage the business itself and must take courses or earn certificates to gain that “how to run a business” knowledge. Local chambers of commerce and other organizations provide training sessions, workshops, and educational programs in marketing, communication, management, and leadership. Other needs include finance, accounting, and software use. The SBA has a learning center where business owners can learn about many topics from how to write a business plan to the legal requirements and financing options that apply to their venture.US Small Business Administration. “Learning Center.” n.d. https://www.sba.gov/learning-center One important topic they address is digital marketing, a training most entrepreneurs need in this day and age. The Small Business Development Center and SCORE are organizations that also provide myriad workshops at no cost or for a very small fee.
Although some entrepreneurs do have business degrees and a few have advanced degrees, they still need to keep abreast of trends and changes in their industry. They have to continually educate themselves through various forms of research, by attending conferences, and through programs available through the chambers and other organizational networks. Maintaining a subscription to a major industry newspaper or trade magazine can be extremely beneficial. Another common trend is for starting entrepreneurs to work in the industry of their business to acquire the skills and knowledge necessary before they embark on their journey. For example, if you want to open a digital marketing business, you might first gain some experience by working for a digital marketing company prior to opening the business. However, you should make certain you abide by any noncompete or similar clauses in your employment contracts.
As we have seen throughout the text, being an entrepreneur is no easy task. It requires many hours to start and grow a business, not to mention the daily stressors from challenges that arise from interactions with employees, customers, and suppliers. High-performing entrepreneurs must have a good support system to help them overcome the ups and downs that owning a business might bring.
Having friends and family members who are supportive of the venture is important because these are people the owner trusts with personal and work issues on a daily basis. Their support is key to the success of the entrepreneur as they listen and understand the frustrations of being in business and may also help with the business itself. By the same token, the entrepreneur needs to spend time with friends and family to bring work-life balance to their lives.
Having mentors who have gone through similar issues and can listen and advise is a great advantage to entrepreneurs. Mentors act as counselors to the business and are genuinely interested and happy to help the business owner. Most mentors have been through similar challenges and have great knowledge and passion about the industry in which they work. SCORE can be a strong network for finding a mentor. This program is a partner of the SBA and provides free education and mentors to business owners. The mentors are volunteers who have many years of experience and now want to help other businesses for free. You can go to their website (https://www.score.org/) and type in your zip code or industry to find a mentor near you. Doreen Graves is an example of a marketing mentor in northeast Mississippi who feels that she is not only a mentor to her mentees, but a support system and confidante, as they share with her their most personal stories of struggle, family values, and business dreams. She feels fortunate to have the power to help them.Service Corps of Retired Executives (SCORE). https://www.score.org
### Summary
The life cycle of the business requires resource allocation and planning at each stage. These stages include the startup phase, growth phase, maturity phase, and decline/rebirth phase. There are instances where a business has failed because the owner failed to re-assess shifting resource needs caused by changes in the marketplace and the overall environment. Research is an ongoing process, and keeping an eye on the external environment allows a business to be able to shift on time.
Resource dependence theory (RDT) is a model that explores creating networks with other companies through mergers, vertical integration, and joint ventures. RDT can help counteract the effects of competing with each other by optimizing collaboration.
Human resources include the labor that produces a product or service, and provides administrative support and customer service. Having good employees adds value to the enterprise because they help generate sales and profit. Education in marketing, management, and leadership are important topics to engage in as a business owner as well as having personal support from mentors.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Referrals and Associations
Tradeshows: http://www.tsnn.com/
Industry research publications: http://www.newslink.org
National Association of Women Business Owners: https://www.nawbo.org/
University and Organizational Resources
Small Business Development Centers: https://www.sba.gov/offices/headquarters/osbdc/about-us
New York University, Stern School of Business: https://www.stern.nyu.edu/
Governmental and Other Agencies:
https:///www.bls.gov
https://www.census.gov/
https://www.sba.gov/
https://www.ready.gov/business/implementation/resource
https://www.usa.gov/laws-and-regulations
https://www.sba.gov/video-series/2_minute_video_series#363481 |
# Next Steps
## Introduction
“How can you know what you’re capable of if you don’t embrace the unknown?”—Esmeralda Santiago
In 2010, two graduate students participated in a project to assist post-earthquake relief efforts for Haitians. These two students focused on the need for light. For most people, we turn on a light switch and seldom ever consider how important light is to our safety and extending our sight beyond dependence on the sun for daylight. Andrea Sreshta and Ana Stork analyzed the problems people have after a disaster and noticed that no one addressed the challenges of lack of light. Recognizing the opportunity to solve this problem, these two social entrepreneurs created a reusable solar powered light source, LuminAID.
Now that you have learned how to create a business plan and understand more about entrepreneurship, we turn to the challenges that many entrepreneurs face as they start their venture, with advice to help you overcome them and consider your next steps beyond the current venture’s successes.
In this chapter, we consider some of the challenges faced by entrepreneurs along the journey, identify reasons why these occur, and discuss what we can do to avoid these challenges through proactive problem solving and understanding biases and habits that get in the way of our success. Some of the themes in this chapter include being open-minded, possessing a willingness to re-evaluate and adapt to new information, and avoiding mistakes through learning from past contributors to the field of entrepreneurship. |
# Next Steps
## Launching Your Venture
### Learning Objectives
By the end of this section, you will be able to:
1. Explain the importance of creating and discussing the vision statement
2. Determine the documents necessary for managing risks
3. Describe company culture and the purpose of a code of conduct
4. Summarize how to outline and schedule the operational steps of the launch
The big day has arrived. Your opportunity recognition process noted that your idea solves a significant problem or need, you double-checked that the target market is large enough for potential profitability, you have a method to reach this target market, you have a passion to start this company, and you found resources to support the start-up. Knowing that you analyzed and addressed these topics, you now need to consider some of the more sensitive topics regarding the agreements within your team. Many entrepreneurs overlook the issues discussed here or act on them in a generic manner instead of fitting them to the specific needs of the venture. This lack of due diligence can be detrimental to the success of the business. The advice presented here can help you avoid those same mistakes.
To protect the interests of all parties involved at launch, the team should develop several important documents, such as a founders’ agreement, nondisclosure and noncompete forms, and a code of conduct. Before these are drafted, the team should ensure the venture’s vision statement is agreed upon. (See Entrepreneurial Vision and Goals for a discussion around creating a vision statement.) The entrepreneurship team needs to be in complete agreement on the vision of the venture before they can successfully create the founders’ agreement. If some team members have an interest in creating a lifestyle business (a venture that provides an income that replaces other types of employment), while other team members want to harvest the venture with significant returns, there is a clash between these expectations. An angel investor will also have a strong opinion on the vision for the venture.
### Founder’s Agreement, Nondisclosure Agreement, and Noncompete Agreement
Honest and open discussions between the entrepreneurial team members, including your angel investor if an angel investor is part of your initial funding, must take place before opening the venture. These frank discussions need to include a founders’ agreement as well as the identified vision for the venture. The founders’ agreement should describe how individual contributions are valued and fit into the compensation plan and should consider and answer these questions:
1. Will the entrepreneurial team members receive a monthly compensation?
2. Is there a vesting plan with defined timelines aligned with equity percentages?
3. What happens if a team member decides to leave the venture before an exit event? How will that team member be compensated, if at all?
Discussing the entrepreneurial team members’ expectations avoids the problem of an entrepreneurial team member expecting a large equity stake in the company for a short-term commitment to the venture, and other misguided expectations. Such problems can be avoided by addressing the following questions:
1. What activities and responsibilities are expected from each team member, and what is the process or action when individual overstep their authority?
2. Is there an evaluation period during which the team members discuss each other’s performance? If so, how is that discussion managed, and is there a formal process?
3. What happens if a team member fails to deliver on expected actions, or if an unexpected life event occurs?
The founders’ agreement should also outline contingency plans if the business does not continue. The following questions help define those next steps and need to be answered prior to opening the venture:
1. If the venture is unsuccessful, how will the dissolution of the venture be conducted?
2. What happens to the assets, and how are the liabilities paid?
3. How is the decision made to liquidate the venture?
4. What happens to the originally identified opportunity? Does a team member have access to that idea, but with a different team, or implemented using a different business model?
Once the venture opens, discussing these topics becomes more complicated because the entrepreneurial team is immersed in various start-up activities, and new information affects their thoughts on these issues. Along with these topics, the founders’ agreement should also state the legal form of ownership, division of ownership (this refers to the division of equity at either the next round of financing, or harvesting of the company), as well as the buyout, or buyback clause. (See Entrepreneurial Journey and Pathways for a discussion on the life cycle stages of a venture, including end stages of harvesting, transition, and reincarnation of the business.)
The buyback clause addresses the situations in which a team member exits the venture prior to the next financing round or harvesting due to internal disputes with team members, illness, death, or other circumstances, clearly stating compensation and profit distribution (with consideration of what is reinvested into the venture). Discussing these topics provides agreement between all team members about how to address these types of situations. The buyback clause should also include a dispute resolution process with agreement on how the dispute solution is implemented. Identifying exactly how these items are handled within the founders’ agreement prevents future conflicts and even legal disputes.
If the entrepreneurship team includes an angel investor, the angel investor typically has the final say in these questions. In the best possible scenario, the angel investor has experience creating a founders’ agreement and can provide valuable insights into working through this document. One common approach to creating this document, given the angel investor’s available time, is for the entrepreneurship team to discuss and agree on the final document, then have the angel investor review the document for final approval. Making Difficult Business Decisions in Response to Challenges will help in finalizing your founders’ agreement.
After completing the formal vision statement and the founders’ agreement, you might want to have an attorney evaluate the documents. This checkpoint can identify gaps or decisions that were not stated clearly. After receiving the examined documents back, the team should once again review the documents for agreement. If everyone is satisfied with the documents, each entrepreneurship team member should sign the document and receive a copy. If, later, the entrepreneurship team decides a change needs to be made to either the vision statement or the founders’ agreement, an addendum can be created, again with all parties agreeing to any changes.
Two other formal documents your team might want to consider include a nondisclosure agreement and a noncompete agreement. These documents can be applied to all employees, including the startup team, with consideration of extending to other contributors such as contractual personnel. A nondisclosure agreement agrees to refrain from disclosing information about the venture. Topics that might be included in this document include trade secrets, key accounts, or any other information of high value to the venture or potentially useful to a competitor. A noncompete agreement states that the person signing the agreement will not work for a competing organization while working for the venture, and generally for a set length of time after leaving the venture. Often, this time period is one year, but it can be longer depending on the know-how or intellectual property the exiting team member has.
### Company Culture and Code of Conduct
In conjunction with these formal documents, the founding team should determine the culture they would like to build for their venture. Ideally, the organization’s company culture is made up of the behaviors and beliefs that support the success of the organization. For example, when you walk into a business, is there a bustle of noise and activity, or is the business calm and restrained? This impression results from the organization’s culture. We could compare the difference between walking into a high-end jewelry store and walking into a fast food restaurant. Both businesses have distinctly different cultures. If the venture is highly dynamic with fast-paced decisions and constant change, then the culture should support this type of venture. Perhaps the team wants to create a work hard, play hard culture. In that case, standards that support ad hoc team creation for impromptu discussions should be encouraged, rather than setting up a bureaucratic culture that requires approval of all meetings and deliberation of decisions prior to action. Many tech companies support a work hard, play hard culture. This culture is reinforced with open office spaces that provide opportunities to collaborate with colleagues. Or perhaps ping pong tables and kitchens are provided to encourage interaction. Even the hours of operation contribute to culture creation by either encouraging employees to set their own hours or restricting work hours through regulated entry. In contrast, a more bureaucratically structured environment may fit a venture whose success relies upon compliance with external regulations and the use of highly sensitive or private information. An example of a bureaucratic culture aligns with many financial institutions. The culture within a bank conveys security of our deposited funds; we want a bank to have processes and systems in place that reinforce that we can trust the bank with our finances.
The culture-defining process should include the entrepreneurship team’s creation of a code of conduct. Some organizations develop a code of conduct that includes guiding principles, while other organizations create detailed descriptions of what is acceptable and what isn’t acceptable. Your venture’s code of conduct should fit with your venture’s vision, the culture desired, and the entrepreneurship team’s values. Codes of conduct should be created as documents that include a sensitivity to people within the company as well as the greater community. A code of conduct addresses the values that the organization supports, as well as ethical considerations. The purpose of a code of conduct is to help guide employee actions to align with the desired behavior. Including uniquely specific examples that align with the specific venture, can further communicate the desired behaviors. There are many varieties of codes of conduct; the main point is to create a code that supports the values and behaviors that you want to advance throughout your organization. and show two approaches to developing a code of conduct that fits the company’s culture and vision. The first example might be used by an advocacy-based venture that desires a principle-based approach to guiding employee behaviors through a code of conduct that provides general guidelines, rather than a more rule-based approach as presented in the second example. These two examples highlight the importance of creating a code of conduct that fits the beliefs and culture that you want to encourage within your venture.
Earlier, we discussed the importance of the lead entrepreneur taking the initiative to discover the investor’s business knowledge and learning about the investor’s previous experience in funding an entrepreneurial venture. The code of conduct is another area that entrepreneurial teams frequently skip over by accepting a generic code of conduct rather than recognizing that there are a multitude of topics, phrases, and principles that should be uniquely designed to fit the venture. These two examples demonstrate the vastly different topics addressed within a code of conduct as evidence for why your code of conduct must fit your intentions for how you will conduct business and support the success of your venture.
These preparatory documents should be personalized to align with the entrepreneurial team and desired behaviors that support the success of the venture. Although standard language and forms addressing these topics are available online, these generic models aren’t intended to meet your unique venture’s needs or the entrepreneurial team’s needs. Taking the time to discuss and prepare these documents pays off in well-crafted documents and aligns the entrepreneurship teams’ vision, goals, and dreams for their venture.
### Operational Steps to Launch
The next action is outlining the operational steps in the venture creation process. A good approach is to create a chart that identifies how you should proceed. The goal in creating this chart is to recognize what actions need to be taken first. For example, if you need a convection oven for your business, what is the timeline between ordering and receiving the oven? If you need ten employees to manually prepare and package your product, how long will it take to interview and hire each person? According to Glassdoor, the hiring process took 23 days in 2014 and appears to be lengthening in time as organizations become more aware of the importance of hiring the right person.Glassdoor Team. “How Long Should the Interview Process Take?” June 18, 2015. https://www.glassdoor.com/blog/long-interview-process/ What about training? Will your employees need training on your product or processes before starting the venture? These necessary outcomes need to be identified and then tracked backwards from the desired start date to include the preparatory actions that support the success of the business. You’ve probably heard the phrase that timing is everything. Not only do entrepreneurs need to be concerned about finding the right time to start the venture, they also need the right timing to orchestrate the start-up of the venture.
Below is a sample Gantt chart, a method to track a list of tasks or activities aligned with time intervals. You can use this tool to help identify and schedule the operational steps that need to be completed to launch the venture. One approach to creating a Gantt chart is for each team member to independently create a list of operational activities or tasks required to start the venture that fall under their area of involvement. Then the team can create a master list of activities to discuss: This helps clarify who is contributing to or owning each task. Next, have all team members create their own Gantt chart based on their task list: That is, the time required for each task should be spelled out, including steps that must happen sequentially (when one task cannot be started until another step is complete). Once again, bring all team members together to create one master Gantt chart. This will help ensure that dependencies from member to member are accounted for in the planning. These contingencies and dependencies need to be identified and accommodated for in the master schedule. For example, in , we see that Mike Smith cannot perform system testing until Sam Watson has developed the system modules, and in turn, that task can’t be done until Mike Smith has documented the current systems. After completing the chart, agree on assignments of responsibility to follow through on the activities, based on the timelines from the Gantt chart.
See the Suggested Resources for more information on how to use a Gantt chart to assist in tracking the actions needed to support the start-up of your venture and to organize each action based on your necessary timelines. You might want to reach out to other sources to find examples of how other entrepreneurs worked through their operational start-up steps.
### Launch Considerations
Sage advice in launching the new venture is to quickly recognize when you don’t have the answer or information to make the best decisions. In the early stage of launching the venture, the level of uncertainty is high, as is the need for agility and spontaneity. Even identifying the actual moment when the venture becomes a new venture can be difficult to determine. Should the venture be recognized as a new venture after receiving the necessary licenses or tax identification number, or when the first sale occurs, or when funds are first invested, or by some other method?
It is also important to keep in mind the end goal of the venture, often referred to as "begin with the end in mind." For example, many highly successful ventures never earn a dollar in sales. Depending on the entrepreneurial team’s vision and the business model selected, the venture could be highly valuable from a harvest, or sale of the venture, perspective. Frequently, this decision is dictated by the angel investor. These people frequently started their own venture, harvested the venture, and as a result have funds available to invest in other new ventures. In most cases, the angel investor expects to cash out of the venture at some point in the future. These are investors who are not interested in holding a long-term equity position but rather expect to grow the venture into a position where another company buys out the venture. This buyout is also known as the harvesting of the venture and the point at which the angel investor receives a percentage of the harvested dollar sale to cover the equity stake in the new venture. Because of this pattern, entrepreneurs are often advised to “begin with the end in mind” when launching a new venture. If the goal is to sell the venture to another company, we want to identify that company before launching the venture. Of course, at this point, this is only a desire or hope, as you cannot require or expect another company to have an interest in your new venture. But you can design the new venture to align with this end goal by making decisions that support this end goal.
Consider the example of YouTube, a startup with zero dollars in sales but with a harvest price of $1.65 billion in stock from Google. The startup team, former PayPal colleagues, understood that the technology was being developed for video searching and recognized that creating a platform to house video-sharing would be desired by companies such as Google at some point in the future. Consider the tight timeline between 2005 when YouTube began supporting video sharing, and the harvest of YouTube to Google in 2006, 21 months later. This example clearly points to the importance of beginning with the end in mind.
Launching your venture is a unique experience for every entrepreneurial team and for every venture. These novel situations and uncertainties create both challenges and new learning opportunities. Accepting that a multitude of possibilities exists and recognizing the importance of researching and discussing actions are valuable to the success of the team. Angel investors hold a wealth of knowledge, and with an equity stake in the venture, these investors should be included in all discussions. If you have an angel investor on your team, you have an added advantage to tap into the expertise available to support the venture. In conjunction with a well-aligned angel investor, conducting research to explore decisions will improve your venture’s success. Although these decisions might seem difficult, the next section addresses how to approach difficult decisions and the role emotional connections for the venture and its team play in those decisions.
### Summary
Before launching a venture, the entrepreneurial team should ensure its members agree on the vision and then develop a founder’s agreement. The company culture should be defined, and a code of conduct developed. The team should identify all operational tasks needed to launch the venture and their associated time requirements and dependencies. Staying openminded and flexible at launch can help support the venture’s success.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
R. Nanda, L. Kind, K. Laws, & J. Lum. "Case Study: Is a Start-up's Strength Becoming Its Weakness?" Harvard Business Review 93, no. 11 (2015): 145.
Ablebit’s instructions for making a Gantt chart in Microsoft Excel: https://www.ablebits.com/office-addins-blog/2014/05/23/make-gantt-chart-excel/
Smartsheet’s step-by-step instructions for making a Gantt chart in Microsoft Excel: https://www.smartsheet.com/blog/gantt-chart-excel
Project Manager’s Ultimate Guide to Gantt Charts: https://www.projectmanager.com/gantt-chart
The Startup Checklist by David Rose, founder of NY Angels and GUST.com
Shortcut: How Analogies Reveal Connections, Spark Innovation, and Sell Our Greatest Ideas by John Pollock discusses using analogies to think about unmet needs and innovative solutions. |
# Next Steps
## Making Difficult Business Decisions in Response to Challenges
### Learning Objectives
By the end of this section, you will be able to:
1. Recognize that cognitive biases can sabotage the success of the venture
2. Identify key problem indicators
3. Distinguish the emotional components involved in difficult decisions
Now that you are prepared to launch your business venture, let’s look at your business plan and the assumptions you made while preparing it. Did you keep a list of assumptions? Did you update assumptions as new data and information suggested “retiring” some initial ideas? Did you identify milestone timelines within your business plan? Did you fully assess risks and have mitigation plans to address them? These are essential questions to consider before launch. As the business venture comes into existence, you should review your assumptions and identified milestones. Ask the following questions:
1. Are your assumptions still realistic?
2. Is your business venture on for the associated milestones?
3. Do you need to consider any changes that have occurred in the industry you plan to enter? Has the competition changed? Are there new regulations?
Tracking any changes and comparing them to your earlier assumptions provides an opportunity to reconsider whether changes to your plan, assumptions, and milestones are necessary. After you begin your venture, you should continue to review your assumptions and milestones. If you are not meeting your projections and milestones, what has changed? What decisions should you adjust to situate your venture into a stronger position for success? If your venture is doing better than expected, analyze why the venture is exceeding your forecasted projections.
It is important to return to your business plan and consider what you will do if your assumptions are incorrect, so if your milestones aren’t met, you can avoid the problem of escalation of commitment. The concept of escalation of commitment describes when an entrepreneur feels so committed to the plan of action that they end up losing their perspective on the reality of what is happening to the venture. They ignore the danger signs and think that if they just work harder, or pour more money into the venture, they can force the venture to become successful. Once an entrepreneur becomes this committed to the venture and is working passionately to keep the enterprise afloat, they can lose the focus and objectivity to make rational decisions. They can begin to react to the situation, stubbornly persist, or begin to ignore the danger signs that should alert them that reevaluation of the situation is necessary.
Escalation of commitment negates the recognition that a pivot action is necessary. As you recall from Launch for Growth to Success, in the entrepreneurial world, pivot is the action in response to recognition that the current method, approach, process, or idea isn’t working. Pivot is the point at which entrepreneurs realize that a change is required and pivot into something different.
### Cognitive Biases and Problem Indicators
There is a fine line between believing in one’s abilities and the value of the venture versus stepping into a perspective that ignores new information or results. Entrepreneurs often need to face criticism and challenges where their confidence in the opportunity and their ability to create a successful venture override the criticism, but there is also danger in not listening to new information and re-evaluating one’s perspective to avoid biases. According to Cossette, in reviewing twenty-five empirical papers on heuristics and cognitive biases of entrepreneurs, overconfidence and optimism are the two most significant biases that contribute to an entrepreneur’s failure to recognize the need to change or end the venture. Other causes for the entrepreneur’s failure to end the venture include “the law of small numbers, the illusion of control, the planning fallacy, escalation of commitment, the status quo bias, and the hindsight bias,”Pierre Cossette. “Heuristics and Cognitive Biases in Entrepreneurs: A Review of the Research.” as shown in . To avoid this failure to exit the venture, we can identify fail-safe points within the business plan. These are the points that trigger the entrepreneur to consider what actions are needed to bring the venture back to a healthy position and whether this action is reasonable and feasible. Identifying these trigger points and creating contingency plans before opening the venture can prevent the entrepreneur from becoming trapped by these biases, such as the dangers of becoming overly committed and throwing resources into an impossible situation. Let’s look deeper into these biases and potential key problems that challenge our own decisions and the success of the venture.
As described in Cossette’s research, the law of small numbers refers to the target market not being large enough, or failure to attract a larger target market. The illusion of control refers to the entrepreneur believing that he or she can force the market into realizing the venture is the best, or that additional persistence will result in positive results. The planning fallacy identifies the pattern of creating a business plan that is too optimistic. Gish noted that business planning is intended to present realistic decisions and projections; however, research suggests that confidence in the plan places entrepreneurs in a position of believing their plans are accurate, causing a heightened belief that the venture will succeed, when in fact, the business plan is overly optimistic.J. Jeffrey Gish. “Failing to Plan but Not Planning to Fail: A Theory of Entrepreneur Optimism and Business Planning.”
The status quo bias is a tendency to refer to a previously identified behavior or information as the ongoing habit to perpetuate. This bias can prevent the entrepreneur from recognizing that a new action is required—when a creative or innovative change is necessary to avoid economic distress rather than following a previously established pattern or habit—instead of continuing to follow the status quo. The hindsight bias is the belief that, in hindsight, the action or event was predictable, when in fact there was little if any indication that an event would occur.
As you can see, many of these problems are related to the hubris of the entrepreneur. Hubris is a strong belief in oneself, a belief of over-confidence or pride in one’s ability to affect the outcome of decisions when other factors have the greatest influence.
Aside from these challenges, other key problem indicators include insufficient available cash. Burn rate is the rate at which the venture burns through the available cash needed to sustain the business: More cash is going out than is coming into the business (review burn rate in Developing Startup Financial Statements and Projections). Lack of control systems can be a contributor to excessive cash use, as can excessive waste in production, lack of follow through on collection of payment, or low inventory turnover creating excessive waste, such as with perishable products.
A misconnect between the target market’s desires and the product or service provided, can also create challenges, as can incorrect pricing of the product, or not having the right talent in your personnel or start-up team. However, planning only for success can be the biggest problem an entrepreneur makes. Keeping an open mind provides opportunities to see the reality of how the venture deviates from the plan as an action item to reconsider the venture from a new perspective.
### Decision Making to Overcome Challenges
Now let’s look at how we can reevaluate the venture and consider what changes are possible to position the venture for a different future than first envisioned. Let’s examine a real story from Stacy Madison’s life. Stacy Madison is the entrepreneur who started Stacy’s Pita Chips. Madison had a background in social work but wasn’t happy with her career choice, so she decided to open a sandwich food cart business in downtown Boston. As her business became more popular, customers had to wait in line for longer times. When they reached the food cart window, they were often cranky and unhappy about the wait. Madison and her team discussed ideas on what to do for customers who grew tired of waiting in line. They came up with the idea of slicing bagels into chip size bites and baking the bagels with olive oil, then handing the bagel chips out to the customers waiting in line. Customers loved the bagel chips and requested the chips when they reached the food cart window. At first, Madison’s team would explain that they did not sell the chips but only gave them away to help their customers who grew hungry waiting in line. After repeatedly hearing this request from customers, Madison reevaluated her sandwich business and considered that maybe she should be in the bagel chip industry. The success of this story is that Madison sold her pita chip company to Frito-Lay for $65 million.Katie Morell. “The Story behind Stacy’s Pita Chips.” Open Forum. May 11, 2012. https://www.americanexpress.com/us/small-business/openforum/articles/the-story-behind-stacys-pita-chips/ And the purpose of this example is to remember that when we start a venture, we need to be open-minded to recognize unexpected patterns and new information that can lead us in a different direction from the original plan and intention.
### Personnel Change Challenges
One area of potential problems in a new venture is the entrepreneurial team, the start-up people on the original team, and the need for personnel changes within the team. Where did the people on your startup team come from? Are some of them longtime friends or perhaps family members? What skills or knowledge do they bring to the venture? Are they aligned with the needs of the venture? And importantly, are they the best resource for their role once the venture is up and running? Answering these questions clarifies whether team members are a good fit within the venture over time. The startup team no doubt provided enthusiasm and ideas that helped to identify and formulate the potential new venture. Team members probably contributed ideas and content in building the business plan, but over time, the needs of the venture will change. Being aware that changing needs might also result in changes within the startup team, and employee skills, is part of managing the growing venture.
For success, the team and employees need to align with the needs of the venture. Sometimes, entrepreneurs begin their business with people who agreed that the idea was sound and that the opportunity existed and was worth supporting. But these people might not have the knowledge, skills, and abilities necessary to support the venture as it grows. Frequently, we share similar skills and interests with our friends and family members. This means that we might have a venture with too many people with the same skill sets. Or we might have disconnects between what the venture needed in the past and what the venture needs currently.
Another personnel problem is discovering unethical actions that violate the code of conduct created in the preparatory documents. According to the National Business Ethics Survey of the U.S. Workforce in their 2014 report, 60 percent of reported misconduct involved someone with managerial authority.Ethics Resource Center. National Business Ethics Survey of the U.S. Workforce. 2014. https://www.bentley.edu/sites/www.bentley.edu.centers/files/centers/National%20Business%20Ethics%20Survey.pdf These findings alert us to the importance of creating a code of conduct that aligns with the values needed to support the success of the organization. When the entrepreneur feels pressure to act unethically in an attempt to bring in new business or prevent the organization from financial stress, unethical actions can become tempting. Knowing that 60 percent of unethical actions occur at the managerial level should provide evidence to support the need to proactively consider how to avoid this dangerous situation. The same report encourages addressing potential problems by including zero tolerance for abusive behavior, lying, discrimination, and sexual harassment. An interesting finding noted that egregious rule-breaking behavior was infrequent, while more subtle “ongoing and continuous behavior, such as abusive and intimidating behavior, seems to be more prevalent.”Ethics Resource Center. National Business Ethics Survey of the U.S. Workforce. 2014. https://www.bentley.edu/sites/www.bentley.edu.centers/files/centers/National%20Business%20Ethics%20Survey.pdf This result speaks to our earlier discussion on the importance of creating an appropriate culture. If an undesirable behavior is prevalent, this would seem to indicate that the culture supports this behavior. The study also noted that “frequency of misconduct reflects the strength of the company’s ethics culture,” noting that “60% of misconduct committed in companies with a strong ethics culture was a one-time occurrence,” and that frequency of unethical acts rose as the culture of ethics declined.Ethics Resource Center. National Business Ethics Survey of the U.S. Workforce. 2014. https://www.bentley.edu/sites/www.bentley.edu.centers/files/centers/National%20Business%20Ethics%20Survey.pdf
Recommendations from this same report for encouraging ethical behavior include the actions shown in .
Ethics and alignment of personnel to the venture’s future growth and success are all reasons to reevaluate the entrepreneurial team and personnel. Frank conversations are required to protect the future success of the venture and the best decisions to support this success. Ethical challenges need to be addressed quickly and preferably proactively to avoid being pulled down into reacting to a crisis that could be avoided by creating a culture and code of conduct that encourages correct actions. Sage advice is to clearly state up front the vision for the venture and agreement from the start-up team that the survival of the venture is the priority. Ethical behavior is an important topic of these discussions.
### Personnel and Growth Challenges
Before starting the venture, the start-up team should ask these two questions:
1. What happens if we are wildly successful?
2. What happens if we are horribly unsuccessful?
The purpose of these questions is to consider how resources and debts will be resolved before the venture begins to use or acquire resources. If your relative or friend contributed by letting you use her living room for your planning meetings and bought pizza to keep the team energized, does she have a stake in your venture? If your venture is wildly successful, she might believe that she should receive financial remuneration for her contributions. The point is, people often change when there is lots of money or when the venture is on the edge of disaster. Planning for both extremes provides a framework for the entrepreneurial team to consider their own expectations and the expectations of other people involved in the project before these types of situations happen.
This discussion should also address the agreed-upon method for making difficult personnel decisions. Is there a severance package? If so, who is entitled to the severance package? Does the exit of employees, and even people on the start-up team, exclude them from future expectations if the venture is successful? If the funding source includes contractual liabilities, how is the release of a start-up team member resolved? If new team members or employees are added, will these people be considered employees who earn wages, or are some positions identified as receiving equity positions with financial gains through the harvesting of the venture? Addressing these questions before starting the venture can preserve relationships by clearly stating and agreeing to these sensitive decisions that can carry long-term consequences. In considering these questions and awareness of how the venture’s need will change in the future, you might want to revisit your founder’s agreement for clarity and alignment with any new information or concerns that arise in the start-up phase.
### Lack of Sales and Customer-Base Challenges
Perhaps the biggest disappointment is when the entrepreneurial team has completed the pre-planning, received funding, and opened the venture for business, only to find out that sales aren’t realized. The target market isn’t rushing to the website or location to purchase the product or service.
There are many reasons this can happen, which can make finding a solution difficult. The first action is to bring the team together to discuss possible reasons why the projected sales aren’t being realized. This could result from inadequate marketing, targeting the wrong market or audience, selecting the wrong distribution system, communicating the wrong message or benefit within the marketing plan, or perhaps lack of training for sales personnel or first responders who manage the venture-customer relationship.
Identifying the problem is one solution to consider. Some tools that help in problem identification include brainstorming, creating mindmaps, and conducting additional research. Brainstorming provides a free flow of ideas for further exploration and analysis. The most important part of brainstorming is not judging any ideas: the more ideas that are shared, the higher the probability for identifying the problem. A mindmap taps into a different approach to gaining a new perspective on thinking about the problem. A mindmap has a center that states the problem, such as lack of sales. Next, you create branches identifying all the possible reasons why the problem occurred, such as incorrect target market and incorrect marketing message. Then you create sub-branches that relate to these first-level branches. Including pictures and color diagrams contributes to the process. The goal in creating a mindmap is to be creative in exploring the problem rather than attempting to hone in on a solution. Adding visuals encourages people’s brains to think creatively. After creating the mindmap, take a break from thinking about the problem. As strange as this seems, the process of focusing on creating the mindmap alerts your mind that this is a problem that is important. As you walk away from the problem, your mind is still thinking about the problem, but at a subconscious level. This opens the opportunity for an “aha” moment where you’re better able to figure out what is happening and understand what you need to do.
Both brainstorming and mindmapping are excellent tools that lead to conducting more research. After completing brainstorming and mindmapping, you should have a better understanding of the problem and a clear picture of topics to research, and possible methods to gain new insights into the problem of lack of sales or customer base, such as surveys, focus groups, or free samples. You can even go back to brainstorming and creating a mindmap around this newly discovered area identified through the first round of brainstorming or creating a mindmap. Or you might already have feedback that reveals a pivot for moving the venture in a new direction, like Stacy Madison did in discontinuing the food cart and moving into the snack food industry. Another response to lack of sales or customers is to use social networking sites to draw attention to your business. You can offer short-term incentives to encourage your target market to react or provide feedback about your product.
### Summary
Some of the same characteristics that make entrepreneurs successful (such as confidence and optimism) can sabotage success. Entrepreneurs should be aware of potential biases or thinking patterns that obfuscate the current reality of the venture so they are able to recognize key problem indicators and put solutions in place. Some of the more difficult decisions an entrepreneur makes are difficult because of the emotional connection to previous decisions or decisions that affect other people involved in the venture. Early agreement that the success of the venture is the primary focus can help to work through these difficult decisions.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
“How Fast Can Your Company Afford to Grow?” Harvard Business Review, 1998. Classic article serves as a good reference on cash flow and self-financed growth, covering key levers to help manage profitable growth without having to go “hat in hand” to investors again.
The Undoing Project by Michael Lewis provides a good reference on biases through the story of psychologists Amos Tversky and Daniel Kahneman.
“3 Steps to Determine Product-Market Fit”, Entrepreneur Magazine, August 2014. Good reference on product-market fit.
What Customers Want, by Ullrich, discusses “Jobs to be Done” theory created by Clayton Christensen and practice by Strategyn.
https://www.npr.org/podcasts/510313/how-i-built-this |
# Next Steps
## Seeking Help or Support
### Learning Objectives
By the end of this section, you will be able to:
1. Identify sources for assistance
2. Explain the benefits provided through seeking assistance
3. Compare tools to assist in deciding what advice to follow
You’ve learned about some of the challenges in starting the venture and the types of decisions that the entrepreneurial team must make, as well as the importance of recognizing when you don’t know something or that you have encountered a problem. Facing these issues is easier when you recognize that asking for help should be part of the process. Given the wide range of variables involved in starting a new venture, it’s just not possible for one entrepreneur to have all the answers. Asking for help is an intelligent decision: It’s an action that recognizes the complexity of starting and managing a venture.
### Types of Assistance
Fortunately, there are many types of assistance available in the field of entrepreneurship starting with your own network of people. Additionally, there are local, regional, national, and even international groups available to help you navigate the entrepreneurial journey.
Ideally, the entrepreneurial team conducted due diligence in their quest for funding (see Entrepreneurial Finance and Accounting). For those entrepreneurs pursuing financing through angel investors, research on what angel investors contribute to the funded entrepreneur beyond the actual dollars invested highlights the importance of the angel investor’s expertise and knowledge as a contributor to the venture’s success.Karla Peterson and William Mayfield. “Knowledge Transference in the Angel-Entrepreneur Relationship.” While many entrepreneurs focus solely or primarily on receiving funding to start the venture, this study points to the importance in selecting an angel investor with knowledge of the industry, the distribution system, the technology, product, or the target market, as imperative to the success of the venture.
We’ve discussed the importance of finding an angel investor who has a background and experience in a similar area as your venture. Finding the right angel investor not only results in receiving the needed funding, but also access to this person’s knowledge and personal network. Ideally, the angel investor has knowledge related to your industry, your target market, and your supply chain or distribution channel. This background knowledge provides you with key resources that can give your venture expertise that contributes to the venture’s success. The angel investor’s network also provides opportunities to gain key insights, seek advice, and discuss ideas or solutions that benefit the venture as a network of well-informed and experienced people.
The other primary network is the entrepreneurial team’s network. These people include spouses/partners, family members, business associates, colleagues, and friends. These people can provide ideas and knowledge from a variety of perspectives and backgrounds. Connecting and reaching out for help requires both the ability to build relationships and the ability to recognize that seeking help reflects maturity and wisdom. As you tap into your network and seek advice, consider each person from a long-term relationship-building perspective. Consider how you might return the favor at a future time, if asked to help, or provide your expertise back to the people you access for help.
As you work with your network, keep track of the person’s name, your conversation, and any commitments made during the meeting. A commitment might be a follow-up message on how you used the advice or response to the request, or an action that you will perform for someone else. Creating a formal network or contact system helps in developing this network into a long-term relationship-based perspective.
When seeking advice, be respectful of the other person’s time. This means identifying exactly what type of help you want to request from the person. Are you requesting an introduction to someone else within that person’s network, or advice about solving a problem, or access to physical resources? Setting up an appointment demonstrates respect, as does preparing for the meeting and explaining how you will use the advice. Remember to thank the person and follow up with feedback on what happened from using the advice.
The types of assistance that can be provided through networking include:
1. advice or information
2. access to other people’s networks
3. access to financial resources
4. business services such as legal, accounting, or administrative support
5. physical resources such as land, buildings, or equipment.
Other free sources of support are instructors of your business courses, other business owners, organizations such as the SCORE (originally called the Service Corps of Retired Executives) and resources within the Small Business Administration (SBA). SCORE is an organization with a network of volunteers across the U.S. and is a resource partner with the SBA. SCORE offers mentor consultants, workshops, and other assistance to support the success of small businesses.
The SBA is a federally funded organization charged with assisting small businesses from startup through their continued existence. The SBA can help in reviewing and improving your business plan, providing assistance in finding funding through loans or grants, and acting as a consultant throughout the venture’s existence. The SBA provides help in complying with both state and federal regulations. Depending on your business model, you might need licenses or permits, and your local SBA office will be well informed on these topics and can help you acquire what is needed to support the success of your venture.
### Support System Development
You learned about a variety of support systems in Building Networks and Foundations. Some entrepreneurs may seek to work with a local incubator service. These incubator community groups provide a physical location to offer working space as well as the opportunity for interactions with other new startup owners and teams. The opportunity to be in a shared space with other inspired entrepreneurs can create excitement, sharing of ideas, and opportunities to talk through challenges. Potentially, there could be synergies between your venture and another venture realized through these discussions.
Companies like Y Combinator in Silicon Valley and Techstars in Boulder, Colorado, provide unique assistance to new startup ventures (). These types of organizations are considered accelerator entities intended to fast track a select number of new ventures through information sharing, seed funding with a small equity stake in the funded venture, mentoring, and offering formal angel investor “pitch” events. The selection process makes being accepted into these organizations difficult. However, once accepted, your venture becomes more credible for having been accepted, as well as for the wealth of connections and information that will be received throughout the experience.
Although each incubation program offers different—and sometimes uniquely specialized—help, they can be generally categorized by the types of support potentially available through these programs. Some incubators focus on one segment of an industry, or one segment of talent or interest. For example, there might be an incubator intended only for marketing start-ups. In this example, the incubator might assist with providing support in various marketing areas such as digital marketing, business-to-business marketing, global marketing, sports marketing, video creation, or other areas that fit within the topic of marketing. Oftentimes, incubators are sponsored by a municipality or government source.
Incubators are unique to a community’s interests and available resources. Some communities have a vision for the community and desire the growth of the community to align with this vision. If a community has this perspective, their incubators would also align with this vision. Other communities create incubators around available resources, such as access and support from specific groups. illustrates the wide variety of approaches used in creating incubators. An incubator is supported by perhaps one or two of these sources, depending on the goal of the incubator.
As you build your support group, you might want to create an advisory group, which is a formal group of people who provide you with advice. In building your advisory group, select people who demonstrate an interest in your venture and your startup team. You want resources who have expertise related to your industry, your target market, or your business model. You also want a diverse group of people who can provide insights that reflect different backgrounds and knowledge. This diversity of experience and knowledge provides you with the greatest breadth of advice, which leads to your difficult decision: what advice to follow.
### Deciding What Advice to Follow
Once you have advice from a variety of sources, how do you decide which recommendations to pursue, which to consider, and which to rule out? One approach is to identify what information is qualitative versus quantitative, and evaluate one type first. Qualitative information is conceptual—about ideas—whereas quantitative information is statistical or numerical. In both qualitative and quantitative areas, the entrepreneur can create visualizations to clarify the information and support analysis and decision making. The brainstorming and mindmaps discussed earlier, and illustrated in , highlight the different types of data you can work with.
Two other tools for sorting through advice are the Delphi method and the Nominal Group technique. Both provide a structured methodology that can be applied to evaluate ideas. In the Delphi method, broad open-ended questions related to the decision being addressed are put into a questionnaire sent out to participants. For example, you might solicit input from your advisory group or another group closely connected to the topic. As responses come in, the questions are updated to align better with the first set of responses. The process repeats until there is a clear understanding of the participants’ responses. Next, you create a list of possible options and request each participant to rank the options. Depending on these results, you either fine tune the list by dropping off low-ranked items, or, if the results are satisfactory, the options are narrowed to two or three top choices.
The Nominal Group technique occurs in a group setting. Participants are presented with a question or topic and write their thoughts in response on a card. The participants do not share their comments. Once everyone has submitted the cards, the facilitator shares all feedback so that everyone can see all participants’ input. The participants discuss all of the ideas. Next, the participants again write down their responses on a new set of cards. The comments are again recorded and shared so that everyone can see the results. The process continues until there is agreement on a final filtered, or narrowed, list or set of options. At this point, the participants vote or rank the remaining set of options with the goal of accepting one option.
Although these techniques and tools take time, the process of thinking through each decision and possible action helps your mind pause to reflect and to be alerted to the importance of the decision. Taking a break at this point allows you to process the information, perhaps while taking a walk or having a lunch break. At some point, you might suddenly have a feeling of knowing the right answer— the decision to make. Sometimes, this experience is attributed to a “gut” feeling or intuition that tells you what you need to do. Resources like Gary Klein’s The Power of Intuition: How to Use Your Gut Feelings to Make Better Decisions at Work explains how this process works in the human brain. Sometimes, this moment of recognition of the chosen decision results in a decision that wasn’t produced through our processes but that offers a new and creative solution.
Taking the time to evaluate and deeply think about the problem, the advice, and possible solutions is an important part of decision making. Just as important are pausing and taking time to select a decision that is not reactive and that you feel comfortable with, keeping in mind that the decision you make might be unique, and the actual decision might not be within the advice provided to you by your support group. As the lead entrepreneur whose goal is the success of the venture, you are ultimately responsible for the decision. If the advice provided doesn’t feel right, make the decision that does feel right and make sure you communicate that decision with your team.
### Summary
Entrepreneurs should recognize the wisdom in seeking help and support as they plan, launch, and grow their ventures. Sources of advice include the entrepreneur’s own network, the connections of the start-up team, and angel investors and their resources. Tools to assist in decision making include the Delphi method and the Nominal Group technique.
### Review Questions
### Discussion Questions
### Case Questions
### Suggested Resources
Service Corps of Retired Executives (SCORE): https://www.score.org/
Small Business Administration: https://www.sba.gov/
Y Combinator: http://www.ycombinator.com/
Techstars: www.techstars.org
G. Klein. The Power of Intuition: How to Use Your Gut Feelings to Make Better Decisions at Work. (New York: Doubleday, 2004) |
# Next Steps
## Now What? Serving as a Mentor, Consultant, or Champion
### Learning Objectives
By the end of this section, you will be able to:
1. Evaluate potential next steps after exiting the venture
2. Explain the roles of mentors, consultants, and champions
Depending on your experience as a first-time entrepreneur, you have a new set of choices in front of you. If you enjoyed the experience, felt the thrill and excitement of taking an idea from launch through to the successful harvesting of the venture, you might want to become involved in another new venture—that is, maybe your path is to become a serial entrepreneur. Or, after all that work, you might want to spend some extended time traveling or with family. You might want to consider ideas for giving back to the entrepreneurial community or becoming a social entrepreneur in your next venture. You might want to take some of your earnings from the harvest and become an angel investor. These decisions depend on your experience as an entrepreneur and money and less-tangible resources you gained through harvesting the venture. Having undergone a positive experience, gained significant learning, and harvested substantial funds often leads an entrepreneur into becoming a mentor, consultant, or champion for another entrepreneurial project. Think back to all the people who helped you get to where you are today. Where would you be without their help? Giving back to others continues the creation of social capital, the goodwill we create by giving back to individuals, organizations, and communities.
### Mentors
Mentor motivation includes the satisfaction of helping and guiding other entrepreneurs through the challenges of starting, growing, and harvesting their venture. Mentors can participate through formal government organizations such as SCORE, or organizations similar to Y Combinator, or from an internal aspect such as an advisory group membership. Mentors provide assistance and advice based on their previous experience as an entrepreneur, or as a content expert within a narrowly defined area related to the new venture’s product or service. Specific areas of expertise might include commercialization of a new technology, safeguarding intellectual property, marketing, or funding sources for a nonprofit social entrepreneurship venture. Just as there can be an alignment between an angel investor’s knowledge and skill set to the entrepreneurial venture, mentors should also seek ventures where they can provide key insights and knowledge. Mentoring in this capacity as a former entrepreneur is more rewarding when there is an interest in the opportunity and the entrepreneurial team.
Identifying exactly what the mentor can provide and what the entrepreneurial team needs is an important part of this relationship. Both parties should discuss time commitments and expectations as part of this relationship. Mentoring requires considerable commitment and can include support for complex topics and difficult decisions. In return for this help, mentors receive satisfaction, rejuvenation, personal growth, new relationships and connections, and a feeling of philanthropic motivation.
There are also risks in taking on the role of a mentor. One risk relates to providing advice that later proves to be detrimental to the venture. Another risk is the perception that the mentor provided direction when the mentor in fact provided suggested options that the entrepreneurial team should consider in its decision. A third risk concerns confidentiality and non-compete covenants. New ideas generate additional ideas, and as a startup team fine-tunes its opportunity and venture, some ideas will be rejected. From your perspective as a mentor and former entrepreneur, you might realize that you could develop one of the rejected ideas into a successful business. This situation can present conflicts of interest between you as the mentor and the venture that you are mentoring.
Because of these risks, as well as the contributions made by the mentor, some sources believe that the mentor should receive financial compensation and enter into a contractual relationship that addresses these risks. Possible financial payments include equity in the venture, profit sharing, or a retainer fee.
### Consultants
Another role you might want to consider is becoming a consultant, a position more formally defined than mentorship. You might even want to create your own consulting company focused on entrepreneurs as your target market, or select a narrower target market such as a segment within the entrepreneurial world. In considering starting your own consultant business, your start-up process is similar to the topics addressed throughout this book. Identify your own strengths and interests, identify other needs that your target market would value, and develop a business plan. Acting as a consultant contributes back to the entrepreneurial world, provides you with the enjoyment of active involvement in areas where you excel, and bolsters to your financial worth.
### Champions
Great Britain offers an Entrepreneur Champion of the Year award in recognition of the importance of having support in starting a new venture. Although we don’t have that award in the United States, we recognize how important support is to become successful. The Startup Champions Network is a startup organization located in Boulder, Colorado. This organization supports and connects entrepreneur-related champions: people who build and lead coalitions that create and advance resources for entrepreneurs. The Startup Champions Network seeks people who support a history of supporting entrepreneurship and innovation within their communities, recognize and model inclusiveness and collaboration skills, enjoy helping other people and work well with people, embrace humility, are action oriented, and focus on possibilities. Forbidden behaviors include being driven by self-interest, being focused on earnings or control of earnings, and lacking experience or a long-term focus.Startup Champions Network. http://www.championsnetwork.co/
Regardless of your interest in joining a formal champion group or acting in an individual capacity, becoming a champion to promote and assist another entrepreneur provides personal growth, satisfaction, and rewarding involvement within the entrepreneurial community. Many of the characteristics desired by the Startup Champions Network reflect research related to effective leaders. Most states have organizations that support entrepreneurs, from business plan development and decision making through opportunities to give back to the entrepreneurial world in whatever capacity a person desires. Take a few minutes to research opportunities in your state and community, and consider how your own future might align with these organizations.
These choices give you some ideas on what you might want to do now that you have harvested your venture. After tasting the excitement of starting, growing, and harvesting your venture, you have a new set of options to consider from becoming a serial entrepreneur through adding value to other entrepreneur’s potential successes to becoming a social entrepreneur.
### Summary
Once you become an entrepreneur, you can consider giving back to the entrepreneurial community by becoming a mentor, consultant, or champion to support other people in their ventures.
### Review Questions
### Discussion Questions
### Suggested Resources
The Case Foundation: https://casefoundation.org/
Startup Champions Network: http://www.championsnetwork.co/ |
# Next Steps
## Reflections: Documenting the Journey
### Learning Objectives
By the end of this section, you will be able to:
1. Examine the value of journaling and reflection
2. Experiment with reflection as a daily habit
Consider the journey of learning about entrepreneurship and of becoming an entrepreneur. What new knowledge have you gained about the world of entrepreneurship? What have you learned about your own interests in becoming an entrepreneur? Discovering your interest in specific areas helps to inform the possible entrepreneurial opportunities you might want to pursue and informs you of specific processes and actions where you might excel within an entrepreneurial endeavor. Consider how you can add value to an entrepreneurial team as a team member, or in the capacity of a mentor, consultant, or champion, as you reflect on your own interests, goals, passions and desires.
### The Power of Journaling
Reflection supports personal growth through identifying actions that worked well and actions that didn’t work out as well as hoped. A formal reflection journal for capturing daily thoughts, experiences, lessons learned, and other material, can lead to insights and identify patterns in thinking and in behaviors that may be helpful to recognize—both for personal growth and for growth as an entrepreneur.
In daily life, people seldom have the time or training to be mindful of their actions—to be aware of how they interact with others, or how they act in the variety of situations that fill their days. A daily practice of reflection can improve your ability to be mindful throughout the day and to grow through your documented reflections. Being mindful is the action of being in the moment, being aware of surroundings and fully engaged in awareness of the people around us, hearing their communications and understanding the complexity of their messages. Mindfulness moves us out of our reaction to situations from our own personal perspective into a more objective awareness—a bit like viewing your life as though you were watching it as a spectator on the sidelines. This change in perspective moves us away from reacting to situations and toward a clearer, unbiased, and focused understanding of the situation with awareness of the situation’s nuances. As we develop the practice of mindfulness, we become skilled at being aware of our own emotions and patterns, which can make us aware of more options about how we want to respond: Rather than acting in a habitual or reactive manner, we can consider responses before we react. Reflection is the first step in developing this skill.
Take a few minutes to reflect on your life up to this point. Can you identify milestones, significant decision points, and understand why you made these decisions? Forming a daily habit of writing down your thoughts about the day, challenges you faced and how you responded to each, tracking what went well and what didn’t go well is the process of reflection. Over time, you will begin to see patterns in your behaviors. Identifying these patterns or habits provides key insights into how you think, process information, make decisions, and react to decisions. Once you notice these patterns, you have the power to analyze them and decide which are helpful and which are not. The patterns that are not helpful should be removed and replaced with better patterns. You can write down the new patterns that you want to develop as a goal in your daily reflection journal. You can then identify if you’re moving closer to following the new pattern and achieving this goal.
This type of journaling activity might seem like busy work, or you might think that you don’t have time for reflection. If this is how you feel, try following this advice for a couple of weeks and then reconsider, or conduct your own research to find articles that discredit reflection. There is a vast body of research that supports reflection as an important part of self-growth and self-realization. Some documented benefits in these studies include learning from mistakes, discovering new insights and ideas, and increases in reported happiness and satisfaction with life and relationships, increased mindfulness, and increased self-understanding resulting in feeling more power to choose how one interacts with the world—feeling empowered rather than the victim of a situation.Cable Neuhaus. “The Multimedia Journal: More Than Just a Notebook.” ,Deborah L. Starczewski. “Encouraging Students to Think Beyond the Course Material: The Benefits of Using Reflective Journals”. ,J. L. Nelson. Express Yourself.
### The Impact of Reflection
Gino and Staats noted four categories that hinder success; “biases cause people to focus too much on success, take action too quickly, try too hard to fit in, and depend too much on experts.”Francesca Gino and Bradley Staats. "Why Organizations Don’t Learn." Their point is that the focus on action and success can get in the way of being successful, or of even knowing what success looks like. Gino and Staats’ research identified challenges related to the category of the focus on success. The first three challenges related to the bias toward success include the fear of failure, a fixed mindset, and overreliance on past performance, topics discussed earlier as impediments to the entrepreneurial team’s success and ability to recognize the need for adaptabilityFrancesca Gino and Bradley Staats. "Why Organizations Don’t Learn." . Under the concept of a bias toward action, Gino and Staats identified two challenges: exhaustion and lack of reflection. Exhaustion prevents entrepreneurs from contributing at top—or even normal—levels, while a lack of reflection reduced performance by 20 percent, according to their findings.Francesca Gino and Bradley Staats. "Why Organizations Don’t Learn." Lack of reflection not only decreased performance but also decreased individual, team, and organizational learning. The U.S. Army uses a system of after-action reviews to reflect on actions, successes, and opportunities for improvement. Another common name for this type of reflection in the business world is post-mortem or lessons learned: the action of reflecting on projects or decisions to identify best practices and areas for improvement. Consider the medical community: What would happen if after every surgery or medical diagnosis, no one analyzed the consequences of the surgery or diagnosis? Might we still be using mercury to kill germs or leeches for bloodletting?
The last two biases identified by Gino and Staats are a bias toward fitting in and a bias toward experts, with two sub-challenges within each area. Under bias toward fitting in, the first challenge is believing you need to conform, and the second challenge is failure to use your strengths.Francesca Gino and Bradley Staats. "Why Organizations Don’t Learn." The pressure to conform is present throughout our lives. We are taught to form a line to enter the kindergarten class, the movie theater, or the cafeteria. We are taught to raise our hand to ask or answer a question. This training to conform makes perfect sense in some situations, but we also need to feel comfortable following a different path or approach to living our lives. Again, reflection can help entrepreneurs recognize when they feel pressured to conform through a closer awareness of inner thoughts and feelings. Increased awareness of our thoughts and feelings often leads to more confidence in expressing our thoughts. Following this process also contributes to recognizing your strengths.
In the findings about bias toward experts, the two challenges identified are an overly narrow view of expertise and inadequate frontline involvement. The dependence on experts can create a situation where entrepreneurs assign responsibility for the information and/or decision-making to someone who might have an area of expertise, without realizing that an expert would not be aware of the complexities present within the venture. The expert likely has a pattern or system that has been success for other companies and in other situations, but this advice might not represent the best information or advice for your venture. Involving the frontline team, as well as other sectors of your venture, in discussions and decision-making presents multiple perspectives well worth accessing.
As you build the habit of reflection in your life, and even within your venture, consider how the challenges discussed frame your reflections. Have you made decisions because you wanted to fit in? Do you and your team have a narrow definition of expertise? Did someone give you a key insight that you disregarded because this person did not fit your picture of an expert or informed person? Are you involving the right people in discussions?
### Documenting Your Journey
As part of your reflection activity, another benefit is to document your journey. If you have identified an opportunity or have started to build your venture, now is the perfect time to keep a journal and document your journey. Each day you face new challenges and exciting ideas that stretch your own learning and growth. Tracking the daily events provides you with a roadmap to use for your next venture, or as a guide to build your knowledge base in moving into a mentor or consultant role. Have you ever asked yourself, why didn’t I write that down? We assume that important and insightful ideas will stick in our minds and that we will readily remember them. But in reality we often forget these key insights and ideas. Through journaling, we can record and reflect on our daily activities and key insights.
### Summary
Reflection and journaling are useful tools for entrepreneurial growth. These practices can help you to identify patterns that act as obstacles, to brainstorm solutions, to set goals, and to document ideas that may lead to your next venture.
### Review Questions
### Discussion Questions
### Suggested Resources
F. T. Evers. Journaling: A Path to Our Innermost Self. Interbeing, 2, no.2 (2008): 53–56.
D. Ciampa. The More Senior Your Job Title, the More You Need to Keep a Journal. Harvard Business Review Digital Articles (2017): 2–4.
Worklife TED-sponsored podcasts: https://itunes.apple.com/us/podcast/worklife-with-adam-grant/id1346314086?mt=2
NPR podcast “How I Built This” founder/CEO podcasts: https://www.npr.org/podcasts/510313/how-i-built-this |
# The Things We Carry: Experience, Culture, and Language
## Unit Introduction
Unit 1 is about you—who you are and what you bring to the writing classroom. In his short story “The Things They Carried” (1990), American author and Vietnam War (1954–1975) veteran Tim O’Brien (b. 1946) suggests that the identities of soldiers may be explored through an examination of the items they choose to carry in their packs. Of course, in their new roles as soldiers, they carry items related to survival—weapons and rations—but they also carry other items. Some carry photographs of loved ones, others carry good luck charms or religious icons, and still others carry paper and pen for writing home. Like these soldiers, you carry experiences into the writing classroom that will inform your participation. Your prior experiences with language, culture, and literacy define the unique viewpoint that you will offer during classroom discussions and writings. During this journey, your classmates will learn from you, as you will learn from them. In this way, a new element of your identity will evolve—that of a college student. |
# Bridging the Divide Between Personal Identity and Academia
## Unit Introduction
Unit 2 is about academia, a term for the world of education. The challenge in this part of your journey is learning to showcase your identity and your viewpoint within an exploration of traditional writing genres. You will learn that academia is defined in part by its traditions. In the writing classroom, expect to be asked to write in a variety of narrative and academic genres. Each of these genres is characterized by a defined set of structures and expectations. However, because writing is also a creative art form, you will find more than enough room in academia to develop your individual voice and to challenge conventions and expectations as you write about different subjects. As you approach the assignments in this unit, consider ways to infuse your writing with your personality and identity—your unique voice. |
# Navigating Rhetoric in Real Life
## Unit Introduction
Unit 3 is about the real world—the world outside the walls of your college or university. There is a common misconception among students that the writing they do in the classroom is not related to the real world. The works of the Trailblazers in this text have argued against this idea. They are all using the genres taught in the text in new and interesting ways as part of their work in the real world. As technology evolves, increasing numbers of platforms are available for people to publish their ideas for professional and personal purposes. However, with these options come new responsibilities to present one’s ideas fairly, accurately, and respectfully. Your voice has power, and your developing ability to present it effectively to the public means your journey with writing is really just beginning. |
# An Introduction to Sociology
## Introduction
A busy commuter train station might seem like a very individualized place. Tens of thousands or hundreds of thousands of strangers flow through with a singular purpose: to get where they need to go. Whether walking through main doors at a pace of a dozen people each second, or arriving by train hundreds at a time, the station can feel a bit like a balloon being pumped too full. Throngs of people cluster in tight bottlenecks until they burst through corridors and stairways and tunnels to reach the next stage of their journey. In some stations, walking against the crowd can be a tedious, nearly impossible process. And cutting across a river of determined commuters can be almost dangerous. Things are fast, relentless, and necessary.
But are those hundred thousand or half a million or, in the case of Tokyo’s Shinjuku station, 3.5 million people really acting individually? It may seem surprising, but even with those numbers, strangers from across cities can synch up on the same schedules, use the same doors, take one leg of the trip together every day before separating into different directions. After just a few months, faces can become familiar, and senses can be tuned. An experienced commuter can tell where another person is going according to their pace and whatever announcement just went out; they may slow up a bit to let the other person pass, or hold a door open just a bit longer than usual, certain that someone will grab the handle behind them. Many regulars don’t need to check the schedule board; they sense whether a train is running late or whether a track has changed simply by the movement of the crowd.
And then the customs develop: Which side to walk on, how fast to go, where to stand, how much space to leave between people on the escalator. When you board early, which seat should you take? When you see someone running for the train, do you jam the closing door with your foot? How does the crowd treat people who ask for food or money? What’s the risk level in telling someone to be quiet?
Very few of these behaviors are taught. None are written down. But the transit hub, that pocket of constant flow, is an echo of its society. It takes on some aspects of the city and country around it, but its people also form an informal group of their own. Sociologists, as you will learn, may study these people. Sociologists may seek to understand how they feel about their trip, be it proud or annoyed or just plain exhausted. Sociologists might study how length of commute relates to job satisfaction or family relationships. They may study the ways that conditions of a train station affect attitudes about government, or how the difficulty of commuting may lead people to relocate. This understanding isn’t just a collection of interesting facts; it can influence government policy and spending decisions, employer interventions, and healthcare practices. The work sociologists do to understand our society, and the work you will do in learning about it, is meaningful to our lives and our futures. |
# An Introduction to Sociology
## What Is Sociology?
### What Are Society and Culture?
Sociology is the scientific and systematic study of groups and group interactions, societies and social interactions, from small and personal groups to very large groups. A group of people who live in a defined geographic area, who interact with one another, and who share a common culture is what sociologists call a society.
Sociologists study all aspects and levels of society. Sociologists working from the micro-level study small groups and individual interactions, while those using macro-level analysis look at trends among and between large groups and societies. For example, a micro-level study might look at the accepted rules of conversation in various groups such as among teenagers or business professionals. In contrast, a macro-level analysis might research the ways that language use has changed over time or in social media outlets.
The term culture refers to the group’s shared practices, values, and beliefs. Culture encompasses a group’s way of life, from routine, everyday interactions to the most important parts of group members’ lives. It includes everything produced by a society, including all the social rules.
Sociologists often study culture using the sociological imagination, which pioneer sociologist C. Wright Mills described as an awareness of the relationship between a person’s behavior and experience and the wider culture that shaped the person’s choices and perceptions. It’s a way of seeing our own and other people’s behavior in relationship to history and social structure (1959). One illustration of this is a person’s decision to marry. In the United States, this choice is heavily influenced by individual feelings. However, the social acceptability of marriage relative to the person’s circumstances also plays a part.
Remember, though, that culture is a product of the people in a society. Sociologists take care not to treat the concept of “culture” as though it were alive and real. The error of treating an abstract concept as though it has a real, material existence is known as reification (Sahn, 2013).
### Studying Patterns: How Sociologists View Society
All sociologists are interested in the experiences of individuals and how those experiences are shaped by interactions with social groups and society. To a sociologist, the personal decisions an individual makes do not exist in a vacuum. Cultural patterns, social forces and influences put pressure on people to select one choice over another. Sociologists try to identify these general patterns by examining the behavior of large groups of people living in the same society and experiencing the same societal pressures.
Consider the changes in U.S. families. The “typical” family in past decades consisted of married parents living in a home with their unmarried children. Today, the percent of unmarried couples, same-sex couples, single-parent and single-adult households is increasing, as well as is the number of expanded households, in which extended family members such as grandparents, cousins, or adult children live together in the family home. While 15 million mothers still make up the majority of single parents, 3.5 million fathers are also raising their children alone (U.S. Census Bureau, 2020). Increasingly, single people and cohabitating couples are choosing to raise children outside of marriage through surrogates or adoption.
Some sociologists study social facts—the laws, morals, values, religious beliefs, customs, fashions, rituals, and cultural rules that govern social life—that may contribute to these changes in the family. Do people in the United States view marriage and family differently over the years? Do they view them differently than Peruvians? Do employment and economic conditions play a role in families? Other sociologists are studying the consequences of these new patterns, such as the ways children influence and are influenced by them and/or the changing needs for education, housing, and healthcare.
Sociologists identify and study patterns related to all kinds of contemporary social issues. The “Stop and Frisk” policy, the emergence of new political factions, how Twitter influences everyday communication—these are all examples of topics that sociologists might explore.
### Studying Part and Whole: How Sociologists View Social Structures
A key component of the sociological perspective is the idea that the individual and society are inseparable. It is impossible to study one without the other. German sociologist Norbert Elias called the process of simultaneously analyzing the behavior of individuals and the society that shapes that behavior figuration.
Consider religion. While people experience religion in a distinctly individual manner, religion exists in a larger social context as a social institution. For instance, an individual’s religious practice may be influenced by what government dictates, holidays, teachers, places of worship, rituals, and so on. These influences underscore the important relationship between individual practices of religion and social pressures that influence that religious experience (Elias, 1978). In simpler terms, figuration means that as one analyzes the social institutions in a society, the individuals using that institution in any fashion need to be ‘figured’ in to the analysis.
### Summary
Sociology is the systematic and scientific study of society and social interaction. In order to carry out their studies, sociologists identify cultural patterns and social forces and determine how they affect individuals and groups. They also develop ways to apply their findings to the real world.
### Section Quiz
### Short Answer
### Further Research
Sociology is a broad discipline. Different kinds of sociologists employ various methods for exploring the relationship between individuals and society. Check out more about sociology at this website..
### References
Chily, M. (2013). Kids of Tarashing, Astore District, Gilgit-Baltistan, Pakistan. [Photograph]. Retrieved from https://www.flickr.com/photos/mariachily/3334450816/in/photostream/#/photos/mariachily/3334450816/in/photostream/lightbox/.
Elias, N. (1978). What Is Sociology? New York: Columbia University Press.
Kierns, N. (2010). Ashley’s Alliance, unpublished presentation. Ohio State University.
Ludden, J. (2012). “Single Dads By Choice: More Men Going It Alone.” National Public Radio. Retrieved from http://www.npr.org/2012/06/19/154860588/single-dads-by-choice-more-men-going-it-alone.
Mills, C. Wright. (2000 [1959]). The Sociological Imagination. 40th ed. New York: Oxford University Press.
Roggi, S. (2014). Storia di un genitore che ama troppo [Photograph]. immagini tratte da Google Immagini. (Trans: Story of a parent who loves too much [Photograph]. Images taken from Google Images).
Sahn, R. (2013). “The Dangers of Reification.” The Contrary Perspective. Retrieved from http://contraryperspective.com/2013/06/06/the-dangers-of-reification/.
Unknown Photographer. 2013. Million People March in Laneta Park, Manila, Philippines. [Photograph] This Photo by is licensed under CC BY-SA. Retrieved from www.wikicommons.com.
Unknown Photographer. 2013. The Young Family in NJ hosted Sarah from France in 2012-13. Attribution 2.0 Generic (CC BY 2.0) Retrieved from https://www.flickr.com/photos/afsusa/8682763589.
Unknown Photographer. 2017. Zairean Students. [Photograph]. Retrieved from https://dgmt.co.za.
U.S. Census Bureau. 2020. “America’s Families and Living Arrangements: 2020.” Retrieved from https://www.census.gov/data/tables/2020/demo/families/cps-2020.html. |
# An Introduction to Sociology
## The History of Sociology
For millennia, people have been fascinated by the relationships between individuals and societies. Many topics studied by ancient philosophers in their desire to describe an ideal society are still studied in modern sociology, including theories of social conflict, economics, social cohesion, and power in a continued attempt to describe an ideal society (Hannoum, 2003). Although we are more familiar with western philosophers like Plato and his student, Aristotle, eastern philosophers also thought about social issues.
Until recently, we have very few texts that are non-religious in nature that theorize about social life. From 4th century through the 19th century, the Catholic Church was the seat of power from today’s Turkey in the east to western and northern Europe, including the British Isles. Only monks who were charged with rewriting holy texts by hand and the aristocracy were literate. Moreover, the Church consolidated power. In the year 800, Pope Leo III named Charlemagne, the king of Francia (today’s France, Belgium, Netherlands and Germany) emperor of the Holy Roman Empire, giving one individual control over most of Europe. Doing so gave the Catholic Church the power to maintain its own traditions safeguard them from the influence of people practicing other religions. If any social patterns challenged any belief of the Church, those practitioners were massacred, burned at the stake, or labeled heretics. As a result, the records that we have are extremely subjective and do not offer an unbiased view of social practice.
In the 13th century, Ma Tuan-Lin, a Chinese historian, was the first to record, in his seminal encyclopedia titled General Study of Literary Remains, the social dynamics underlying and generating historical development.
In the 14th century, the Tunisian historian Ibn Khaldun (1332–1406) set the foundation for both modern sociology and economics. Khaldun proposed a theory of social conflict and provided a comparison of nomadic and sedentary life, an analysis of political economy, and a study connecting a tribe’s social cohesion to its capacity for power (Hannoum, 2003). Khaldun often challenged authorities. As sociologists continue to study and report on social issues and problems, they often find themselves in the center of controversy.
From 1347 to 1522, the bubonic plague ravaged Europe, killing up to 35% of population (Armstrong, 2019). The plague dealt a major blow to the credibility of the Catholic Church. Out of this chaos emerged the the work of Copernicus, Galileo, Leonardo, Newton, Linnaeus, and other philosophers whose work sometimes contradicted church teachings. Events once held to be the product of the divine hand could be analyzed by human reason and observation and could be explained by scientific, testable, and retestable hypotheses. As literacy spread through conquests and colonization, more records and literature became available for sociologists and historians to put social puzzles together.
In the 18th century, Enlightenment philosophers developed general principles that could be used to explain social life. Thinkers such as John Locke, François-Marie Arouet (Voltaire), Immanuel Kant, and Thomas Hobbes responded to what they saw as social ills by writing on topics that they hoped would lead to social reform. Mary Wollstonecraft (1759–1797) wrote about women’s conditions in society. Like Harriet Martineau and Jane Addams, her works were long ignored by the male academic structure, but since the 1970s, Wollstonecraft has been widely considered the first feminist thinker of consequence. Ideas about economic systems, the family, health and hygiene, national offense and defense, were among the many concerns of social life.
The early 19th century saw great changes with the Industrial Revolution, increased mobility, and new kinds of employment. It was also a period of increased trade, travel, and globalization that exposed many people — for the first time—to societies and cultures other than their own. Millions of people moved into cities and many people turned away from their traditional religious beliefs. Ideas spread rapidly, groups were created, political decisions became public decisions. Among a new generation of philosophers, there were some who believed they could make sense of it all.
### Creating a Discipline: European Theorists
### Auguste Comte (1798 – 1857)
The term sociology was first coined in 1780 by the French essayist Emmanuel-Joseph Sieyès (1748–1836) in an unpublished manuscript (Fauré et al. 1999). In 1838, the term was reintroduced by Auguste Comte (1798–1857). Comte originally studied to be an engineer, but later became a pupil of social philosopher Claude Henri de Rouvroy Comte de Saint-Simon (1760–1825). They both thought that social scientists could study society using the same scientific methods utilized in natural sciences. Comte also believed in the potential of social scientists to work toward the betterment of society. He held that once scholars identified the laws that governed society, sociologists could address problems such as poor education and poverty (Abercrombie et al. 2000).
Comte named the scientific study of social patterns positivism. He described his philosophy in a series of books called The Course in Positive Philosophy (1830–1842) and A General View of Positivism (1848). He believed that revealing the laws by which societies and individuals interact would usher in a new “positivist” age of history. While the field and its terminology have grown, sociologists still believe in the positive impact of their work.
### Harriet Martineau (1802 – 1876)
Harriet Martineau introduced sociology to English speaking scholars through her translation of Comte’s writing from French to English. She was an early analyst of social practices, including economics, social class, religion, suicide, government, and women’s rights. Her career began with Illustrations of Political Economy, a work educating ordinary people about the principles of economics (Johnson, 2003). She later developed the first systematic methodological international comparisons of social institutions in two of her most famous sociological works: Society in America (1837) and Retrospect of Western Travel (1838).
Martineau found the workings of capitalism at odds with the professed moral principles of people in the United States. She pointed out the faults with the free enterprise system in which workers were exploited and impoverished while business owners became wealthy. She further noted that the belief that all are created equal was inconsistent with the lack of women’s rights. Much like Mary Wollstonecraft, Martineau was often discounted in her own time because academic sociology was a male-dominated profession.
### Karl Marx (1818-1883)
Karl Marx was a German philosopher and economist. In 1848, he and Friedrich Engels (1820–1895) coauthored the Communist Manifesto. This book is one of the most influential political manuscripts in history. It also presents Marx’s theory of society, which differed from what Comte proposed.
Marx rejected Comte’s positivism. He believed that societies grew and changed as a result of the struggles of different social classes over the means of production. At the time he was developing his theories, the Industrial Revolution and the rise of capitalism led to great disparities in wealth between the owners of the factories and workers. Capitalism, an economic system characterized by private or corporate ownership of goods and the means to produce them, had developed in many nations.
Marx predicted that inequalities of capitalism would become so extreme that workers would eventually revolt. This would lead to the collapse of capitalism, which would be replaced by communism. Communism is an economic system under which there is no private or corporate ownership: everything is owned communally and distributed as needed. Marx believed that communism was a more equitable system than capitalism.
While his economic predictions did not materialize in the time frame he predicted, Marx’s idea that social conflict leads to change in society is still one of the major theories used in modern sociology.
### Herbert Spencer (1820–1903)
In 1873, the English philosopher Herbert Spencer published The Study of Sociology, the first book with the term “sociology” in the title. Spencer rejected much of Comte’s philosophy as well as Marx’s theory of class struggle and his support of communism. Instead, he favored a form of government that allowed market forces to control capitalism. His work influenced many early sociologists including Émile Durkheim (1858–1917). Spencer, using Charles Darwin’s work as a comparison said, “This survival of the fittest, which I have here sought to express in mechanical terms, is that which Mr. Darwin has called ‘natural selection,’ or the preservation of favoured races in the struggle for life.” (Spencer, 1864) The statement is often misinterpreted and adopted by those who believe in the superiority of one race over another.
### Georg Simmel (1858–1918)
Georg Simmel was a German art critic who wrote widely on social and political issues as well. Simmel took an anti-positivism stance and addressed topics such as social conflict, the function of money, individual identity in city life, and the European fear of outsiders (Stapley 2010). Much of his work focused on micro-level theories and analyzed the dynamics of two-person and three-person groups. His work also emphasized individual culture as the creative capacities of individuals (Ritzer and Goodman 2004).
### Émile Durkheim (1858–1917)
Émile Durkheim helped establish sociology as a formal academic discipline by establishing the first European department of sociology at the University of Bordeaux in 1895 and by publishing his Rules of the Sociological Method in 1895. In Division of Labour in Society (1893), Durkheim further laid out his theory on how societies transformed from a primitive state into a capitalist, industrial society. According to Durkheim, people rise to their proper levels in society based on merit.
Durkheim believed that sociologists could study objective social facts (Poggi, 2000). He also believed that through such studies it would be possible to determine if a society was “healthy” or “pathological.” Healthy societies were stable while pathological societies experienced a breakdown in social norms.
In 1897, Durkheim attempted to demonstrate the effectiveness of his rules of social research when he published a work titled Suicide. Durkheim examined suicide statistics in different police districts to research differences between Catholic and Protestant communities. He attributed the differences to socio-religious forces rather than to individual or psychological causes.
### Max Weber (1864–1920)
Prominent sociologist Max Weber established a sociology department in Germany at the Ludwig Maximilians University of Munich in 1919. Weber wrote on many topics related to sociology including political change in Russia and social forces that affect factory workers. He is known best for his 1904 book, The Protestant Ethic and the Spirit of Capitalism. The theory that Weber sets forth in this book is still controversial. Some believe that Weber argued that the beliefs of many Protestants, especially Calvinists, led to the rise of capitalism. Others interpret it as simply claiming that the ideologies of capitalism and Protestantism are complementary.
Weber believed that it was difficult, if not impossible, to use standard scientific methods to accurately predict the behavior of groups as some sociologists hoped to do. Weber argued that the influence of culture on human behavior had to be taken into account. This even applied to the researchers themselves, who should be aware of how their own cultural biases could influence their research. To deal with this problem, Weber and Wilhelm Dilthey introduced the concept of verstehen, a German word that means to understand in a deep way. In seeking verstehen, outside observers of a social world—an entire culture or a small setting—attempt to understand it from an insider’s point of view.
In The Nature of Social Action, Weber described sociology as striving to “… interpret the meaning of social action and thereby give a causal explanation of the way in which action proceeds and the effects it produces.” He and other like-minded sociologists proposed a philosophy of anti-positivism whereby social researchers would strive for subjectivity as they worked to represent social processes, cultural norms, and societal values. This approach led to some research methods whose aim was not to generalize or predict (traditional in science), but to systematically gain an in-depth understanding of social worlds.
The different approaches to research based on positivism or anti-positivism are often considered the foundation for the differences found today between quantitative sociology and qualitative sociology. Quantitative sociology uses statistical methods such as surveys with large numbers of participants. Researchers analyze data using statistical techniques to see if they can uncover patterns of human behavior. Qualitative sociology seeks to understand human behavior by learning about it through in-depth interviews, focus groups, and analysis of content sources (like books, magazines, journals, and popular media).
### Applying the Discipline: American Theorists and Practitioners
In the early 1900s, sociology reached universities in the United States. William Sumner held the first professorship in sociology (Yale University), Franklin Giddings was the first full professor of Sociology (Columbia University), and Albion Small wrote the first sociology textbook. Early American sociologists tested and applied the theories of the Europeans and became leaders in social research. Lester Ward (1841 – 1913) developed social research methods and argued for the use of the scientific method and quantitative data (Chapter 2) to show the effectiveness of policies. In order for sociology to gain respectability in American academia, social researchers understood that they must adopt empirical approaches.
### W.E.B. Du Bois (1868-1963)
William Edward Burghardt (W.E.B.) Du Bois, a Harvard-trained historian, pioneered the use of rigorous empirical methodology into sociology. His groundbreaking 1896-1897 study of the African American community in Philadelphia incorporated hundreds of interviews Du Bois conducted in order to document the familial and employment structures and assess the chief challenges of the community. These new, comprehensive research methods stood in stark contrast to the less scientific practices of the time, which Du Bois critiqued as being similar to doing research as if through the window of a moving car. His scientific approach became highly influential to entire schools of sociological study, and is considered a forerunner to contemporary practices. Additionally, Du Bois’ 1899 publication provided empirical evidence to challenge pseudoscientific ideas of biological racism (Morris, 2015; Green & Wortham, 2018), which had been used as justification to oppress people of different races.
Du Bois also played a prominent role in the effort to increase rights for Black people. Concerned at the slow pace of progress and advice from some Black leaders to be more accommodating of racism, Du Bois became a leader in what would later be known as the Niagara Movement. In 1905, he and others drafted a declaration that called for immediate political, economic, and social equality for African Americans. A few years later, he helped found the National Association for the Advancement of Colored People (NAACP) and served as its director of publications.
### Thorstein Veblen (1857 – 1929)
After a brief stint as an unemployed college graduate, Thorstein Veblen began to study the economy through a social lens, writing about the leisure class, the business class, and other areas that touched on the idea of ‘working’ itself. He researched the chronically unemployed, the currently unemployed, the working classes, and the impact of technology and business within society. Veblen is known as a co-founder of the branch (or school) of institutional economics.
### Jane Addams (1860-1935)
Jane Addams founded Hull House, a center that served needy immigrants through social and educational programs while providing extensive opportunities for sociological research. Founded in Chicago, Addams worked closely with University of Chicago’s Chicago School of Sociology. This school of thought places much importance on environment in which relationships and behaviors develop. Research conducted at Hull House informed child labor, immigration, health care, and other areas of public policy.
### Charles Horton Cooley (1864-1929)
Charles Horton Cooley posited that individuals compare themselves to others in order to check themselves against social standards and remain part of the group. Calling this idea ‘the looking-glass self,’ Cooley argued that we ‘see’ ourselves by the reactions of others with whom we interact. If someone reacts positively to our behavior, theoretically we will continue that behavior. He wrote substantially on what he saw as the order of life in Human Nature and the Social Order (1902) followed by Social Organization in 1909. He was very concerned with the increasing individualism and competitiveness of US society, fearing it would disrupt families as primary groups lost their importance.
### George Herbert Mead (1863–1931)
George Herbert Mead was a philosopher and sociologist whose work focused on the ways in which the mind and the self were developed as a result of social processes (Cronk, n.d.). He argued that how an individual comes to view himself or herself is based to a very large extent on interactions with others. Though Mead adopted Cooley’s concept of ‘looking-glasses,’ Mead felt that an individual’s reaction to a positive or negative reflection depended on who the ‘other’ was. Individuals that had the greatest impact on a person’s life were significant others while generalized others were the organized and generalized attitude of a social group. Mead often shares the title of father of symbolic interactionism with Cooley and Erving Goffman.
### Robert E. Park (1864-1944)
Robert E. Park is best known as the founder of social ecology. Attached to the Chicago School, Park focused on how individuals lived within their environment. One of the first sociologists to focus on ethnic minorities, he wrote on the Belgian oppression of the Congolese. When he returned to the US, he and Ernest Burgess researched the inner city to show that no matter who lived there, social chaos was prevalent. As such, it was not the residents who caused the chaos but the environment.
### Summary
Sociology was developed as an academic and scientific way to study and theorize about the changes to society brought on by the Industrial Revolution in the eighteenth and nineteenth centuries. Some of the earliest sociologists thought that societies and individuals’ roles in society could be studied using the same scientific methodologies that were used in the natural sciences, while others believed that is was impossible to predict human behavior scientifically, and still others debated the value of such predictions. Those perspectives continue to be represented within sociology today.
### Section Quiz
### Short Answer
### Further Research
Many sociologists helped shape the discipline. To learn more, check out this site featuring prominent sociologists and how they changed sociology.
### References
Abercrombie, N., S. Hill, & B. S. Turner. (2000). The Penguin Dictionary of Sociology. London: Penguin.
Armstrong, D. (2019) 1215: The Year That Changed Everything. The Teaching Company.
Buroway, M. (2005). “2004 Presidential Address: For Public Sociology.” American Sociological Review 70 (February): 4–28. Retrieved from http://burawoy.berkeley.edu/Public%20Sociology,%20Live/Burawoy.pdf.
Cronk, G. n.d. “George Herbert Mead.” Internet Encyclopedia of Philosophy: A Peer-Reviewed Academic Resource. Retrieved from http://www.iep.utm.edu/mead/.
Daileader, P. (2007). The Early Middle Ages. The Teaching Company.
Datar, R., Alatas, S., van den Bent, J., & Irwin, R. (2019). The Forum. Ibn Khaldun: 14th Century Sage. Retrieved from https://www.bbc.co.uk/sounds/play/w3csyp5t.
Durkheim, É. (1964 [1895]). The Rules of Sociological Method, edited by J. Mueller, E. George & E. Caitlin. 8th ed. Translated by S. Solovay. New York: Free Press.
The Editors of Encyclopaedia Britannica. (2020). Ma Duanlin Chinese Historian. Retrieved from https://www.britannica.com/biography/Ma-Duanlin.
Fauré, C., J. Guilhaumou, J. Vallier, & F. Weil. (2007 [1999]). Des Manuscrits de Sieyès, 1773–1799, Volumes I and II. Paris: Champion.
Green, D.S. and Wortham, R.A. (2018), The Sociological Insight of W.E.B. Du Bois. Sociological Inquiry, 88: 56-78. Retrieved January 10, 2021, from https://doi.org/10.1111/soin.12179
Hannoum, A. (2003). Translation and the Colonial Imaginary: Ibn Khaldun Orientalist. Middletown, CT: Wesleyan University. Retrieved from http://www.jstor.org/pss/3590803.
Hill, M. (1991). “Harriet Martineau.” Women in Sociology: A Bio-Bibliographic Sourcebook, edited by Mary Jo Deegan. New York: Greenwood Press.
Johnson, B. (2003). “Harriet Martineau: Theories and Contributions to Sociology.” Education Portal. Retrieved from http://education-portal.com/academy/lesson/harriet-martineau-theories-and-contributions-to-sociology.html#lesson.
Morris, A. (2015). The Scholar Denied: W. E. B. Du Bois and the Birth of Modern Sociology. Oakland, California: University of California Press. Retrieved January 10, 2021, from http://www.jstor.org/stable/10.1525/j.ctv1xxtc2
Poggi, Gianfranco. (2000). Durkheim. Oxford, United Kingdom: Oxford University Press.
Ritzer, G. & Goodman, D. (2004). Sociological Theory, 6th Edition. New York: McGraw Hill Education.
Stapley, Pierre. (2010). “Georg Simmel.” Cardiff University School of Social Sciences. Retrieved from http://www.cf.ac.uk/socsi/undergraduate/introsoc/simmel.html.
U.S. Congress Joint Economic Committee. (2010). Women and the Economy, 2010: 25 Years of Progress But Challenges Remain. August. Washington, DC: Congressional Printing Office. Retrieved from http://jec.senate.gov/public/?a=Files.Serve&File_id=8be22cb0-8ed0-4a1a-841b-aa91dc55fa81 |
# An Introduction to Sociology
## Theoretical Perspectives in Sociology
Sociologists study social events, interactions, and patterns, and they develop theories to explain why things work as they do. In sociology, a theory is a way to explain different aspects of social interactions and to create a testable proposition, called a hypothesis, about society (Allan 2006).
For example, although suicide is generally considered an individual phenomenon, Émile Durkheim was interested in studying the social factors that affect it. He studied social solidarity, social ties within a group, and hypothesized that differences in suicide rates might be explained by religious differences. Durkheim gathered a large amount of data about Europeans and found that Protestants were more likely to commit suicide than Catholics. His work supports the utility of theory in sociological research.
Theories vary in scope depending on the scale of the issues that they are meant to explain. Macro-level theories relate to large-scale issues and large groups of people, while micro-level theories look at very specific relationships between individuals or small groups. Grand theories attempt to explain large-scale relationships and answer fundamental questions such as why societies form and why they change. Sociological theory is constantly evolving and should never be considered complete. Classic sociological theories are still considered important and current, but new sociological theories build upon the work of their predecessors and add to them (Calhoun, 2002).
In sociology, a few theories provide broad perspectives that help explain many different aspects of social life, and these are called paradigms. Paradigms are philosophical and theoretical frameworks used within a discipline to formulate theories, generalizations, and the experiments performed in support of them. Three paradigms have come to dominate sociological thinking because they provide useful explanations: structural functionalism, conflict theory, and symbolic interactionism.
### Functionalism
Functionalism, also called structural-functional theory, sees society as a structure with interrelated parts designed to meet the biological and social needs of the individuals in that society. Functionalism grew out of the writings of English philosopher and biologist, Herbert Spencer, who saw similarities between society and the human body. He argued that just as the various organs of the body work together to keep the body functioning, the various parts of society work together to keep society functioning (Spencer, 1898). The parts of society that Spencer referred to were the social institutions, or patterns of beliefs and behaviors focused on meeting social needs, such as government, education, family, healthcare, religion, and the economy.
Émile Durkheim applied Spencer’s theory to explain how societies change and survive over time. Durkheim believed that society is a complex system of interrelated and interdependent parts that work together to maintain stability (Durkheim, 1893), and that society is held together by shared values, languages, and symbols. He believed that to study society, a sociologist must look beyond individuals to social facts such as laws, morals, values, religious beliefs, customs, fashion, and rituals, which all serve to govern social life (Durkheim, 1895). Alfred Radcliffe-Brown (1881–1955), a social anthropologist, defined the function of any recurrent activity as the part it played in social life as a whole, and therefore the contribution it makes to social stability and continuity (Radcliffe-Brown 1952). In a healthy society, all parts work together to maintain stability, a state called dynamic equilibrium by later sociologists such as Parsons (1961).
Durkheim believed that individuals may make up society, but in order to study society, sociologists have to look beyond individuals to social facts. . Each of these social facts serves one or more functions within a society. For example, one function of a society’s laws may be to protect society from violence, while another is to punish criminal behavior, while another is to preserve public health.
Another noted structural functionalist, Robert Merton (1910–2003), pointed out that social processes often have many functions. Manifest functions are the consequences of a social process that are sought or anticipated, while latent functions are the unsought consequences of a social process. A manifest function of a college education, for example, includes gaining knowledge, preparing for a career, and finding a good job that utilizes that education. Latent functions of your college years include meeting new people, participating in extracurricular activities, or even finding a spouse or partner. Another latent function of education is creating a hierarchy of employment based on the level of education attained. Latent functions can be beneficial, neutral, or harmful. Social processes that have undesirable consequences for the operation of society are called dysfunctions. In education, examples of dysfunction include getting bad grades, truancy, dropping out, not graduating, and not finding suitable employment.
### Criticism
One criticism of the structural-functional theory is that it can’t adequately explain social change even though the functions are processes. Also problematic is the somewhat circular nature of this theory: repetitive behavior patterns are assumed to have a function, yet we profess to know that they have a function only because they are repeated. Furthermore, dysfunctions may continue, even though they don’t serve a function, which seemingly contradicts the basic premise of the theory. Many sociologists now believe that functionalism is no longer useful as a macro-level theory, but that it does serve a useful purpose in some mid-level analyses.
### Conflict Theory
Conflict theory looks at society as a competition for limited resources. This perspective is a macro-level approach most identified with the writings of German philosopher and economist Karl Marx, who saw society as being made up of individuals in different social classes who must compete for social, material, and political resources such as food and housing, employment, education, and leisure time. Social institutions like government, education, and religion reflect this competition in their inherent inequalities and help maintain the unequal social structure. Some individuals and organizations are able to obtain and keep more resources than others, and these “winners” use their power and influence to maintain social institutions. The perpetuation of power results in the perpetuation of oppression.
Several theorists suggested variations on this basic theme like Polish-Austrian sociologist Ludwig Gumplowicz (1838–1909) who expanded on Marx’s ideas by arguing that war and conquest are the bases of civilizations. He believed that cultural and ethnic conflicts led to states being identified and defined by a dominant group that had power over other groups (Irving, 2007).
German sociologist Max Weber (1864–1920) agreed with Marx but also believed that, in addition to economic inequalities, inequalities of political power and social structure cause conflict. Weber noted that different groups were affected differently based on education, race, and gender, and that people’s reactions to inequality were moderated by class differences and rates of social mobility, as well as by perceptions about the legitimacy of those in power. A reader of Marx, Georg Simmel believed that conflict can help integrate and stabilize a society. He said that the intensity of the conflict varies depending on the emotional involvement of the parties, the degree of solidarity within the opposing groups, and the clarity and limited nature of the goals. Simmel also showed that groups work to create internal solidarity, centralize power, and reduce dissent. The stronger the bond, the weaker the discord. Resolving conflicts can reduce tension and hostility and can pave the way for future agreements.
In the 1930s and 1940s, German philosophers, known as the Frankfurt School, developed critical theory as an elaboration on Marxist principles. Critical theory is an expansion of conflict theory and is broader than just sociology, incorporating other social sciences and philosophy. A critical theory is a holistic theory and attempts to address structural issues causing inequality. It must explain what’s wrong in current social reality, identify the people who can make changes, and provide practical goals for social transformation (Horkeimer, 1982).
More recently, inequality based on gender or race has been explained in a similar manner and has identified institutionalized power structures that help to maintain inequality between groups. Janet Saltzman Chafetz (1941–2006) presented a model of feminist theory that attempts to explain the forces that maintain gender inequality as well as a theory of how such a system can be changed (Turner, 2003). Similarly, critical race theory grew out of a critical analysis of race and racism from a legal point of view. Critical race theory looks at structural inequality based on white privilege and associated wealth, power, and prestige.
### Criticism
Just as structural functionalism was criticized for focusing too much on the stability of societies, conflict theory has been criticized because it tends to focus on conflict to the exclusion of recognizing stability. Many social structures are extremely stable or have gradually progressed over time rather than changing abruptly as conflict theory would suggest.
### Symbolic Interactionist Theory
Symbolic interactionism is a micro-level theory that focuses on the relationships among individuals within a society. Communication—the exchange of meaning through language and symbols—is believed to be the way in which people make sense of their social worlds. Theorists Herman and Reynolds (1994) note that this perspective sees people as being active in shaping the social world rather than simply being acted upon.
George Herbert Mead is considered a founder of symbolic interactionism though he never published his work on it (LaRossa and Reitzes, 1993). Mead’s student, Herbert Blumer (1900-1987), coined the term “symbolic interactionism” and outlined these basic premises: humans interact with things based on meanings ascribed to those things; the ascribed meaning of things comes from our interactions with others and society; the meanings of things are interpreted by a person when dealing with things in specific circumstances (Blumer 1969). If you love books, for example, a symbolic interactionist might propose that you learned that books are good or important in the interactions you had with family, friends, school, or church. Maybe your family had a special reading time each week, getting your library card was treated as a special event, or bedtime stories were associated with warmth and comfort.
Social scientists who apply symbolic-interactionist thinking look for patterns of interaction between individuals. Their studies often involve observation of one-on-one interactions. For example, while a conflict theorist studying a political protest might focus on class difference, a symbolic interactionist would be more interested in how individuals in the protesting group interact, as well as the signs and symbols protesters use to communicate their message.
The focus on the importance of symbols in building a society led sociologists like Erving Goffman (1922-1982) to develop a technique called dramaturgical analysis. Goffman used theater as an analogy for social interaction and recognized that people’s interactions showed patterns of cultural “scripts.” He argued that individuals were actors in a play. We switched roles, sometimes minute to minute—for example, from student or daughter to dog walker. Because it can be unclear what part a person may play in a given situation, he or she has to improvise his or her role as the situation unfolds (Goffman, 1958).
Studies that use the symbolic interactionist perspective are more likely to use qualitative research methods, such as in-depth interviews or participant observation, because they seek to understand the symbolic worlds in which research subjects live.
Constructivism is an extension of symbolic interaction theory which proposes that reality is what humans cognitively construct it to be. We develop social constructs based on interactions with others, and those constructs that last over time are those that have meanings which are widely agreed-upon or generally accepted by most within the society. This approach is often used to examine what’s defined as deviant within a society. There is no absolute definition of deviance, and different societies have constructed different meanings for deviance, as well as associating different behaviors with deviance.
One situation that illustrates this is what you believe you’re to do if you find a wallet in the street. In the United States, turning the wallet in to local authorities would be considered the appropriate action, and to keep the wallet would be seen as deviant. In contrast, many Eastern societies would consider it much more appropriate to keep the wallet and search for the owner yourself. Turning it over to someone else, even the authorities, would be considered deviant behavior.
### Criticism
Research done from this perspective is often scrutinized because of the difficulty of remaining objective. Others criticize the extremely narrow focus on symbolic interaction. Proponents, of course, consider this one of its greatest strengths.
### Sociological Theory Today
These three approaches still provide the main foundation of modern sociological theory though they have evolved. Structural-functionalism was a dominant force after World War II and until the 1960s and 1970s. At that time, sociologists began to feel that structural-functionalism did not sufficiently explain the rapid social changes happening in the United States at that time. The women’s movement and the Civil Rights movement forced academics to develop approaches to study these emerging social practices.
Conflict theory then gained prominence, with its emphasis on institutionalized social inequality. Critical theory, and the particular aspects of feminist theory and critical race theory, focused on creating social change through the application of sociological principles. The field saw a renewed emphasis on helping ordinary people understand sociology principles, in the form of public sociology.
Gaining prominence in the wake of Mead’s work in the 1920s and 1930s, symbolic interactionism declined in influence during the 1960s and 1970s only to be revitalized at the turn of the twenty-first century (Stryker, 1987). Postmodern social theory developed in the 1980s to look at society through an entirely new lens by rejecting previous macro-level attempts to explain social phenomena. Its growth in popularity coincides with the rise of constructivist views of symbolic interactionism.
### Summary
Sociologists develop theories to explain social events, interactions, and patterns. A theory is a proposed explanation of those social interactions. Theories have different scales. Macro-level theories, such as structural functionalism and conflict theory, attempt to explain how societies operate as a whole. Micro-level theories, such as symbolic interactionism, focus on interactions between individuals.
### Section Quiz
### Short Answer
### Further Research
People often think of all conflict as violent, but many conflicts can be resolved nonviolently. To learn more about nonviolent methods of conflict resolution check out the Albert Einstein Institution.
### References
Allan, K. Contemporary Social and Sociological Theory: Visualizing Social Worlds. Thousand Oaks, CA: Pine Forge Press.
Blumer, H. (1969). Symbolic Interactionism: Perspective and Method. Englewood Cliffs, NJ: Prentice Hall.
Broce, G. (1973). History of Anthropology. Minneapolis: Burgess Publishing Company.
Calhoun, C. (2002). Classical Sociological Theory. Malden, MA: Wiley-Blackwell.
Cooley, C. (1902). Human nature and the social order. NY: Charles Schribner’s Sons. Retrieved from https://www.asanet.org/charles-h-cooley.
Durkheim, É. (1984 [1893]). The Division of Labor in Society. New York: Free Press.
Durkheim, É. (1964 [1895]). The Rules of Sociological Method, edited by J. Mueller, E. George and E. Caitlin. 8th ed. Translated by S. Solovay. New York: Free Press.
Goffman, E. (1958). The Presentation of Self in Everyday Life. Edinburgh: University of Edinburgh, Social Sciences Research Centre.
Goldschmidt, W. (1996). “Functionalism” in Encyclopedia of Cultural Anthropology, Vol. 2, edited by D. Levinson and M. Ember. New York: Henry Holt and Company.
Henry, S. (2007). “Deviance, Constructionist Perspectives.” Blackwell Encyclopedia of Sociology. Retrieved from http://www.sociologyencyclopedia.com/public/tocnode?id=g9781405124331_yr2011_chunk_g978140512433110_ss1-41.
Herman, N. & Reynolds, L. (1994). Symbolic Interaction: An Introduction to Social Psychology. Lanham, MD: Altamira Press.
Horkeimer, M. (1982). Critical Theory. New York: Seabury Press.
Hurst, A. (n.d.) Classical Sociological Theory and Foundations of American Sociology. Retrieved from https://open.oregonstate.education/sociologicaltheory/
Irving, J. (2007). Fifty Key Sociologists: The Formative Theorists. New York: Routledge.
LaRossa, R. & Reitzes, D. (1993). “Symbolic Interactionism and Family Studies.” Pp. 135–163 in Sourcebook of Family Theories and Methods: A Contextual Approach, edited by P. G. Boss, et al. New York: Springer.
Maryanski, A. & Turner, J. (1992). The Social Cage: Human Nature and the Evolution of Society. Stanford, CA: Stanford University Press.
Marx, K. & Engels, F. (1998 [1848]). The Communist Manifesto. New York: Penguin.
Parsons, T. (1961). Theories of Society: Foundations of Modern Sociological Theory. New York: Free Press.
Pew Research Center. (2012). “Mobile Technology Fact Sheet.” Pew Research Internet Project, April 2012. Retrieved from http://www.pewinternet.org/fact-sheets/mobile-technology-fact-sheet/.
Radcliffe-Brown, A.R. (1952). Structure and Function in Primitive Society: Essays and Addresses. London: Cohen and West.
Spencer, Herbert. (1894). The Principles of Biology. New York: D. Appleton and Company.
Stanford University. (2016). George Herbert Mead. Retrieved from https://plato.stanford.edu/entries/mead/.
Stanford University. (2017). Max Weber. Retrieved from https://plato.stanford.edu/entries/weber/
Stryker, Sheldon (1987). The Vitalization of Symbolic Interactionism. Social Psychology Quarterly, 50(1), 83-94.
Turner, J. (2003). The Structure of Sociological Theory. 7th ed. Belmont, CA: Thompson/Wadsworth.
UCLA School of Public Affairs. (n.d.) “What is Critical Race Theory?” UCLA School of Public Affairs: Critical Race Studies. Retrieved from http://spacrs.wordpress.com/what-is-critical-race-theory/. |
# An Introduction to Sociology
## Why Study Sociology?
When Elizabeth Eckford tried to enter Central High School in Little Rock, Arkansas, in September 1957, she was met by an angry crowd and was turned away by authorities. But she knew she had the law on her side. Three years earlier in the landmark Brown vs. the Board of Education decision, the U.S. Supreme Court had overturned twenty-one state laws that allowed Black and White people to be taught in separate school systems as long as the school systems were “equal.” The decision was nothing short of momentous, not only for education, but for a number of other segregation and discrimination issues that have lasted into this decade. And in that momentous decision, the Supreme Court cited the research of the husband-and-wife team of social scientists, Kenneth and Mamie Clark, as evidence that segregation generates in minority students a feeling of inferiority. In the ‘doll test,’ for example, the Clarks showed children four dolls, two with white skin and yellow hair and two with brown skin and black hair. When asked which doll they preferred, the majority of Black children chose the doll with the light skin doll, and they assigned positive characteristics to it. Most of the Black children discarded the doll with the brown skin—the one that had a closer resemblance to themselves.
When asked to choose the doll that looked like them, many children left the room, started to cry, and/or became depressed. The Clarks’ research contributed to the Supreme Court’s conclusion that separate but equal was damaging to students, and that separate facilities are unequal.
### Sociology and a Better Society
Since it was first founded, many people interested in sociology have been driven by the scholarly desire to contribute knowledge to this field, while others have seen it as way not only to study society but also to improve it. Besides desegregation, sociology has played a crucial role in many important social reforms, such as equal opportunity for women in the workplace, improved treatment for individuals with mental illnesses or learning disabilities, increased accessibility and accommodation for people with physical disabilities, the right of native populations to preserve their land and culture, and prison system reforms.
The predominant American sociologist, the late Peter L. Berger (1929–2017), in his 1963 book, Invitation to Sociology: A Humanistic Perspective, describes a sociologist as “someone concerned with understanding society in a disciplined way.” He asserts that sociologists have a natural interest in the monumental moments of people’s lives, as well as a fascination with banal, everyday occurrences. Berger also describes the “aha” moment when a sociological theory becomes applicable and understood:
Sociology can be exciting because it teaches people ways to recognize how they fit into the world and how others perceive them. Looking at themselves and society from a sociological perspective helps people see where they connect to different groups based on the many different ways they classify themselves and how society classifies them in turn. It raises awareness of how those classifications—such as economic and status levels, education, ethnicity, or sexual orientation—affect perceptions.
Sociology teaches people not to accept easy explanations. It teaches them a way to organize their thinking so that they can ask better questions and formulate better answers. It makes people more aware that there are many different kinds of people in the world who do not necessarily think the way they do. It increases their willingness and ability to try to see the world from other people’s perspectives. This prepares them to live and work in an increasingly diverse and integrated world.
### Sociology in the Workplace
Employers continue to seek people with what are called “transferable skills.” This means that they want to hire people whose knowledge and education can be applied in a variety of settings and whose skills will contribute to various tasks.
Studying sociology can provide people with this wide knowledge and a skill set that can contribute to many workplaces, including
1. an understanding of social systems and large bureaucracies;
2. the ability to devise and carry out research projects to assess whether a program or policy is working;
3. the ability to collect, read, and analyze statistical information from polls or surveys;
4. the ability to recognize important differences in people’s social, cultural, and economic backgrounds;
5. skills in preparing reports and communicating complex ideas; and
6. the capacity for critical thinking about social issues and problems that confront modern society. (Department of Sociology, University of Alabama-Huntsville)
Sociology prepares people for a wide variety of careers. Besides actually conducting social research or training others in the field, people who graduate from college with a degree in sociology are hired by government agencies and corporations in fields such as social services, counseling (e.g., family planning, career, substance abuse), community planning, health services, marketing, market research, and human resources. Even a small amount of training in sociology can be an asset in careers like sales, public relations, journalism, teaching, law, and criminal justice.
### Summary
Studying sociology is beneficial both for the individual and for society. By studying sociology people learn how to think critically about social issues and problems that confront our society. The study of sociology enriches students’ lives and prepares them for careers in an increasingly diverse world. Society benefits because people with sociological training are better prepared to make informed decisions about social issues and take effective action to deal with them.
### Section Quiz
### Short Answer
### Further Research
Social communication is rapidly evolving due to ever improving technologies. Check out this website to learn more about how sociologists study the impact of these changes
### References
Berger, P. (1963). Invitation to Sociology: A Humanistic Perspective. New York: Anchor Books.
Department of Sociology, University of Alabama. (n.d.) Is Sociology Right for You? Huntsville: University of Alabama. Retrieved from https://www.uah.edu/ahs/departments/sociology/about. |
# Sociological Research
## Introduction
As sociology made its way into American universities, scholars developed it into a science that relies on research to build a body of knowledge. Sociologists began collecting data (observations and documentation) and applying the scientific method or an interpretative framework to increase understanding of societies and social interactions.
Our observations about social situations often incorporate biases based on our own views and limited data. To avoid subjectivity, sociologists conduct experiments or studies that gather and analyze empirical evidence from direct experience. Peers review the conclusions from this research and often repeat the experiments or studies or apply them to other contexts in order to validate these conclusions. Examples of peer-reviewed research are found in scholarly journals.
Consider a study on the relationship between COVID-19 and crime rates published in Crime Science, a scholarly journal. Researchers hypothesized that COVID-19 stay-at-home restrictions would lead to a drop both in street crimes and home burglaries. Researchers collected the data Swedish police used to track and project future crimes. They found that assaults, pickpocketing and burglary had decreased significantly (Gerell, Kardell, and Kindgren, 2020). In this way, researchers used empirical evidence and statistical analysis to answer the question how did COVID-19 restrictions impact crime rates. In this chapter, we will explore the approaches and methods sociologists use to conduct studies like this one.
### References
Arkowitz, Hal, and Scott O. Lilienfeld. 2009. “Lunacy and the Full Moon: Does a full moon really trigger strange behavior?” Scientific American. Retrieved December 30, 2014 (http://www.scientificamerican.com/article/lunacy-and-the-full-moon/).
Bradbury Jones, C. and Isham, L. (2020), The pandemic paradox: The consequences of COVID 19 on domestic violence. J Clin Nurs, 29: 2047-2049. doi:10.1111/jocn.15296
Gerell, M., Kardell, J., & Kindgren, J. (2020, May 2). Minor covid-19 association with crime in Sweden, a ten week follow up. https://doi.org/10.31235/osf.io/w7gka
Rotton, James, and Ivan W. Kelly. 1985. “Much Ado about the Full Moon: A Meta-analysis of Lunar-Lunacy Research.”
Psychological Bulletin 97 (no. 2): 286–306. |
# Sociological Research
## Approaches to Sociological Research
When sociologists apply the sociological perspective and begin to ask questions, no topic is off limits. Every aspect of human behavior is a source of possible investigation. Sociologists question the world that humans have created and live in. They notice patterns of behavior as people move through that world. Using sociological methods and systematic research within the framework of the scientific method and a scholarly interpretive perspective, sociologists have discovered social patterns in the workplace that have transformed industries, in families that have enlightened family members, and in education that have aided structural changes in classrooms.
Sociologists often begin the research process by asking a question about how or why things happen in this world. It might be a unique question about a new trend or an old question about a common aspect of life. Once the question is formed, the sociologist proceeds through an in-depth process to answer it. In deciding how to design that process, the researcher may adopt a scientific approach or an interpretive framework. The following sections describe these approaches to knowledge.
### The Scientific Method
Sociologists make use of tried and true methods of research, such as experiments, surveys, and field research. But humans and their social interactions are so diverse that these interactions can seem impossible to chart or explain. It might seem that science is about discoveries and chemical reactions or about proving ideas right or wrong rather than about exploring the nuances of human behavior.
However, this is exactly why scientific models work for studying human behavior. A scientific process of research establishes parameters that help make sure results are objective and accurate. Scientific methods provide limitations and boundaries that focus a study and organize its results.
The scientific method involves developing and testing theories about the social world based on empirical evidence. It is defined by its commitment to systematic observation of the empirical world and strives to be objective, critical, skeptical, and logical. It involves a series of six prescribed steps that have been established over centuries of scientific scholarship.
Sociological research does not reduce knowledge to right or wrong facts. Results of studies tend to provide people with insights they did not have before—explanations of human behaviors and social practices and access to knowledge of other cultures, rituals and beliefs, or trends and attitudes.
In general, sociologists tackle questions about the role of social characteristics in outcomes or results. For example, how do different communities fare in terms of psychological well-being, community cohesiveness, range of vocation, wealth, crime rates, and so on? Are communities functioning smoothly? Sociologists often look between the cracks to discover obstacles to meeting basic human needs. They might also study environmental influences and patterns of behavior that lead to crime, substance abuse, divorce, poverty, unplanned pregnancies, or illness. And, because sociological studies are not all focused on negative behaviors or challenging situations, social researchers might study vacation trends, healthy eating habits, neighborhood organizations, higher education patterns, games, parks, and exercise habits.
Sociologists can use the scientific method not only to collect but also to interpret and analyze data. They deliberately apply scientific logic and objectivity. They are interested in—but not attached to—the results. They work outside of their own political or social agendas. This does not mean researchers do not have their own personalities, complete with preferences and opinions. But sociologists deliberately use the scientific method to maintain as much objectivity, focus, and consistency as possible in collecting and analyzing data in research studies.
With its systematic approach, the scientific method has proven useful in shaping sociological studies. The scientific method provides a systematic, organized series of steps that help ensure objectivity and consistency in exploring a social problem. They provide the means for accuracy, reliability, and validity. In the end, the scientific method provides a shared basis for discussion and analysis (Merton 1963). Typically, the scientific method has 6 steps which are described below.
### Step 1: Ask a Question or Find a Research Topic
The first step of the scientific method is to ask a question, select a problem, and identify the specific area of interest. The topic should be narrow enough to study within a geographic location and time frame. “Are societies capable of sustained happiness?” would be too vague. The question should also be broad enough to have universal merit. “What do personal hygiene habits reveal about the values of students at XYZ High School?” would be too narrow. Sociologists strive to frame questions that examine well-defined patterns and relationships.
In a hygiene study, for instance, hygiene could be defined as “personal habits to maintain physical appearance (as opposed to health),” and a researcher might ask, “How do differing personal hygiene habits reflect the cultural value placed on appearance?”
### Step 2: Review the Literature/Research Existing Sources
The next step researchers undertake is to conduct background research through a literature review, which is a review of any existing similar or related studies. A visit to the library, a thorough online search, and a survey of academic journals will uncover existing research about the topic of study. This step helps researchers gain a broad understanding of work previously conducted, identify gaps in understanding of the topic, and position their own research to build on prior knowledge. Researchers—including student researchers—are responsible for correctly citing existing sources they use in a study or that inform their work. While it is fine to borrow previously published material (as long as it enhances a unique viewpoint), it must be referenced properly and never plagiarized.
To study crime, a researcher might also sort through existing data from the court system, police database, prison information, interviews with criminals, guards, wardens, etc. It’s important to examine this information in addition to existing research to determine how these resources might be used to fill holes in existing knowledge. Reviewing existing sources educates researchers and helps refine and improve a research study design.
### Step 3: Formulate a Hypothesis
A hypothesis is an explanation for a phenomenon based on a conjecture about the relationship between the phenomenon and one or more causal factors. In sociology, the hypothesis will often predict how one form of human behavior influences another. For example, a hypothesis might be in the form of an “if, then statement.” Let’s relate this to our topic of crime: If unemployment increases, then the crime rate will increase.
In scientific research, we formulate hypotheses to include an independent variables (IV), which are the cause of the change, and a dependent variable (DV), which is the effect, or thing that is changed. In the example above, unemployment is the independent variable and the crime rate is the dependent variable.
In a sociological study, the researcher would establish one form of human behavior as the independent variable and observe the influence it has on a dependent variable. How does gender (the independent variable) affect rate of income (the dependent variable)? How does one’s religion (the independent variable) affect family size (the dependent variable)? How is social class (the dependent variable) affected by level of education (the independent variable)?
Taking an example from Table 12.1, a researcher might hypothesize that teaching children proper hygiene (the independent variable) will boost their sense of self-esteem (the dependent variable). Note, however, this hypothesis can also work the other way around. A sociologist might predict that increasing a child’s sense of self-esteem (the independent variable) will increase or improve habits of hygiene (now the dependent variable). Identifying the independent and dependent variables is very important. As the hygiene example shows, simply identifying related two topics or variables is not enough. Their prospective relationship must be part of the hypothesis.
### Step 4: Design and Conduct a Study
Researchers design studies to maximize reliability, which refers to how likely research results are to be replicated if the study is reproduced. Reliability increases the likelihood that what happens to one person will happen to all people in a group or what will happen in one situation will happen in another. Cooking is a science. When you follow a recipe and measure ingredients with a cooking tool, such as a measuring cup, the same results is obtained as long as the cook follows the same recipe and uses the same type of tool. The measuring cup introduces accuracy into the process. If a person uses a less accurate tool, such as their hand, to measure ingredients rather than a cup, the same result may not be replicated. Accurate tools and methods increase reliability.
Researchers also strive for validity, which refers to how well the study measures what it was designed to measure. To produce reliable and valid results, sociologists develop an operational definition, that is, they define each concept, or variable, in terms of the physical or concrete steps it takes to objectively measure it. The operational definition identifies an observable condition of the concept. By operationalizing the concept, all researchers can collect data in a systematic or replicable manner. Moreover, researchers can determine whether the experiment or method validly represent the phenomenon they intended to study.
A study asking how tutoring improves grades, for instance, might define “tutoring” as “one-on-one assistance by an expert in the field, hired by an educational institution.” However, one researcher might define a “good” grade as a C or better, while another uses a B+ as a starting point for “good.” For the results to be replicated and gain acceptance within the broader scientific community, researchers would have to use a standard operational definition. These definitions set limits and establish cut-off points that ensure consistency and replicability in a study.
We will explore research methods in greater detail in the next section of this chapter.
### Step 5: Draw Conclusions
After constructing the research design, sociologists collect, tabulate or categorize, and analyze data to formulate conclusions. If the analysis supports the hypothesis, researchers can discuss the implications of the results for the theory or policy solution that they were addressing. If the analysis does not support the hypothesis, researchers may consider repeating the experiment or think of ways to improve their procedure.
However, even when results contradict a sociologist’s prediction of a study’s outcome, these results still contribute to sociological understanding. Sociologists analyze general patterns in response to a study, but they are equally interested in exceptions to patterns. In a study of education, a researcher might predict that high school dropouts have a hard time finding rewarding careers. While many assume that the higher the education, the higher the salary and degree of career happiness, there are certainly exceptions. People with little education have had stunning careers, and people with advanced degrees have had trouble finding work. A sociologist prepares a hypothesis knowing that results may substantiate or contradict it.
Sociologists carefully keep in mind how operational definitions and research designs impact the results as they draw conclusions. Consider the concept of “increase of crime,” which might be defined as the percent increase in crime from last week to this week, as in the study of Swedish crime discussed above. Yet the data used to evaluate “increase of crime” might be limited by many factors: who commits the crime, where the crimes are committed, or what type of crime is committed. If the data is gathered for “crimes committed in Houston, Texas in zip code 77021,” then it may not be generalizable to crimes committed in rural areas outside of major cities like Houston. If data is collected about vandalism, it may not be generalizable to assault.
### Step 6: Report Results
Researchers report their results at conferences and in academic journals. These results are then subjected to the scrutiny of other sociologists in the field. Before the conclusions of a study become widely accepted, the studies are often repeated in the same or different environments. In this way, sociological theories and knowledge develops as the relationships between social phenomenon are established in broader contexts and different circumstances.
### Interpretive Framework
While many sociologists rely on empirical data and the scientific method as a research approach, others operate from an interpretive framework. While systematic, this approach doesn’t follow the hypothesis-testing model that seeks to find generalizable results. Instead, an interpretive framework, sometimes referred to as an interpretive perspective, seeks to understand social worlds from the point of view of participants, which leads to in-depth knowledge or understanding about the human experience.
Interpretive research is generally more descriptive or narrative in its findings. Rather than formulating a hypothesis and method for testing it, an interpretive researcher will develop approaches to explore the topic at hand that may involve a significant amount of direct observation or interaction with subjects including storytelling. This type of researcher learns through the process and sometimes adjusts the research methods or processes midway to optimize findings as they evolve.
### Critical Sociology
Critical sociology focuses on deconstruction of existing sociological research and theory. Informed by the work of Karl Marx, scholars known collectively as the Frankfurt School proposed that social science, as much as any academic pursuit, is embedded in the system of power constituted by the set of class, caste, race, gender, and other relationships that exist in the society. Consequently, it cannot be treated as purely objective. Critical sociologists view theories, methods, and the conclusions as serving one of two purposes: they can either legitimate and rationalize systems of social power and oppression or liberate humans from inequality and restriction on human freedom. Deconstruction can involve data collection, but the analysis of this data is not empirical or positivist.
### Summary
Using the scientific method, a researcher conducts a study in six phases: asking a question, researching existing sources, formulating a hypothesis, research design, collecting & analyzing data, and drawing conclusions. The scientific method is useful in that it provides a clear method of organizing a study. Some sociologists conduct research through an interpretive framework rather than employing the scientific method.
Scientific sociological studies often observe relationships between variables. Researchers study how one variable influences another. Prior to conducting a study, researchers are careful to apply operational definitions to their terms and to establish dependent and independent variables.
### Section Quiz
### Short Answer
### Further Research
For a historical perspective on the scientific method in sociology, read “The Elements of Scientific Method in Sociology” by F. Stuart Chapin (1914) in the
### References
Arkowitz, Hal, and Scott O. Lilienfeld. 2009. “Lunacy and the Full Moon: Does a full moon really trigger strange behavior?” Scientific American. Retrieved October 20, 2014 (http://www.scientificamerican.com/article/lunacy-and-the-full-moon/).
Berger, Peter L. 1963. Invitation to Sociology: A Humanistic Perspective. New York: Anchor Books.
Merton, Robert. 1968 [1949]. Social Theory and Social Structure. New York: Free Press.
“Scientific Method Lab,” the University of Utah, (http://aspire.cosmic-ray.org/labs/scientific_method/sci_method_main.html). |
# Sociological Research
## Research Methods
Sociologists examine the social world, see a problem or interesting pattern, and set out to study it. They use research methods to design a study. Planning the research design is a key step in any sociological study. Sociologists generally choose from widely used methods of social investigation: primary source data collection such as survey, participant observation, ethnography, case study, unobtrusive observations, experiment, and secondary data analysis, or use of existing sources. Every research method comes with plusses and minuses, and the topic of study strongly influences which method or methods are put to use. When you are conducting research think about the best way to gather or obtain knowledge about your topic, think of yourself as an architect. An architect needs a blueprint to build a house, as a sociologist your blueprint is your research design including your data collection method.
When entering a particular social environment, a researcher must be careful. There are times to remain anonymous and times to be overt. There are times to conduct interviews and times to simply observe. Some participants need to be thoroughly informed; others should not know they are being observed. A researcher wouldn’t stroll into a crime-ridden neighborhood at midnight, calling out, “Any gang members around?”
Making sociologists’ presence invisible is not always realistic for other reasons. That option is not available to a researcher studying prison behaviors, early education, or the Ku Klux Klan. Researchers can’t just stroll into prisons, kindergarten classrooms, or Klan meetings and unobtrusively observe behaviors or attract attention. In situations like these, other methods are needed. Researchers choose methods that best suit their study topics, protect research participants or subjects, and that fit with their overall approaches to research.
### Surveys
As a research method, a survey collects data from subjects who respond to a series of questions about behaviors and opinions, often in the form of a questionnaire or an interview. The survey is one of the most widely used scientific research methods. The standard survey format allows individuals a level of anonymity in which they can express personal ideas.
At some point, most people in the United States respond to some type of survey. The 2020 U.S. Census is an excellent example of a large-scale survey intended to gather sociological data. Since 1790, United States has conducted a survey consisting of six questions to received demographical data pertaining to residents. The questions pertain to the demographics of the residents who live in the United States. Currently, the Census is received by residents in the United Stated and five territories and consists of 12 questions.
Not all surveys are considered sociological research, however, and many surveys people commonly encounter focus on identifying marketing needs and strategies rather than testing a hypothesis or contributing to social science knowledge. Questions such as, “How many hot dogs do you eat in a month?” or “Were the staff helpful?” are not usually designed as scientific research. The Nielsen Ratings determine the popularity of television programming through scientific market research. However, polls conducted by television programs such as American Idol or So You Think You Can Dance cannot be generalized, because they are administered to an unrepresentative population, a specific show’s audience. You might receive polls through your cell phones or emails, from grocery stores, restaurants, and retail stores. They often provide you incentives for completing the survey.
Sociologists conduct surveys under controlled conditions for specific purposes. Surveys gather different types of information from people. While surveys are not great at capturing the ways people really behave in social situations, they are a great method for discovering how people feel, think, and act—or at least how they say they feel, think, and act. Surveys can track preferences for presidential candidates or reported individual behaviors (such as sleeping, driving, or texting habits) or information such as employment status, income, and education levels.
A survey targets a specific population, people who are the focus of a study, such as college athletes, international students, or teenagers living with type 1 (juvenile-onset) diabetes. Most researchers choose to survey a small sector of the population, or a sample, a manageable number of subjects who represent a larger population. The success of a study depends on how well a population is represented by the sample. In a random sample, every person in a population has the same chance of being chosen for the study. As a result, a Gallup Poll, if conducted as a nationwide random sampling, should be able to provide an accurate estimate of public opinion whether it contacts 2,000 or 10,000 people.
After selecting subjects, the researcher develops a specific plan to ask questions and record responses. It is important to inform subjects of the nature and purpose of the survey up front. If they agree to participate, researchers thank subjects and offer them a chance to see the results of the study if they are interested. The researcher presents the subjects with an instrument, which is a means of gathering the information.
A common instrument is a questionnaire. Subjects often answer a series of closed-ended questions. The researcher might ask yes-or-no or multiple-choice questions, allowing subjects to choose possible responses to each question. This kind of questionnaire collects quantitative data—data in numerical form that can be counted and statistically analyzed. Just count up the number of “yes” and “no” responses or correct answers, and chart them into percentages.
Questionnaires can also ask more complex questions with more complex answers—beyond “yes,” “no,” or checkbox options. These types of inquiries use open-ended questions that require short essay responses. Participants willing to take the time to write those answers might convey personal religious beliefs, political views, goals, or morals. The answers are subjective and vary from person to person. How do you plan to use your college education?
Some topics that investigate internal thought processes are impossible to observe directly and are difficult to discuss honestly in a public forum. People are more likely to share honest answers if they can respond to questions anonymously. This type of personal explanation is qualitative data—conveyed through words. Qualitative information is harder to organize and tabulate. The researcher will end up with a wide range of responses, some of which may be surprising. The benefit of written opinions, though, is the wealth of in-depth material that they provide.
An interview is a one-on-one conversation between the researcher and the subject, and it is a way of conducting surveys on a topic. However, participants are free to respond as they wish, without being limited by predetermined choices. In the back-and-forth conversation of an interview, a researcher can ask for clarification, spend more time on a subtopic, or ask additional questions. In an interview, a subject will ideally feel free to open up and answer questions that are often complex. There are no right or wrong answers. The subject might not even know how to answer the questions honestly.
Questions such as “How does society’s view of alcohol consumption influence your decision whether or not to take your first sip of alcohol?” or “Did you feel that the divorce of your parents would put a social stigma on your family?” involve so many factors that the answers are difficult to categorize. A researcher needs to avoid steering or prompting the subject to respond in a specific way; otherwise, the results will prove to be unreliable. The researcher will also benefit from gaining a subject’s trust, from empathizing or commiserating with a subject, and from listening without judgment.
Surveys often collect both quantitative and qualitative data. For example, a researcher interviewing people who are incarcerated might receive quantitative data, such as demographics – race, age, sex, that can be analyzed statistically. For example, the researcher might discover that 20 percent of incarcerated people are above the age of 50. The researcher might also collect qualitative data, such as why people take advantage of educational opportunities during their sentence and other explanatory information.
The survey can be carried out online, over the phone, by mail, or face-to-face. When researchers collect data outside a laboratory, library, or workplace setting, they are conducting field research, which is our next topic.
### Field Research
The work of sociology rarely happens in limited, confined spaces. Rather, sociologists go out into the world. They meet subjects where they live, work, and play. Field research refers to gathering primary data from a natural environment. To conduct field research, the sociologist must be willing to step into new environments and observe, participate, or experience those worlds. In field work, the sociologists, rather than the subjects, are the ones out of their element.
The researcher interacts with or observes people and gathers data along the way. The key point in field research is that it takes place in the subject’s natural environment, whether it’s a coffee shop or tribal village, a homeless shelter or the DMV, a hospital, airport, mall, or beach resort.
While field research often begins in a specific setting, the study’s purpose is to observe specific behaviors in that setting. Field work is optimal for observing how people think and behave. It seeks to understand why they behave that way. However, researchers may struggle to narrow down cause and effect when there are so many variables floating around in a natural environment. And while field research looks for correlation, its small sample size does not allow for establishing a causal relationship between two variables. Indeed, much of the data gathered in sociology do not identify a cause and effect but a correlation.
### Participant Observation
In 2000, a comic writer named Rodney Rothman wanted an insider’s view of white-collar work. He slipped into the sterile, high-rise offices of a New York “dot com” agency. Every day for two weeks, he pretended to work there. His main purpose was simply to see whether anyone would notice him or challenge his presence. No one did. The receptionist greeted him. The employees smiled and said good morning. Rothman was accepted as part of the team. He even went so far as to claim a desk, inform the receptionist of his whereabouts, and attend a meeting. He published an article about his experience in The New Yorker called “My Fake Job” (2000). Later, he was discredited for allegedly fabricating some details of the story and The New Yorker issued an apology. However, Rothman’s entertaining article still offered fascinating descriptions of the inside workings of a “dot com” company and exemplified the lengths to which a writer, or a sociologist, will go to uncover material.
Rothman had conducted a form of study called participant observation, in which researchers join people and participate in a group’s routine activities for the purpose of observing them within that context. This method lets researchers experience a specific aspect of social life. A researcher might go to great lengths to get a firsthand look into a trend, institution, or behavior. A researcher might work as a waitress in a diner, experience homelessness for several weeks, or ride along with police officers as they patrol their regular beat. Often, these researchers try to blend in seamlessly with the population they study, and they may not disclose their true identity or purpose if they feel it would compromise the results of their research.
At the beginning of a field study, researchers might have a question: “What really goes on in the kitchen of the most popular diner on campus?” or “What is it like to be homeless?” Participant observation is a useful method if the researcher wants to explore a certain environment from the inside.
Field researchers simply want to observe and learn. In such a setting, the researcher will be alert and open minded to whatever happens, recording all observations accurately. Soon, as patterns emerge, questions will become more specific, observations will lead to hypotheses, and hypotheses will guide the researcher in analyzing data and generating results.
In a study of small towns in the United States conducted by sociological researchers John S. Lynd and Helen Merrell Lynd, the team altered their purpose as they gathered data. They initially planned to focus their study on the role of religion in U.S. towns. As they gathered observations, they realized that the effect of industrialization and urbanization was the more relevant topic of this social group. The Lynds did not change their methods, but they revised the purpose of their study.
This shaped the structure of Middletown: A Study in Modern American Culture, their published results (Lynd & Lynd, 1929).
The Lynds were upfront about their mission. The townspeople of Muncie, Indiana, knew why the researchers were in their midst. But some sociologists prefer not to alert people to their presence. The main advantage of covert participant observation is that it allows the researcher access to authentic, natural behaviors of a group’s members. The challenge, however, is gaining access to a setting without disrupting the pattern of others’ behavior. Becoming an inside member of a group, organization, or subculture takes time and effort. Researchers must pretend to be something they are not. The process could involve role playing, making contacts, networking, or applying for a job.
Once inside a group, some researchers spend months or even years pretending to be one of the people they are observing. However, as observers, they cannot get too involved. They must keep their purpose in mind and apply the sociological perspective. That way, they illuminate social patterns that are often unrecognized. Because information gathered during participant observation is mostly qualitative, rather than quantitative, the end results are often descriptive or interpretive. The researcher might present findings in an article or book and describe what he or she witnessed and experienced.
This type of research is what journalist Barbara Ehrenreich conducted for her book Nickel and Dimed. One day over lunch with her editor, Ehrenreich mentioned an idea. How can people exist on minimum-wage work? How do low-income workers get by? she wondered. Someone should do a study. To her surprise, her editor responded, Why don’t you do it?
That’s how Ehrenreich found herself joining the ranks of the working class. For several months, she left her comfortable home and lived and worked among people who lacked, for the most part, higher education and marketable job skills. Undercover, she applied for and worked minimum wage jobs as a waitress, a cleaning woman, a nursing home aide, and a retail chain employee. During her participant observation, she used only her income from those jobs to pay for food, clothing, transportation, and shelter.
She discovered the obvious, that it’s almost impossible to get by on minimum wage work. She also experienced and observed attitudes many middle and upper-class people never think about. She witnessed firsthand the treatment of working class employees. She saw the extreme measures people take to make ends meet and to survive. She described fellow employees who held two or three jobs, worked seven days a week, lived in cars, could not pay to treat chronic health conditions, got randomly fired, submitted to drug tests, and moved in and out of homeless shelters. She brought aspects of that life to light, describing difficult working conditions and the poor treatment that low-wage workers suffer.
The book she wrote upon her return to her real life as a well-paid writer, has been widely read and used in many college classrooms.
### Ethnography
Ethnography is the immersion of the researcher in the natural setting of an entire social community to observe and experience their everyday life and culture. The heart of an ethnographic study focuses on how subjects view their own social standing and how they understand themselves in relation to a social group.
An ethnographic study might observe, for example, a small U.S. fishing town, an Inuit community, a village in Thailand, a Buddhist monastery, a private boarding school, or an amusement park. These places all have borders. People live, work, study, or vacation within those borders. People are there for a certain reason and therefore behave in certain ways and respect certain cultural norms. An ethnographer would commit to spending a determined amount of time studying every aspect of the chosen place, taking in as much as possible.
A sociologist studying a tribe in the Amazon might watch the way villagers go about their daily lives and then write a paper about it. To observe a spiritual retreat center, an ethnographer might sign up for a retreat and attend as a guest for an extended stay, observe and record data, and collate the material into results.
### Institutional Ethnography
Institutional ethnography is an extension of basic ethnographic research principles that focuses intentionally on everyday concrete social relationships. Developed by Canadian sociologist Dorothy E. Smith (1990), institutional ethnography is often considered a feminist-inspired approach to social analysis and primarily considers women’s experiences within male- dominated societies and power structures. Smith’s work is seen to challenge sociology’s exclusion of women, both academically and in the study of women’s lives (Fenstermaker, n.d.).
Historically, social science research tended to objectify women and ignore their experiences except as viewed from the male perspective. Modern feminists note that describing women, and other marginalized groups, as subordinates helps those in authority maintain their own dominant positions (Social Sciences and Humanities Research Council of Canada n.d.). Smith’s three major works explored what she called “the conceptual practices of power” and are still considered seminal works in feminist theory and ethnography (Fensternmaker n.d.).
### Case Study
Sometimes a researcher wants to study one specific person or event. A case study is an in-depth analysis of a single event, situation, or individual. To conduct a case study, a researcher examines existing sources like documents and archival records, conducts interviews, engages in direct observation and even participant observation, if possible.
Researchers might use this method to study a single case of a foster child, drug lord, cancer patient, criminal, or rape victim. However, a major criticism of the case study as a method is that while offering depth on a topic, it does not provide enough evidence to form a generalized conclusion. In other words, it is difficult to make universal claims based on just one person, since one person does not verify a pattern. This is why most sociologists do not use case studies as a primary research method.
However, case studies are useful when the single case is unique. In these instances, a single case study can contribute tremendous incite. For example, a feral child, also called “wild child,” is one who grows up isolated from human beings. Feral children grow up without social contact and language, which are elements crucial to a “civilized” child’s development. These children mimic the behaviors and movements of animals, and often invent their own language. There are only about one hundred cases of “feral children” in the world.
As you may imagine, a feral child is a subject of great interest to researchers. Feral children provide unique information about child development because they have grown up outside of the parameters of “normal” growth and nurturing. And since there are very few feral children, the case study is the most appropriate method for researchers to use in studying the subject.
At age three, a Ukranian girl named Oxana Malaya suffered severe parental neglect. She lived in a shed with dogs, and she ate raw meat and scraps. Five years later, a neighbor called authorities and reported seeing a girl who ran on all fours, barking. Officials brought Oxana into society, where she was cared for and taught some human behaviors, but she never became fully socialized. She has been designated as unable to support herself and now lives in a mental institution (Grice 2011). Case studies like this offer a way for sociologists to collect data that may not be obtained by any other method.
### Experiments
You have probably tested some of your own personal social theories. “If I study at night and review in the morning, I’ll improve my retention skills.” Or, “If I stop drinking soda, I’ll feel better.” Cause and effect. If this, then that. When you test the theory, your results either prove or disprove your hypothesis.
One way researchers test social theories is by conducting an experiment, meaning they investigate relationships to test a hypothesis—a scientific approach.
There are two main types of experiments: lab-based experiments and natural or field experiments. In a lab setting, the research can be controlled so that more data can be recorded in a limited amount of time. In a natural or field- based experiment, the time it takes to gather the data cannot be controlled but the information might be considered more accurate since it was collected without interference or intervention by the researcher.
As a research method, either type of sociological experiment is useful for testing if-then statements: if a particular thing happens (cause), then another particular thing will result (effect). To set up a lab-based experiment, sociologists create artificial situations that allow them to manipulate variables.
Classically, the sociologist selects a set of people with similar characteristics, such as age, class, race, or education. Those people are divided into two groups. One is the experimental group and the other is the control group. The experimental group is exposed to the independent variable(s) and the control group is not. To test the benefits of tutoring, for example, the sociologist might provide tutoring to the experimental group of students but not to the control group. Then both groups would be tested for differences in performance to see if tutoring had an effect on the experimental group of students. As you can imagine, in a case like this, the researcher would not want to jeopardize the accomplishments of either group of students, so the setting would be somewhat artificial. The test would not be for a grade reflected on their permanent record of a student, for example.
And if a researcher told the students they would be observed as part of a study on measuring the effectiveness of tutoring, the students might not behave naturally. This is called the Hawthorne effect—which occurs when people change their behavior because they know they are being watched as part of a study. The Hawthorne effect is unavoidable in some research studies because sociologists have to make the purpose of the study known. Subjects must be aware that they are being observed, and a certain amount of artificiality may result (Sonnenfeld 1985).
### Secondary Data Analysis
While sociologists often engage in original research studies, they also contribute knowledge to the discipline through secondary data analysis. Secondary data does not result from firsthand research collected from primary sources, but are the already completed work of other researchers or data collected by an agency or organization. Sociologists might study works written by historians, economists, teachers, or early sociologists. They might search through periodicals, newspapers, or magazines, or organizational data from any period in history.
Using available information not only saves time and money but can also add depth to a study. Sociologists often interpret findings in a new way, a way that was not part of an author’s original purpose or intention. To study how women were encouraged to act and behave in the 1960s, for example, a researcher might watch movies, televisions shows, and situation comedies from that period. Or to research changes in behavior and attitudes due to the emergence of television in the late 1950s and early 1960s, a sociologist would rely on new interpretations of secondary data. Decades from now, researchers will most likely conduct similar studies on the advent of mobile phones, the Internet, or social media.
Social scientists also learn by analyzing the research of a variety of agencies. Governmental departments and global groups, like the U.S. Bureau of Labor Statistics or the World Health Organization (WHO), publish studies with findings that are useful to sociologists. A public statistic like the foreclosure rate might be useful for studying the effects of a recession. A racial demographic profile might be compared with data on education funding to examine the resources accessible by different groups.
One of the advantages of secondary data like old movies or WHO statistics is that it is nonreactive research (or unobtrusive research), meaning that it does not involve direct contact with subjects and will not alter or influence people’s behaviors. Unlike studies requiring direct contact with people, using previously published data does not require entering a population and the investment and risks inherent in that research process.
Using available data does have its challenges. Public records are not always easy to access. A researcher will need to do some legwork to track them down and gain access to records. To guide the search through a vast library of materials and avoid wasting time reading unrelated sources, sociologists employ content analysis, applying a systematic approach to record and value information gleaned from secondary data as they relate to the study at hand.
Also, in some cases, there is no way to verify the accuracy of existing data. It is easy to count how many drunk drivers, for example, are pulled over by the police. But how many are not? While it’s possible to discover the percentage of teenage students who drop out of high school, it might be more challenging to determine the number who return to school or get their GED later.
Another problem arises when data are unavailable in the exact form needed or do not survey the topic from the precise angle the researcher seeks. For example, the average salaries paid to professors at a public school is public record. But these figures do not necessarily reveal how long it took each professor to reach the salary range, what their educational backgrounds are, or how long they’ve been teaching.
When conducting content analysis, it is important to consider the date of publication of an existing source and to take into account attitudes and common cultural ideals that may have influenced the research. For example, when Robert S. Lynd and Helen Merrell Lynd gathered research in the 1920s, attitudes and cultural norms were vastly different then than they are now. Beliefs about gender roles, race, education, and work have changed significantly since then. At the time, the study’s purpose was to reveal insights about small U.S. communities. Today, it is an illustration of 1920s attitudes and values.
### Summary
Sociological research is a fairly complex process. As you can see, a lot goes into even a simple research design. There are many steps and much to consider when collecting data on human behavior, as well as in interpreting and analyzing data in order to form conclusive results. Sociologists use the scientific methods for good reasons. The scientific method provides a system of organization to help researchers plan and conduct a study to ensure data and results are reliable, valid, and objective.
The many methods available to researchers—including experiments, surveys, participant observation, ethnography, case study, and secondary data analysis—all come with advantages and disadvantages. The strength of a study can depend on the choice and implementation of the appropriate method of gathering data. Depending on the topic, a study might use a single method or a combination of methods. It is important to plan a research design before undertaking a study. The information gathered may in itself be surprising, and the study design should provide a solid framework in which to analyze predicted and unpredicted data.
### Section Quiz
### Short Answer
### Further Research
For information on current real-world sociology experiments, visit the Everday Sociology Blog.
### References
Butsch, Richard. 2000. The Making of American Audiences: From Stage to Television, 1750–1990. Cambridge: Cambridge UP.
Caplow, Theodore, Louis Hicks, and Ben Wattenberg. 2000. “The First Measured Century: Middletown.” The First Measured Century. PBS. Retrieved February 23, 2012 (http://www.pbs.org/fmc/index.htm).
Click, M., Lee, H., & Holladay, H. (2013). Making monsters: Lady Gaga, fan identification, and social media. Popular Music and Society, 36(3), 360–379. https://doi.org/10.1080/03007766.2013.798546
Dilling-Hansen, Lise. 2015. “Affective Fan Experiences of Lady Gaga.” Transformative Works and Cultures, no. 20. https://doi.org/10.3983/twc.2015.0662.
Durkheim, Émile. 1966 [1897]. Suicide. New York: Free Press.
Fenstermaker, Sarah. n.d. “Dorothy E. Smith Award Statement” American Sociological Association. Retrieved October 19, 2014 (http://www.asanet.org/about/awards/duboiscareer/smith.cfm).
Franke, Richard, and James Kaul. 1978. “The Hawthorne Experiments: First Statistical Interpretation.” American Sociological Review 43(5):632–643.
Grice, Elizabeth. “Cry of an Enfant Sauvage.” The Telegraph. Retrieved July 20, 2011 (http://www.telegraph.co.uk/culture/tvandradio/3653890/Cry-of-an-enfant-sauvage.html).
Griffin, F. J. (2011). At last . . . ? : Michelle obama, beyoncé, race & history. Daedalus, 140(1), 131-141,8. Retrieved from https://libproxy.uhcl.edu/login?url=https://search.proquest.com/docview/848998668?accountid=7108
Heussenstamm, Frances K. 1971. “Bumper Stickers and Cops” Trans-action: Social Science and Modern Society 4:32–33.
Igo, Sarah E. 2008. The Averaged American: Surveys, Citizens, and the Making of a Mass Public. Cambridge, MA: Harvard University Press.
Kumari, A. (2016), “Yoü and I”: Identity and the Performance of Self in Lady Gaga and Beyoncé. J Pop Cult, 49: 403-416. doi:10.1111/jpcu.12405
Jang, S. M., & Lee, H. (2014). When Pop Music Meets a Political Issue: Examining How “Born This Way” Influences Attitudes Toward Gays and Gay Rights Policies. Journal of Broadcasting & Electronic Media, 58(1), 114–130. https://doi-org.libproxy.uhcl.edu/10.1080/08838151.2013.875023
Lynd, Robert S., and Helen Merrell Lynd. 1959. Middletown: A Study in Modern American Culture. San Diego, CA: Harcourt Brace Javanovich.
Lynd, Staughton. 2005. “Making Middleton.” Indiana Magazine of History 101(3):226–238.
Pew Research Center. 2014. “Ebola Worries Rise, But Most Are ‘Fairly’ Confident in Government, Hospitals to Deal with Disease: Broad Support for U.S. Efforts to Deal with Ebola in West Africa.” Pew Research Center for the People & the Press, October 21. Retrieved October 25, 2014 (http://www.people-press.org/2014/10/21/ebola-worries-rise-but-most-are-fairly-confident-in-government-hospitals-to-deal-with-disease/).
Rothman, Rodney. 2000. “My Fake Job.” Pp. 120 in The New Yorker, November 27.
Social Sciences and Humanities Research Council of Canada. n.d. “Institutional Ethnography.” Retrieved October 19, 2014 (http://web.uvic.ca/~mariecam/kgSite/institutionalEthnography.html).
Sonnenfeld, Jeffery A. 1985. “Shedding Light on the Hawthorne Studies.” Journal of Occupational Behavior 6:125.
Sascha Buchanan. (2019). Competition and controlling images as the fuel igniting Beyoncé and Rihanna fandom fights. Transformative Works and Cultures, 29. https://doaj.org/article/557dc6f3b65a4e168f22a243eed914e2
Turbek, S.P., Chock, T.M., Donahue, K., Havrilla, C.A., Oliverio, A.M., Polutchko, S.K., Shoemaker, L.G. and Vimercati, L. (2016), Scientific Writing Made Easy: A Step by Step Guide to Undergraduate Writing in the Biological Sciences. Bull Ecol Soc Am, 97: 417-426. doi:10.1002/bes2.1258 |
# Sociological Research
## Ethical Concerns
Sociologists conduct studies to shed light on human behaviors. Knowledge is a powerful tool that can be used to achieve positive change. As a result, conducting a sociological study comes with a tremendous amount of responsibility. Like all researchers, sociologists must consider their ethical obligation to avoid harming human subjects or groups while conducting research.
Pioneer German sociologist Max Weber (1864–1920) identified another crucial ethical concern. Weber understood that personal values could distort the framework for disclosing study results. While he accepted that some aspects of research design might be influenced by personal values, he declared it was entirely inappropriate to allow personal values to shape the interpretation of the responses. Sociologists, he stated, must establish value neutrality, a practice of remaining impartial, without bias or judgment, during the course of a study and in publishing results (Weber, 1949). Sociologists are obligated to disclose research findings without omitting or distorting significant data.
Is value neutrality possible? Many sociologists believe it is impossible to retain complete objectivity. They caution readers, rather, to understand that sociological studies may contain a certain amount of value bias. This does not discredit the results, but allows readers to view them as one form of truth—one fact-based perspective. Some sociologists attempt to remain uncritical and as objective as possible when studying social institutions. They strive to overcome personal biases, particularly subconscious biases, when collecting and analyzing data. They avoid skewing data in order to match a predetermined outcome that aligns with a particular agenda, such as a political or moral point of view. Investigators are ethically obligated to report results, even when they contradict personal views, predicted outcomes, or widely accepted beliefs.
The American Sociological Association, or ASA, is the major professional organization of sociologists in North America. The ASA is a great resource for students of sociology as well. The ASA maintains a code of ethics—formal guidelines for conducting sociological research—consisting of principles and ethical standards to be used in the discipline. These formal guidelines were established by practitioners in 1905 at John Hopkins University, and revised in 1997. When working with human subjects, these codes of ethics require researchers’ to do the following:
1. Maintain objectivity and integrity in research
2. Respect subjects’ rights to privacy and dignity
3. Protect subject from personal harm
4. Preserve confidentially
5. Seek informed consent
6. Acknowledge collaboration and assistance
7. Disclose sources of financial support
Unfortunately, when these codes of ethics are ignored, it creates an unethical environment for humans being involved in a sociological study. Throughout history, there have been numerous unethical studies, some of which are summarized below.
The Tuskegee Experiment: This study was conducted 1932 in Macon County, Alabama, and included 600 African American men, including 399 diagnosed with syphilis. The participants were told they were diagnosed with a disease of “bad blood.” Penicillin was distributed in the 1940s as the cure for the disease, but unfortunately, the African American men were not given the treatment because the objective of the study was to see “how untreated syphilis would affect the African American male” (Caplan, 2007)
Henrietta Lacks: Ironically, this study was conducted at the hospital associated with Johns Hopkins University, where codes of the ethics originated. In 1951, Henrietta Lacks was receiving treatment for cervical cancer at John Hopkins Hospital, and doctors discovered that she had “immortal” cells, which could reproduce rapidly and indefinitely, making them extremely valuable for medical research. Without her consent, doctors collected and shared her cells to produce extensive cell lines. Lacks’ cells were widely used for experiments and treatments, including the polio vaccine, and were put into mass production. Today, these cells are known worldwide as HeLa cells (Shah, 2010).
Milgram Experiment: In 1961, psychologist Stanley Milgram conducted an experiment at Yale University. Its purpose was to measure the willingness of study subjects to obey an authority figure who instructed them to perform acts that conflicted with their personal conscience. People in the role of teacher believed they were administering electric shocks to students who gave incorrect answers to word-pair questions. No matter how concerned they were about administering the progressively more intense shocks, the teachers were told to keep going. The ethical concerns involve the extreme emotional distress faced by the teachers, who believed they were hurting other people. (Vogel 2014).
Philip Zimbardo and the Stanford prison experiment: In 1971, psychologist Phillip Zimbardo conducted a study involving students from Stanford University. The students were put in the roles of prisoners and guards, and were required to play their assigned role accordingly. The experiment was intended to last two weeks, but it only last six days due to the negative outcome and treatment of the “prisoners.” Beyond the ethical concerns, the study’s validity has been questioned after participants revealed they had been coached to behave in specific ways.
Laud Humphreys: In the 1960s, Laud Humphreys conducted an experiment at a restroom in a park known for same-sex sexual encounters. His objective was to understand the diversity of backgrounds and motivations of people seeking same-sex relationships. His ethics were questioned because he misrepresented his identity and intent while observing and questioning the men he interviewed (Nardi, 1995).
### Summary
Sociologists and sociology students must take ethical responsibility for any study they conduct. They must first and foremost guarantee the safety of their participants. Whenever possible, they must ensure that participants have been fully informed consent before participating ina study.
The American Sociological Association (ASA) establishes parameters for ethical guidelines that sociologists must take into account as they conduct research. The guidelines address conducting studies, properly using existing sources, accepting funding, and publishing results. Unfortunately, the code of ethics were not in existence and in some cases researchers did not adhere to ASA guidelines resulting in unethical practices in which humans were caused either physical or psychological harm.
Sociologists must try to maintain value neutrality. They must gather and analyze data objectively and set aside their personal preferences, beliefs, and opinions. They must report findings accurately, even if they contradict personal values and convictions.
### Section Quiz
### Short Answer
### Further Research
Founded in 1905, the American Sociological Association is a nonprofit organization located in Washington, DC, with a membership of 14,000 researchers, faculty members, students, and practitioners of sociology. Its mission is “to articulate policy and implement programs likely to have the broadest possible impact for sociology now and in the future.” Learn more about this organization here.
### References
Caplain, Arthur (2007). Bad blood: The Tuskegee syphilis experiment. BioSocieties, 2(2). https://doi.org/10.1017/S1745855207225529
Code of Ethics. 1999. American Sociological Association. Retrieved July 1, 2011 (http://www.asanet.org/about/ethics.cfm).
Khan FA. The Immortal Life of Henrietta Lacks. J IMA. 2011;43(2):93-94. doi:10.5915/43-2-8609
Nardi, P. (1995). “The Breastplate of Righteousness”: Twenty-Five Years After Laud Humphreys’ Tearoom Trade; Impersonal Sex in Public Places. Journal of Homosexuality, 30(2), 1–10. http://search.proquest.com/docview/204986635/
Rossi, Peter H. 1987. “No Good Applied Social Research Goes Unpunished.” Society 25(1):73–79.
Shah, S. (2010). Henrietta Lacks’ story. The Lancet, 375(9721), 1154–1154. https://doi.org/10.1016/S0140-6736(10)60500-4
Valentine, Austin, “A Look Into the Tuskegee Study of Untreated Syphilis in the Negro Male in Macon County, Alabama“ (2019). Student Scholarship & Creative Works. 9. https://digitalcommons.murraystate.edu/sscw/9
Vogels, S. (2014). The Milgram experiment: Its impact and interpretation.
Weber, Max. 1949. Methodology of the Social Sciences. Translated by H. Shils and E. Finch. Glencoe, IL: Free Press.
Wikipedia contributors. (2020, June 28). Milgram experiment. In Wikipedia, The Free Encyclopedia. Retrieved 19:33, July 18, 2020, from https://en.wikipedia.org/w/index.php?title=Milgram_experiment&oldid=964989892
Wikipedia contributors. (2020, July 14). Laud Humphreys. In Wikipedia, The Free Encyclopedia. Retrieved 21:24, July 18, 2020, from https://en.wikipedia.org/w/index.php?title=Laud_Humphreys&oldid=967693266
Zimbardo, P., & Musen, K. (2004). Quiet Rage The Stanford Prison Experiment. Philip G. Zimbardo and Stanford University. |
# Culture
## Introduction
If you passed someone in a hallway, joined a video conference, or even called into a radio show, it’s likely you and the other people involved would exchange some version of the following question : “How are you?” One of you may ask the other. You may exchange a greeting and the question or one of its variants. Generally, we do not consider our responses to these acquaintances as rules. We simply say, “Hello!” and ask, “How was your weekend?” or some other trivial question meant to be a friendly greeting.
We all adhere to various rules, expectations, and standards that are created and maintained in our specific culture. These rules and expectations have meaning, and there are many ways by which the meanings can be misinterpreted or misunderstood. When we do not meet those expectations, we may receive some form of disapproval such as a look or comment informing us that we did something unacceptable.
Consider what would happen if you stopped and informed everyone who asked “Hi, how are you?” exactly how you were doing that day, and in detail. In U.S. society, you would violate norms of ‘greeting.’ Perhaps if you were in a different situation, such as having coffee with a good friend, that question might warrant a detailed response.
These examples are all aspects of culture, which is comprised of shared values (ideals), beliefs which strengthen the values, norms and rules that maintain the values, language so that the values can be taught, symbols that form the language people must learn, arts and artifacts, and the people’s collective identities and memories. Sociologically, we examine in which situation and context a certain behavior is expected and in which it is not. People who interact within a shared culture create and enforce these expectations. Sociologists examine these circumstances and search for patterns.
In everyday conversation, people in the U.S. rarely distinguish between the terms culture and society, but the terms have different meanings, and the distinction is important to a sociologist. A culture represents the values, beliefs, norms, language, symbols, and practices of a group, while society represents the people who share a culture. Neither society or culture could exist without the other.
Within the U.S., many groups of people share a community and a culture. By “community,” sociologists refer to a definable region of a society, real terra firma—as small as a neighborhood (Brooklyn, or “the east side of town”), as large as a country (Ethiopia, Nepal or the U.S.), or somewhere in between (in the U.S., this might include someone who identifies with Southern or Midwestern society).
In this chapter, we examine the relationship between culture and society in greater detail and pay special attention to the elements and forces that shape culture, including diversity and social changes. A final discussion examines the theoretical perspectives from which sociologists research culture. |
# Culture
## What Is Culture?
Humans are social creatures. According to Smithsonian Institution research, humans have been forming groups for almost 3 million years in order to survive. Living together, people formed common habits and behaviors, from specific methods of childrearing to preferred techniques for obtaining food.
Almost every human behavior, from shopping to marriage, is learned. In the U.S., marriage is generally seen as an individual choice made by two adults, based on mutual feelings of love. In other nations and in other times, marriages have been arranged through an intricate process of interviews and negotiations between entire families. In Papua New Guinea, almost 30 percent of women marry before the age of 18, and 8 percent of men have more than one wife (National Statistical Office, 2019). To people who are not from such a culture, arranged marriages may seem to have risks of incompatibility or the absence of romantic love. But many people from cultures where marriages are arranged, which includes a number of highly populated and modern countries, often prefer the approach because it reduces stress and increases stability (Jankowiak 2021).
Being familiar with unwritten rules helps people feel secure and at ease. Knowing to look left instead of right for oncoming traffic while crossing the street can help avoid serious injury and even death. Knowing unwritten rules is also fundamental in understanding humor in different cultures. Humor is common to all societies, but what makes something funny is not. Americans may laugh at a scene in which an actor falls; in other cultures, falling is never funny. Most people want to live their daily lives confident that their behaviors will not be challenged or disrupted. But even an action as seemingly simple as commuting to work evidences a great deal of cultural propriety, that is, there are a lot of expected behaviors. And many interpretations of them.
Take the case of going to work on public transportation. Whether people are commuting in Egypt, Ireland, India, Japan, and the U.S., many behaviors will be the same and may reveal patterns. Others will be different. In many societies that enjoy public transportation, a passenger will find a marked bus stop or station, wait for the bus or train, pay an agent before or after boarding, and quietly take a seat if one is available. But when boarding a bus in Cairo, Egypt, passengers might board while the bus is moving, because buses often do not come to a full stop to take on patrons. In Dublin, Ireland, bus riders would be expected to extend an arm to indicate that they want the bus to stop for them. And when boarding a commuter train in Mumbai, India, passengers must squeeze into overstuffed cars amid a lot of pushing and shoving on the crowded platforms. That kind of behavior might be considered rude in other societies, but in Mumbai it reflects the daily challenges of getting around on a train system that is taxed to capacity.
Culture can be material or nonmaterial. Metro passes and bus tokens are part of material culture, as are the buses, subway cars, and the physical structures of the bus stop. Think of material culture as items you can touch-they are tangible. Nonmaterial culture, in contrast, consists of the ideas, attitudes, and beliefs of a society. These are things you cannot touch. They are intangible. You may believe that a line should be formed to enter the subway car or that other passengers should not stand so close to you. Those beliefs are intangible because they do not have physical properties and can be touched.
Material and nonmaterial aspects of culture are linked, and physical objects often symbolize cultural ideas. A metro pass is a material object, but it represents a form of nonmaterial culture, namely, capitalism, and the acceptance of paying for transportation. Clothing, hairstyles, and jewelry are part of material culture, but the appropriateness of wearing certain clothing for specific events reflects nonmaterial culture. A school building belongs to material culture symbolizing education, but the teaching methods and educational standards are part of education’s nonmaterial culture.
As people travel from different regions to entirely different parts of the world, certain material and nonmaterial aspects of culture become dramatically unfamiliar. What happens when we encounter different cultures? As we interact with cultures other than our own, we become more aware of the differences and commonalities between others and our own. If we keep our sociological imagination awake, we can begin to understand and accept the differences. Body language and hand gestures vary around the world, but some body language seems to be shared across cultures: When someone arrives home later than permitted, a parent or guardian meeting them at the door with crossed arms and a frown on their face means the same in Russia as it does in the U.S. as it does in Ghana.
### Cultural Universals
Although cultures vary, they also share common elements. Cultural universals are patterns or traits that are globally common to all societies. One example of a cultural universal is the family unit: every human society recognizes a family structure that regulates sexual reproduction and the care of children. Even so, how that family unit is defined and how it functions vary. In many Asian cultures, for example, family members from all generations commonly live together in one household. In these cultures, young adults continue to live in the extended household family structure until they marry and join their spouse’s household, or they may remain and raise their nuclear family within the extended family’s homestead. In the U.S., by contrast, individuals are expected to leave home and live independently for a period before forming a family unit that consists of parents and their offspring. Other cultural universals include customs like funeral rites, weddings, and celebrations of births. However, each culture may view and conduct the ceremonies quite differently.
Anthropologist George Murdock first investigated the existence of cultural universals while studying systems of kinship around the world. Murdock found that cultural universals often revolve around basic human survival, such as finding food, clothing, and shelter, or around shared human experiences, such as birth and death or illness and healing. Through his research, Murdock identified other universals including language, the concept of personal names, and, interestingly, jokes. Humor seems to be a universal way to release tensions and create a sense of unity among people (Murdock, 1949). Sociologists consider humor necessary to human interaction because it helps individuals navigate otherwise tense situations.
### Ethnocentrism and Cultural Relativism
Although human societies have much in common, cultural differences are far more prevalent than cultural universals. For example, while all cultures have language, analysis of conversational etiquette reveals tremendous differences. In some Middle Eastern cultures, it is common to stand close to others in conversation. Americans keep more distance and maintain a large “personal space.” Additionally, behaviors as simple as eating and drinking vary greatly from culture to culture. Some cultures use tools to put the food in the mouth while others use their fingers. If your professor comes into an early morning class holding a mug of liquid, what do you assume they are drinking? In the U.S., it’s most likely filled with coffee, not Earl Grey tea, a favorite in England, or Yak Butter tea, a staple in Tibet.
Some travelers pride themselves on their willingness to try unfamiliar foods, like the late celebrated food writer Anthony Bourdain (1956-2017). Often, however, people express disgust at another culture's cuisine. They might think that it’s gross to eat raw meat from a donkey or parts of a rodent, while they don’t question their own habit of eating cows or pigs.
Such attitudes are examples of ethnocentrism, which means to evaluate and judge another culture based on one’s own cultural norms. Ethnocentrism is believing your group is the correct measuring standard and if other cultures do not measure up to it, they are wrong. As sociologist William Graham Sumner (1906) described the term, it is a belief or attitude that one’s own culture is better than all others. Almost everyone is a little bit ethnocentric.
A high level of appreciation for one’s own culture can be healthy. A shared sense of community pride, for example, connects people in a society. But ethnocentrism can lead to disdain or dislike of other cultures and could cause misunderstanding, stereotyping, and conflict. Individuals, government, non-government, private, and religious institutions with the best intentions sometimes travel to a society to “help” its people, because they see them as uneducated, backward, or even inferior. Cultural imperialism is the deliberate imposition of one’s own cultural values on another culture.
Colonial expansion by Portugal, Spain, Netherlands, and England grew quickly in the fifteenth century was accompanied by severe cultural imperialism. European colonizers often viewed the people in these new lands as uncultured savages who needed to adopt Catholic governance, Christianity, European dress, and other cultural practices.
A modern example of cultural imperialism may include the work of international aid agencies who introduce agricultural methods and plant species from developed countries into areas that are better served by indigenous varieties and agricultural approaches to the particular region. Another example would be the deforestation of the Amazon Basin as indigenous cultures lose land to timber corporations.
When people find themselves in a new culture, they may experience disorientation and frustration. In sociology, we call this culture shock. In addition to the traveler’s biological clock being ‘off’, a traveler from Chicago might find the nightly silence of rural Montana unsettling, not peaceful. Now, imagine that the ‘difference’ is cultural. An exchange student from China to the U.S. might be annoyed by the constant interruptions in class as other students ask questions—a practice that is considered rude in China. Perhaps the Chicago traveler was initially captivated with Montana’s quiet beauty and the Chinese student was originally excited to see a U.S.- style classroom firsthand. But as they experience unanticipated differences from their own culture, they may experience ethnocentrism as their excitement gives way to discomfort and doubts about how to behave appropriately in the new situation. According to many authors, international students studying in the U.S. report that there are personality traits and behaviors expected of them. Black African students report having to learn to ‘be Black in the U.S.’ and Chinese students report that they are naturally expected to be good at math. In African countries, people are identified by country or kin, not color. Eventually, as people learn more about a culture, they adapt to the new culture for a variety of reasons.
Culture shock may appear because people aren’t always expecting cultural differences. Anthropologist Ken Barger (1971) discovered this when he conducted a participatory observation in an Inuit community in the Canadian Arctic. Originally from Indiana, Barger hesitated when invited to join a local snowshoe race. He knew he would never hold his own against these experts. Sure enough, he finished last, to his mortification. But the tribal members congratulated him, saying, “You really tried!” In Barger’s own culture, he had learned to value victory. To the Inuit people, winning was enjoyable, but their culture valued survival skills essential to their environment: how hard someone tried could mean the difference between life and death. Over the course of his stay, Barger participated in caribou hunts, learned how to take shelter in winter storms, and sometimes went days with little or no food to share among tribal members. Trying hard and working together, two nonmaterial values, were indeed much more important than winning.
During his time with the Inuit tribe, Barger learned to engage in cultural relativism. Cultural relativism is the practice of assessing a culture by its own standards rather than viewing it through the lens of one’s own culture. Practicing cultural relativism requires an open mind and a willingness to consider, and even adapt to, new values, norms, and practices.
However, indiscriminately embracing everything about a new culture is not always possible. Even the most culturally relativist people from egalitarian societies—ones in which women have political rights and control over their own bodies—question whether the widespread practice of female genital mutilation in countries such as Ethiopia and Sudan should be accepted as a part of cultural tradition. Sociologists attempting to engage in cultural relativism, then, may struggle to reconcile aspects of their own culture with aspects of a culture that they are studying. Sociologists may take issue with the practices of female genital mutilation in many countries to ensure virginity at marriage just as some male sociologists might take issue with scarring of the flesh to show membership. Sociologists work diligently to keep personal biases out of research analysis.
Sometimes when people attempt to address feelings of ethnocentrism and develop cultural relativism, they swing too far to the other end of the spectrum. Xenocentrism is the opposite of ethnocentrism, and refers to the belief that another culture is superior to one’s own. (The Greek root word xeno-, pronounced “ZEE-no,” means “stranger” or “foreign guest.”) An exchange student who goes home after a semester abroad or a sociologist who returns from the field may find it difficult to associate with the values of their own culture after having experienced what they deem a more upright or nobler way of living. An opposite reaction is xenophobia, an irrational fear or hatred of different cultures.
Perhaps the greatest challenge for sociologists studying different cultures is the matter of keeping a perspective. It is impossible for anyone to overcome all cultural biases. The best we can do is strive to be aware of them. Pride in one’s own culture doesn’t have to lead to imposing its values or ideas on others. And an appreciation for another culture shouldn’t preclude individuals from studying it with a critical eye. This practice is perhaps the most difficult for all social scientists.
### Summary
Though “society” and “culture” are often used interchangeably, they have different meanings. A society is a group of people sharing a community and culture. The term culture generally describes the shared values, beliefs, norms, language, practices, and artifacts of these people, and includes material and nonmaterial elements. Our experience of cultural difference is influenced by our ethnocentrism (judging others using your cultural standards) and Xenocentrism (belief that another culture is superior). Sociologists practice cultural relativism (assessing others using their own cultural standards) although it is quite difficult.
### Section Quiz
### Short Answer
### Further Research
Ethnocentrism is a problem in many arenas. In the workplace, it can be hurtful and detrimental to an entire organization and especially to those who face mistreatment or feel unwelcome. People who exhibit ethnocentrism in the workplace are not only putting their careers at risk, but missing opportunities to flourish and advance with colleagues and customers of different backgrounds. In other words, curbing ethnocentrism is an important personal and societal goal, and it’s important for careers. This guide from an executive leadership academy discusses ways that multicultural teams can create more success if the people and company undertake the correct practices.
### References
Amazon.com. 2020. Search for Humor Studies. “1-16 of over 40,000 results for Books : “humor studies””. Retrieved October 6, 2020. (Amazon.com)
Barger, Ken. 2008. “Ethnocentrism.” Indiana University, July 1. Retrieved May 2, 2011 (http://www.iupui.edu/~anthkb/ethnocen.htm).
Darwin, Charles R. 1871. The Descent of Man, and Selection in Relation to Sex. London: John Murray.
DuBois, Cora. 1951. “Culture Shock.” Presentation to Panel Discussion at the First Midwest Regional Meeting of the Institute of International Education.” November 28. Also presented to the Women’s Club of Rio de Janeiro, Brazil, August 3, 1954.
Fritz, Thomas, S and Jentschke, N. Gosselin, et al. 2009. “Universal Recognition of Three Basic Emotions in Music.” Current Biology 19(7).
Jankowiak, William and Nelson, Alex. 2021. “Does Love Always Come Before Marriage.” Sapiens.org. February 11, 2021. (https://www.sapiens.org/culture/love-and-marriage)
Murdock, George P. 1949. Social Structure. New York: Macmillan.
National Statistical Office (NSO) [Papua New Guinea] and ICF. 2019. Papua New Guinea Demographic and Health Survey 2016-18. Port Moresby, Papua New Guinea, and Rockville, Maryland, USA: NSO and ICF. Retrieved https://dhsprogram.com/publications/publication-fr364-dhs-final-reports.cfm.
Oberg, Kalervo. 1960. “Cultural Shock: Adjustment to New Cultural Environments.” Practical Anthropology 7:177–182.
Old Dominion University. ‘Journal of International Students’. Accessed October 16, 2020. (https://www.ojed.org/index.php/jis/index)
Smithsonian Institution. Natural History Museum. What does it mean to be human? Retrieved October 6, 2020. (https://humanorigins.si.edu/human-characteristics/social-life)
Sumner, William G. 1906. Folkways: A Study of the Sociological Importance of Usages, Manners, Customs, Mores, and Morals. New York: Ginn and Co.
Swoyer, Chris. 2003. “The Linguistic Relativity Hypothesis.” In The Stanford Encyclopedia of Philosophy, edited by E. N. Zalta, Winter. Retrieved May 5, 2011 (http://plato.stanford.edu/archives/win2003/entries/davidson/) |
# Culture
## Elements of Culture
### Values and Beliefs
The first, and perhaps most crucial, elements of culture we will discuss are values and beliefs. Value does not mean monetary worth in sociology, but rather ideals, or principles and standards members of a culture hold in high regard. Most cultures in any society hold “knowledge” (education) in high regard. Values are deeply embedded and are critical for learning a culture’s beliefs, which are the tenets or convictions that people hold to be true. Individual cultures in a society have personal beliefs, but they also shared collective values. To illustrate the difference, U.S. citizens may believe in the American Dream—that anyone who works hard enough will be successful and wealthy. Underlying this belief is the American value that wealth is important. In other cultures, success may be tied less to wealth and more to having many healthy children. Values shape a society by suggesting what is good and bad, beautiful and ugly, sought or avoided.
Consider the value that the U.S. places upon youth. Children represent innocence and purity, while a youthful adult appearance signifies sexuality. Shaped by this value, individuals spend millions of dollars each year on cosmetic products and surgeries to look young and beautiful. The U.S. also has an individualistic culture, meaning people place a high value on individuality and independence. In contrast, many other cultures are collectivist, meaning the welfare of the group takes priority over that of the individual. Fulfilling a society’s values can be difficult. Marital monogamy is valued, but many spouses engage in infidelity. Cultural diversity and equal opportunities for all people are valued in the U.S., yet the country’s highest political offices have been dominated by white men.
Values often suggest how people should behave, but they don’t accurately reflect how people do behave. Values portray an ideal culture, the standards society would like to embrace and live up to. But ideal culture differs from real culture. In an ideal culture, there would be no traffic accidents, murders, poverty, or racial tension. But in real culture, police officers, lawmakers, educators, and social workers constantly strive to prevent or address these issues. American teenagers are encouraged to value celibacy. However, the number of unplanned pregnancies among teens reveals that the ideal alone is not enough to spare teenagers the potential consequences of having sex.
One of the ways societies strive to maintain its values is through rewards and punishments. When people observe the norms of society and uphold its values, they are often rewarded. A boy who helps an elderly woman board a bus may receive a smile and a “thank you.” A business manager who raises profit margins may receive a quarterly bonus. People sanction unwanted or inappropriate behaviors by withholding support, approval, or permission, or by implementing sanctions. We may think of ‘sanction’ as a negative term, but sanctions are forms of social control, ways to encourage conformity to cultural norms or rules. Sometimes people conform to norms in anticipation or expectation of positive sanctions. Receiving good grades, for instance, may mean praise from parents and teachers. Sanctions can also be negative. . A boy who shoves an elderly woman aside to board the bus first may receive frowns or even a scolding from other passengers. A business manager who drives away customers will likely be fired. Breaking norms and rejecting values can lead to cultural sanctions such as earning a negative label like ‘lazy’ or to legal sanctions, such as traffic tickets, fines, or imprisonment. Utilizing social control encourages most people to conform regardless of whether authority figures (such as law enforcement) are present.
Values are not static. They change across time and between groups as people evaluate, debate, and change collective social beliefs. Values also vary from culture to culture. For example, cultures differ in their values about what kinds of physical closeness are appropriate in public. It’s rare to see two male friends or coworkers holding hands in the U.S. where that behavior often symbolizes romantic feelings. But in many nations, masculine physical intimacy is considered natural in public. This difference in cultural values came to light when people reacted to photos of former president G.W. Bush holding hands with the Crown Prince of Saudi Arabia in 2005. Simple gestures, such as hand-holding, carry great symbolic differences across cultures.
### Norms
So far, many of the examples in this chapter have described how people are expected to behave in certain situations—for example, buying food or boarding a bus. These examples describe the visible and invisible rules of conduct through which societies are structured, or what sociologists call norms. Norms are behaviors that reflect compliance with what cultures and societies have defined as good, right, and important. Most members adhere to them.
Formal norms are established, written rules existing in all societies. They support many social institutions, such as the military, criminal justice and healthcare systems, and public schools. Functionalists may question what purpose these norms serve, conflict theorists might be interested in who creates, benefits, and suffers under these formal norms, and symbolic interactionists wonder about how a group that benefits interacts. Laws are formal norms, but so are employee manuals, college entrance exam requirements, and “no running” signs at swimming pools. Formal norms are the most specific and clearly stated of the various types of norms, and they are the most strictly enforced. But they are enforced to varying degrees.
For example, private property is highly valued in the U.S. Thieves can be fined, imprisoned, or both. People safeguard valuable possessions by locking their doors, buying a safe, and installing alarm systems on homes and cars. A less strictly enforced social norm is driving while intoxicated. While it’s against the law to drive drunk, drinking is for the most part an acceptable social behavior. And though there are laws to punish drunk driving, there are few systems in place to prevent the crime.
There are plenty of formal norms, but the list of informal norms—casual behaviors that are generally and widely conformed to—is longer. People learn informal norms by observation, imitation, and general socialization. Some informal norms are taught directly— “Kiss your Aunt Edna” or “Use your napkin”—while others are learned by observation, including understanding consequences when someone else violates a norm. Informal norms dictate appropriate behaviors without the need of written rules and so may be difficult to learn when you are new to or not familiar with the culture.
Although informal norms define personal interactions, they extend into other systems as well. In the U.S., there are informal norms regarding behavior at fast food restaurants. Customers line up to order their food and leave when they are done. They don’t sit down at a table with strangers, sing loudly as they prepare their condiments, or nap in a booth. Most people don’t commit even harmless breaches of informal norms.
Norms may be further classified as either mores or folkways. Mores (mor-ays) are norms that embody the moral views and principles of a group. They often have a religious foundation. Violating them can have serious consequences. The strongest mores are protected with laws and other formal sanctions. In most societies, for instance, homicide is considered immoral, and it’s punishable by law (a formal norm). But more often, mores are judged and guarded by public sentiment (an informal norm). People who violate mores are seen as shameful. They can even be shunned or banned from some groups.
The mores of the U.S. school system require that a student’s writing be in the student’s own words or use special forms (such as quotation marks and a whole system of citation) for crediting other writers. Submitting or publishing another person’s words as if they are one’s own has a name—plagiarism. The consequences for violating this norm are often severe and can result in expulsion from school or termination from employment.
Unlike mores, folkways are norms without any moral underpinnings. Rather, folkways direct appropriate behavior in the day-to-day practices and expressions of a culture. We can think of them as ‘traditions’—things we do because we ‘always have.’ They indicate whether to shake hands or kiss on the cheek when greeting another person. They specify whether to wear a tie and blazer or a T-shirt and sandals to an event. In Canada, women can smile and say hello to men on the street. In Egypt, that’s not acceptable. In regions in the southern U.S., bumping into an acquaintance means stopping to chat. It’s considered rude not to, no matter how busy one is. In other regions, people guard their privacy and value time efficiency. A simple nod of the head is enough. Other accepted folkways in the U.S. may include holding the door open for a stranger or giving someone a gift on their birthday. The rules regarding these folkways may change from culture to culture. A folkway in one culture could be extremely rude in another.
Folkways are actions that people everywhere take for granted. People need to act without thinking in order to get seamlessly through daily routines. They can’t stop and analyze every action (Sumner, 1906). Folkways might be small actions, learned by observation and imitated, but they are by no means trivial. An important folkway in many cultures is kissing Grandmother on the cheek. Fail to do so and you will likely be scolded.
### Symbols and Culture
Humans, consciously and subconsciously, are always striving to make sense of their surrounding world. Symbols—such as gestures, signs, objects, signals, and words—help people understand that world. They provide communication methods to understanding experiences by conveying recognizable meanings that are shared by societies.
The world is filled with symbols. Sports uniforms, company logos, and traffic signs are symbols. In some cultures, a gold ring is a symbol of marriage. Some symbols are highly functional; stop signs, for instance, provide useful instruction. As physical objects, they belong to material culture, but because they function as symbols, they also convey nonmaterial cultural meanings. Some symbols are valuable only in what they represent. Trophies, blue ribbons, or gold medals, for example, represent accomplishments. But many objects have both material and nonmaterial symbolic value.
Symbols often get noticed when they are out of context. Used unconventionally, they convey strong messages. A stop sign placed on the door of a college building makes a political statement, as does a camouflage military jacket worn in an antiwar protest. Together, the semaphore signals for “N” and “D” represent nuclear disarmament—and form the well-known peace sign (Westcott, 2008). Some college students wear pajamas and bedroom slippers to class, clothing that was formerly associated only with privacy and bedtime. By wearing the outfit, students are defying traditional cultural norms.
Some symbols represent only one side of the story and elicit strong emotions, which can lead to social unrest. Their presence is a reminder of a nation’s worst times and not something to celebrate. Many of these symbols are targets of vandalism as the destruction of these representations is symbolic. Effigies representing public figures are burned to demonstrate anger at certain leaders. In 1989, crowds tore down the Berlin Wall, a decades-old symbol of the division between East and West Germany, communism, and capitalism. In the U.S. beginning in 2019, statues associated with slavery and the Civil War were removed from state capitols, college campuses, and public parks. In Germany, any display of Hitler or Nazi memorabilia or to deny the Holocaust is illegal.
While different cultures have varying systems of symbols, one system is common to all: language. Whatever its form, people learn social and cultural norms through it.
### Language and Symbols
Language is a system that uses symbols with which people communicate and through which culture is transmitted. Letters (which make up words), pictographs, and hand gestures are all symbols that create a language used for communication. Sign language, for example, requires an intimate knowledge not only of an alphabet but also of signs that represent entire words and the meaning indicated by certain facial expressions or postures. Its grammar differs from the spoken language. As spoken language is different across regions, nations and cultures, and can even differ by the age of the person, so too does sign language.
All language systems contain the same basic elements that are effective in communicating ideas - object, subject, action. A written language system consists of symbols that refer to spoken sound. Taken together, these symbols convey specific meanings. The English language uses a combination of twenty-six letters to create words. These twenty-six letters make up over 600,000 recognized words (OED Online, 2011). We can compare the reliance on tone and inflection to Mandarin Chinese. It contains over 8,000 characters, but the same character may symbolize different concepts depending on the tone used.
English today contains an English and French version for the same concept. For example, in the English version, one eats, but in French version, one dines. In the English version, we meet someone. In the French version, we encounter someone. Readers of American English may be surprised by the inclusion of a ‘u’ in some spellings of words like ‘behaviour’ or ‘flavour.’ Americans have dropped that ‘u’ that writers of British English include. Billions of people speak English, and there are almost as many pronunciations of it.
Rules for speaking and writing vary even within cultures, most notably by region. Do you eat a grinder, a sub, or a hero/gyro? Do you refer to a can of carbonated liquid as “soda” or “pop”? Is a household entertainment room a “family room,” “rec room,” or “den”? When leaving a restaurant, do you ask your server for a “check,” the “ticket,” or your “bill”? Language is constantly evolving and adding new words as societies create new ideas. In this age of technology, many cultures have adapted almost instantly to new nouns such as “e-mail” and “Internet,” and verbs such as “downloading,” “texting,” and “blogging.” These would have considered nonsense words just the world twenty-five years ago.
### Language and Culture
Even while it constantly evolves, language shapes our perception of reality and our behavior. In the 1920s, linguists Edward Sapir and Benjamin Whorf advanced this idea which became known as Sapir-Whorf hypothesis or linguistic relativity. It is based on the idea that people experience their world through their language, and therefore understand their world through the cultural meanings embedded in their language. The hypothesis suggests that language shapes thought and thus behavior (Swoyer, 2003). For example, words have attached meanings beyond their definition that can influence thought and behavior. In the U.S. where the number thirteen is associated with bad luck, many high-rise buildings do not have a 13th floor. In Japan, however, the number four is considered unlucky, since it is pronounced similarly to the Japanese word for “death.”
Many sociologists believe that language can have a broad and lasting impact on perception. In 2002, Lera Boroditsky and her colleagues conducted experiments on native German and Spanish speakers in English. Unlike English, these languages assign genders to nouns. In German, for example, the word for sun, die Sonne, is feminine, but the word for moon, der Mond, is masculine. The team chose a set of nouns with opposite genders in German and Spanish and asked participants to provide adjectives to describe them. They found that German speakers used more masculine adjectives than Spanish speakers when describing a noun that was grammatically masculine in German but feminine in Spanish. For example, the word for key is masculine in German and feminine in Spanish. German speakers described keys as hard, heavy, jagged, metal, serrated, and useful, while Spanish speakers used the adjectives, golden, intricate, little, lovely, shiny, and tiny. The team concluded that gender perceptions acquired in a person’s native language carry forward to how they see the world even when they switch to a language without grammatical genders (Boroditsky, Schmidt, and Phillips, 2002).
Some sociologists also believe the structure of language can have consequences on both individual and group behavior. For example, a series of studies have found that Finland has a significantly higher rate of workplace accidents than Sweden despite the fact that the languages have similar workplace regulations (Salminen & Johansson, 2000). John A. Lucy explained this discrepancy through differences in the structure of these languages. Swedish places a greater emphasis on the timing of movement in three-dimensional space. Consequently, Lucy argued, the Swedish factories are physically arranged in a manner that supports the smooth running of the product process. Finnish factors experience frequent disruptions, so that workers must rush and have more accidents (Lucy, 1997).
The Sapir-Whorf hypothesis has been interpreted to suggest that if a word does not exist in a language then users of that language cannot have the experience. Studies have shown, for instance, that unless people have access to the word “ambivalent,” they don’t recognize having conflicting positive and negative feelings about an issue as ‘ambivalence.’ However, the hypothesis should not suggest that people do not have conflicting feelings but rather that they interpret the feelings differently.
In addition to using spoken language, people communicate without words. Nonverbal communication is symbolic, and, as in the case of language, is learned through one’s culture. Some gestures are nearly universal; some are not. Smiles often indicate positive reinforcement in the U.S., whereas in some cultures it is rude as you do not know the person. A thumbs-up in Russia and Australia is an offensive curse (Passero, 2002). Other gestures vary in meaning depending on the situation and the person. A wave of the hand can mean many things, depending on how it’s done and for whom. It may mean “hello,” “goodbye,” “no thank you,” or “I’m royalty.” Winks convey a variety of messages, including “We have a secret,” “I’m only kidding,” or “I’m attracted to you.” From a distance, a person may “read” the emotional situation of people just by watching their body language and facial expressions. However, many cultures communicate with lots of physicality, which people outside that culture may interpret as an argument. So, for example, you might believe two people are arguing when, in fact, they are simply having a regular conversation.
### Summary
A culture consists of many elements, such as the values and beliefs of its society. Culture is also governed by norms, including laws, mores (norms that embody moral views), and folkways (traditions without any moral underpinnings). The symbols and language of a society are key to developing and conveying culture. In a nutshell, the four main components are values, beliefs, norms, language, practices, and artifacts.
### Section Quiz
### Short Answer
### Further Research
The science-fiction novel, Babel-17, by Samuel R. Delaney was based upon the principles of the Sapir-Whorf hypothesis. Read an excerpt from .
### References
Boroditsky, Lera & Schmidt, Lauren. (2000). Sex, Syntax, and Semantics. Proceedings of the 22nd Annual Meeting of the Cognitive Science Society.
Eberhard, David M., Gary F. Simons, and Charles D. Fennig (eds.). 2020. Ethnologue: Languages of the World. Twenty-Third edition. Dallas, Texas: SIL International. Online version http://www.ethnologue.com
Lucy, J. (1997). Linguistic Relativity. Annual Review of Anthropology, 26, 291-312. Retrieved January 31, 2021, from http://www.jstor.org/stable/2952524
Mount, Steve. 2010. “Constitutional Topic: Official Language.” USConstitution.net, last modified January 24. Retrieved January 3, 2012 (http://www.USconstitution.net/consttop_lang.html).
National WWII Museum. 2020. “American Indian Code Talkers”. New Orleans, LA. Retrieved October 11, 2020. (https://www.nationalww2mUSeum.org/war/articles/american-indian-code-talkers).
OED Online. 2011. Oxford University Press. Retrieved May 5, 2011 (http://www.oed.com/view/Entry/260911).
Passero, Kathy. 2002. “Global Travel Expert Roger Axtell Explains Why.” Biography July:70–73,97–98.
Salminen S, Johansson A. Occupational accidents of Finnish- and Swedish-speaking workers in Finland: a mental model view. Int J Occup Saf Ergon. 2000;6(2):293-306. doi: 10.1080/10803548.2000.11076456. PMID: 10927671
Slavin, R. E., A. Cheung, C. Groff, and C. Lake. 2008. “Effective Reading Programs for Middle and High Schools: A Best-Evidence Synthesis.” Reading Research Quarterly 43(3):290–322.
Sumner, William G. 1906. Folkways: A Study of the Sociological Importance of Usages, Manners, Customs, Mores, and Morals. New York: Ginn and Co.
Swoyer, Chris. 2003. “The Linguistic Relativity Hypothesis.” In The Stanford Encyclopedia of Philosophy, edited by E. N. Zalta, Winter. Retrieved May 5, 2011 (http://plato.stanford.edu/archives/win2003/entries/relativism/supplement2.html).
Vaughan, R. M. 2007. “Cairo’s Man Show.” Utne Reader March–April:94–95.
Weber, Bruce. 2001. “Harold Garfinkel, a Common-Sense Sociologist, Dies at 93.” The New York Times, May 3. Retrieved February 10, 2012 (http://www.nytimes.com/2011/05/04/US/04garfinkel.html?_r=2)
Westcott, Kathryn. 2008. “World’s Best-Known Protest Symbol Turns 50.” BBC News, March 20. Retrieved January 3, 2012 (http://news.bbc.co.uk/2/hi/uk_news/magazine/7292252.stm).
Weston, J. (Director). (2002). Wild Child: The Story of Feral Children [Motion Picture]. |
# Culture
## High, Low, Pop, Sub, Counter-culture and Cultural Change
It may seem obvious that there are a multitude of cultural differences between societies in the world. After all, we can easily see that people vary from one society to the next. It’s natural to think that a young woman from a village in rural Kenya in Eastern Africa would have a different view of the world from a young woman from urban Mumbai, India—one of the most populated cities in the world.
Additionally, each culture has its own internal variations. Sometimes the differences between cultures are not as large as the differences within cultures. Sociologist Pierre Bourdieu wrote about cultural capital, which consists of material goods, non-material attitudes, and knowledge that are specific to a certain economic class. Bourdieu grouped cultural capital into three categories: embodied (a regional dialect), objectified (possessions), and institutionalized (academic credentials). In the U.S., some group culture into three categories as well: high, low, and pop (for popular).
### High, Low, and Popular Culture
Can you identify the Chief Financial Officer of three major corporations? How about the name of the server at three local hangouts? How many books do you own? How many social media sites do you visit? Is your family listed on the Social Register©? Have you ever heard of the Social Register©? In each pair, one type of knowledge is considered high culture and the other low culture.
This could be considered stereotyping by economic class rather than by race or gender, but sociologists use the term high culture to describe the pattern of cultural experiences and attitudes that exist in the highest or elite class segments of a society. People often associate high culture with intellectualism, political power, and prestige. In America, high culture also tends to be associated with wealth. Events considered high culture can be expensive, formal, and exclusive – attending a ballet, seeing a play, listening to a live symphony performance, or attending a prestigious university. Similarly, low culture is associated with the pattern of cultural experiences and attitudes that exist in the lowest class segments of a society.
The term popular culture refers to the pattern of cultural experiences and attitudes that exist in mainstream society. Popular culture events might include a parade, a baseball game, or the season finale of a television show. Music, anime, and cosplay are pieces of popular culture. Popular culture is accessible by most and is expressed and spread via commercial and social media outlets such as radio, television, movies, the music industry, publishers, and corporate-run websites. You can share a discussion of favorite football teams with a new coworker or comment on a reality show when making small talk in line at the grocery store. But if you tried to launch into a deep discussion on the classical Greek play Antigone, few members of U.S. society today would be familiar with it. Although high culture may be considered by some as superior to popular culture, the lines between high culture and popular culture vary over time and place. Shakespearean plays, considered to be popular culture when they were written, are now part of our society’s high culture. Five hundred years from now, will our descendants consider Dancing with the Stars as fine performance art?
### Subculture and Counterculture
A subculture is just what it sounds like—a smaller cultural group within a larger culture. People of a subculture are part of the larger culture but also share a specific identity within a smaller group.*
Thousands of subcultures exist within the U.S. Ethnic and racial groups share the language, food, and customs of their heritage. Other subcultures are formed through shared experiences. Biker culture revolves around an interest in motorcycles. Some subcultures are formed by people who possess traits or preferences that differ from the majority of a society’s population. The body modification community embraces aesthetic additions to the human body, such as tattoos, piercings, and certain forms of plastic surgery. But even as members of a subculture band together, they still identify with and participate in the larger society.
Sociologists distinguish subcultures from countercultures, which reject some of the larger culture’s norms and values. In contrast to subcultures, which operate relatively smoothly within the larger society, countercultures might actively defy larger society by developing their own set of rules and norms to live by, sometimes even creating communities that operate outside of greater society. Counterculture members are ‘against’ the dominant ruling culture and want to install their own values. Sub-culture members may want to change some things but established procedures are followed.
Cults, a word derived from culture, are also considered counterculture groups. The group “Yearning for Zion” (YFZ) in Eldorado, Texas, existed outside the mainstream and the limelight, until its leader was accused of statutory rape and underage marriage. The sect’s formal norms clashed too severely to be tolerated by US law, and in 2008, authorities raided the compound and removed more than two hundred women and children from the property. Many cults claim to be spiritual, often establishing themselves as a religion. When each of the three Abrahamic religions (Christianity, Islam, and Judaism) in the world began, they were treated as cults and suffered much oppression because of it.
### Cultural Change
Cultures continually change because new items are added to material culture every day and in turn, meanings are assigned to them (non-material), which affects other cultural components. For example, a new technology, such as railroads or smartphones, might introduce new ways of traveling or communicating. New ideas, such as flash mobs or crowdfunding, enter a culture . Sociologists identify two broad categories of change as innovation (meaning new) and diffusion (to spread out). Material cultural change happens when new items are discovered or invented or enter a culture as a result of globalization.
### Innovation: Discovery and Invention
An innovation refers to an object or concept’s initial appearance in society—it is innovative because it is new. Innovations are discovered or invented. Discoveries make known previously unknown but existing aspects of reality. In 1610, when Galileo looked through his telescope and discovered Saturn, the planet was already there, but until then, no one had known about it. When Christopher Columbus encountered Hispaniola, the island was, of course, already well known to its inhabitants. However, his discovery was new knowledge for Europeans, and it opened the way to changes in European culture, as well as to the cultures of the discovered lands. For example, new foods such as potatoes and tomatoes transformed the European diet, and horses brought from Europe changed hunting practices of Great Plains Native Americans.
Inventions result when something new is formed from existing objects or concepts—when things are put together in an entirely new manner. In the late 1800s and early 1900s, electric appliances were invented at an astonishing pace. Cars, airplanes, vacuum cleaners, lamps, radios, telephones, and televisions were all new inventions. Inventions may shape a culture by replacing older ways of carrying out tasks, being integrated into current practices, or creating new activities. Their adoption reflects (and may shape) cultural values, and their use may introduce new norms and practices.
Consider the rise of mobile phones. As more and more people began carrying these devices, phone conversations no longer were restricted to homes, offices, and phone booths. People on trains, in restaurants, and in other public places became annoyed by listening to one-sided conversations. New norms and behaviors were needed for cell phone use. Some people pushed for the idea that those who are out in the world should pay attention to their companions and surroundings. Fortunately, technology found a workaround: texting, which enables quiet communication surpassed phone conversations as the primary way to communicate anywhere, everywhere.
When the pace of innovation increases, it can lead to generation gaps. Technological gadgets that catch on quickly with one generation are sometimes dismissed by an older generation that is skeptical or struggles to adopt them. The older generation might tune into a musician performing on public television while the younger generation prefers a livestream. A culture’s objects and ideas can cause not just generational but cultural gaps. Material culture tends to diffuse more quickly than nonmaterial culture; technology can spread through society in a matter of months, but it can take generations for the ideas and beliefs of society to change including methods for researching or learning information (e.g., library versus Internet search).
Coined by sociologist William F. Ogburn (1957), the term culture lag refers to the time that passes between the introduction of a new item of material culture and its social acceptance. Culture lag can also cause tangible problems. The infrastructure of the U.S., built a hundred years ago or more, is having trouble supporting today’s more heavily populated and fast-paced life. Yet there is a lag in conceptualizing solutions to infrastructure problems. Municipalities struggle with traffic control, increased air pollution, and limited parking, which are all symptoms of culture lag. Although people are becoming aware of the consequences, overuse, or lack of resources, addressing these needs takes time.
### Diffusion and Globalization
Another way material and nonmaterial culture crosses borders is through diffusion. Like a gas in a laboratory experiment, the item or idea spreads throughout. Diffusion relates to the process of the integration of cultures into the mainstream while globalization refers to the promotion and increase of interactions between different regions and populations around the globe resulting in the integration of markets and interdependence of nations fostered through trade.
Ideas concepts, or artifacts are often diffused, or spread, to individuals and groups, resulting in new social practices. People might develop a new appreciation of Thai noodles or Italian gelato (ice cream). Access to television and the Internet has brought the lifestyles and values portrayed in U.S. sitcoms into homes around the globe and vice versa. Twitter feeds from public demonstrations in one nation have encouraged political protesters in other countries. When this kind of diffusion occurs, ideas from one culture are introduced into another, often before the associated material objects. The graph above displays when diffusion typically occurs, essentially driving an innovation to spread beyond its earliest adopters to the wider majority of people.
### Summary
Sociologists recognize that there is a dominant culture or cultural practice that is dominant often characterized as the norm in a society as well as different types of cultures within societies. Societies also consist of many subcultures (a smaller cultural group within a larger culture). Some arese as a result of a shared identity or interest. Countercultures reject the dominant culture’s values and create their own cultural rules and norms. Cultural change can happen through invention or discovery. Cultures evolve via new ideas and new ways of thinking. In many modern cultures, the cornerstone of innovation is technology, the rapid growth of which can lead to cultural lag (time from creation or introduction to social acceptance). Technology is also responsible for the spread of both material and nonmaterial culture that contributes to globalization (the increase of movement and exchange of goods and ideas all over the planet).
### Section Quiz
### Short Answer
### Further Research
Many people believe that the time of the counterculture is over. Like many aspects of culture, it could come back at any time. In this interview, Princeton professor German Labrador and director of exhibitions at the Centre de Cultura Contemporània de Barcelona discuss the past, present, and potential future of counterculture.
### References
Ogburn, William F. 1957. “Cultural Lag as Theory.” Sociology & Social Research 41(3):167–174.
Scheuerman, William. 2010. “Globalization.” The Stanford Encyclopedia of Philosophy, edited by E. N.
Zalta, Summer. Retrieved February 10, 2012 (http://plato.stanford.edu/archives/sum2010/entries/globalization/).
Social Register Association. 2020. New York. https://www.socialregisteronline.com/ |
# Culture
## Theoretical Perspectives on Culture
Music, fashion, technology, and values—all are products of culture. But what do they mean? How do sociologists perceive and interpret culture based on these material and nonmaterial items? Let’s finish our analysis of culture by reviewing them in the context of three theoretical perspectives: functionalism, conflict theory, and symbolic interactionism.
Functionalists view society as a system in which all parts work—or function—together to create society as a whole. They often use the human body as an analogy. Looking at life in this way, societies need culture to exist. Cultural norms function to support the fluid operation of society, and cultural values guide people in making choices. Just as members of a society work together to fulfill a society’s needs, culture exists to meet its members’ social and personal needs.
Functionalists also study culture in terms of values. For example, education is highly valued in the U.S. The culture of education—including material culture such as classrooms, textbooks, libraries, educational technology, dormitories and non-material culture such as specific teaching approaches—demonstrates how much emphasis is placed on the value of educating a society’s members. In contrast, if education consisted of only providing guidelines and some study material without the other elements, that would demonstrate that the culture places a lower value on education.
Functionalists view the different categories of culture as serving many functions. Having membership in a culture, a subculture, or a counterculture brings camaraderie and social cohesion and benefits the larger society by providing places for people who share similar ideas.
Conflict theorists, however, view social structure as inherently unequal, based on power differentials related to issues like class, gender, race, and age. For a conflict theorist, established educational methods are seen as reinforcing the dominant societal culture and issues of privilege. The historical experiences of certain groups— those based upon race, sex, or class, for instance, or those that portray a negative narrative about the dominant culture—are excluded from history books. For a long time, U.S. History education omitted the assaults on Native American people and society that were part of the colonization of the land that became the United States. A more recent example is the recognition of historical events like race riots and racially based massacres like the Tulsa Massacre, which was widely reported when it occurred in 1921 but was omitted from many national historical accounts of that period of time. When an episode of HBO’s Watchmen showcased the event in stunning and horrific detail, many people expressed surprise that it had occurred and it hadn’t been taught or discussed (Ware 2019).
Historical omission is not restricted to the U.S. North Korean students learn of their benevolent leader without information about his mistreatment of large portions of the population. According to defectors and North Korea experts, while famines and dire economic conditions are obvious, state media and educational agencies work to ensure that North Koreans do not understand how different their country is from others (Jacobs 2019).
Inequities exist within a culture’s value system and become embedded in laws, policies, and procedures. This inclusion leads to the oppression of the powerless by the powerful. A society’s cultural norms benefit some people but hurt others. Women were not allowed to vote in the U.S. until 1920, making it hard for them to get laws passed that protected their rights in the home and in the workplace. Same-sex couples were denied the right to marry in the U.S. until 2015. Elsewhere around the world, same-sex marriage is only legal in 31 of the planet’s 195 countries.
At the core of conflict theory is the effect of economic production and materialism. Dependence on technology in rich nations versus a lack of technology and education in poor nations. Conflict theorists believe that a society’s system of material production has an effect on the rest of culture. People who have less power also have fewer opportunities to adapt to cultural change. This view contrasts with the perspective of functionalism. Where functionalists would see the purpose of culture—traditions, folkways, values—as helping individuals navigate through life and societies run smoothly, conflict theorists examine socio-cultural struggles, including the power and privilege created for some by using and reinforcing a dominant culture that sustains their position in society.
Symbolic interactionism is the sociological perspective that is most concerned with the face-to-face interactions and cultural meanings between members of society. It is considered a micro-level analysis. Instead of looking how access is different between the rich and poor, interactionists see culture as being created and maintained by the ways people interact and in how individuals interpret each other’s actions. In this perspective, people perpetuate cultural ways. Proponents of this theory conceptualize human interaction as a continuous process of deriving meaning from both objects in the environment and the actions of others. Every object and action has a symbolic meaning, and language serves as a means for people to represent and communicate interpretations of these meanings to others. Symbolic interactionists perceive culture as highly dynamic and fluid, as it is dependent on how meaning is interpreted and how individuals interact when conveying these meanings. Interactionists research changes in language. They study additions and deletions of words, the changing meaning of words, and the transmission of words in an original language into different ones.
We began this chapter by asking, “What is culture?” Culture is comprised of values, beliefs, norms, language, practices, and artifacts of a society. Because culture is learned, it includes how people think and express themselves. While we may like to consider ourselves individuals, we must acknowledge the impact of culture on us and our way of life. We inherit language that shapes our perceptions and patterned behavior, including those of family, friends, faith, and politics.
To an extent, culture is a social comfort. After all, sharing a similar culture with others is precisely what defines societies. Nations would not exist if people did not coexist culturally. There could be no societies if people did not share heritage and language, and civilization would cease to function if people did not agree on similar values and systems of social control.
Culture is preserved through transmission from one generation to the next, but it also evolves through processes of innovation, discovery, and cultural diffusion. As such, cultures are social constructions. The society approves or disapproves of items or ideas, which are therefore included or not in the culture. We may be restricted by the confines of our own culture, but as humans we have the ability to question values and make conscious decisions. No better evidence of this freedom exists than the amount of cultural diversity around the world. The more we study another culture, the better we become at understanding our own.
### Summary
There are three major theoretical approaches toward the interpretation of culture. A functionalist perspective acknowledges that the many parts of culture work together as a system to fulfill society’s needs. Functionalists view culture as a reflection of society’s values. Conflict theorists see culture as inherently unequal, reinforcing inequalities in gender, class, race, and age. Symbolic interactionists are primarily interested in culture as experienced in the daily interactions, interpretations, and exchanges between individuals and the symbols that comprise a culture. Various cultural and sociological occurrences can be explained by these theories. Each theory provides a different perspective or lens to help understand culture in societies.
### Section Quiz
### Short Answer
### References
Jacobs, Harrison. 2019. “North Koreans understand their government lies, but there’s one thing they don’t know, according to a defector.” Business Insider. (https://www.businessinsider.com/what-north-koreans-dont-understand-about-world-defector-news-2018-6)
Ware, Lawrence. 2019. “Watchmen’s Tulsa Massacre Is American History. It’s Also Mine.” Slate. October 25 2019. (https://slate.com/culture/2019/10/watchmen-tulsa-massacre-history-tv.html) |
# Society and Social Interaction
## Introduction
It was a school day, and Inayah woke up at 5:15 a.m, checked her phone, and began a few chores. Her aunt had gone to work, but had left a pile of vegetables for be cut for dinner. After taking care of that, Inayah gathered and organized the laundry, then woke up her younger cousin and sister. She led them in prayers, gave them breakfast, and dressed for school. Inayah was running late, so she didn’t have time to record a full video. Instead she took a few pictures and posted a good-morning clip, updated her status on another platform, and went to check on the younger girls.
Twenty minutes later, Inayah was fixing her sister’s uniform and calling to her cousin to hurry along. She loaded them up with their school bags and one sack of laundry each. The three girls walked the two kilometers to the bus station, dropping the laundry at the cleaner on the way. The ride to school took about thirty minutes.
Inayah had grown up about sixty kilometers away, where her parents still lived. She usually saw them on weekends. She had previously attended a boarding school, but those had become dangerous due to kidnappings or other trouble. Inayah’s new school was not quite as good as the old one, but she was still learning. She did particularly well in math and economics.
After school and the bus ride back, Inayah sent her sister and her cousin to the house while she stayed in town with some friends. The girls sat at the picnic tables near the basketball courts, where groups of other teenagers and some adults usually came to play. She didn’t talk to any of the boys there, but she had met several of them at her uncle’s store. The girls recorded a few videos together, started on their homework, and after about an hour, headed home to help with dinner.
How does Inayah’s day compare with yours? How does it compare to the days of teenagers you know? Inayah interacts with her family and friends based on individual relationships and personalities, but societal norms and acceptable behaviors shape those interactions. Someone from outside of her community might feel that her society’s expectations are too challenging, while others may feel they are too lenient. But Inayah may disagree with both perspectives. She might have taken those societal expectations as her own.
### References
Maasai Association. “Facing the Lion.” Retrieved January 4, 2012 (http://www.maasai-association.org/lion.html). |
# Society and Social Interaction
## Types of Societies
In sociological terms, society refers to a group of people who live in a definable community and share the same cultural components. On a broader scale, society consists of the people and institutions around us, our shared beliefs, and our cultural ideas. Typically, many societies also share a political authority.
Consider China and the United States. Both are technologically advanced, have dense networks of transportation and communications, rely on foreign trading partners for large portions of their economies, focus on education as a way to advance their citizens, and have large and expensive militaries. Both countries have citizens that may be largely satisfied with their governments and ways of life, while still holding some degree of distrust or discontent regarding their leaders. And both have a rural versus urban disparity that can cause tension and economic inequality among the population. An individual family or even a whole office full of people in one of the countries may look and act very similarly to families or offices in the other country.
But what is different? In China, a far greater percentage of people may be involved in manufacturing than America. Many of China’s cities didn’t evolve from ports, transit centers, or river confluences hundreds of years ago, but are newly created urban centers inhabited by recent transplants from other locations. While citizens in the U.S. can openly express their dissatisfaction with their government through social activism in person or, especially, online, Twitter, Facebook, and YouTube are banned in China, and the press is controlled by the government. Their appearance might be very similar, but the two countries are very different societies.
Sociologist Gerhard Lenski Jr. (1924–2015) defined societies in terms of their technological sophistication. As a society advances, so does its use of technology. Societies with rudimentary technology depend on the fluctuations of their environments, while industrialized societies have more control over the impact of their surroundings and thus develop different cultural features. This distinction is so important that sociologists generally classify societies along a spectrum of their level of industrialization—from preindustrial to industrial to postindustrial.
### Preindustrial Societies
Before the Industrial Revolution and the widespread use of machines, societies were small, rural, and dependent largely on local resources. Economic production was limited to the amount of labor a human being could provide, and there were few specialized occupations. The very first occupation was that of hunter-gatherer.
### Hunter-Gatherer
Hunter-gatherer societies demonstrate the strongest dependence on the environment of the various types of preindustrial societies. As the basic structure of human society until about 10,000–12,000 years ago, these groups were based around kinship or tribes. Hunter-gatherers relied on their surroundings for survival—they hunted wild animals and foraged for uncultivated plants for food. When resources became scarce, the group moved to a new area to find sustenance, meaning they were nomadic. These societies were common until several hundred years ago, but today only a few hundred remain in existence, such as indigenous Australian tribes sometimes referred to as “aborigines,” or the Bambuti, a group of pygmy hunter-gatherers residing in the Democratic Republic of Congo. Hunter-gatherer groups are quickly disappearing as the world’s population explodes.
### Pastoral
Changing conditions and adaptations led some societies to rely on the domestication of animals where circumstances permitted. Roughly 7,500 years ago, human societies began to recognize their ability to tame and breed animals and to grow and cultivate their own plants. Pastoral societies, such as the Maasai villagers, rely on the domestication of animals as a resource for survival. Unlike earlier hunter-gatherers who depended entirely on existing resources to stay alive, pastoral groups were able to breed livestock for food, clothing, and transportation, and they created a surplus of goods. Herding, or pastoral, societies remained nomadic because they were forced to follow their animals to fresh feeding grounds. Around the time that pastoral societies emerged, specialized occupations began to develop, and societies commenced trading with local groups.
### Horticultural
Around the same time that pastoral societies were on the rise, another type of society developed, based on the newly developed capacity for people to grow and cultivate plants. Previously, the depletion of a region’s crops or water supply forced pastoral societies to relocate in search of food sources for their livestock. Horticultural societies formed in areas where rainfall and other conditions allowed them to grow stable crops. They were similar to hunter-gatherers in that they largely depended on the environment for survival, but since they didn’t have to abandon their location to follow resources, they were able to start permanent settlements. This created more stability and more material goods and became the basis for the first revolution in human survival.
### Agricultural
While pastoral and horticultural societies used small, temporary tools such as digging sticks or hoes, agricultural societies relied on permanent tools for survival. Around 3000 B.C.E., an explosion of new technology known as the Agricultural Revolution made farming possible—and profitable. Farmers learned to rotate the types of crops grown on their fields and to reuse waste products such as manure as fertilizer, which led to better harvests and bigger surpluses of food. New tools for digging and harvesting were made of metal, and this made them more effective and longer lasting. Human settlements grew into towns and cities, and particularly bountiful regions became centers of trade and commerce.
This is also the age in which people had the time and comfort to engage in more contemplative and thoughtful activities, such as music, poetry, and philosophy. This period became referred to as the “dawn of civilization” by some because of the development of leisure and humanities. Craftspeople were able to support themselves through the production of creative, decorative, or thought-provoking aesthetic objects and writings.
As resources became more plentiful, social classes became more divisive. Those who had more resources could afford better living and developed into a class of nobility. Difference in social standing between men and women increased. As cities expanded, ownership and preservation of resources became a pressing concern.
### Feudal
The ninth century gave rise to feudal societies. These societies contained a strict hierarchical system of power based around land ownership and protection. The nobility, known as lords, placed vassals in charge of pieces of land. In return for the resources that the land provided, vassals promised to fight for their lords.
These individual pieces of land, known as fiefdoms, were cultivated by the lower class. In return for maintaining the land, peasants were guaranteed a place to live and protection from outside enemies. Power was handed down through family lines, with peasant families serving lords for generations and generations. Ultimately, the social and economic system of feudalism failed and was replaced by capitalism and the technological advances of the industrial era.
### Industrial Society
In the eighteenth century, Europe experienced a dramatic rise in technological invention, ushering in an era known as the Industrial Revolution. What made this period remarkable was the number of new inventions that influenced people’s daily lives. Within a generation, tasks that had until this point required months of labor became achievable in a matter of days. Before the Industrial Revolution, work was largely person- or animal-based, and relied on human workers or horses to power mills and drive pumps. In 1782, James Watt and Matthew Boulton created a steam engine that could do the work of twelve horses by itself.
Steam power began appearing everywhere. Instead of paying artisans to painstakingly spin wool and weave it into cloth, people turned to textile mills that produced fabric quickly at a better price and often with better quality. Rather than planting and harvesting fields by hand, farmers were able to purchase mechanical seeders and threshing machines that caused agricultural productivity to soar. Products such as paper and glass became available to the average person, and the quality and accessibility of education and health care soared. Gas lights allowed increased visibility in the dark, and towns and cities developed a nightlife.
One of the results of increased productivity and technology was the rise of urban centers. Workers flocked to factories for jobs, and the populations of cities became increasingly diverse. The new generation became less preoccupied with maintaining family land and traditions and more focused on acquiring wealth and achieving upward mobility for themselves and their families. People wanted their children and their children’s children to continue to rise to the top, and as capitalism increased, so did social mobility.
It was during the eighteenth and nineteenth centuries of the Industrial Revolution that sociology was born. Life was changing quickly and the long-established traditions of the agricultural eras did not apply to life in the larger cities. Masses of people were moving to new environments and often found themselves faced with horrendous conditions of filth, overcrowding, and poverty. Social scientists emerged to study the relationship between the individual members of society and society as a whole.
It was during this time that power moved from the hands of the aristocracy and “old money” to business-savvy newcomers who amassed fortunes in their lifetimes. Families such as the Rockefellers and the Vanderbilts became the new power players and used their influence in business to control aspects of government as well. Eventually, concerns over the exploitation of workers led to the formation of labor unions and laws that set mandatory conditions for employees. Although the introduction of new technology at the end of the nineteenth century ended the industrial age, much of our social structure and social ideas—like family, childhood, and time standardization—have a basis in industrial society.
### Postindustrial Society
Information societies, sometimes known as postindustrial or digital societies, are a recent development. Unlike industrial societies that are rooted in the production of material goods, information societies are based on the production of information and services.
Digital technology is the steam engine of information societies, and computer moguls such as Steve Jobs and Bill Gates are its John D. Rockefellers and Cornelius Vanderbilts. Since the economy of information societies is driven by knowledge and not material goods, power lies with those in charge of storing and distributing information. Members of a postindustrial society are likely to be employed as sellers of services—software programmers or business consultants, for example—instead of producers of goods. Social classes are divided by access to education, since without technical skills, people in an information society lack the means for success.
### Summary
Societies are classified according to their development and use of technology. For most of human history, people lived in preindustrial societies characterized by limited technology and low production of goods. After the Industrial Revolution, many societies based their economies around mechanized labor, leading to greater profits and a trend toward greater social mobility. At the turn of the new millennium, a new type of society emerged. This postindustrial, or information, society is built on digital technology and nonmaterial goods.
### Section Quiz
### Short Answer
### Further Research
The Maasai are a modern pastoral society with an economy largely structured around herds of cattle. Read more about the Maasai people and see pictures of their daily lives here .
### References
Immigration and Refugee Board of Canada. 2005. “Israel: Treatment of Bedouin, Including Incidents of Harassment, Discrimination or Attacks; State Protection (January 2003–July 2005)”, Refworld, July 29. Retrieved February 10, 2012 (http://www.unhcr.org/refworld/docid/440ed71325.html).
Kjeilen, Tore. “Bedouin.” Looklex.com. Retrieved February 17, 2012 (http://looklex.com/index.htm).
University of Michigan. n.d. "The Curse of Oil in Ogoniland". Retrieved January 2, 2015 (http://www.umich.edu/~snre492/cases_03-04/Ogoni/Ogoni_case_study.htm). |
# Society and Social Interaction
## Theoretical Perspectives on Society
While many sociologists have contributed to research on society and social interaction, three thinkers form the base of modern-day perspectives. Émile Durkheim, Karl Marx, and Max Weber developed different theoretical approaches to help us understand the way societies function.
### Émile Durkheim and Functionalism
As a functionalist, Émile Durkheim’s (1858–1917) perspective on society stressed the necessary interconnectivity of all of its elements. To Durkheim, society was greater than the sum of its parts. He asserted that individual behavior was not the same as collective behavior and that studying collective behavior was quite different from studying an individual’s actions. Durkheim called the communal beliefs, morals, and attitudes of a society the collective conscience. In his quest to understand what causes individuals to act in similar and predictable ways, he wrote, “If I do not submit to the conventions of society, if in my dress I do not conform to the customs observed in my country and in my class, the ridicule I provoke, the social isolation in which I am kept, produce, although in an attenuated form, the same effects as punishment” (Durkheim 1895). Durkheim also believed that social integration, or the strength of ties that people have to their social groups, was a key factor in social life.
Following the ideas of Comte and Spencer, Durkheim likened society to a living organism, in which each organ plays a necessary role in keeping the being alive. Even the socially deviant members of society are necessary, Durkheim argued, as punishments for deviance affirm established cultural values and norms. That is, punishment of a crime reaffirms our moral consciousness. “A crime is a crime because we condemn it,” Durkheim wrote in 1893. “An act offends the common consciousness not because it is criminal, but it is criminal because it offends that consciousness” (Durkheim 1893). Durkheim called these elements of society “social facts.” By this, he meant that social forces were to be considered real and existed outside the individual.
As an observer of his social world, Durkheim was not entirely satisfied with the direction of society in his day. His primary concern was that the cultural glue that held society together was failing, and people were becoming more divided. In his book The Division of Labor in Society (1893), Durkheim argued that as society grew more complex, social order made the transition from mechanical to organic.
Preindustrial societies, Durkheim explained, were held together by mechanical solidarity, a type of social order maintained by the collective conscience of a culture. Societies with mechanical solidarity act in a mechanical fashion; things are done mostly because they have always been done that way. This type of thinking was common in preindustrial societies where strong bonds of kinship and a low division of labor created shared morals and values among people, such as hunter-gatherer groups. When people tend to do the same type of work, Durkheim argued, they tend to think and act alike.
In industrial societies, mechanical solidarity is replaced with organic solidarity, which is social order based around an acceptance of economic and social differences. In capitalist societies, Durkheim wrote, division of labor becomes so specialized that everyone is doing different things. Instead of punishing members of a society for failure to assimilate to common values, organic solidarity allows people with differing values to coexist. Laws exist as formalized morals and are based on restitution rather than revenge.
While the transition from mechanical to organic solidarity is, in the long run, advantageous for a society, Durkheim noted that it can be a time of chaos and “normlessness.” One of the outcomes of the transition is something he called social anomie. Anomie—literally, “without law”—is a situation in which society no longer has the support of a firm collective consciousness. Collective norms are weakened. People, while more interdependent to accomplish complex tasks, are also alienated from each other. Anomie is experienced in times of social uncertainty, such as war or a great upturn or downturn in the economy. As societies reach an advanced stage of organic solidarity, they avoid anomie by redeveloping a set of shared norms. According to Durkheim, once a society achieves organic solidarity, it has finished its development.
### Karl Marx and Conflict Theory
Karl Marx (1818–1883) is certainly among the most significant social thinkers in recent history. While there are many critics of his work, it is still widely respected and influential. For Marx, society’s constructions were predicated upon the idea of “base and superstructure.” This term refers to the idea that a society’s economic character forms its base, upon which rests the culture and social institutions, the superstructure. For Marx, it is the base (economy) that determines what a society will be like.
Additionally, Marx saw conflict in society as the primary means of change. Economically, he saw conflict existing between the owners of the means of production—the bourgeoisie—and the laborers, called the proletariat.
Marx maintained that these conflicts appeared consistently throughout history during times of social revolution. These revolutions or “class antagonisms” as he called them, were a result of one class dominating another. Most recently, with the end of feudalism, a new revolutionary class he called the bourgeoisie dominated the proletariat laborers. The bourgeoisie were revolutionary in the sense that they represented a radical change in the structure of society. In Marx’s words, “Society as a whole is more and more splitting up into two great hostile camps, into two great classes directly facing each other—Bourgeoisie and Proletariat” (Marx and Engels 1848).
In the mid-nineteenth century, as industrialization was booming, industrial employers, the "owners of the means of production" in Marx's terms, became more and more exploitative toward the working class. The large manufacturers of steel were particularly ruthless, and their facilities became popularly dubbed “satanic mills” based on a poem by William Blake. Marx’s colleague and friend, Frederick Engels, wrote The Condition of the Working-Class in England in 1844, which described in detail the horrid conditions.
Add to that the long hours, the use of child labor, and exposure to extreme conditions of heat, cold, and toxic chemicals, and it is no wonder that Marx and Engels referred to capitalism, which is a way of organizing an economy so that the things that are used to make and transport products (such as land, oil, factories, ships, etc.) are owned by individual people and companies rather than by the government, as the “dictatorship of the bourgeoisie.”
For Marx, what we do defines who we are. In historical terms, in spite of the persistent nature of one class dominating another, some element of humanity existed. There was at least some connection between the worker and the product, augmented by the natural conditions of seasons and the rise and fall of the sun, such as we see in an agricultural society. But with the bourgeoisie revolution and the rise of industry and capitalism, the worker now worked for wages alone. His relationship to his efforts was no longer of a human nature, but based on artificial conditions.
Marx described modern society in terms of alienation. Alienation refers to the condition in which the individual is isolated and divorced from his or her society, work, or the sense of self. Marx defined four specific types of alienation.
Alienation from the product of one’s labor. An industrial worker does not have the opportunity to relate to the product he labors on. Instead of training for years as a watchmaker, an unskilled worker can get a job at a watch factory pressing buttons to seal pieces together. The worker does not care if he is making watches or cars, simply that the job exists. In the same way, a worker may not even know or care what product to which he is contributing. A worker on a Ford assembly line may spend all day installing windows on car doors without ever seeing the rest of the car. A cannery worker can spend a lifetime cleaning fish without ever knowing what product they are used for.
Alienation from the process of one’s labor. A worker does not control the conditions of her job because she does not own the means of production. If a person is hired to work in a fast food restaurant, she is expected to make the food the way she is taught. All ingredients must be combined in a particular order and in a particular quantity; there is no room for creativity or change. An employee at Burger King cannot decide to change the spices used on the fries in the same way that an employee on a Ford assembly line cannot decide to place a car’s headlights in a different position. Everything is decided by the bourgeoisie who then dictate orders to the laborers.
Alienation from others. Workers compete, rather than cooperate. Employees vie for time slots, bonuses, and job security. Even when a worker clocks out at night and goes home, the competition does not end. As Marx commented in The Communist Manifesto (1848), “No sooner is the exploitation of the laborer by the manufacturer, so far at an end, that he receives his wages in cash, than he is set upon by the other portion of the bourgeoisie, the landlord, the shopkeeper, the pawnbroker.”
Alienation from one’s self. A final outcome of industrialization is a loss of connectivity between a worker and her occupation. Because there is nothing that ties a worker to her labor, there is no longer a sense of self. Instead of being able to take pride in an identity such as being a watchmaker, automobile builder, or chef, a person is simply a cog in the machine.
Taken as a whole, then, alienation in modern society means that an individual has no control over his life. Even in feudal societies, a person controlled the manner of his labor as to when and how it was carried out. But why, then, does the modern working class not rise up and rebel? (Indeed, Marx predicted that this would be the ultimate outcome and collapse of capitalism.)
Another idea that Marx developed is the concept of false consciousness. False consciousness is a condition in which the beliefs, ideals, or ideology of a person are not in the person’s own best interest. In fact, it is the ideology of the dominant class (here, the bourgeoisie capitalists) that is imposed upon the proletariat. Ideas such as the emphasis of competition over cooperation, or of hard work being its own reward, clearly benefit the owners of industry. Therefore, workers are less likely to question their place in society and assume individual responsibility for existing conditions.
In order for society to overcome false consciousness, Marx proposed that it be replaced with class consciousness, the awareness of one’s rank in society. Instead of existing as a “class in itself,” the proletariat must become a “class for itself” in order to produce social change (Marx and Engels 1848), meaning that instead of just being an inert strata of society, the class could become an advocate for social improvements. Only once society entered this state of political consciousness would it be ready for a social revolution.
### Max Weber and Symbolic Interactionism
While Karl Marx may be one of the best-known thinkers of the nineteenth century, Max Weber is certainly one of the greatest influences in the field of sociology. Like the other social thinkers discussed here, he was concerned with the important changes taking place in Western society with the advent of industrialization. And, like Marx and Durkheim, he feared that industrialization would have negative effects on individuals.
Weber’s primary focus on the structure of society lay in the elements of class, status, and power. Similar to Marx, Weber saw class as economically determined. Society, he believed, was split between owners and laborers. Status, on the other hand, was based on noneconomic factors such as education, kinship, and religion. Both status and class determined an individual’s power, or influence over ideas. Unlike Marx, Weber believed that these ideas formed the base of society.
Weber’s analysis of modern society centered on the concept of rationalization. A rational society is one built around logic and efficiency rather than morality or tradition. To Weber, capitalism is entirely rational. Although this leads to efficiency and merit-based success, it can have negative effects when taken to the extreme. In some modern societies, this is seen when rigid routines and strict design lead to a mechanized work environment and a focus on producing identical products in every location.
Another example of the extreme conditions of rationality can be found in Charlie Chaplin’s classic film Modern Times (1936). Chaplin’s character performs a routine task to the point where he cannot stop his motions even while away from the job. Indeed, today we even have a recognized medical condition that results from such tasks, known as “repetitive stress syndrome.”
Weber was also unlike his predecessors in that he was more interested in how individuals experienced societal divisions than in the divisions themselves. The symbolic interactionism theory, the third of the three most recognized theories of sociology, is based on Weber’s early ideas that emphasize the viewpoint of the individual and how that individual relates to society. For Weber, the culmination of industrialization, rationalization, and the like results in what he referred to as the iron cage, in which the individual is trapped by institutions and bureaucracy. This leads to a sense of “disenchantment of the world,” a phrase Weber used to describe the final condition of humanity. Indeed a dark prediction, but one that has, at least to some degree, been borne out (Gerth and Mills 1918). In a rationalized, modern society, we have supermarkets instead of family-owned stores. We have chain restaurants instead of local eateries. Superstores that offer a multitude of merchandise have replaced independent businesses that focused on one product line, such as hardware, groceries, automotive repair, or clothing. Shopping malls offer retail stores, restaurants, fitness centers, even condominiums. This change may be rational, but is it universally desirable?
### Summary
Émile Durkheim believed that as societies advance, they make the transition from mechanical to organic solidarity. For Karl Marx, society exists in terms of class conflict. With the rise of capitalism, workers become alienated from themselves and others in society. Sociologist Max Weber noted that the rationalization of society can be taken to unhealthy extremes.
### Section Quiz
### Short Answer
### Further Research
One of the most influential pieces of writing in modern history was Karl Marx and Friedrich Engels’ The Communist Manifesto. Visit this site to read the original document that spurred revolutions around the world.
### References
Durkheim, Émile. 1960 [1893]. The Division of Labor in Society. Translated by George Simpson. New York: Free Press.
Durkheim, Émile. 1982 [1895]. . Translated by W. D. Halls. New York: Free Press.
Engels, Friedrich. 1892. The Condition of the Working-Class in England in 1844. London: Swan Sonnenschein & Co.
Geographia. 1998. “The Bedouin Way.” Geograpia.com. Retrieved January 4, 2012 (http://www.geographia.com/egypt/sinai/bedouin02.htm).
Gerth, H. H., and C. Wright Mills. 1946. From Max Weber: Essays in Sociology. New York: Oxford University Press.
Marx, Karl and Friedrich Engels. 1998 [1848]. The Communist Manifesto. New York: Penguin Group. |
# Society and Social Interaction
## Social Constructions of Reality
Until now, we’ve primarily discussed the differences between societies. Rather than discuss their problems and configurations, we’ll now explore how society came to be and how sociologists view social interaction.
In 1966 sociologists Peter Berger and Thomas Luckmann wrote a book called The Social Construction of Reality. In it, they argued that society is created by humans and human interaction, which they call habitualization. Habitualization describes how “any action that is repeated frequently becomes cast into a pattern, which can then be … performed again in the future in the same manner and with the same economical effort” (Berger and Luckmann 1966). Not only do we construct our own society but we also accept it as it is because others have created it before us. Society is, in fact, “habit.”
For example, your school exists as a school and not just as a building because you and others agree that it is a school. If your school is older than you are, it was created by the agreement of others before you. In a sense, it exists by consensus, both prior and current. This is an example of the process of institutionalization, the act of implanting a convention or norm into society. Bear in mind that the institution, while socially constructed, is still quite real.
Another way of looking at this concept is through W.I. Thomas’s notable Thomas theorem which states, “If men define situations as real, they are real in their consequences” (Thomas and Thomas 1928). That is, people’s behavior can be determined by their subjective construction of reality rather than by objective reality. For example, a teenager who is repeatedly given a label—overachiever, player, bum—might live up to the term even though it initially wasn’t a part of his character.
Like Berger and Luckmann in their description of habitualization, Thomas states that our moral codes and social norms are created by “successive definitions of the situation.” This concept is defined by sociologist Robert K. Merton as a self-fulfilling prophecy. Merton explains that with a self-fulfilling prophecy, even a false idea can become true if it is acted upon. One example he gives is of a “bank run.” Say for some reason, a number of people falsely fear that their bank is soon to be bankrupt. Because of this false notion, people run to their bank and demand all of their cash at once. As banks rarely, if ever, have that much money on hand, the bank does indeed run out of money, fulfilling the customers’ prophecy. Here, reality is constructed by an idea.
Symbolic interactionists offer another lens through which to analyze the social construction of reality. With a theoretical perspective focused on the symbols (like language, gestures, and artifacts) that people use to interact, this approach is interested in how people interpret those symbols in daily interactions. Interactionists also recognize that language and body language reflect our values. One has only to learn a foreign tongue to know that not every English word can be easily translated into another language. The same is true for gestures. While Americans might recognize a “thumbs up” as meaning “great,” in Germany it would mean “one” and in Japan it would mean “five.” Thus, our construction of reality is influenced by our symbolic interactions.
### Roles and Status
As you can imagine, people employ many types of behaviors in day-to-day life. Roles are patterns of behavior that we recognize in each other that are representative of a person’s social status. Currently, while reading this text, you are playing the role of a student. However, you also play other roles in your life, such as “daughter,” “neighbor,” or “employee.” These various roles are each associated with a different status.
Sociologists use the term status to describe the responsibilities and benefits that a person experiences according to their rank and role in society. Some statuses are ascribed—those you do not select, such as son, elderly person, or female. Others, called achieved statuses, are obtained by choice, such as a high school dropout, self-made millionaire, or nurse. As a daughter or son, you occupy a different status than as a neighbor or employee. One person can be associated with a multitude of roles and statuses. Even a single status such as “student” has a complex role-set, or array of roles, attached to it (Merton 1957). It is important to note that status refers to the rank in social hierarchy, while role is the behavior expected of a person holding a certain status.
If too much is required of a single role, individuals can experience role strain. Consider the duties of a parent: cooking, cleaning, driving, problem-solving, acting as a source of moral guidance—the list goes on. Similarly, a person can experience role conflict when one or more roles are contradictory. A parent who also has a full-time career can experience role conflict on a daily basis. When there is a deadline at the office but a sick child needs to be picked up from school, which comes first? When you are working toward a promotion but your children want you to come to their school play, which do you choose? Being a college student can conflict with being an employee, being an athlete, or even being a friend. Our roles in life have a great effect on our decisions and who we become.
### Presentation of Self
Of course, it is impossible to look inside a person’s head and study what role they are playing. All we can observe is behavior, or role performance. Role performance is how a person expresses his or her role. Sociologist Erving Goffman presented the idea that a person is like an actor on a stage. Calling his theory dramaturgy, Goffman believed that we use “impression management” to present ourselves to others as we hope to be perceived. Each situation is a new scene, and individuals perform different roles depending on who is present (Goffman 1959). Think about the way you behave around your coworkers versus the way you behave around your grandparents versus the way you behave with a blind date. Even if you’re not consciously trying to alter your personality, your grandparents, coworkers, and date probably see different sides of you.
As in a play, the setting matters as well. If you have a group of friends over to your house for dinner, you are playing the role of a host. It is agreed upon that you will provide food and seating and probably be stuck with a lot of the cleanup at the end of the night. Similarly, your friends are playing the roles of guests, and they are expected to respect your property and any rules you may set forth (“Don’t leave the door open or the cat will get out.”). In any scene, there needs to be a shared reality between players. In this case, if you view yourself as a guest and others view you as a host, there are likely to be problems.
Impression management is a critical component of symbolic interactionism. For example, a judge in a courtroom has many “props” to create an impression of fairness, gravity, and control—like their robe and gavel. Those entering the courtroom are expected to adhere to the scene being set. Just imagine the “impression” that can be made by how a person dresses. This is the reason that attorneys frequently select the hairstyle and apparel for witnesses and defendants in courtroom proceedings.
Goffman’s dramaturgy ideas expand on the ideas of Charles Cooley and the looking-glass self. According to Cooley, we base our image on what we think other people see (Cooley 1902). We imagine how we must appear to others, then react to this speculation. We don certain clothes, prepare our hair in a particular manner, wear makeup, use cologne, and the like—all with the notion that our presentation of ourselves is going to affect how others perceive us. We expect a certain reaction, and, if lucky, we get the one we desire and feel good about it. But more than that, Cooley believed that our sense of self is based upon this idea: we imagine how we look to others, draw conclusions based upon their reactions to us, and then we develop our personal sense of self. In other words, people’s reactions to us are like a mirror in which we are reflected.
### Summary
Society is based on the social construction of reality. How we define society influences how society actually is. Likewise, how we see other people influences their actions as well as our actions toward them. We all take on various roles throughout our lives, and our social interactions depend on what types of roles we assume, who we assume them with, and the scene where interaction takes place.
### Section Quiz
### Short Answer
### Further Research
TV Tropes is a website where users identify concepts that are commonly used in literature, film, and other media. Although its tone is for the most part humorous, the site provides a good jumping-off point for research. Browse the list of examples under the entry of “self-fulfilling prophecy.” Pay careful attention to the real-life examples. Are there ones that surprised you or that you don’t agree with?
### References
Berger, P. L., and T. Luckmann. 1966. The Social Construction of Reality: A Treatise in the Sociology of Knowledge. Garden City, NY: Anchor Books.
Cooley, Charles H. 1902. Human Nature and the Social Order. New York: Scribner's.
Goffman, Erving. 1959. The Presentation of Self In Everyday Life. New York: Doubleday.
Merton, Robert K. 1957. “The Role-Set: Problems in Sociological Theory.” British Journal of Sociology 8(2):110–113.
Thomas, W.I., and D.S. Thomas. 1928. The Child in America: Behavior Problems and Programs. New York: Knopf. |
# Socialization
## Introduction
When Noel was fifteen, they saw a flyer about joining the volunteer ambulance corps. Noel was intrigued: They had an interest in pursuing medicine, and liked volunteering, but ambulance work seemed like something for older people with professional training. At the information session, Noel learned that junior members of the ambulance corps could help with supplies and communications, and were allowed to ride on ambulance calls to assist the Emergency Medical Technicians (EMTs). Noel was thrilled and signed up right away.
Noel was amazed by how confidently the EMTs—some just a few years older than Noel—made consequential decisions. The EMTs relied heavily on their training and guidelines, but they did so quickly. And upon arriving at the hospital with a patient, Noel was similarly impacted by the efficiency of the nurses, doctors, and other staff. Noel developed a deep level of respect for that level of decisiveness and the expertise it required.
Over their college years, Noel found themselves drawn toward the more strategic aspects of medicine, and pursued a degree in healthcare administration. Meanwhile, they did get an EMT certification and joined the college emergency services team; later on, while in grad school, Noel was a part-time professional EMT in a small city. With good grades and varied experience, Noel was recruited into a great job several states away.
After interning in an urban hospital and spending years as an EMT, Noel had come to expect a degree of urgency in medicine. Hospital administration was certainly not an ambulance facility, but the slow pace of Noel's job was agonizing. Every inventory list, bill of lading, email reply, and even meeting schedule went through at several people for approval. Noel enjoyed the job, but was used to working more quickly.
One day, Noel was looking over an equipment bill and noticed a serious error that no one else had caught. Nearly $250,000 in overpayment was about to be paid to a supplier. Noel immediately called the accounting department. No answer. Then they sent a group Slack message and fired off an email to their boss and a few other people involved with the billing and payment process. Noel was about to head across the building to address the issue in person, but finally a message popped up: "Good eye, Noel. We'll hold this payment until we clear things up."
Toward the end of the day, Noel received a message from their manager, Tracy, asking them to stop by. Tracy's office was crowded with three other people, including the director of accounting. Expecting to be congratulated, Noel was shocked when Tracy began outlining all the things Noel had done wrong.
"Your frantic messaging and over-the-top language was incredibly disruptive...almost irresponsible," Tracy said.
"But I was right," Noel replied in a louder voice than they intended.
"Right or wrong," Tracy said, "you should have told your contact in accounting and waited to see the outcome. Instead, you panicked."
"I did call accounting, but when I didn't hear back, I needed to take the next step. I wasn't panicking; I was being decisive." As Noel said this, they were thinking of all the times they had saved someone's life by making good decisions.
Tracy sighed. "Decisiveness isn't good when it's disruptive. You caused five people to drop everything and start investigating. A few thought it was their fault." Noel started to protest but Tracy shook her head. "I understand that you are coming from a faster-paced environment, and I can tell you've been frustrated. But if you're going to work here, you're going to have to work within our culture. Instead of pushing against how we do things, try to appreciate them. Otherwise, no one will be happy, least of all you." Tracy told Noel to take the evening to think about it and come back for a talk the next morning.
Who was correct in this situation? Noel saved the hospital hundreds of thousands of dollars, or at least the hours of managing the refund process. Tracy, with broader responsibilities, was considering the long-term impacts of Noel's style, and how Noel, as a talented member of the team, will function within the team.
Tracy was concerned about the organization’s culture. Culture, as discussed in the chapter on the topic, is the shared beliefs, values and practices of a group. Countries, societies, religions, and sports teams all have culture, and companies do, too. When you interview for a job, it will likely come up. Researchers who study organizations find that when workers aren't properly incorporated into the corporate culture, they begin a cycle of mutual disappointment, where workers are likely to reject company values and ultimately leave or be fired (Cebollero 2019).
Why didn't Noel enjoy the job, and why were people put off by Noel's approach? For the most part, Noel wasn't prepared for the pacing and style; their previous experience was in opposition to the culture of the hospital. Company culture is easier to learn if someone is predisposed to it, while others might need time to unlearn past behaviors (Schein 1988). Experts indicate that the responsibility for such adaptation is shared between the new employee and the company.
How could Noel have learned, and what could Tracy have done to help? Company culture is learned the same way that other types of culture are learned: through observing and adapting to the norms and values, understanding and applying beliefs, and, in general, seeking to be productive as a member of the group. Just like a child learns how to behave during a play-date or school day, people learn to be productive partners through an ongoing process called socialization.
Socialization is the process through which people are taught to be proficient members of a society. It describes the ways that people come to understand societal norms and expectations, to accept society’s beliefs, and to be aware of societal values. Socialization is not the same as socializing (interacting with others, like family and friends); to be precise, it is a sociological process that occurs through socializing.
While Noel's story is about a relatively advanced stage of life, socialization is crucial for early childhood. Even the most basic of human activities are learned. Learning to crawl and then walk are major milestones, but as any parent, guardian, or family member of a toddler knows, other minor accomplishments can be life-altering for the child: climbing stairs, safely getting out of bed, sitting in a regular chair, and drinking from a regular cup. Likewise, family behaviors and values must be learned, sometimes through observation and sometimes through active instruction.
In the following sections, we will examine the importance of the complex process of socialization and how it takes place through interaction with many individuals, groups, and social institutions. We will explore how socialization is not only critical to children as they develop but how it is also a lifelong process through which we become prepared for new social environments and expectations in every stage of our lives. But first, we will turn to scholarship about self-development, the process of coming to recognize a sense of self, a “self” that is then able to be socialized.
### References
Cebollero, Chris. 2019. "Organizational Socialization: What Businesses Often Forget When Onboarding New Employees." Forbes Coaches Council Blog. February 26, 2019. (https://www.forbes.com/sites/forbescoachescouncil/2019/02/26/organizational-socialization-what-businesses-often-forget-when-onboarding-new-employees/?sh=6db8c89e4faf)
Schein, Edgar H. 1988. "Organizational Socialization and the Profession of Management." MIT Sloan Review. October 15 1988. (https://sloanreview.mit.edu/article/organizational-socialization-and-the-profession-of-management/) |
# Socialization
## Theories of Self-Development
When we are born, we have a genetic makeup and biological traits. However, who we are as human beings develops through social interaction. Many scholars, both in the fields of psychology and in sociology, have described the process of self-development as a precursor to understanding how that “self” becomes socialized.
### Psychological Perspectives on Self-Development
Psychoanalyst Sigmund Freud (1856–1939) was one of the most influential modern scientists to put forth a theory about how people develop a sense of self. He divided the maturation process into stages, and posited that people’s self-development is closely linked to their early stages of development.
According to Freud, failure to properly engage in or disengage from a specific stage results in emotional and psychological consequences throughout adulthood.
Psychologist Erik Erikson (1902–1994) created a theory of personality development based, in part, on the work of Freud. However, Erikson believed the personality continued to change over time and was never truly finished. His theory includes eight stages of development, beginning with birth and ending with death. According to Erikson, people move through these stages throughout their lives. In contrast to Freud’s focus on psychosexual stages and basic human urges, Erikson’s view of self-development gave credit to more social aspects, like the way we negotiate between our own base desires and what is socially accepted (Erikson 1982).
Jean Piaget (1896–1980) was a psychologist who focused on the role of social interactions in child development. He recognized that the development of self evolved through a negotiation between the world as it exists in one’s mind and the world that exists as it is experienced socially (Piaget 1954). All three of these thinkers have contributed to our modern understanding of self-development.
Psychologist Harry Harlow (1905–1981) is known for studying the role of social relationships in human development by observing the impact of isolation and maternal deprivation on the development of young rhesus monkeys. Harlow found that the monkeys, when subjected to isolation, exhibit disturbed behaviors, including self-harm, and had a difficult time integrating when reconnected with other monkeys. Harlow also introduced isolated monkeys to simulated surrogate mothers, some that were covered in cloth while others were constructed out of wire. Based on observed behaviors, the young monkeys appeared to develop attachment with the cloth mothers and lean on them for emotional support. More than seven decades later, this experiment continues to inform the research of psychologists, sociologists, and those interested in human development.
### Sociological Theories of Self-Development
One of the pioneering contributors to sociological perspectives was Charles Cooley (1864–1929). He asserted that people’s self understanding is constructed, in part, by their perception of how others view them—a process termed “the looking glass self” (Cooley 1902).
Later, George Herbert Mead (1863–1931) studied the self, a person’s distinct identity that is developed through social interaction. In order to engage in this process of “self,” an individual has to be able to view him or herself through the eyes of others. That’s not an ability that we are born with (Mead 1934). Through socialization we learn to put ourselves in someone else's shoes and look at the world through their perspective. This assists us in becoming self-aware, as we look at ourselves from the perspective of the "other."
How do we go from being newborns to being humans with “selves?” Mead believed that there is a specific path of development that all people go through. During the preparatory stage, children are only capable of imitation: they have no ability to imagine how others see things. They copy the actions of people with whom they regularly interact, such as their caregivers. This is followed by the play stage, during which children begin to take on the role that one other person might have. Thus, children might try on a parent’s point of view by acting out “grownup” behavior, like playing dress-up and acting out the “mom” role, or talking on a toy telephone the way they see adults do.
During the game stage, children learn to consider several roles at the same time and how those roles interact with each other. They learn to understand interactions involving different people with a variety of purposes. For example, a child at this stage is likely to be aware of the different responsibilities of people in a restaurant who together make for a smooth dining experience (someone seats you, another takes your order, someone else cooks the food, while yet another clears away dirty dishes).
Finally, children develop, understand, and learn the idea of the generalized other, the common behavioral expectations of general society. By this stage of development, an individual is able to imagine how he or she is viewed by one or many others—and thus, from a sociological perspective, to have a “self” (Mead 1934; Mead 1964).
### Kohlberg’s Theory of Moral Development
Moral development is an important part of the socialization process. The term refers to the way people learn what society considers to be “good” and “bad,” which is important for a smoothly functioning society. Moral development prevents people from acting on unchecked urges, instead considering what is right for society and good for others. Lawrence Kohlberg (1927–1987) was interested in how people learn to decide what is right and what is wrong. To understand this topic, he developed a theory of moral development that includes three levels: preconventional, conventional, and postconventional.
In the preconventional stage, young children, who lack a higher level of cognitive ability, experience the world around them only through their senses. It isn’t until the teen years that the conventional theory develops, when youngsters become increasingly aware of others’ feelings and take those into consideration when determining what’s “good” and “bad.” The final stage, called postconventional, is when people begin to think of morality in abstract terms, such as Americans believing that everyone has the right to life, liberty, and the pursuit of happiness. At this stage, people also recognize that legality and morality do not always match up evenly (Kohlberg 1981). When hundreds of thousands of Egyptians turned out in 2011 to protest government corruption, they were using postconventional morality. They understood that although their government was legal, it was not morally correct.
### Gilligan’s Theory of Moral Development and Gender
Another sociologist, Carol Gilligan (1936–), recognized that Kohlberg’s theory might show gender bias since his research was only conducted on male subjects. Would females study subjects have responded differently? Would a female social scientist notice different patterns when analyzing the research? To answer the first question, she set out to study differences between how boys and girls developed morality. Gilligan’s research suggested that boys and girls do have different understandings of morality. Boys appeared to have a justice perspective, by placing emphasis on rules and laws. Girls, on the other hand, seem to have a care and responsibility perspective; they consider people’s reasons behind behavior that seems morally wrong.
While Gilligan is correct that Kohlberg’s research should have included both male and female subjects, her study has been scientifically discredited due to its small sample size. The results Gilligan noted in this study also have not been replicated by subsequent researchers. The differences Gilligan observed were not an issue of the development of morality, but an issue of socialization. Differences in behavior between males and females is the result of gender socialization that teaches boys and girls societal norms and behaviors expected of them based on their sex (see “What a Pretty Little Lady”).
Gilligan also recognized that Kohlberg’s theory rested on the assumption that the justice perspective was the right, or better, perspective. Gilligan, in contrast, theorized that neither perspective was “better”: the two norms of justice served different purposes. Ultimately, she explained that boys are socialized for a work environment where rules make operations run smoothly, while girls are socialized for a home environment where flexibility allows for harmony in caretaking and nurturing (Gilligan 1982; Gilligan 1990).
### Summary
Psychological theories of self-development have been broadened by sociologists who explicitly study the role of society and social interaction in self-development. Charles Cooley and George Mead both contributed significantly to the sociological understanding of the development of self. Lawrence Kohlberg and Carol Gilligan developed their ideas further and researched how our sense of morality develops. Gilligan added the dimension of gender differences to Kohlberg’s theory.
### Section Quiz
### Short Answer
### Further Research
Lawrence Kohlberg was most famous for his research using moral dilemmas. He presented dilemmas to boys and asked them how they would judge the situations. Visit this site to read about Kohlberg’s most famous moral dilemma, known as the Heinz dilemma..
### References
Cooley, Charles Horton. 1902. “The Looking Glass Self.” Pp. 179–185 in Human Nature and Social Order. New York: Scribner’s.
Bloom, Lisa. 2011. “How to Talk to Little Girls.” Huffington Post, June 22. Retrieved January 12, 2012 (http://www.huffingtonpost.com/lisa-bloom/how-to-talk-to-little-gir_b_882510.html).
Erikson, Erik. 1982. The Lifecycle Completed: A Review. New York: Norton.
Durkheim, Émile. 2011 [1897]. Suicide. London: Routledge.
Freud, Sigmund. 2000 [1904]. Three Essays on Theories of Sexuality. New York: Basic Books.
Gilligan, Carol. 1982. In a Different Voice: Psychological Theory and Women’s Development. Cambridge, MA: Harvard University Press.
Gilligan, Carol. 1990. Making Connections: The Relational Worlds of Adolescent Girls at Emma Willard School. Cambridge, MA: Harvard University Press.
Haney, Phil. 2011. “Genderless Preschool in Sweden.” Baby & Kids, June 28. Retrieved January 12, 2012 (http://www.neatorama.com/2011/06/28/genderless-preschool-in-sweden/).
Harlow, Harry F. 1971. Learning to Love. New York: Ballantine.
Harlow, Harry F., and Margaret Kuenne Harlow. 1962. “Social Deprivation in Monkeys.” Scientific American November:137–46.
Kohlberg, Lawrence. 1981. The Psychology of Moral Development: The Nature and Validity of Moral Stages. New York: Harper and Row.
Mead, George H. 1934. Mind, Self and Society, edited by C. W. Morris. Chicago: University of Chicago Press.
Mead, George H. 1964. On Social Psychology, edited by A. Strauss. Chicago: University of Chicago Press.
Piaget, Jean. 1954. The Construction of Reality in the Child. New York: Basic Books. |
# Socialization
## Why Socialization Matters
Socialization is critical both to individuals and to the societies in which they live. It illustrates how completely intertwined human beings and their social worlds are. First, it is through teaching culture to new members that a society perpetuates itself. If new generations of a society don’t learn its way of life, it ceases to exist. Whatever is distinctive about a culture must be transmitted to those who join it in order for a society to survive. For U.S. culture to continue, for example, children in the United States must learn about cultural values related to democracy: they have to learn the norms of voting, as well as how to use material objects such as voting machines. They may learn these through watching their parents or guardians vote, or, in some schools, by using real machines in student government elections. Of course, some would argue that it’s just as important in U.S. culture for the younger generation to learn the etiquette of eating in a restaurant or the rituals of tailgate parties at football games. In fact, there are many ideas and objects that people in the United States teach children about in hopes of keeping the society’s way of life going through another generation.
Socialization is just as essential to us as individuals. Social interaction provides the means via which we gradually become able to see ourselves through the eyes of others, and how we learn who we are and how we fit into the world around us. In addition, to function successfully in society, we have to learn the basics of both material and nonmaterial culture, everything from how to dress ourselves to what’s suitable attire for a specific occasion; from when we sleep to what we sleep on; and from what’s considered appropriate to eat for dinner to how to use the stove to prepare it. Most importantly, we have to learn language—whether it’s the dominant language or one common in a subculture, whether it’s verbal or through signs—in order to communicate and to think. Without socialization we literally have no self.
### Nature versus Nurture
Some experts assert that who we are is a result of nurture—the relationships and caring that surround us. Others argue that who we are is based entirely in genetics. According to this belief, our temperaments, interests, and talents are set before birth. From this perspective, then, who we are depends on nature.
One way researchers attempt to measure the impact of nature is by studying twins. Some studies have followed identical twins who were raised separately. The pairs shared the same genetics but in some cases were socialized in different ways. Instances of this type of situation are rare, but studying the degree to which identical twins raised apart are the same and different can give researchers insight into the way our temperaments, preferences, and abilities are shaped by our genetic makeup versus our social environment.
For example, in 1968, twin girls were put up for adoption, separated from each other, and raised in different households. The adoptive parents, and certainly the babies, did not realize the girls were one of five pairs of twins who were made subjects of a scientific study (Flam 2007).
In 2003, the two women, then age thirty-five, were reunited. Elyse Schein and Paula Bernstein sat together in awe, feeling like they were looking into a mirror. Not only did they look alike but they also behaved alike, using the same hand gestures and facial expressions (Spratling 2007). Studies like these point to the genetic roots of our temperament and behavior.
Though genetics and hormones play an important role in human behavior, sociology’s larger concern is the effect society has on human behavior, the “nurture” side of the nature versus nurture debate. What race were the twins? From what social class were their parents? What about gender? Religion? All these factors affected the lives of the twins as much as their genetic makeup and are critical to consider as we look at life through the sociological lens.
Sociologists all recognize the importance of socialization for healthy individual and societal development. But how do scholars working in the three major theoretical paradigms approach this topic? Structural functionalists would say that socialization is essential to society, both because it trains members to operate successfully within it and because it perpetuates culture by transmitting it to new generations. Without socialization, a society’s culture would perish as members died off. A conflict theorist might argue that socialization reproduces inequality from generation to generation by conveying different expectations and norms to those with different social characteristics. For example, individuals are socialized differently by gender, social class, and race. As in Chris Langan's case, this creates different (unequal) opportunities. An interactionist studying socialization is concerned with face-to-face exchanges and symbolic communication. For example, dressing baby boys in blue and baby girls in pink is one small way we convey messages about differences in gender roles.
### Summary
Socialization is important because it helps uphold societies and cultures; it is also a key part of individual development. Research demonstrates that who we are is affected by both nature (our genetic and hormonal makeup) and nurture (the social environment in which we are raised). Sociology is most concerned with the way that society’s influence affects our behavior patterns, made clear by the way behavior varies across class and gender.
### Section Quiz
### Short Answer
### Further Research
Check out this article about other sets of twins who grew up apart and discovered each other later in life.
### References
Brabham, Denis. 2001. “The Smart Guy.” Newsday, August 21. Retrieved January 31, 2012 (http://www.megafoundation.org/CTMU/Press/TheSmartGuy.pdf).
Flam, Faye. 2007. “Separated Twins Shed Light on Identity Issues.” The Philadelphia Inquirer, December 9. Retrieved January 31, 2012 (http://www.megafoundation.org/CTMU/Press/TheSmartGuy.pdf).
Gladwell, Malcolm. 2008. “The Trouble With Geniuses, Part 2.” Outliers: The Story of Success. New York: Little, Brown and Company.
Spratling, Cassandra. 2007. “Nature and Nurture.” Detroit Free Press. November 25. Retrieved January 31, 2012 (http://articles.southbendtribune.com/2007-11-25/news/26786902_1_twins-adoption-identical-strangers).
Sternberg, R.J., G.B. Forsythe, J. Hedlund, J. Horvath, S. Snook, W.M. Williams, R.K. Wagner, and E.L. Grigorenko. 2000. Practical Intelligence in Everyday Life. New York: Cambridge University Press. |
# Socialization
## Agents of Socialization
Socialization helps people learn to function successfully in their social worlds. How does the process of socialization occur? How do we learn to use the objects of our society’s material culture? How do we come to adopt the beliefs, values, and norms that represent its nonmaterial culture? This learning takes place through interaction with various agents of socialization, like peer groups and families, plus both formal and informal social institutions.
### Social Group Agents
Social groups often provide the first experiences of socialization. Families, and later peer groups, communicate expectations and reinforce norms. People first learn to use the tangible objects of material culture in these settings, as well as being introduced to the beliefs and values of society.
### Family
Family is the first agent of socialization. Mothers and fathers, siblings and grandparents, plus members of an extended family, all teach a child what he or she needs to know. For example, they show the child how to use objects (such as clothes, computers, eating utensils, books, bikes); how to relate to others (some as “family,” others as “friends,” still others as “strangers” or “teachers” or “neighbors”); and how the world works (what is “real” and what is “imagined”). As you are aware, either from your own experience as a child or from your role in helping to raise one, socialization includes teaching and learning about an unending array of objects and ideas.
Keep in mind, however, that families do not socialize children in a vacuum. Many social factors affect the way a family raises its children. For example, we can use sociological imagination to recognize that individual behaviors are affected by the historical period in which they take place. Sixty years ago, it would not have been considered especially strict for a father to hit his son with a wooden spoon or a belt if he misbehaved, but today that same action might be considered child abuse.
Sociologists recognize that race, social class, religion, and other societal factors play an important role in socialization. For example, poor families usually emphasize obedience and conformity when raising their children, while wealthy families emphasize judgment and creativity (National Opinion Research Center 2008). This may occur because working-class parents have less education and more repetitive-task jobs for which it is helpful to be able to follow rules and conform. Wealthy parents tend to have better educations and often work in managerial positions or careers that require creative problem solving, so they teach their children behaviors that are beneficial in these positions. This means children are effectively socialized and raised to take the types of jobs their parents already have, thus reproducing the class system (Kohn 1977). Likewise, children are socialized to abide by gender norms, perceptions of race, and class-related behaviors.
In Sweden, for instance, stay-at-home fathers are an accepted part of the social landscape. A government policy provides subsidized time off work—480 days for families with newborns—with the option of the paid leave being shared between mothers and fathers. As one stay-at-home dad says, being home to take care of his baby son “is a real fatherly thing to do. I think that’s very masculine” (Associated Press 2011). Close to 90 percent of Swedish fathers use their paternity leave (about 340,000 dads); on average they take seven weeks per birth (The Economist, 2014). How do U.S. policies—and our society’s expected gender roles—compare? How will Swedish children raised this way be socialized to parental gender norms? How might that be different from parental gender norms in the United States?
### Peer Groups
A peer group is made up of people who are similar in age and social status and who share interests. Peer group socialization begins in the earliest years, such as when kids on a playground teach younger children the norms about taking turns, the rules of a game, or how to shoot a basket. As children grow into teenagers, this process continues. Peer groups are important to adolescents in a new way, as they begin to develop an identity separate from their parents and exert independence. Additionally, peer groups provide their own opportunities for socialization since kids usually engage in different types of activities with their peers than they do with their families. Peer groups provide adolescents’ first major socialization experience outside the realm of their families. Interestingly, studies have shown that although friendships rank high in adolescents’ priorities, this is balanced by parental influence.
### Institutional Agents
The social institutions of our culture also inform our socialization. Formal institutions—like schools, workplaces, and the government—teach people how to behave in and navigate these systems. Other institutions, like the media, contribute to socialization by inundating us with messages about norms and expectations.
### School
Most U.S. children spend about seven hours a day, 180 days a year, in school, which makes it hard to deny the importance school has on their socialization (U.S. Department of Education 2004). Students are not in school only to study math, reading, science, and other subjects—the manifest function of this system. Schools also serve a latent function in society by socializing children into behaviors like practicing teamwork, following a schedule, and using textbooks.
School and classroom rituals, led by teachers serving as role models and leaders, regularly reinforce what society expects from children. Sociologists describe this aspect of schools as the hidden curriculum, the informal teaching done by schools.
For example, in the United States, schools have built a sense of competition into the way grades are awarded and the way teachers evaluate students (Bowles and Gintis 1976). When children participate in a relay race or a math contest, they learn there are winners and losers in society. When children are required to work together on a project, they practice teamwork with other people in cooperative situations. The hidden curriculum prepares children for the adult world. Children learn how to deal with bureaucracy, rules, expectations, waiting their turn, and sitting still for hours during the day. Schools in different cultures socialize children differently in order to prepare them to function well in those cultures. The latent functions of teamwork and dealing with bureaucracy are features of U.S. culture.
Schools also socialize children by teaching them about citizenship and national pride. In the United States, children are taught to say the Pledge of Allegiance. Most districts require classes about U.S. history and geography. As academic understanding of history evolves, textbooks in the United States have been scrutinized and revised to update attitudes toward other cultures as well as perspectives on historical events; thus, children are socialized to a different national or world history than earlier textbooks may have done. For example, information about the mistreatment of African Americans and Native American Indians more accurately reflects those events than in textbooks of the past.
### The Workplace
Just as children spend much of their day at school, many U.S. adults at some point invest a significant amount of time at a place of employment. Although socialized into their culture since birth, workers require new socialization into a workplace, in terms of both material culture (such as how to operate the copy machine) and nonmaterial culture (such as whether it’s okay to speak directly to the boss or how to share the refrigerator). In the chapter introduction, Noel did not fully embrace the culture of their new company. Importantly, the obligation of such socialization is not simply on the worker: Organizational behavior and other business experts place responsibility on companies; organizations must have strong onboarding and socialization programs in order to build satisfaction, productivity, and workplace retention (Cebollero 2019).
Different jobs require different types of socialization. In the past, many people worked a single job until retirement. Today, the trend is to switch jobs at least once a decade. Between the ages of eighteen and forty-six, the average Baby Boomer of the younger set held 11.3 different jobs (U.S. Bureau of Labor Statistics, 2014). This means that people must become socialized to, and socialized by, a variety of work environments.
### Religion
While some religions are informal institutions, here we focus on practices followed by formal institutions. Religion is an important avenue of socialization for many people. The United States is full of synagogues, temples, churches, mosques, and similar religious communities where people gather to worship and learn. Like other institutions, these places teach participants how to interact with the religion’s material culture (like a mezuzah, a prayer rug, or a communion wafer). For some people, important ceremonies related to family structure—like marriage and birth—are connected to religious celebrations. Many religious institutions also uphold gender norms and contribute to their enforcement through socialization. From ceremonial rites of passage that reinforce the family unit to power dynamics that reinforce gender roles, organized religion fosters a shared set of socialized values that are passed on through society.
### Government
Although we do not think about it, many of the rites of passage people go through today are based on age norms established by the government. To be defined as an “adult” usually means being eighteen years old, the age at which a person becomes legally responsible for him- or herself. And sixty-five years old is the start of “old age” since most people become eligible for senior benefits at that point.
Each time we embark on one of these new categories—senior, adult, taxpayer—we must be socialized into our new role. Seniors must learn the ropes of Medicare, Social Security benefits, and senior shopping discounts. When U.S. males turn eighteen, they must register with the Selective Service System within thirty days to be entered into a database for possible military service. These government dictates mark the points at which we require socialization into a new category.
### Mass Media
Mass media distribute impersonal information to a wide audience, via television, newspapers, radio, and the Internet. With the average person spending over four hours a day in front of the television (and children averaging even more screen time), media greatly influences social norms (Roberts, Foehr, and Rideout 2005). People learn about objects of material culture (like new technology and transportation options), as well as nonmaterial culture—what is true (beliefs), what is important (values), and what is expected (norms).
### Summary
Our direct interactions with social groups, like families and peers, teach us how others expect us to behave. Likewise, a society’s formal and informal institutions socialize its population. Schools, workplaces, and the media communicate and reinforce cultural norms and values.
### Section Quiz
### Short Answer
### Further Research
Glassdoor.com provides reviews of companies and also articles on finding the correct fit. Take a look at what Glassdoor.com's blog has to say on these topics and explore some companies you might like in order to learn about their corporate culture and worker experience.
### References
Associated Press. 2011. “Swedish Dads Swap Work for Child Care.” The Gainesville Sun, October 23. Retrieved January 12, 2012 (http://www.gainesville.com/article/20111023/wire/111029834?template=printpicart.
Barnes, Brooks. 2010. “Pixar Removes Its First Female Director.” The New York Times, December 20. Retrieved August 2, 2011 (http://artsbeat.blogs.nytimes.com/2010/10/20/first-woman-to-direct-a-pixar-film-is-instead-first-to-be-replaced/?ref=arts.
Bowles, Samuel, and Herbert Gintis. 1976. Schooling in Capitalistic America: Educational Reforms and the Contradictions of Economic Life. New York: Basic Books.
Coyne, Sarah M. and Ruh Lindner, Jennifer and Rasmussen, Eric E. and Nelson, David A. and Birkbeck, Victoria. 2016. "Pretty as a Princess: Longitudinal Effects of Engagement With Disney Princesses on Gender Stereotypes, Body Esteem, and Prosocial Behavior in Children." Child Development. Volume 87, Issue 6. https://srcd.onlinelibrary.wiley.com/doi/full/10.1111/cdev.12569
Crampton, Thomas. 2002. “The Ongoing Battle over Japan’s Textbooks.” , February 12. Retrieved August 2, 2011 (http://www.nytimes.com/2002/02/12/news/12iht-rtexts_ed3_.html).
Kohn, Melvin L. 1977. Class and Conformity: A Study in Values. Homewood, IL: Dorsey Press.
National Opinion Research Center. 2007. General Social Surveys, 1972–2006: Cumulative Codebook. Chicago: National Opinion Research Center.
O’Connor, Lydia. 2011. “The Princess Effect: Are Girls Too ‘Tangled’ in Disney’s Fantasy?” Annenberg Digital News, January 26. Retrieved August 2, 2011 (http://www.neontommy.com/news/2011/01/princess-effect-are-girls-too-tangled-disneys-fantasy).
Roberts, Donald F., Ulla G. Foehr, and Victoria Rideout. 2005. “Parents, Children, and Media: A Kaiser Family Foundation Survey.” The Henry J. Kaiser Family Foundation. Retrieved February 14, 2012 (http://www.kff.org/entmedia/upload/7638.pdf).
Rose, Steve. 2011. “Studio Ghibli: Leave the Boys Behind.” The Guardian, July 14. Retrieved August 2, 2011. (http://www.guardian.co.uk/film/2011/jul/14/studio-ghibli-arrietty-heroines).
“South Koreans Sever Fingers in Anti-Japan Protest.” 2001. The Telegraph. Retrieved January 31, 2012 (http://www.telegraph.co.uk/news/1337272/South-Koreans-sever-fingers-in-anti-Japan-protest.html).
U.S. Bureau of Labor Statistics. 2014. “Number of Jobs Held, Labor Market Activity, and Earnings Growth Among the Youngest Baby Boomers.” September 10. Retrieved Oct. 27th, 2012 (www.bls.gov/nls/nlsfaqs.htm).
U.S. Department of Education, National Center for Education Statistics. 2004. “Average Length of School Year and Average Length of School Day, by Selected Characteristics: United States, 2003-04.” Private School Universe Survey (PSS). Retrieved July 30, 2011 (http://nces.ed.gov/surveys/pss/tables/table_2004_06.asp).
Wagner, Jennifer. 2016. "So What If My Daughter Loves To Play Princess." Parent.com. September 27, 2016. (https://www.parent.com/blogs/conversations/embracing-the-princess-culture-one-story-at-a-time)
"Why Swedish Men take so much Paternity Leave." 2014. The Economist. Retrieved Oct. 27th, 2014. (http://www.economist.com/blogs/economist-explains/2014/07/economist-explains-15) |
# Socialization
## Socialization Across the Life Course
Socialization isn’t a one-time or even a short-term event. We aren’t “stamped” by some socialization machine as we move along a conveyor belt and thereby socialized once and for all. In fact, socialization is a lifelong process.
In the United States, socialization throughout the life course is determined greatly by age norms and “time-related rules and regulations” (Settersten 2002). As we grow older, we encounter age-related transition points that require socialization into a new role, such as becoming school age, entering the workforce, or retiring. For example, the U.S. government mandates that all children attend school. Child labor laws, enacted in the early twentieth century, nationally declared that childhood be a time of learning, not of labor. In countries such as Niger and Sierra Leone, however, child labor remains common and socially acceptable, with little legislation to regulate such practices (UNICEF 2012).
Many of life’s social expectations are made clear and enforced on a cultural level. Through interacting with others and watching others interact, the expectation to fulfill roles becomes clear. While in elementary or middle school, the prospect of having a boyfriend or girlfriend may have been considered undesirable. The socialization that takes place in high school changes the expectation. By observing the excitement and importance attached to dating and relationships within the high school social scene, it quickly becomes apparent that one is now expected not only to be a child and a student, but also a significant other. Graduation from formal education—high school, vocational school, or college—involves socialization into a new set of expectations.
Educational expectations vary not only from culture to culture, but also from class to class. While middle- or upper-class families may expect their daughter or son to attend a four-year university after graduating from high school, other families may expect their child to immediately begin working full-time, as many within their family have done before.
### Resocialization
In the process of resocialization, old behaviors that were helpful in a previous role are removed because they are no longer of use. Resocialization is necessary when a person moves to a senior care center, goes to boarding school, or serves a sentence in the prison system. In the new environment, the old rules no longer apply. The process of resocialization is typically more stressful than normal socialization because people have to unlearn behaviors that have become customary to them. While resocialization has a specific meaning, many organizations consider their training or retraining processes to embody elements of resocialization.
The most common way resocialization occurs is in a total institution where people are isolated from society and are forced to follow someone else’s rules. A ship at sea is a total institution, as are religious convents, prisons, or some cult organizations. They are places cut off from a larger society. The 6.9 million Americans who lived in prisons and penitentiaries at the end of 2012 are also members of this type of institution (U.S. Department of Justice 2012).
Many individuals are resocialized into an institution through a two-part process. First, members entering an institution must leave behind their old identity through what is known as a degradation ceremony. In a degradation ceremony, new members lose the aspects of their old identity and are given new identities. The process is sometimes gentle. To enter a senior care home, an elderly person often must leave a family home and give up many belongings which were part of his or her long-standing identity. Though caretakers guide the elderly compassionately, the process can still be one of loss. In many cults, this process is also gentle and happens in an environment of support and caring.
In other situations, the degradation ceremony can be more extreme. New prisoners lose freedom, rights (including the right to privacy), and personal belongings. When entering the military, soldiers have their hair cut short. Their old clothes are removed, and they wear matching uniforms. These individuals must give up any markers of their former identity in order to be resocialized into an identity as a “soldier.”
After new members of an institution are stripped of their old identity, they build a new one that matches the new society. In the military, soldiers go through basic training together, where they learn new rules and bond with one another. They follow structured schedules set by their leaders. Soldiers must keep their areas clean for inspection, learn to march in correct formations, and salute when in the presence of superiors.
Learning to deal with life after having lived in a total institution requires yet another process of resocialization. In the U.S. military, soldiers learn discipline and a capacity for hard work. They set aside personal goals to achieve a mission, and they take pride in the accomplishments of their units. Many soldiers who leave the military transition these skills into excellent careers. Others have significant challenges upon leaving, uncertain about the outside world and what to do next. The process of resocialization to civilian life is not a simple one.
Other types of organizations may utilize or extend the concept of resocialization with regard to changing people's behaviors. Corporate trainers (and training researchers) sometimes emphasize the need for trainees to shed their old behaviors and adopt entirely new ones. When the people return to their jobs after training, they may be called to leave their old behaviors behind. Similarly, if an entire team goes for training, they may be called to leave their culture behind (Weinbauer-Heidel 2019). Not all such training would apply the resocialization metaphor, but behavioral or personal-professional areas such as stress management or priority/project management might borrow from resocialization principles in order to make the training effective.
### Summary
Socialization is a lifelong process that reoccurs as we enter new phases of life, such as adulthood or senior age. Resocialization is a process that removes the socialization we have developed over time and replaces it with newly learned rules and roles. Because it involves removing old habits that have been built up, resocialization can be a stressful and difficult process.
### Section Quiz
### Short Answer
### Further Research
Homelessness is an endemic problem among veterans. Many soldiers leave the military or return from war and have difficulty resocializing into civilian life. Learn more about this problem at the National Coalition for Homeless Veterans' website.
### References
Andersen. 2009. "Committee proposes cash incentives for speedy students. Jyllands-Posten. The Copenhagen Post 5 May 2009.
Bureau of Labor Statistics. 2020. "College Enrollment and Work Activity of Recent High School and College Graduates Summary" April 28 2020. (https://www.bls.gov/news.release/hsgec.nr0.htm)
Davidson, Adam. 2014. "It's Official, the Boomerang Kids Won't Leave." New York Times, June 20. Retrieved October 27, 2014 (http://www.nytimes.com/2014/06/22/magazine/its-official-the-boomerang-kids-wont-leave.html?_r=0).
Henig, Robin Marantz. 2010. “What Is It About Twenty-Somethings?” New York Times, August 18. Retrieved December 28, 2011 (http://www.nytimes.com/2010/08/22/magazine/22Adulthood-t.html?adxnnl=1&adxnnlx=1325202682-VVzEPjqlYdkfmWonoE3Spg).
Hoffawer, Hillary. 2020. "One chart shows just how badly young adults are getting slammed by the coronavirus recession." Business Insider. August 12 2020. (https://www.businessinsider.com/how-coronavirus-recession-is-affecting-millennials-gen-z-2020-8)
NCES. 2020. "Fast Facts: Immediate Transition to College." National Center for Education Statistics. Retrieved April 6 2020. (https://nces.ed.gov/fastfacts/display.asp?id=51)
Ritzau. 2019. "Rekordfå studenter læser videre med det samme" (English title translation: "Record few students move on immediately.") Ritzau News Agency. June 11 2019. (https://fagbladet3f.dk/artikel/rekordfaa-studenter-laeser-videre-med-det-samme)
Settersten, Richard A., Jr. 2002. “Socialization in the Life Course: New Frontiers in Theory and Research.” New Frontiers in Socialization, Vol. 7. Oxford, UK: Elsevier Science Ltd.
UNICEF. 2011. “Percentage of Children Aged 5–14 Engaged in Child Labour.” Retrieved December 28, 2011 (http://www.childinfo.org/labour_countrydata.php).
UNICEF. 2012. "Percentage of Children Aged 5-14 Engaged in Child Labour." Retrieved Oct. 27th, 2014 (http://www.unicef.org/search/search.phpen=Percentage+of+children+Aged+5-14+engaged+in+child+labour&go.x=0&go.y=0)
U.S. Department of Justice. 2012. "Corrections Populations in the US, 2012." Retrieved October 27, 2014 (http://www.bjs.gov/content/pub/pdf/cpus12.pdf).
Weinbauer-Heidel, Ina and Ibeschitz-Manderbach, Masha. 2019. "What Makes Training Really Work." Tredition Publishing. January 24 2019. Page 37. |
# Groups and Organization
## Introduction
Throughout the history of the United States, individuals have formed groups in order to achieve goals and bring about change. Some groups are loosely defined, while others have highly organized structure and mission. And in some cases, groups can have significant influence on culture, society, the economy, and government.
In 2009, people protesting government spending held a series of “tea parties,” referencing the Boston Tea Party, an anti-taxation event that led up to the Revolutionary War. Tea Party activists also opposed big government, high taxes, and political corruption and supported gun rights and traditional family values. They called for “awareness to any issue which challenges the security, sovereignty, or domestic tranquility of our beloved nation, the United States of America” (Tea Party, Inc. 2021). The movement grew into a major political force, with chapters popping up in nearly every community across the country.
By 2010, Tea Party candidates had won seats in the U.S. House of Representatives and the Senate, demonstrating the political power of the group and its message. As grassroots activism faded, the Tea Party gained influence within the Republican Party. Many of its ideas have been assimilated into the mainstream conservative movement and Republican Party platform.
In 2016, highly successful Fox News host Gretchen Carlson filed a lawsuit against Fox chairman, Roger Ailes, for sexual harassment. The suit led other women to come forward with similar allegations against Ailes and others in the entertainment industry. Soon after, actress Alyssa Milano posted this statement on Twitter: “If all the women who have been sexually harassed or assaulted wrote 'Me too’ as a status, we might give people a sense of the magnitude of the problem.” The phrase, “Me Too” had been first used in this context in 2006 by activist Tarana Burke, in an effort to empower women of color. Within a day of Milano’s post, the “Me Too” phrase or hashtag was used over 500,000 times on Twitter, and was used in over 12 million posts by 4.7 million people on Facebook. Thousands of people, including other celebrities, shared their own stories of sexual harassment, abuse, or assault. (MeTooMvmt.org, 2020) The “MeToo” movement became the lead story on many newscasts and talk shows. Over the months that followed, the movement sparked reforms within companies and governments to combat sexual harassment and better support women. The movement inspired abuse victims to come forward and led to the sanction or removal of prominent individuals accused of serial harassment or abuse in academia, media, government, and other industries.
The Tea Party evolved into an organization. From a loosely associated set of local chapters, it developed into several closely affiliated nonprofits (filed with the IRS), a political faction within the Republican Party, and a caucus within Congress. What about the MeToo movement? Burke started it in 2006 and was working to enact change long before the hashtag sparked more awareness and new policies. The MeToo has brought together people to work in groups, but it has yet to form into a permanent MeToo organization.
As enduring social units, groups help foster shared value systems and are key to the structure of society as we know it. There are three primary sociological perspectives for studying groups: Functionalist, Conflict, and Interactionist. We can look at the Tea Party and the MeToo movements through the lenses of these methods to better understand the roles and challenges that they offer.
The Functionalist perspective is a big-picture, macro-level view that looks at how different aspects of society are intertwined. This perspective is based on the idea that society is a well-balanced system with all parts necessary to the whole, and it studies the roles these parts play in relation to the whole. A Functionalist might look at the macro-level needs that each movement serves. For example, a Structural Functionalist might ask how the Tea Party arose to voice the concerns of a large sector of society that felt politically underrepresented, or how MeToo drove people to pay attention to sexual harassment and gender inequality. This approach might look at how each group enabled the voicing of discontent and so stabilized society.
The Conflict perspective is another macroanalytical view, one that focuses on the genesis and growth of inequality. A conflict theorist studying the Tea Party Movement might look at how it checked interests that have manipulated the political system over the last 30 years. Or this perspective might explore how MeToo challenged organizations that have allowed sexual harassment to persist in order to protect those in power.
A third perspective is the Symbolic Interaction or Interactionist perspective. This method of analyzing groups takes a micro-level view. Instead of studying the big picture, these researchers look at the day-to-day interactions of groups. Studying these details, the Interactionist looks at issues like leadership style and group dynamics. In the case of the Tea Party Movement, Interactionists might ask, “How does the Tea Party dynamic in New York differ from that in Atlanta?” Or, in the case of the MeToo, researchers may seek to learn about who defines the agenda and approach within the movement.
### References
Cabrel, Javier. 2011. “NOFX - Occupy LA.” LAWeekly.com, November 28. Retrieved December 13, 2021 (https://www.laweekly.com/nofx-occupy-la-11-28-2011/).
Tea Party, Inc. 2014. “Tea Party.” Retrieved December 31, 2020 (http://www.teaparty.org).
MeTooMvmt.org, 2021. “History and Inception.” Retrieved December 31, 2020. (https://metoomvmt.org/get-to-know-us/history-inception/). |
# Groups and Organization
## Types of Groups
Most of us feel comfortable using the word “group” without giving it much thought. Often, we mean different things when using that word. We might say that a group of kids all saw the dog, and it could mean 250 students in a lecture hall or four siblings playing on a front lawn. In everyday use, it can be a generic term, although it carries important clinical and scientific meanings. Moreover, the concept of a group is central to much of how we think about society and human interaction. So how can we hone the meaning more precisely for sociological purposes?
### Defining a Group
The term group is an amorphous one and can refer to a wide variety of gatherings, from just two people (think about a “group project” in school when you partner with another student), a club, a regular gathering of friends, or people who work together or share a hobby. In short, the term refers to any collection of at least two people who interact with some frequency and who share a sense that their identity is somehow aligned with the group. Of course, every time people are gathered, it is not necessarily a group. A rally is usually a one-time event, for instance, and belonging to a political party doesn’t imply interaction with others. People who happen to be in the same place at the same time but who do not interact or share a sense of identity—such as a bunch of people standing in line at Starbucks—are considered an aggregate, or a crowd.
Another example of a nongroup is people who share similar characteristics but are not tied to one another in any way. These people are considered a category, and as an example all children born from approximately 1980–2000 are referred to as “Millennials.” Why are Millennials a category and not a group? Because while some of them may share a sense of identity, they do not, as a whole, interact frequently with each other.
Interestingly, people within an aggregate or category can become a group. During disasters, people in a neighborhood (an aggregate) who did not know each other might become friendly and depend on each other at the local shelter. After the disaster when people go back to simply living near each other, the feeling of cohesiveness may last since they have all shared an experience. They might remain a group, practicing emergency readiness, coordinating supplies for next time, or taking turns caring for neighbors who need extra help.
Similarly, there may be many groups within a single category. Consider teachers, for example. Within this category, groups may exist like teachers’ unions, teachers who coach, or staff members who are involved with the PTA.
### Types of Groups
Sociologist Charles Horton Cooley (1864–1929) suggested that groups can broadly be divided into two categories: primary groups and secondary groups (Cooley 1909). According to Cooley, primary groups play the most critical role in our lives. The primary group is usually fairly small and is made up of individuals who generally engage face-to-face in long-term emotional ways. This group serves emotional needs: expressive functions rather than pragmatic ones. The primary group is usually made up of significant others, those individuals who have the most impact on our socialization. The best example of a primary group is the family.
Secondary groups are often larger and impersonal. They may also be task-focused and time-limited. These groups serve an instrumental function rather than an expressive one, meaning that their role is more goal- or task-oriented than emotional. A classroom or office can be an example of a secondary group.
Neither primary nor secondary groups are bound by strict definitions or set limits. In fact, people can move from one group to another. A group of coworkers, for example, can start as a secondary group, but as the employees work together over the years, they may find common interests and strong ties that transform them into a primary group. As we will discuss in the chapter on Media and Technology, even online networks of people with common interests can sometimes move from secondary to primary group status.
### In-Groups and Out-Groups
One of the ways that groups can be powerful is through inclusion, and its inverse, exclusion. The feeling that we belong in an elite or select group is a heady one, while the feeling of not being allowed in, or of being in competition with a group, can be motivating in a different way. Sociologist William Sumner (1840–1910) developed the concepts of in-group and out-group to explain this phenomenon (Sumner 1906). In short, an in-group is the group that an individual feels she belongs to, and she believes it to be an integral part of who she is. An out-group, conversely, is a group someone doesn’t belong to; often we may feel disdain or competition in relationship to an out-group. Sports teams, unions, and sororities are examples of in-groups and out-groups. Primary groups consist of both in-groups and out-groups, as do secondary groups.
While group affiliations can be neutral or positive, the concept of in-groups and out-groups can also explain some negative human behavior, such as white supremacist movements. By defining others as “not like us” and inferior, in-groups can end up practicing ethnocentrism, racism, sexism, ageism, and heterosexism—manners of judging others negatively based on their culture, race, sex, age, or sexuality.
Often, in-groups can form within a secondary group. For instance, a workplace can have cliques of people, from senior executives who play golf together, to engineers who write code together, to young singles who socialize after hours. While these in-groups might show favoritism and affinity for other in-group members, the overall organization may be unable or unwilling to acknowledge it. Therefore, it pays to be wary of the politics of in-groups, since members may exclude others as a form of gaining status within the group.
### Reference Groups
A reference group is a group that people compare themselves to—it provides a standard of measurement. In U.S. society, peer groups are common reference groups. Kids and adults pay attention to what their peers wear, what music they like, what they do with their free time—and they compare themselves to what they see. Most people have more than one reference group, so a middle school boy might look not just at his classmates but also at his older brother’s friends and see a different set of norms. And he might observe the behaviors of his favorite athletes for yet another point of reference.
Some other examples of reference groups can be one’s cultural center, workplace, family gathering, and even parents. Often, reference groups convey competing messages. For instance, on television and in movies, young adults often have wonderful apartments and cars and lively social lives despite not holding a job. In music videos, young women might dance and sing in a sexually aggressive way that suggests experience beyond their years. At all ages, we use reference groups to help guide our behavior and establish our social norms. So how important is it to surround yourself with positive reference groups? You may not recognize a reference group, but it still influences the way you act. Identifying your reference groups can help you understand the source of the social identities you aspire to or want to distance yourself from.
### Summary
Groups largely define how we think of ourselves. There are two main types of groups: primary and secondary. As the names suggest, the primary group is the long-term, complex one. People use groups as standards of comparison to define themselves—both who they are and who they are not. Sometimes groups can be used to exclude people or as a tool that strengthens prejudice.
### Section Quiz
### Short Answer
### Further Research
For more information about cyberbullying causes and statistics, check out this website on cyberbullying research.
### References
Cooley, Charles Horton.1963 [1909]. Social Organizations: A Study of the Larger Mind. New York: Shocken.
Cyberbullying Research Center. n.d. Retrieved November 30, 2011 (http://www.cyberbullying.us).
Hinduja, Sameer. 2018. "Bullying, Cyberbullying, and Suicide Among US Youth: Our Updated Research Findings." Cyberbullying Research Center, https://cyberbullying.org/bullying-cyberbullying-suicide-among-us-youth.
Hinduja, Sameer, and Justin W. Patchin.2019. “Summary of Our Cyberbullying Research (2007-2019).” Cyberbullying Research Center, https://cyberbullying.org/summary-of-our-cyberbullying-research/. Retrieved February 14, 2021
Hinduja, S. & Patchin, J. W. (2020). Bullying, Cyberbullying, and Sexual Orientation/Gender Identity. Cyberbullying Re- search Center (cyberbullying.org).
John, Ann. “Self-Harm, Suicidal Behaviours, and Cyberbullying in Children and Young People: Systematic Review.” Journal of Medical Internet Research. https://www.jmir.org/2018/4/e129/
Khandaroo, Stacy T. 2010. “Phoebe Prince Case a ‘Watershed’ in Fight Against School Bullying.” Christian Science Monitor, April 1. Retrieved February 10, 2012 (http://www.csmonitor.com/USA/Education/2010/0401/Phoebe-Prince-case-a-watershed-in-fight-against-school-bullying).
Occupy Wall Street. Retrieved November 27, 2011. (http://occupywallst.org/about/).
Schwartz, Mattathias. 2011. “Pre-Occupied: The Origins and Future of Occupy Wall St.” New Yorker Magazine, November 28.
Sumner, William. 1959 [1906]. Folkways. New York: Dover.
“Times Topics: Occupy Wall Street.” New York Times. 2011. Retrieved February 10, 2012 (http://topics.nytimes.com/top/reference/timestopics/organizations/o/occupy_wall_street/index.html?scp=1-spot&sq=occupy%20wall%20street&st=cse).
We Are the 99 Percent. Retrieved November 28, 2011 (http://wearethe99percent.tumblr.com/page/2). |
# Groups and Organization
## Group Size and Structure
### Dyads, Triads, and Large Groups
A small group is typically one where the collection of people is small enough that all members of the group know each other and share simultaneous interaction, such as a nuclear family, a dyad, or a triad. Georg Simmel (1858–1915) wrote extensively about the difference between a dyad, or two-member group, and a triad, which is a three-member group (Simmel 1902). In the former, if one person withdraws, the group can no longer exist. We can think of a divorce, which effectively ends the “group” of the married couple or of two best friends never speaking again. In a triad, however, the dynamic is quite different. If one person withdraws, the group lives on. A triad has a different set of relationships. If there are three in the group, two-against-one dynamics can develop, and a majority opinion may form on any issue.
Small groups generally have strong internal cohesiveness and a sense of connection. Small groups may face challenges when trying to achieve large goals. They can struggle to be heard or to be a force for change if they are pushing against larger groups.
It is difficult to define exactly when a small group becomes a large group. Perhaps it occurs when one group grows so large that there are too many people to join in a simultaneous discussion. Sometimes it occurs when a group joins with other groups as part of a movement. These larger groups may share a geographic space, such as a fraternity or sorority on the same campus, or they might be spread out around the globe. The larger the group, the more attention it can garner, and the more pressure members can put toward whatever goal they wish to achieve. At the same time, the larger the group becomes, the more the risk grows for division and lack of cohesion.
### Group Leadership
Often, larger groups require some kind of leadership. In small, primary groups, leadership tends to be informal. After all, most families don’t take a vote on who will rule the group, nor do most groups of friends. This is not to say that de facto leaders don’t emerge, but formal leadership is rare. In secondary groups, leadership is usually more overt. They often outline roles and responsibilities, with a chain of command to follow. Some secondary groups, like the military, have highly structured and clearly understood chains of command, and sometimes lives depend on those. After all, how well could soldiers function in a battle if different people were calling out orders and if they had no idea whom to listen to? Other secondary groups, like a workplace or a classroom, also have formal leaders, but the styles and functions of leadership can vary significantly.
Leadership function refers to the main goal of the leader, which may be instrumental or expressive. An instrumental leader is one who is goal-oriented and largely concerned with accomplishing set tasks. We can imagine that an army general or a Fortune 500 CEO would be an instrumental leader. In contrast, expressive leaders are more concerned with promoting emotional strength and health, and ensuring that people feel supported. Social and religious leaders—rabbis, priests, imams, directors of youth homes and social service programs—are often perceived as expressive leaders. Sometimes people expect men to take on instrumental roles and women to assume expressive roles. Women and men who exhibit the other-gender manner can be seen as deviants and can encounter resistance. Yet, both men and women prefer leaders who use a combination of expressive and instrumental leadership (Boatwright and Forrest, 2000).
Sociologists recognize three leadership styles. Democratic leaders encourage group participation in all decision making. They work hard to build consensus before choosing a course of action and moving forward. This type of leader is particularly common, for example, in a club where the members vote on which activities or projects to pursue. Democratic leaders can be well liked, but there is often a danger that decisions will proceed slowly since consensus building is time-consuming. A further risk is that group members might pick sides and entrench themselves into opposing factions rather than reaching a solution.
In contrast, a laissez-faire (French for “leave it alone”) leader is hands-off, allowing group members to self-manage and make their own decisions. An example of this kind of leader might be an art teacher who opens the art cupboard, leaves materials on the shelves, and tells students to help themselves and make some art. While this style can work well with highly motivated and mature participants who have clear goals and guidelines, it risks group dissolution and a lack of progress.
Finally, authoritarian leaders issue orders and assign tasks with little to no feedback from group members. These leaders are often instrumental leaders with a strong focus on meeting goals. Often, entrepreneurs fall into this mold, like Facebook founder Mark Zuckerberg. Not surprisingly, authoritarian leaders risk alienating the workers. When decisions need to made quickly or informed by a high level of expertise, however, this style of leadership can be required.
In different circumstances, each of these leadership styles can be effective and successful. Consider what leadership style you prefer. Why? Do you like the same style in different areas of your life, such as a classroom, a workplace, and a sports team?
### Conformity
We all like to fit in to some degree. Likewise, if we want to stand out, then we want to choose how we stand out and for what reasons. For example, a person who loves cutting-edge fashion might dress in thought-provoking new styles to set a new trend.
Conformity is the extent to which an individual complies with group norms or expectations. As you might recall, we use reference groups to assess and understand how to act, to dress, and to behave. Not surprisingly, young people are particularly aware of who conforms and who does not. A high school boy whose mother makes him wear ironed button-down shirts might protest that everyone else wears T-shirts and he will look stupid. Another high school boy might like wearing those shirts as a way of standing out. How much do you enjoy being noticed? Do you consciously prefer to conform to group norms so as not to be singled out? Are there people in your class who immediately come to mind when you think about those who don’t want to conform?
Psychologist Solomon Asch (1907–1996) conducted experiments that illustrated how great the pressure to conform is, specifically within a small group (1956). Read about his work in the Sociological Research feature and consider what you would do in Asch’s experiment. Would you speak up? What would help you speak up and what would discourage it?
### The Bystander Effect and Diffusion of Responsibility
Social psychologists have recognized that other people’s presence influences our behavior, whether we are aware of it or not. One example is the bystander effect, a situation in which people are less likely to interfere during an emergency or when a social norm is being violated if there are others around. They feel less responsible because of the presence of other bystanders (Beyer et al., 2017). This is known as diffusion of responsibility.
Most of the time people report that they don’t want to get involved and that’s why they don’t respond when they see something wrong. They assume someone else will step up and help. Researchers have found that people are less likely to help if they don’t know the victim (Cherry 2020).
Think about it this way, you’re walking to class and there are several students around. Someone falls on the ground having a seizure. What would you do? The bystander effect suggests that unless you know the person who has fallen, you are more likely to walk away than help. However, social psychologists believe that you are much more likely to help, or at least stop and check, if you are the only one around.
### Summary
The size and dynamic of a group greatly affects how members act. Primary groups rarely have formal leaders, although there can be informal leadership. Groups generally are considered large when there are too many members for a simultaneous discussion. In secondary groups there are two types of leadership functions, with expressive leaders focused on emotional health and wellness, and instrumental leaders more focused on results. Further, there are different leadership styles: democratic leaders, authoritarian leaders, and laissez-faire leaders.
Within a group, conformity is the extent to which people want to go along with the norm. A number of experiments have illustrated how strong the drive to conform can be. It is worth considering real-life examples of how conformity and obedience can lead people to ethically and morally suspect acts.
### Section Quiz
### Short Answer
### Further Research
What is your leadership style? This leadership style quiz helps you find out.
### References
Asch, Solomon. 1956. “Studies of Independence and Conformity: A Minority of One Against a Unanimous Majority.” Psychological Monographs 70(9, Whole No. 416).
Baldoni, John. 2020. "Double-edged workplace ambition: Good for men, bad for women." SmartBrief. August 7, 2020. https://www.smartbrief.com/original/2020/08/double-edged-workplace-ambition-good-men-bad-women
Boatwright, K.J., and L. Forrest. 2000. “Leadership Preferences: The Influence of Gender and Needs for Connection on Workers’ Ideal Preferences for Leadership Behaviors.” The Journal of Leadership Studies 7(2): 18–34.
Beyer, F., Sidarus, N., Bonicalzi, S., & Haggard, P. (2017). Beyond self-serving bias: diffusion of responsibility reduces sense of agency and outcome monitoring. Social cognitive and affective neuroscience, 12(1), 138–145. https://doi.org/10.1093/scan/nsw160
Cherry, K. 2020. “The Diffusion of Responsibility Concept in Psychology.” Very Well Mind. Retrieved October 28, 2020 (https://www.verywellmind.com/what-is-diffusion-of-responsibility-2795095).
Conroy, M,, Martin, D. J., and Nalder. KL. (2020). “Gender, Sex, and the Role of Stereotypes in Evaluations of Hillary Clinton and the 2016 Presidential Candidates.” Journal of Women, Politics & Policy 41(2): 194-218.
Cox, Ana Marie. 2006. “How Americans View Hillary: Popular but Polarizing.” Time, August 19. Retrieved February 10, 2012 (http://www.time.com/time/magazine/article/0,9171,1229053,00.html).
Dowd, Maureen. 2008. “Can Hillary Cry Her Way to the White House?” New York Times, January 9. Retrieved February 10, 2012 (http://www.nytimes.com/2008/01/09/opinion/08dowd.html?pagewanted=all).
Heilman, Madeline E. 2012. “Gender stereotypes and workplace bias.” Research in Organizational Behavior. 32: 113-135
HeroicImagination TV. (2011, September 28). The Bystander Effect. [Video]. YouTube. (https://www.youtube.com/watch?v=z4S1LLrSzVE).
Kurtieben, Danielle. 2010. “Sarah Palin, Hillary Clinton, Michelle Obama, and Women in Politics.” US News and World Report, September 30. Retrieved February 10, 2012 (http://www.usnews.com/opinion/articles/2010/09/30/sarah-palin-hillary-clinton-michelle-obama-and-women-in-politics).
Milgram, Stanley. 1963. “Behavioral Study of Obedience.” Journal of Abnormal and Social Psychology 67: 371–378.
Simmel, Georg. 1950. The Sociology of Georg Simmel. Glencoe, IL: The Free Press.
Weeks, Linton. 2011. “The Feminine Effect on Politics.” National Public Radio (NPR), June 9. Retrieved February 10, 2012 (http://www.npr.org/2011/06/09/137056376/the-feminine-effect-on-presidential-politics). |
# Groups and Organization
## Formal Organizations
A complaint of modern life is that society is dominated by large and impersonal secondary organizations. From schools to businesses to healthcare to government, these organizations, referred to as formal organizations, are highly bureaucratized. Indeed, all formal organizations are, or likely will become, bureaucracies. We will discuss the purpose of formal organizations and the structure of their bureaucracies.
### Types of Formal Organizations
Sociologist Amitai Etzioni (1975) posited that formal organizations fall into three categories. Normative organizations, also called voluntary organizations, are based on shared interests. As the name suggests, joining them is voluntary. People find membership rewarding in an intangible way. They receive non-material benefits. The Audubon Society and a ski club are examples of normative organizations.
Coercive organizations are groups that we must be coerced, or pushed, to join. These may include prison or a rehabilitation center. Symbolic interactionist Erving Goffman states that most coercive organizations are total institutions (1961). A total institution is one in which inmates or military soldiers live a controlled lifestyle and in which total resocialization takes place.
The third type is utilitarian organizations, which, as the name suggests, are joined because of the need for a specific material reward. High school and the workplace fall into this category—one joined in pursuit of a diploma, the other in order to make money.
### The Structure of Bureaucracies
Bureaucracies are an ideal type of formal organization. By ideal, sociologists don’t mean “best.” Rather, bureaucracies have a collection of characteristics that most of them exhibit. Pioneer sociologist Max Weber characterized a bureaucracy as having a hierarchy of authority, a clear division of labor, explicit rules, and impersonality (1922). People often complain about bureaucracies––declaring them slow, rule-bound, difficult to navigate, and unfriendly. Let’s take a look at terms that define a bureaucracy to understand what they mean.
Hierarchy of authority refers to the chain of command that places one individual or office in charge of another, who in turn must answer to her own superiors. For example, as an employee at Walmart, your shift manager assigns you tasks. Your shift manager answers to his store manager, who must answer to her regional manager, and so on, up to the CEO who must answer to the board members, who in turn answer to the stockholders. Everyone in this bureaucracy follows the chain of command.
Bureaucracies have a clear division of labor: each individual has a specialized task to perform. For example, at a university, psychology professors teach psychology, but they do not attempt to provide students with financial aid forms. The Office of Admissions often takes on this task. In this case, it is a clear and commonsense division. But what about in a restaurant where food is backed up in the kitchen and a hostess is standing nearby texting on her phone? Her job is to seat customers, not to deliver food. Is this a smart division of labor?
Bureaucracies have explicit rules, rules that are outlined, written down, and standardized. For example, at your college or university, the student guidelines are contained within the Student Handbook. As technology changes and campuses encounter new concerns like cyberbullying, identity theft, and other problems that arise, organizations scramble to ensure their explicit rules cover these emerging issues.
Finally, bureaucracies are also characterized by impersonality, which takes personal feelings out of professional situations. This characteristic grew, to some extent, out of a desire to avoid nepotism, backroom deals, and other types of favoritism, while simultaneously protecting customers and others served by the organization. Impersonality Bureaucracies can effectively and efficiently serve volumes of customers quickly. However, explicit rules, clear division of labor, and a strict hierarchy of authority does not allow them to easily adjust to unique or new situations. As a result, customers frequently complain that stores with bureaucratic structures, like Walmart, care little about individuals, other businesses, and the community at large.
Bureaucracies are often meritocracies, meaning that hiring and promotion is based on proven and documented skills, rather than on nepotism or random choice. In order to get into a prestigious college, you need to perform well on the SAT and have an impressive transcript. In order to become a lawyer and represent clients, you must graduate law school and pass the state bar exam. Of course, there are many well-documented examples of success by those who did not proceed through traditional meritocracies. Think about technology companies with founders who dropped out of college, or performers who became famous after a YouTube video went viral.
In addition, organizations that aspire to become meritocracies encounter challenges. How well do you think established meritocracies identify talent? Wealthy families hire tutors, interview coaches, test-prep services, and consultants to help their kids get into the best schools. This starts as early as kindergarten in New York City, where competition for the most highly-regarded schools is especially fierce. Are these schools, many of which have copious scholarship funds that are intended to make the school more democratic, really offering all applicants a fair shake?
There are several positive aspects of bureaucracies. They are intended to improve efficiency, ensure equal opportunities, and serve a large population. And there are times when rigid hierarchies are needed. But remember that many of our bureaucracies grew large at the same time that our school model was developed––during the Industrial Revolution. Young workers were trained, and organizations were built for mass production, assembly line work, and factory jobs. In these scenarios, a clear chain of command was critical. Now, in the information age, this kind of rigid training and adherence to protocol can actually decrease both productivity and efficiency.
Today’s workplace requires a faster pace, more problem solving, and a flexible approach to work. Too much adherence to explicit rules and a division of labor can leave an organization behind. And unfortunately, once established, bureaucracies can take on a life of their own. Maybe you have heard the expression “trying to turn a tanker around mid-ocean,” which refers to the difficulties of changing direction with something large and set in its ways. State governments and current budget crises are examples of this challenge. It is almost impossible to make quick changes, leading states to fail, year after year, to address increasingly unbalanced budgets. Finally, bureaucracies, grew as institutions at a time when privileged white males held all the power. While ostensibly based on meritocracy, bureaucracies can perpetuate the existing balance of power by only recognizing the merit in traditionally male and privileged paths.
Michels (1911) suggested that all large organizations are characterized by the Iron Rule of Oligarchy, wherein an entire organization is ruled by a few elites. Do you think this is true? Can a large organization be collaborative?
### The McDonaldization of Society
The McDonaldization of Society (Ritzer 1993) refers to the increasing presence of the fast food business model in common social institutions, including government, education, and even relationships. The term itself isn't widely used in publications, research, or common conversation, but its effects are very familiar, even commonplace. The McDonald's model includes efficiency (the division of labor), predictability, calculability, and control (monitoring). For example, in your average chain grocery store, people at the register check out customers while stockers keep the shelves full of goods and deli workers slice meats and cheese to order (efficiency). Whenever you enter a store within that grocery chain, you receive the same type of goods, see the same store organization, and find the same brands at the same prices (predictability). You will find that goods are sold by the pound, so that you can weigh your fruit and vegetable purchase rather than simply guessing at the price for that bag of onions. The employees use a timecard to calculate their hours and receive overtime pay (calculability). Finally, you will notice that all store employees are wearing a uniform, and usually a name tag, so that they can be easily identified. There are security cameras to monitor the store, and some parts of the store, such as the stockroom, are generally considered off-limits to customers (control). This approach is so common in chain stores that you might not even notice it; in fact, if you went to a large-chain resturant or a store like Walmart, seeing a worker or a process that didn’t have these uniform characteristics would seem odd.
While McDonaldization has resulted in improved profits and an increased availability of various goods and services to more people worldwide, it has also reduced the variety of goods available in the marketplace while rendering available products uniform, generic, and bland. Think of the difference between a mass-produced shoe and one made by a local cobbler, between a chicken from a family-owned farm and a corporate grower, or between a cup of coffee from the local diner and one from Starbucks. Some more contemporary efforts can be referred to as “de-McDonaldization”: farmers markets, microbreweries, and various do-it-yourself trends. And with recent advertising and products emphasizing individuality, even McDonald’s seems to be de-McDonaldizing itself.
The corporate impact of this phenomenon is interesting on its own, but sociologists and ordinary citizens are often more concerned about its echoes in other areas of society. A primary example, discussed extensively later on in this text, is education. Curricula and teaching practices were long the domain of local districts under state guidance. Some experts felt that this led to both inefficiency and underperformance. Starting in the 1990s and especially in the early 2000s with the No Child Left Behind law, national standards began to override local approaches. But the desired outcome (improved education) is difficult to measure and far more difficult to achieve. Due to funding gaps, difficult standards, and intense public and local government opposition, the law was largely seen as having limited impact and was eventually phased out.
Healthcare has also gone to a mass production and efficiency model. As you will explore later in the text, U.S. healthcare providers and insurers faced overwhelming increases in demand, partly the result of America’s aging and less healthy population. In the 1990s, providers consolidated in what was called hospital “merger mania.” Local hospitals and even small doctors’ offices were merged or acquired by larger systems (Fuchs 1997). The trend continued with new growth in providers like urgent care offices. Other efficiency and standardization methods include telemedicine, new types of healthcare professionals, insurance mandates, and artificial intelligence.
### Summary
Large organizations fall into three main categories: normative/voluntary, coercive, and utilitarian. We live in a time of contradiction: while the pace of change and technology are requiring people to be more nimble and less bureaucratic in their thinking, large bureaucracies like hospitals, schools, and governments are more hampered than ever by their organizational format. At the same time, the past few decades have seen the development of a trend to bureaucratize and conventionalize local institutions. Increasingly, Main Streets across the country resemble each other; instead of a Bob’s Coffee Shop and Jane’s Hair Salon there is a Dunkin Donuts and a Supercuts. This trend has been referred to as the McDonaldization of society.
### Section Quiz
### Short Answer
### Further Research
As mentioned above, the concept of McDonaldization is a growing one. Check out this article discussing the phenomenon of McDonaldization further.
### References
Di Meglio, Francesca. 2007. “Learning on the McJob.” Bloomberg Businessweek, March 22. Retrieved February 10, 2012 (http://www.businessweek.com/stories/2007-03-22/learning-on-the-mcjobbusinessweek-business-news-stock-market-and-financial-advice).
Etzioni, Amitai. 1975. A Comparative Analysis of Complex Organizations: On Power, Involvement, and Their Correlates. New York: Free Press.
Fuchs, Victor R.. 1997. “Managed Care and Merger Mania,” JAMA 277.11 (920-921).
Goffman, Erving. 1961. Asylums: Essays on the Social Situation of Mental Patients and Other Inmates. Chicago, IL: Aldine.
Michels, Robert. 1949 [1911]. Political Parties. Glencoe, IL: Free Press.
Newman, Jerry. 2007. My Secret Life on the McJob. New York: McGraw-Hill.
Ritzer, George. 1993. The McDonaldization of Society. Thousand Oaks, CA: Pine Forge.
Schlosser, Eric. 2001. Fast Food Nation: The Dark Side of the All-American Meal. Boston: Houghton Mifflin Company.
United States Department of Labor. Bureau of Labor Statistics Occupational Outlook Handbook, 2010–2011 Edition. Retrieved February 10, 2012 (http://www.bls.gov/oco/ocos162.htm).
Weber, Max. 1968 [1922]. Economy and Society: An Outline of Interpretative Sociology. New York: Bedminster. |
# Deviance, Crime, and Social Control
## Introduction
After decades of classification as an illegal substance, marijuana is now legal in some form in nearly every state in the country. Most of the others have decriminalized the drug and/or have made it available for medical use. Considering public opinion and the policy stances of governors and legislators just ten or fifteen years ago, this is a remarkable turn of events.
In 2013, the Pew Research Center found for the first time that a majority of people in the United States (52 percent) favored legalizing marijuana. Until that point, most people were in favor of retaining the drug's status as illegal. (The question about marijuana’s legal status was first asked in a 1969 Gallup poll, and only 12 percent of U.S. adults favored legalization at that time.) Marijuana had for years been seen as a danger to society, especially to youth, and many people applied stereotypes to users, often considering them lazy or burdens on society, and often conflating marijuana use with negative stereotypes about race. In essence, marijuana users were considered deviants.
Public opinion has certainly changed. That 2013 study showed support for legalization had just gone over the 50 percent mark. By 2019, the number was up to 67 percent. Fully two-thirds of Americans favored permitting some types of legal usage, as well as decriminalization and elimination of jail time for users of the drug (Daniller 2019). Government officials took note, and states began changing their policies. Now, many people who had once shunned cannabis users are finding benefits of the substance, and perhaps rethinking their past opinions.
As in many aspects of sociology, there are no absolute answers about deviance. What people agree is deviant differs in various societies and subcultures, and it may change over time.
Tattoos, vegan lifestyles, single parenthood, breast implants, and even jogging were once considered deviant but are now widely accepted. The change process usually takes some time and may be accompanied by significant disagreement, especially for social norms that are viewed as essential. For example, divorce affects the social institution of family, and so divorce carried a deviant and stigmatized status at one time. Marijuana use was once seen as deviant and criminal, but U.S. social norms on this issue are changing.
### References
CBS News. 2014. “Marijuana Advocates Eye New Targets After Election Wins.” Associated Press, November 5. Retrieved November 5, 2014 (http://www.cbsnews.com/news/marijuana-activists-eye-new-targets-after-election-wins/).
Daniller, Andrew. 2019. “Two Thirds of Americans Support Marijuana Legalization.” Pew Research Center (https://www.pewresearch.org/fact-tank/2019/11/14/americans-support-marijuana-legalization/)
Governing. 2014. “Governing Data: State Marijuana Laws Map.” Governing: The States and Localities, November 5. Retrieved November 5, 2014 (http://www.governing.com/gov-data/state-marijuana-laws-map-medical-recreational.html).
Pew Research Center. 2013. “Partisans Disagree on Legalization of Marijuana, but Agree on Law Enforcement Policies.” Pew Research Center, April 30. Retrieved November 2, 2014 (http://www.pewresearch.org/daily-number/partisans-disagree-on-legalization-of-marijuana-but-agree-on-law-enforcement-policies/).
Motel, Seth. 2014. “6 Facts About Marijuana.” Pew Research Center: FactTank: News in the Numbers, November 5. Retrieved (http://www.pewresearch.org/fact-tank/2014/11/05/6-facts-about-marijuana/). |
# Deviance, Crime, and Social Control
## Deviance and Control
Wells Fargo CEO John Stumpf was forced to resign after his company enrolled customers in unnecessary auto insurance programs, while also fraudulently creating bank accounts without client consent. Both of these actions are prohibited by a range of laws and regulations. Over a million victims were charged improper fees or overcharged for insurance; some suffered reductions in their credit scores, and an estimated 25,000 people had their cars improperly repossessed. Even though these actions were found to be criminal, no one from Wells Fargo faced jail time, as is common in financial crimes. Deviance does not always align with punishment, and perceptions of its impact vary greatly.
What, exactly, is deviance? And what is the relationship between deviance and crime? According to sociologist William Graham Sumner, deviance is a violation of established contextual, cultural, or social norms, whether folkways, mores, or codified law (1906). It can be as minor as picking your nose in public or as major as committing murder. Although the word “deviance” has a negative connotation in everyday language, sociologists recognize that deviance is not necessarily bad (Schoepflin 2011). In fact, from a structural functionalist perspective, one of the positive contributions of deviance is that it fosters social change. For example, during the U.S. civil rights movement, Rosa Parks violated social norms when she refused to move to the “Black section” of the bus, and the Little Rock Nine broke customs of segregation to attend an Arkansas public school.
“What is deviant behavior?” cannot be answered in a straightforward manner. Whether an act is labeled deviant or not depends on many factors, including location, audience, and the individual committing the act (Becker 1963). Listening to music on your phone on the way to class is considered acceptable behavior. Listening to music during your 2 p.m. sociology lecture is considered rude. Listening to music when on the witness stand before a judge may cause you to be held in contempt of court and consequently fined or jailed.
As norms vary across cultures and time, it also makes sense that notions of deviance change. Sixty years ago, public schools in the United States had dress codes that often banned women from wearing pants to class. Today, it’s socially acceptable for women to wear pants, but less so for men to wear skirts. And more recently, the act of wearing or not wearing a mask became a matter of deviance, and in some cases, political affiliation and legality. Whether an act is deviant or not depends on society’s response to that act.
### Deviance, Crime, and Society
Deviance is a more encompassing term than crime, meaning that it includes a range of activities, some of which are crimes and some of which are not. Sociologists may study both with equal interest, but, as a whole, society views crime as far more significant. Crime preoccupies several levels of government, and it drives concerns among families and communities.
Deviance may be considered relative: Behaviors may be considered deviant based mostly on the circumstances in which they occurred; those circumstances may drive the perception of deviance more than the behavior itself. Relatively minor acts of deviance can have long-term impacts on the person and the people around them. For example, if an adult, who should “know better,” spoke loudly or told jokes at a funeral, they may be chastised and forever marked as disrespectful or unusual. But in many cultures, funerals are followed by social gatherings – some taking on a party-like atmosphere – so those same jovial behaviors would be perfectly acceptable, and even encouraged, just an hour later.
As discussed earlier, we typically learn these social norms as children and evolve them with experience. But the relativity of deviance can have significant societal impacts, including perceptions and prosecutions of crime. They may often be based on racial, ethnic, or related prejudices. When 15-year-old Elizabeth Eckford of the Little Rock Nine attempted to enter her legally desegregated high school, she was abiding by the law; but she was considered deviant by the crowd of White people that harassed and insulted her. (These events are discussed in more detail in the Education chapter.)
Consider the example of marijuana legalization mentioned earlier. Why was marijuana illegal in the first place? In fact, it wasn’t. Humans have used cannabis openly in their societies for thousands of years. While it was not a widely used substance in the United States, it had been accepted as a medicinal and recreational option, and was neither prohibited nor significantly regulated until the early 1900s. What changed?
In the early 1900s, an influx of immigrants began entering the country from Mexico. These newcomers took up residence in White communities, spoke a different language, and began competing for jobs and resources. They used marijuana more frequently than most Americans. Police and others began to circulate rumors regarding the substance’s link to violence and immorality. Newspapers and lawmakers spoke about the “Marijuana Menace” and the “evil weed,” and articles and images began to portray it as a corrupting force on America’s youth. Beginning in 1916, state after state began passing laws prohibiting marijuana use, and in 1937 Congress passed a federal law banning it (White 2012). Penalties for its usage increased over time, spiking during the War on Drugs, with racially and ethnically disparate applications. But more recently, as discussed in the introduction, marijuana is once again seen as an important medical treatment and an acceptable recreational pursuit. What changed this time?
Perceptions and proclamations of deviance have long been a means to oppress people by labeling their private behavior as criminal. Until the 1970s and 1980s, same-sex acts were prohibited by state laws. It was illegal to be gay or lesbian, and the restrictions extended to simple displays like holding hands. Other laws prohibited clothing deemed “inappropriate” for one’s biological sex. As a result, military service members and even war veterans were dishonorably discharged (losing all benefits) if they were discovered to be gay. Police harassed and humiliated LGBTQ people and regularly raided gay bars. And anti-LGBTQ street violence or hate crimes were tacitly permitted because they were rarely prosecuted and often lightly punished. While most states had eliminated their anti-LGBTQ laws by the time the Supreme Court struck them down in 2003, 14 states still had some version of them on the books.
To further explore the relativity of deviance and its relationship to perceptions of crime, consider gambling. Excessive or high-risk gambling is usually seen as deviant, but more moderate gambling is generally accepted. Still, gambling has long been limited in most of the United States, making it a crime to participate in certain types of gambling or to do so outside of specified locations. For example, a state may allow betting on horse races but not on sports. Changes to these laws are occurring, but for decades, a generally non-deviant behavior has been made criminal: When otherwise law-abiding people decided to engage in low-stakes and non-excessive gambling, they were breaking the law. Sociologists may study the essential question arising from this situation: Are these gamblers being deviant by breaking the law, even when the actual behavior at hand is not generally considered deviant?
### Social Control
When a person violates a social norm, what happens? A driver caught speeding can receive a speeding ticket. A student who wears a bathrobe to class gets a warning from a professor. An adult belching loudly is avoided. All societies practice social control, the regulation and enforcement of norms. The underlying goal of social control is to maintain social order, an arrangement of practices and behaviors on which society’s members base their daily lives. Think of social order as an employee handbook and social control as a manager. When a worker violates a workplace guideline, the manager steps in to enforce the rules; when an employee is doing an exceptionally good job at following the rules, the manager may praise or promote the employee.
The means of enforcing rules are known as sanctions. Sanctions can be positive as well as negative. Positive sanctions are rewards given for conforming to norms. A promotion at work is a positive sanction for working hard. Negative sanctions are punishments for violating norms. Being arrested is a punishment for shoplifting. Both types of sanctions play a role in social control.
Sociologists also classify sanctions as formal or informal. Although shoplifting, a form of social deviance, may be illegal, there are no laws dictating the proper way to scratch your nose. That doesn’t mean picking your nose in public won’t be punished; instead, you will encounter informal sanctions. Informal sanctions emerge in face-to-face social interactions. For example, wearing flip-flops to an opera or swearing loudly in church may draw disapproving looks or even verbal reprimands, whereas behavior that is seen as positive—such as helping an elderly person carry grocery bags across the street—may receive positive informal reactions, such as a smile or pat on the back.
Formal sanctions, on the other hand, are ways to officially recognize and enforce norm violations. If a student violates a college’s code of conduct, for example, the student might be expelled. Someone who speaks inappropriately to the boss could be fired. Someone who commits a crime may be arrested or imprisoned. On the positive side, a soldier who saves a life may receive an official commendation.
The table below shows the relationship between different types of sanctions.
### Summary
Deviance is a violation of norms. Whether or not something is deviant depends on contextual definitions, the situation, and people’s response to the behavior. Society seeks to limit deviance through the use of sanctions that help maintain a system of social control. Deviance is often relative, and perceptions of it can change quickly and unexpectedly.
### Section Quiz
### Short Answer
### Further Research
Although we rarely think of it in this way, deviance can have a positive effect on society. Check out the Positive Deviance Initiative, a program initiated by Tufts University to promote social movements around the world that strive to improve people’s lives.
### References
Becker, Howard. 1963. Outsiders: Studies in the Sociology of Deviance. New York: Free Press.
Schoepflin, Todd. 2011. “Deviant While Driving?” Everyday Sociology Blog, January 28. Retrieved February 10, 2012 (http://nortonbooks.typepad.com/everydaysociology/2011/01/deviant-while-driving.html).
Sumner, William Graham. 1955 [1906]. Folkways. New York, NY: Dover.
White, K., & Holman, M. (2012). Marijuana Prohibition in California: Racial Prejudice and Selective-Arrests. Race, Gender & Class, 19(3/4), 75-92. |
# Deviance, Crime, and Social Control
## Theoretical Perspectives on Deviance and Crime
Why does deviance occur? How does it affect a society? Since the early days of sociology, scholars have developed theories that attempt to explain what deviance and crime mean to society. These theories can be grouped according to the three major sociological paradigms: functionalism, symbolic interactionism, and conflict theory.
### Functionalism
Sociologists who follow the functionalist approach are concerned with the way the different elements of a society contribute to the whole. They view deviance as a key component of a functioning society. Strain theory and social disorganization theory represent two functionalist perspectives on deviance in society.
### Émile Durkheim: The Essential Nature of Deviance
Émile Durkheim believed that deviance is a necessary part of a successful society. One way deviance is functional, he argued, is that it challenges people’s present views (1893). For instance, when Black students across the United States participated in sit-ins during the civil rights movement, they challenged society’s notions of segregation. Moreover, Durkheim noted, when deviance is punished, it reaffirms currently held social norms, which also contributes to society (1893). Seeing a student given detention for skipping class reminds other high schoolers that playing hooky isn’t allowed and that they, too, could get detention.
Durkheim’s point regarding the impact of punishing deviance speaks to his arguments about law. Durkheim saw laws as an expression of the “collective conscience,” which are the beliefs, morals, and attitudes of a society. “A crime is a crime because we condemn it,” he said (1893). He discussed the impact of societal size and complexity as contributors to the collective conscience and the development of justice systems and punishments. For example, in large, industrialized societies that were largely bound together by the interdependence of work (the division of labor), punishments for deviance were generally less severe. In smaller, more homogeneous societies, deviance might be punished more severely.
### Robert Merton: Strain Theory
Sociologist Robert Merton agreed that deviance is an inherent part of a functioning society, but he expanded on Durkheim’s ideas by developing strain theory, which notes that access to socially acceptable goals plays a part in determining whether a person conforms or deviates. From birth, we’re encouraged to achieve the “American Dream” of financial success. A person who attends business school, receives an MBA, and goes on to make a million-dollar income as CEO of a company is said to be a success. However, not everyone in our society stands on equal footing. That MBA-turned-CEO may have grown up in the best school district and had means to hire tutors. Another person may grow up in a neighborhood with lower-quality schools, and may not be able to pay for extra help. A person may have the socially acceptable goal of financial success but lack a socially acceptable way to reach that goal. According to Merton’s theory, an entrepreneur who can’t afford to launch their own company may be tempted to embezzle from their employer for start-up funds.
Merton defined five ways people respond to this gap between having a socially accepted goal and having no socially accepted way to pursue it.
1. Conformity: Those who conform choose not to deviate. They pursue their goals to the extent that they can through socially accepted means.
2. Innovation: Those who innovate pursue goals they cannot reach through legitimate means by instead using criminal or deviant means.
3. Ritualism: People who ritualize lower their goals until they can reach them through socially acceptable ways. These members of society focus on conformity rather than attaining a distant dream.
4. Retreatism: Others retreat and reject society’s goals and means. Some people who beg and people who are homeless have withdrawn from society’s goal of financial success.
5. Rebellion: A handful of people rebel and replace a society’s goals and means with their own. Terrorists or freedom fighters look to overthrow a society’s goals through socially unacceptable means.
### Social Disorganization Theory
Developed by researchers at the University of Chicago in the 1920s and 1930s, social disorganization theory asserts that crime is most likely to occur in communities with weak social ties and the absence of social control. An individual who grows up in a poor neighborhood with high rates of drug use, violence, teenage delinquency, and deprived parenting is more likely to become engaged in crime than an individual from a wealthy neighborhood with a good school system and families who are involved positively in the community.
Social disorganization theory points to broad social factors as the cause of deviance. A person isn’t born as someone who will commit crimes but becomes one over time, often based on factors in their social environment. Robert Sampson and Byron Groves (1989) found that poverty and family disruption in given localities had a strong positive correlation with social disorganization. They also determined that social disorganization was, in turn, associated with high rates of crime and delinquency—or deviance. Recent studies Sampson conducted with Lydia Bean (2006) revealed similar findings. High rates of poverty and single-parent homes correlated with high rates of juvenile violence. Research into social disorganization theory can greatly influence public policy. For instance, studies have found that children from disadvantaged communities who attend preschool programs that teach basic social skills are significantly less likely to engage in criminal activity. (Lally 1987)
### Conflict Theory
Conflict theory looks to social and economic factors as the causes of crime and deviance. Unlike functionalists, conflict theorists don’t see these factors as positive functions of society. They see them as evidence of inequality in the system. They also challenge social disorganization theory and control theory and argue that both ignore racial and socioeconomic issues and oversimplify social trends (Akers 1991). Conflict theorists also look for answers to the correlation of gender and race with wealth and crime.
### Karl Marx: An Unequal System
Conflict theory was greatly influenced by the work of German philosopher, economist, and social scientist Karl Marx. Marx believed that the general population was divided into two groups. He labeled the wealthy, who controlled the means of production and business, the bourgeois. He labeled the workers who depended on the bourgeois for employment and survival the proletariat. Marx believed that the bourgeois centralized their power and influence through government, laws, and other authority agencies in order to maintain and expand their positions of power in society. Though Marx spoke little of deviance, his ideas created the foundation for conflict theorists who study the intersection of deviance and crime with wealth and power.
### C. Wright Mills: The Power Elite
In his book The Power Elite (1956), sociologist C. Wright Mills described the existence of what he dubbed the power elite, a small group of wealthy and influential people at the top of society who hold the power and resources. Wealthy executives, politicians, celebrities, and military leaders often have access to national and international power, and in some cases, their decisions affect everyone in society. Because of this, the rules of society are stacked in favor of a privileged few who manipulate them to stay on top. It is these people who decide what is criminal and what is not, and the effects are often felt most by those who have little power. Mills’ theories explain why celebrities can commit crimes and suffer little or no legal retribution. For example, USA Today maintains a database of NFL players accused and convicted of crimes. 51 NFL players had been convicted of committing domestic violence between the years 2000 and 2019. They have been sentenced to a collective 49 days in jail, and most of those sentences were deferred or otherwise reduced. In most cases, suspensions and fines levied by the NFL or individual teams were more severe than the justice system's (Schrotenboer 2020 and clickitticket.com 2019).
### Crime and Social Class
While crime is often associated with the underprivileged, crimes committed by the wealthy and powerful remain an under-punished and costly problem within society. The FBI reported that victims of burglary, larceny, and motor vehicle theft lost a total of $15.3 billion dollars in 2009 (FB1 2010). In comparison, when former advisor and financier Bernie Madoff was arrested in 2008, the U.S. Securities and Exchange Commission reported that the estimated losses of his financial Ponzi scheme fraud were close to $50 billion (SEC 2009).
This imbalance based on class power is also found within U.S. criminal law. In the 1980s, the use of crack cocaine (a less expensive but powerful drug) quickly became an epidemic that swept the country’s poorest urban communities. Its pricier counterpart, cocaine, was associated with upscale users and was a drug of choice for the wealthy. The legal implications of being caught by authorities with crack versus cocaine were starkly different. In 1986, federal law mandated that being caught in possession of 50 grams of crack was punishable by a ten-year prison sentence. An equivalent prison sentence for cocaine possession, however, required possession of 5,000 grams. In other words, the sentencing disparity was 1 to 100 (New York Times Editorial Staff 2011). This inequality in the severity of punishment for crack versus cocaine paralleled the unequal social class of respective users. A conflict theorist would note that those in society who hold the power are also the ones who make the laws concerning crime. In doing so, they make laws that will benefit them, while the powerless classes who lack the resources to make such decisions suffer the consequences. Throughout the 1980s and early 1990s, states passed numerous laws increasing penalties, especially for repeat offenders. The U.S. government passed an even more significant law, the Violent Crime Control and Law Enforcement Act of 1994 (known as the 1994 Crime Bill), which further increased penalties, funded prisons, and incentivized law enforcement agencies to further pursue drug offenders. One outcome of these policies was the mass incarceration of Black and Hispanic people, which led to a cycle of poverty and reduced social mobility. The crack-cocaine punishment disparity remained until 2010, when President Obama signed the Fair Sentencing Act, which decreased the disparity to 1 to 18 (The Sentencing Project 2010).
### Symbolic Interactionism
Symbolic interactionism is a theoretical approach that can be used to explain how societies and/or social groups come to view behaviors as deviant or conventional.
### Labeling Theory
Although all of us violate norms from time to time, few people would consider themselves deviant. Those who do, however, have often been labeled “deviant” by society and have gradually come to believe it themselves. Labeling theory examines the ascribing of a deviant behavior to another person by members of society. Thus, what is considered deviant is determined not so much by the behaviors themselves or the people who commit them, but by the reactions of others to these behaviors. As a result, what is considered deviant changes over time and can vary significantly across cultures.
Sociologist Edwin Lemert expanded on the concepts of labeling theory and identified two types of deviance that affect identity formation. Primary deviance is a violation of norms that does not result in any long-term effects on the individual’s self-image or interactions with others. Speeding is a deviant act, but receiving a speeding ticket generally does not make others view you as a bad person, nor does it alter your own self-concept. Individuals who engage in primary deviance still maintain a feeling of belonging in society and are likely to continue to conform to norms in the future.
Sometimes, in more extreme cases, primary deviance can morph into secondary deviance. Secondary deviance occurs when a person’s self-concept and behavior begin to change after his or her actions are labeled as deviant by members of society. The person may begin to take on and fulfill the role of a “deviant” as an act of rebellion against the society that has labeled that individual as such. For example, consider a high school student who often cuts class and gets into fights. The student is reprimanded frequently by teachers and school staff, and soon enough, develops a reputation as a “troublemaker.” As a result, the student starts acting out even more and breaking more rules; the student has adopted the “troublemaker” label and embraced this deviant identity. Secondary deviance can be so strong that it bestows a master status on an individual. A master status is a label that describes the chief characteristic of an individual. Some people see themselves primarily as doctors, artists, or grandfathers. Others see themselves as beggars, convicts, or addicts.
### Techniques of Neutralization
How do people deal with the labels they are given? This was the subject of a study done by Sykes and Matza (1957). They studied teenage boys who had been labeled as juvenile delinquents to see how they either embraced or denied these labels. Have you ever used any of these techniques?
Let’s take a scenario and apply all five techniques to explain how they are used. A young person is working for a retail store as a cashier. Their cash drawer has been coming up short for a few days. When the boss confronts the employee, they are labeled as a thief for the suspicion of stealing. How does the employee deal with this label?
The Denial of Responsibility: When someone doesn’t take responsibility for their actions or blames others. They may use this technique and say that it was their boss’s fault because they don’t get paid enough to make rent or because they’re getting a divorce. They are rejecting the label by denying responsibility for the action.
The Denial of Injury: Sometimes people will look at a situation in terms of what effect it has on others. If the employee uses this technique they may say, “What’s the big deal? Nobody got hurt. Your insurance will take care of it.” The person doesn’t see their actions as a big deal because nobody “got hurt.”
The Denial of the Victim: If there is no victim there’s no crime. In this technique the person sees their actions as justified or that the victim deserved it. Our employee may look at their situation and say, “I’ve worked here for years without a raise. I was owed that money and if you won’t give it to me I’ll get it my own way.”
The Condemnation of the Condemners: The employee might “turn it around on” the boss by blaming them. They may say something like, “You don’t know my life, you have no reason to judge me.” This is taking the focus off of their actions and putting the onus on the accuser to, essentially, prove the person is living up to the label, which also shifts the narrative away from the deviant behavior.
Appeal to a Higher Authority: The final technique that may be used is to claim that the actions were for a higher purpose. The employee may tell the boss that they stole the money because their mom is sick and needs medicine or something like that. They are justifying their actions by making it seem as though the purpose for the behavior is a greater “good” than the action is “bad.” (Sykes & Matza, 1957)
### Edwin Sutherland: Differential Association
In the early 1900s, sociologist Edwin Sutherland sought to understand how deviant behavior developed among people. Since criminology was a young field, he drew on other aspects of sociology including social interactions and group learning (Laub 2006). His conclusions established differential association theory, which suggested that individuals learn deviant behavior from those close to them who provide models of and opportunities for deviance. According to Sutherland, deviance is less a personal choice and more a result of differential socialization processes. For example, a young person whose friends are sexually active is more likely to view sexual activity as acceptable. Sutherland developed a series of propositions to explain how deviance is learned. In proposition five, for example, he discussed how people begin to accept and participate in a behavior after learning whether it is viewed as “favorable” by those around them. In proposition six, Sutherland expressed the ways that exposure to more “definitions” favoring the deviant behavior than those opposing it may eventually lead a person to partake in deviance (Sutherland 1960), applying almost a quantitative element to the learning of certain behaviors. In the example above, a young person may find sexual activity more acceptable once a certain number of their friends become sexually active, not after only one does so.
Sutherland’s theory may explain why crime is multigenerational. A longitudinal study beginning in the 1960s found that the best predictor of antisocial and criminal behavior in children was whether their parents had been convicted of a crime (Todd and Jury 1996). Children who were younger than ten years old when their parents were convicted were more likely than other children to engage in spousal abuse and criminal behavior by their early thirties. Even when taking socioeconomic factors such as dangerous neighborhoods, poor school systems, and overcrowded housing into consideration, researchers found that parents were the main influence on the behavior of their offspring (Todd and Jury 1996).
### Travis Hirschi: Control Theory
Continuing with an examination of large social factors, control theory states that social control is directly affected by the strength of social bonds and that deviance results from a feeling of disconnection from society. Individuals who believe they are a part of society are less likely to commit crimes against it.
Travis Hirschi (1969) identified four types of social bonds that connect people to society:
1. Attachment measures our connections to others. When we are closely attached to people, we worry about their opinions of us. People conform to society’s norms in order to gain approval (and prevent disapproval) from family, friends, and romantic partners.
2. Commitment refers to the investments we make in the community. A well-respected local businessperson who volunteers at their synagogue and is a member of the neighborhood block organization has more to lose from committing a crime than a person who doesn’t have a career or ties to the community.
3. Similarly, levels of involvement, or participation in socially legitimate activities, lessen a person’s likelihood of deviance. A child who plays little league baseball and takes art classes has fewer opportunities to ______.
4. The final bond, belief, is an agreement on common values in society. If a person views social values as beliefs, they will conform to them. An environmentalist is more likely to pick up trash in a park, because a clean environment is a social value to them (Hirschi 1969).
### Summary
The three major sociological paradigms offer different explanations for the motivation behind deviance and crime. Functionalists point out that deviance is a social necessity since it reinforces norms by reminding people of the consequences of violating them. Violating norms can open society’s eyes to injustice in the system. Conflict theorists argue that crime stems from a system of inequality that keeps those with power at the top and those without power at the bottom. Symbolic interactionists focus attention on the socially constructed nature of the labels related to deviance. Crime and deviance are learned from the environment and enforced or discouraged by those around us.
### Section Quiz
### Short Answer
### Further Research
The Skull and Bones Society made news in 2004 when it was revealed that then-President George W. Bush and his Democratic challenger, John Kerry, had both been members at Yale University. In the years since, conspiracy theorists have linked the secret society to numerous world events, arguing that many of the nation’s most powerful people are former Bonesmen. Although such ideas may raise a lot of skepticism, many influential people of the past century have been Skull and Bones Society members, and the society is sometimes described as a college version of the power elite later in life.
### References
Akers, Ronald L. 1991. “Self-control as a General Theory of Crime.” Journal of Quantitative Criminology:201–11.
Cantor, D. and Lynch, J. 2000. Self-Report Surveys as Measures of Crime and Criminal Victimization. Rockville, MD: National Institute of Justice. Retrieved February 10, 2012 (https://www.ncjrs.gov/criminal_justice2000/vol_4/04c.pdf).
Clickitticket.com, 2019. “A Complete List (with Statistics) of the NFL Players Arrested For Domestic Abuse in the 21st Century.” Retrieved January 3, 2021. (https://www.clickitticket.com/nfl-domestic-violence/)
Durkheim, Émile. 1997 [1893]. New York, NY: Free Press.
The Federal Bureau of Investigation. 2010. “Crime in the United States, 2009.” Retrieved January 6, 2012 (http://www2.fbi.gov/ucr/cius2009/offenses/property_crime/index.html).
Hirschi, Travis. 1969. Causes of Delinquency. Berkeley and Los Angeles: University of California Press.
Holding, Reynolds. 2006. “Why Can’t Felons Vote?” Time, November 21. Retrieved February 10, 2012 (http://www.time.com/time/nation/article/0,8599,1553510,00.html).
Krajick, Kevin. 2004. “Why Can’t Ex-Felons Vote?” The Washington Post, August 18, p. A19. Retrieved February 10, 2012 (http://www.washingtonpost.com/wp-dyn/articles/A9785-2004Aug17.html).
Lally, J.R., Mangione, P.L., and Honig, A.S. 1987. “The Syracuse University Family development Research Program: Long-Range Impact of an Early Intervention with Low-Income Children and Their Families.”
Laub, John H. 2006. “Edwin H. Sutherland and the Michael-Adler Report: Searching for the Soul of Criminology Seventy Years Later.” Criminology 44:235–57.
Lott, John R. Jr. and Sonya D. Jones. 2008. “How Felons Who Vote Can Tip an Election.” Fox News, October 20. Retrieved February 10, 2012 (http://www.foxnews.com/story/0,2933,441030,00.html).
Mills, C. Wright. 1956. The Power Elite. New York: Oxford University Press.
New York Times Editorial Staff. 2011. “Reducing Unjust Cocaine Sentences.” New York Times, June 29. Retrieved February 10, 2012 (http://www.nytimes.com/2011/06/30/opinion/30thu3.html).
ProCon.org. 2009. “Disenfranchised Totals by State.” April 13. Retrieved February 10, 2012 (http://felonvoting.procon.org/view.resource.php?resourceID=000287).
Schrotenboer, Brent. 2020. “NFL player arrests database: Records since 2000” Gannett, USA Today. Retrieved January 3, 2021. (https://databases.usatoday.com/nfl-arrests/).
Sutherland, Edwin H., and Donald R. Cressey. “A Theory of Differential Association.” (1960) Criminological Theory: Past to Present. Ed. Francis T. Cullen and Robert Agnew. Los Angeles: Roxbury Company, 2006. 122-125.
ProCon.org. 2011. “State Felon Voting Laws.” April 8. Retrieved February 10, 2012 (http://felonvoting.procon.org/view.resource.php?resourceID=000286).
Sampson, Robert J. and Lydia Bean. 2006. “Cultural Mechanisms and Killing Fields: A Revised Theory of Community-Level Racial Inequality.” The Many Colors of Crime: Inequalities of Race, Ethnicity and Crime in America, edited by R. Peterson, L. Krivo and J. Hagan. New York: New York University Press.
Sampson, Robert J. and W. Byron Graves. 1989. “Community Structure and Crimes: Testing Social-Disorganization Theory.” American Journal of Sociology 94:774-802.
Shaw, Clifford R. and Henry McKay. 1942. Juvenile Delinquency in Urban Areas Chicago, IL: University of Chicago Press.
U.S. Securities and Exchange Commission. 2009. “SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme.” Washington, DC: U.S. Securities and Exchange Commission. Retrieved January 6, 2012 (http://www.sec.gov/news/press/2008/2008-293.htm).
The Sentencing Project. 2010. “Federal Crack Cocaine Sentencing.” The Sentencing Project: Research and Advocacy Reform. Retrieved February 12, 2012 (http://sentencingproject.org/doc/publications/dp_CrackBriefingSheet.pdf).
Shaw, Clifford R. and Henry H. McKay. 1942. Juvenile Delinquency in Urban Areas. Chicago: University of Chicago Press.
Todd, Roger and Louise Jury. 1996. “Children Follow Convicted Parents into Crime.” The Independent, February 27. Retrieved February 10, 2012 (http://www.independent.co.uk/news/children-follow-convicted-parents-into-crime-1321272.html). |
# Deviance, Crime, and Social Control
## Crime and the Law
Although deviance is a violation of social norms, it’s not always punishable, and it’s not necessarily bad. Crime, on the other hand, is a behavior that violates official law and is punishable through formal sanctions. Walking to class backward is a deviant behavior. Driving with a blood alcohol percentage over the state’s limit is a crime. Like other forms of deviance, however, ambiguity exists concerning what constitutes a crime and whether all crimes are, in fact, “bad” and deserve punishment. For example, during the 1960s, civil rights activists often violated laws intentionally as part of their effort to bring about racial equality. In hindsight, we recognize that the laws that deemed many of their actions crimes—for instance, Rosa Parks refusing to give up her seat to a White man—were inconsistent with social equality.
As you have learned, all societies have informal and formal ways of maintaining social control. Within these systems of norms, societies have legal codes that maintain formal social control through laws, which are rules adopted and enforced by a political authority. Those who violate these rules incur negative formal sanctions. Normally, punishments are relative to the degree of the crime and the importance to society of the value underlying the law. As we will see, however, there are other factors that influence criminal sentencing.
### Types of Crimes
Not all crimes are given equal weight. Society generally socializes its members to view certain crimes as more severe than others. For example, most people would consider murdering someone to be far worse than stealing a wallet and would expect a murderer to be punished more severely than a thief. In modern U.S. society, crimes are classified as one of two types based on their severity. Violent crimes (also known as “crimes against a person”) are based on the use of force or the threat of force. Rape, murder, and armed robbery fall under this category. Nonviolent crimes involve the destruction or theft of property but do not use force or the threat of force. Because of this, they are also sometimes called “property crimes.” Larceny, car theft, and vandalism are all types of nonviolent crimes. If you use a crowbar to break into a car, you are committing a nonviolent crime; if you mug someone with the crowbar, you are committing a violent crime.
When we think of crime, we often picture street crime, or offenses committed by ordinary people against other people or organizations, usually in public spaces. An often overlooked category is corporate crime, or crime committed by white-collar workers in a business environment. Embezzlement, insider trading, and identity theft are all types of corporate crime. Although these types of offenses rarely receive the same amount of media coverage as street crimes, they can be far more damaging. Financial frauds such as insurance scams, Ponzi schemes, and improper practices by banks can devastate families who lose their savings or home.
An often-debated third type of crime is victimless crime. Crimes are called victimless when the perpetrator is not explicitly harming another person. As opposed to battery or theft, which clearly have a victim, a crime like drinking a beer when someone is twenty years old or selling a sexual act do not result in injury to anyone other than the individual who engages in them, although they are illegal. While some claim acts like these are victimless, others argue that they actually do harm society. Prostitution may foster abuse toward women by clients or pimps. Drug use may increase the likelihood of employee absences. Such debates highlight how the deviant and criminal nature of actions develops through ongoing public discussion.
### Crime Statistics
The FBI gathers data from approximately 17,000 law enforcement agencies, and the Uniform Crime Reports (UCR) is the annual publication of this data (FBI 2021). The UCR has comprehensive information from police reports but fails to account for the many crimes that go unreported, often due to victims’ fear, shame, or distrust of the police. The quality of this data is also inconsistent because of differences in approaches to gathering victim data; important details are not always asked for or reported (Cantor and Lynch 2000). As of 2021, states will be required to provide data for the National Incident-Based Reporting System (NIBRS), which captures more detailed information on each crime, including time of day, location, and other contexts. NIBRS is intended to provide more data-informed discussion to better improve crime prevention and policing (FBI 2021).
The U.S. Bureau of Justice Statistics publishes a separate self-report study known as the National Crime Victimization Survey (NCVS). A self-report study is a collection of data gathered using voluntary response methods, such as questionnaires or telephone interviews. Self-report data are gathered each year, asking approximately 160,000 people in the United States about the frequency and types of crime they’ve experienced in their daily lives (BJS 2019). The NCVS reports a higher rate of crime than the UCR, likely picking up information on crimes that were experienced but never reported to the police. Age, race, gender, location, and income-level demographics are also analyzed.
The NCVS survey format allows people to more openly discuss their experiences and also provides a more-detailed examination of crimes, which may include information about consequences, relationship between victim and criminal, and substance abuse involved. One disadvantage is that the NCVS misses some groups of people, such as those who don’t have telephones and those who move frequently. The quality of information may also be reduced by inaccurate victim recall of the crime (Cantor and Lynch 2000).
### Public Perception of Crime
Neither the NCVR nor the UCR accounts for all crime in the United States, but general trends can be determined. Crime rates, particularly for violent and gun-related crimes, have been on the decline since peaking in the early 1990s (Cohn, Taylor, Lopez, Gallagher, Parker, and Maass 2013). However, the public believes crime rates are still high, or even worsening. Recent surveys (Saad 2011; Pew Research Center 2013, cited in Overburg and Hoyer 2013) have found U.S. adults believe crime is worse now than it was twenty years ago.
Inaccurate public perception of crime may be heightened by popular crime series such as Law & Order (Warr 2008) and by extensive and repeated media coverage of crime. Many researchers have found that people who closely follow media reports of crime are likely to estimate the crime rate as inaccurately high and more likely to feel fearful about the chances of experiencing crime (Chiricos, Padgett, and Gertz 2000). Recent research has also found that people who reported watching news coverage of 9/11 or the Boston Marathon Bombing for more than an hour daily became more fearful of future terrorism (Holman, Garfin, and Silver 2014).
### The U.S. Criminal Justice System
A criminal justice system is an organization that exists to enforce a legal code. There are three branches of the U.S. criminal justice system: the police, the courts, and the corrections system.
### Police
Police are a civil force in charge of enforcing laws and public order at a federal, state, or community level. No unified national police force exists in the United States, although there are federal law enforcement officers. Federal officers operate under specific government agencies such as the Federal Bureau of Investigations (FBI); the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF); and the Department of Homeland Security (DHS). Federal officers can only deal with matters that are explicitly within the power of the federal government, and their field of expertise is usually narrow. A county police officer may spend time responding to emergency calls, working at the local jail, or patrolling areas as needed, whereas a federal officer would be more likely to investigate suspects in firearms trafficking or provide security for government officials.
State police have the authority to enforce statewide laws, including regulating traffic on highways. Local or county police, on the other hand, have a limited jurisdiction with authority only in the town or county in which they serve.
### Courts
Once a crime has been committed and a violator has been identified by the police, the case goes to court. A court is a system that has the authority to make decisions based on law. The U.S. judicial system is divided into federal courts and state courts. As the name implies, federal courts (including the U.S. Supreme Court) deal with federal matters, including trade disputes, military justice, and government lawsuits. Judges who preside over federal courts are selected by the president with the consent of Congress.
State courts vary in their structure but generally include three levels: trial courts, appellate courts, and state supreme courts. In contrast to the large courtroom trials in TV shows, most noncriminal cases are decided by a judge without a jury present. Traffic court and small claims court are both types of trial courts that handle specific civil matters.
Criminal cases are heard by trial courts with general jurisdictions. Usually, a judge and jury are both present. It is the jury’s responsibility to determine guilt and the judge’s responsibility to determine the penalty, though in some states the jury may also decide the penalty. Unless a defendant is found “not guilty,” any member of the prosecution or defense (whichever is the losing side) can appeal the case to a higher court. In some states, the case then goes to a special appellate court; in others it goes to the highest state court, often known as the state supreme court.
### Corrections
The corrections system is charged with supervising individuals who have been arrested, convicted, and sentenced for a criminal offense, plus people detained while awaiting hearings, trials, or other procedures. At the end of 2018, approximately 2.3 million people were incarcerated in the United States (BJS 2020); these include people who are in state and federal prisons as well as those in local jails or related facilities, as explained below. Since many convicted people are placed on probation or parole, have their sentences deferred or otherwise altered, or are released under other circumstances, the total number of people within the corrections system is much higher. In 2018, the total number of people either incarcerated, detained, paroled, or on probation was 6,410,000 (BJS 2020).
The U.S. incarceration rate has grown considerably in the last hundred years, but has begun to decline in the past decade. The total correctional population (including parolees and those on probation), peaked in 2007 at 7.3 million, resulting in approximately 1 in 32 people being under some sort of correctional supervision. With the 2018 correction system number close to 6.4 million people, that ratio goes to 1 in every 40 people (BJS 2020). The declines are seen as a positive, but the United States holds the largest number of prisoners of any nation in the world.
Prison is different from jail. A jail provides temporary confinement, usually while an individual awaits trial or parole. Prisons are facilities built for individuals serving sentences of more than a year. Whereas jails are small and local, prisons are large and run by either the state or the federal government. While incarcerated, people have differing levels of freedom and opportunity for engagement. Some inmates have options to take classes, play organized sports, and otherwise enrich themselves, usually with the goal of improving their lives upon release. Other incarcerated people have very limited opportunities. Usually these distinctions are based on the severity of their crimes and their behavior once imprisoned, but available resources and funding can be a significant factor.
Parole refers to a temporary release from prison or jail that requires supervision and the consent of officials. Parole is different from probation, which is supervised time used as an alternative to prison. Probation and parole can both follow a period of incarceration in prison, especially if the prison sentence is shortened. Most people in these situations are supervised by correctional officers or other appropriate professionals, including mental health professionals; they may attend regular meetings or counseling sessions and may be required to report on their activities and travel. People on probation or parole often have strict guidelines; not only will they be returned to jail upon committing a crime, but they may also be prohibited from associating with known criminals or suspects. These strategies are designed to prevent people on parole or probation from returning to criminal engagements, and to increase the likelihood that they will remain positive members of the community through interactions with family, productive employment, and mental health treatment if needed.
### Policing and Race
This chapter described just a few of the sociological theories regarding deviance and crime; there are many more, as well as many approaches for preventing crime and enforcing laws. Citizens, law enforcement, and elected officials weigh a wide array of contexts and personal experiences when considering the best way to address crime. In at least some cases, decision makers are motivated by a desire to protect the status quo or improve their political or financial position.
As discussed earlier, during the 1980s, crack cocaine was exploding in usage among lower income, Black, and Hispanic people. White middle class and upper economic class Americans became terrified of the potential for their family and children to be involved with drugs and drug-related crime. State governments passed increasingly harsh laws, resulting in stiffer penalties and the removal of judges’ discretion in drug case sentencing. Among the most well known of these were “three strikes laws,” which mandated long sentences for anyone convicted of multiple drug offenses, even if the offenses themselves were minor. Practices like civil forfeiture, in which law enforcement or municipalities could seize cash and property of suspected criminals even before they were convicted, provided a significant financial incentive to investigate drug crimes (Tiegen 2018).
The additional funding sources and high likelihood of successful prosecution drove police forces toward more aggressive and inequitable tactics. After training by the Drug Enforcement Agency, police forces around the country began racial profiling in a focused, consistent manner. Black and Hispanic people were many times more likely than White people to be pulled over for routine traffic stops. Local police forces focused on patrolling minority-inhabited neighborhoods, resulting in more arrests and prosecutions of Black and Hispanic people (Harris 2020).
No issue related to race and policing is of more concern than the shooting of unarmed Black people by police. The lack of punishment of police officers for committing these acts perpetuates the issue of unequal justice. Eric Garner was killed by an officer using a prohibited chokehold after Garner had allegedly committed a misdemeanor. Breonna Taylor was killed by police who violently infiltrated the wrong home. None of the officers involved in those deaths were prosecuted, though several were fired. The officer who killed George Floyd was immediately charged with the crime, and was eventually convicted, but some believe that to be the case due to the clear and horrific video of the event (Abdollah 2021).
Police advocates, elected officials, and ordinary citizens often express the importance of effective and just law enforcement. When “Defund The Police” became a widespread position during 2020, many Black people spoke out against it; polling revealed that a majority of Black people did not support the idea, and over 80 percent of Black people preferred having the police spend the same or more time in their communities (Saad 2020). While this frequently cited result is relatively consistent across different polls, it also reveals divisions within the Black community, often based on age or other factors. The same polls find that many Black people still distrust the police or feel less secure when they see them (Yahoo/Yougov 2020).
### Summary
Crime is established by legal codes and upheld by the criminal justice system. In the United States, there are three branches of the justice system: police, courts, and corrections. Although crime rates and incarceration increased throughout most of the twentieth century, they are now dropping. Despite these developments, inequitable law enformcenent is a destructive reality in American communities, and efforts are underway to improve outcomes.
### Section Quiz
### Short Answer
### Further Research
Is the U.S. criminal justice system confusing? You’re not alone. Check out this handy flowchart from the Bureau of Justice Statistics.
How is crime data collected in the United States? Read about the methods of data collection and take the National Crime Victimization Survey.
### References
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