UNDERSTANDING ENTREPRENEURSHIP AND BUSINESS OWNERSHIP CHAPTER 3 Department of Business Administration Eastern Mediterranean University Gazi. Mağusa, TRNC This slide set is prepared for use with Ebert and Griffin, Business Essentials. Fifth Edition. Prentice Hall, New Jersey. 2005. 1
TOPICS SUMMARY l What is A Small Business? l Entrepreneurship l Starting and Operating the Small Business l Franchising l Success and Failure in Small Business l Noncorporate Business Ownership l Corporations 2
WHAT IS A SMALL BUSINESS? l Small Business -- a company that is independently owned and operated, that is not dominant in its field, and that meets certain criteria for number of employees or annual sales revenue. l In the U. S. , Department of Commerce defines a company as small business if it has fewer than 500 employees. 3
WHAT IS A SMALL BUSINESS? l The Small Business Administration (SBA) regards some companies with 1500 employees as “small”. The SBA uses two factors in its definition: – number of employees – total annual sales 4
WHAT IS A SMALL BUSINESS? l In Turkey, companies with fewer than 50 employees are classified as small businesses. Companies with 50 - 199 employees are called medium-sized businesses. (KOS -- Küçük ve Orta Ölçekli Sanayi “Small and Medium Size Enterprises - SME ) Look at link KOSGEB (Küçük ve Orta Ölçekli Sanayi Geliştirme ve Destekleme İdaresi Başkanlığı) for material on SME’s in 5 Turkey.
WHAT IS A SMALL BUSINESS? l Governments in many countries play a significant role in the formation and operation of small businesses. – importance to the overall economy – provider of jobs – introduce new products and services (innovation) 6
WHAT IS A SMALL BUSINESS? l Importance of Small Business in A Country’s Economy. In Turkey – Small and Medium Industrial Enterprises account for 99. 5% of all manufacturing industrial enterprises. – Small and medium Industry Enterprises have a 61. 1% share within total employment in the manufacturing industry. – As regards value added created, the share of Small and Medium Industry Enterprises 7 is 27. 3%.
WHAT IS A SMALL BUSINESS? l Why is small business so important to the economy? Let’s look at its contribution to the economy. – Job Creation Many jobs are created by small businesses than big business. Small business especially in some industries - is an important source of new jobs. Example: Dell Computer Company started with one full-time and two part-time employees. It now has around 10, 000 8 employees.
WHAT IS A SMALL BUSINESS? – Innovation Major innovations are as likely to come from small businesses (or individuals) as from big businesses. Small businesses (or individuals invented the l PC, stainless steel razor blade, transistor radio, the photocopy machine, the jet engine, and the self developing photograph. Some innovation stories follow. . . 9
The Story of Apple Computer Steven Jobs, with Apple cofounder Steve Wozniak, built the first Apple computer in his parents’ garage. Apple Computer went on to become the fastestgrowing company in American history. In 1985, after developing the original Apple Macintosh, Jobs resigned to form Ne. XT, Inc. His innovative designs have proven technologically superior but prohibitively expensive and are often considered to be too far ahead of their time. REUTERS/THE BETTMANN ARCHIVE – "Steven Jobs, " Microsoft® Encarta® Encyclopedia 99. © 1993 -1998 Microsoft Corporation. All rights reserved. 10
The Story of the Safety Blade Razors made of substances other than steel have been in use since ancient times. Straight razors with open steel blades, now used chiefly by barbers, were common before the 20 th century. A new era in shaving began in 1903, when the safety razor with disposable blades was introduced by the American inventor King Camp Gillette. The thin, small blade was enclosed by the razor, thus guarding the skin against deep cuts. Plastic disposable razors and razors with replaceable blades are in common use today. "Razor, " Microsoft® Encarta® Encyclopedia 99. © 1993 -1998 Microsoft Corporation. All rights reserved. 11
The Story of the Polaroid Camera Land, Edwin Herbert (1909 -91), American physicist and inventor, born in Bridgeport, Connecticut. While a freshman at Harvard University in 1926, he became interested in polarized light (light oriented in a plane with respect to the source). Taking a leave of absence, he developed a new kind of polarizer, which he called Polaroid, by aligning and embedding crystals in a plastic sheet. Land returned to Harvard at the age of 19 but left again in his senior year to found a laboratory nearby. Joined by other young scientists, he applied the polarizing principle to light filters, optical devices, and motion picture processes. 12
The Story of the Polaroid Camera In 1937 the group became the Polaroid Corporation with Land as president and head of research. During World War II the corporation turned to military tasks, inventing infrared filters, dark-adaptation goggles, and target finders. In the late 1940 s it introduced the first model of its most successful product, the self-developing Polaroid Land camera; it also put out a microscope for viewing living cells in natural color. For his contributions to the fields of polarized light, photography, and color perception, Land received numerous awards and honorary degrees. "Land, Edwin Herbert, " Microsoft® Encarta® Encyclopedia 99. © 1993 -1998 Microsoft Corporation. All rights reserved. 13
WHAT IS A SMALL BUSINESS? – Importance of Small Business to Big Business l most products made by big manufactureres are sold to consumers by small businesses – Think of all the products that are made by large companies which you buy from small businesses l small businesses provide big businesses with many of the services, supplies, and raw materials they need 14
POPULAR AREAS OF SMALL BUSINESS ENTERPRISE l The seven major small business industry groups are 1. 2. 3. 4. 5. 6. 7. services (hizmetler) retailing (perakende) construction financial and insurance wholesaling (toptantıcılık) transportation manufacturing (imalat) Each group differs in its requirements for employees, money, materials, and machines. Also remember that manufacturing businesses are the hardest to start and service businesses the easiest. 15
POPULAR AREAS OF SMALL BUSINESS ENTERPRISE 1. Services: l Service businesses require few resources, therefore they are relatively easy to establish l Services appeal to the talent for innovation – motorcycle-courier service in İstanbul – some banks offering all kinds of services to holders of their credit cards – companies offering “dog walking” service 16 in İstanbul and Ankara
POPULAR AREAS OF SMALL BUSINESS ENTERPRISE 2. Retailing: l A retail business sells products manufactured by other firms directly to consumers. (perakendeci) l There are thousands of retail shops that sell everything from shoes to cars. l Some retail businesses concentrate on being “specialty” shops focusing on narrow market segments. – Pickles shop (turşucu); Mado (ice- cream); slipper shop (terlikçi); etc. 17
POPULAR AREAS OF SMALL BUSINESS ENTERPRISE 3. Wholesaling: l A wholesale business buys products from manufacturers or other producers and then sell them to retailers. (toptancı) l They buy goods in bulk and store them in quantities and places convenient for retailers. l They need fewer employees than 18 manufacturers or retailers.
POPULAR AREAS OF SMALL BUSINESS ENTERPRISE 4. Manufacturing: l Manufacturing is more suitable for big business due to heavy investment requirements. (machinery, energy, materials, workforce, etc. ) l This does not mean that there are no small and medium sized manufacturing businesses. There are many SME’s that produce lots of products for other manufacturers and 19 also for consumers.
ENTREPRENEURSHIP l We already know who an entrepreneur is from earlier discussions. Although many small business people like to think of themselves as entrepreneurs, this is not always the case. l An individual who starts a small business with no future plans to grow and expand, is not really an entrepreneur in a true sense. 20
ENTREPRENEURSHIP l Entrepreneurial Characteristics – resourcefulness – concern for good, often personal, customer relations – strong desire to be their own bosses – able to handle ambiguity – enjoy taking risks and hard work – strong need for personal freedom and opportunity l İbrahim Özer of Özer Elektronik (ESCORT) l Jeff Bezos of Amazon Online Bookstore 21 – selected 1999 Person of the Year by TIME Magazine
STARTING AND OPERATING A SMALL BUSINESS l How should one get into business? – buy an existing business? – build from the ground up? In other words, start one’s own company from scratch. – how about financing (finding enough money) the new business? – how about seeking expert advice from others (friends, consultants (danışmanlar), others? ) 22
STARTING AND OPERATING A SMALL BUSINESS l Buying an Existing Business – reduced risks (known product and system for producing it) – no need to go through the process of building a reputation, establishing clientele, hiring and training personnel – obtaining financing is easier because of past successful operation of the business – established working relationships with suppliers, lenders, and the community 23
STARTING AND OPERATING A SMALL BUSINESS l Starting from Scratch (start your own company) – more risky but flexible – most difficult – formation formalities may take a long time – a very common way of going into business both in Turkey and abroad. l Just consider the computer hardware and software business---many new businesses are formed 24
STARTING AND OPERATING A SMALL BUSINESS – Before starting a business, entrepreneurs must study their markets and answer the following questions: l who are my customers? l where are they? l at what price will they buy my product? l in what quantities will they buy? l who are my competitors? l how will my product differ from that of my competitors? How will the above questions be answered? Next slide. . 25
STARTING AND OPERATING A SMALL BUSINESS – Sources of information: l the best way to get information about a market is to work in it before going into business in it l quick scan of Yellow Pages (phone book) or advertisements in trade journals will help reveal potential competitors l in Turkey, Chambers of Commerce (Ticaret Odaları), Chambers of Industry (Sanayi Odaları), and Union of Chambers of Commerce, Industry, Maritime Trade and Commodity Exchanges of Turkey (TOBB) are excellent sources of information 26
STARTING AND OPERATING A SMALL BUSINESS l For Istanbul Chamber of Industry click l For TOBB click l For Ankara Chamber of Industry click http: //www. aso. org. tr 27
STARTING AND OPERATING A SMALL BUSINESS l For an excellent source on business in Turkey click l For general information about web sites in Turkey click www. arabul. com 28
STARTING AND OPERATING A SMALL BUSINESS l Another good source for business information is “Turkey On-Line Yellow Pages” 29
FRANCHISING l One way to avoid some management headaches associated with starting a business is to invest in a franchise – What is a franchise? A business arrangement in which an individual obtains rights from a larger company to sell a well-known product or service. – Franchisee--person or group to whom a corporation grants an exclusive right to the use of its name in a certain territory. (initial fee plus monthly payments based on sales) – Franchiser -- corporation that grants a 30 franchise to an individual or group
FRANCHISING l Advantages of Franchising – Franchiser builds a strong foundation for his company l expanded business and profits l regular income from franchisees – Franchisee can take advantage of a proven business and its systems l low risk; proven business l name recognition, mass advertising benefits l lack of money problems solved (start-up money given by franchiser) l Training, technical assistance and managerial 31 advice given by the franchiser
FRANCHISING l Disadvantages of Franchising – it is not the cheapest way to go into business – royalty must be paid (monthly/yearly) – little independence on the part of the franchisee – franchisee must buy from the franchiser at whatever price it charges – important decisions can be made without consulting the franchisees – possibility of fraud (hile) 32 – the franchiser may go out of business
SUCCESS AND FAILURE IN SMALL BUSINESS l While some small businesses become successful and eventually grow into large corporations, there are many small businesses that fail. l Trends in Small Business Start-Ups Many new businesses are started each year. There are several factors for this trend. These are discussed in the next few slides. . 33
FAILURE AND SUCCESS IN SMALL BUSINESS – Crossovers from big business People leave large companies, form their own businesses and put their experience and know-how to work for themselves. – Opportunities for Minorities and Women This is especially true for the U. S. Not a significant trend in Turkey, Cyprus and many other countries. – Global opportunities Many entrepreneurs are finding new opportunities in foreign countries and markets 34
FAILURE AND SUCCESS IN SMALL BUSINESS – Better Survival Rates In the U. S. , the survival rate (yaşama oranı) has been increasing over the years. This encourages entrepreneurs to establish small and medium sized businesses. In Turkey and many other developing countries, the same claim can not be made due to – economic instability – high inflation or deflation – high interest rates – unstable political environment – greater uncertainty about the future 35
l VENTURE CAPITAL IST l RISK SERMAYESI 36
FAILURE AND SUCCESS IN SMALL BUSINESS l Reasons for Failure: – managerial incompetence or inexperience – neglect – weak control systems – insufficient capital l Reasons for Success: – hard work, drive and dedication – market demand for products or services being provided – managerial competence – luck 37
NONCORPORATE BUSINESS OWNERSHIP l Types of business organizations are: 1. Sole proprietorship (şahıs işletmesi) 2. Partnership (ortaklık) 3. Corporation (anonim şirket) l A critical decision -- it affects managerial and financial issues 38
SOLE PROPRIETORSHIP (Şahıs İşletmesi) l business is owned and operated by a single individual who is responsible for all of its debts l many small businesses are in this category – dry cleaners, grocers, meat stores, florists, barber shops, beauty parlors, etc. l many people may be employed 39
SOLE PROPRIETORSHIP (Şahıs İşletmesi) l Advantages of Sole Proprietorships – freedom -- responsible only to themselves – privacy -- no need to report information to – – – shareholders or partners simple to form (need a license only) “work for yourself” easy to dissolve (feshetmek) low start-up costs (little money is needed) owner keeps all the profits; profits are taxed at personal income rates 40
SOLE PROPRIETORSHIP (Şahıs İşletmesi) l Disadvantages of Sole Proprietorships – unlimited liability : owners are responsible for – – paying off all debts of a business (sınırsız sorumluluk) lack of continuity : if the owner dies, the business is legally dissolved (NOTE: This may change from country to country) small business, therefore limited financial resources business depends upon owner’s talents (yetenek) and skills (beceri) hard to borrow money; may have to pay higher interest rates for borrowing 41
PARTNERSHIPS (Ortaklıklar) l Most common type of partnership is called general partnership (kollektif şirket) – it is an extension of sole proprietorship; two or more partners – partners share in both the operation and in the financial responsibility for its debts – In the Turkish Commercial Code “Türk Ticaret Yasası” these are referred to as Ticaret Şirketleri LINK (In Turkish) : Ministry of Industry & Trade 42
PARTNERSHIPS (Ortaklıklar) l Advantages of Partnerships – ability to grow with the addition of new talent and money – easier to borrow money compared to sole proprietorships – easy to form (as compared to corporations) – superior to sole proprietorships in terms of resources (due to partners) 43
PARTNERSHIPS (Ortaklıklar) l Disadvantages of Partnerships lunlimited liability of general partners lpotential for interpersonal problems and disagreements l“unproductive partners” problem (ense yapan ortaklar sorunu) lrivalry among partners may damage the business lmore difficult to obtain loans as compared to corporations llack of continuity (when one partner dies or leaves, the original partnership 44 dissolves
CORPORATIONS (Anonim Şirketler) l Corporation : A business that is legally considered an entity separate from its owners and is liable (sorumlu) for its own debts; owners’ liability extends to the limits of their investments. (Anonim Şirket) 45
CORPORATIONS (Anonim Şirketler) l What is a “corporate entity” ? – It is an artificial being separate from the owners in the eyes of the law – It is a “legal person” (tüzel kişilik, hükmi şahsiyet) l As a corporate entity, corporations can do the following: – sue and be sued (davacı veya davalı olabilir) – buy, hold, and sell property – make and sell products to customers – commit crimes (suç işlemek) and be tried and punished for them 46
CORPORATIONS (Anonim Şirketler) l Advantages of Corporations – limited liability of owners (sınırlı sorumluluk) – continuity (süreklilik): unlimited life span l unlimited life span allows for long range plans for recruiting, training and retaining talented employees – can raise money more easily l sell more stock l get loans from banks and other financial institutions – successful in bringing together money, resources, and talent 47
CORPORATIONS (Anonim Şirketler) l Disadvantages of Corporations – ease of transfer of ownership – cost of incorporation (şirketin kurulması) l to set up a corporation requires a lot of work and money, especially if stocks are being offered to the public – required by law to publish information about finances and operations (especially for public corporations) l Companies traded at İMKB (İstanbul Stock Exchange) have to disclose balance sheets every 3 months – heavily regulated (many do’s and don’ts by the government and laws) – double taxation (çifte vergilendirme) l corporate income tax paid by the corporation l personal income tax paid by stokholders on the dividends 48 (kar payı, temettü) that they receive
CORPORATIONS (Anonim Şirketler) l There are basically two types of corporations: 1. Public Corporations (Halka Açık Anonim Şirket) 2. Private Corporations (Halka Açık Olmayan Anonim Şirket) Now let us see each type. . 49
CORPORATIONS (Anonim Şirketler) 1. Public Corporation (Halka Açık Anonim Şirket) Corporation whose stock (shares) (hisse senedi) is widely held and available for sale to the general public. The shares are actively traded on the open market. Examples: Arçelik, General Motors, Intel Corp. etc 50
CORPORATIONS (Anonim Şirketler) 2. Private Corporations (Halka Açık Olmayan Anonim Şirket) – Sometimes called “closely held corporation” Corporation whose stock is held by only a few people and is not available for sale to the general public. The stockholders (shareholders) may be one person, a family, a management group, or the firm’s employees. 51
MANAGING A CORPORATION l Corporate Governance (Anonim Şirketin Yönetilmesi) Three distinct bodies or groups are responsible for the governance of a corporation: 1. Stockholders (hissedarlar; hisse sahipleri) 2. Board of Directors (Yönetim Kurulu) 3. Corporate Officers (Şirket Üst Yönetimi) Let us look at each one more closely. . 52
MANAGING A CORPORATION 1. Stockholders (hissedarlar; pay sahipleri) Stockholders or shareholders are the owners of shares of stock (hisse; pay) in a corporation. They are the owners of the corporation. they get dividends (kardan pay; temettü) in return for their investment in the company – they select the Board of Directors – 53
MANAGING A CORPORATION l Two types of stock 1. Common Stock -- stock that pays dividends and guarantees corporate voting rights but offers last claims over assets (şirketin varlıkları) 2. Preferred stock -- Stock that guarantees its holders fixed dividends and priority claims over assets but no corporate voting rights. Preferred stock owners have priority over common stockholders when dividends are distributed. 54
MANAGING A CORPORATION l Proxy -- authorization given by a shareholder for someone else to vote his or her shares (vekaletname ile oy verme) 2. Board of Directors -- top governing body of a corporation – reports to shareholders – delegates power to officers (üst yönetim) to run its day-to-day operations – is responsible for the general management and assets of the corporation continued. . 55
MANAGING A CORPORATION – prepares the annual report (yıllık çalışma raporu) and presents it to the stockholders – top policy-making body on dividends, major spending 56
MANAGING A CORPORATION 3. Corporate Officers Appointed by the Board of Directors to run the company. These are the top managers (üst yönetim). – Chief Executive Officer (CEO): Top manager hired by the board of directors to run the corporation (Murahhas Üye) – Other officers : president (genel müdür), vice presidents (genel müdür yardımcıları) 57
CORPORATIONS (Anonim Şirketler) l Special Issues in Corporate Ownership – Joint Ventures : collaboration between two or more organizations on an enterprise or project. Usually a new company is formed (Ortak Girişim) – Strategic Alliances : two or more organizations collaborate on a project for mutual gain l SONY and Philips collaborated (worked together) to develop the compact disc (CD) in the 1980’s 58
CORPORATIONS (Anonim Şirketler) – Employee Stock Ownership Plans (ESOP) An arrangement in which a corporation enables its own employees to receive stocks of the corporation and thus become owners of the corporation. (Çalışanların Hissedar Yapılması Planı) – Institutional Ownership Large organizations or companies that buy large blocks of stocks of other corporations (Kurumsal Yatırımcılar) 59
CORPORATIONS (Anonim Şirketler) – Merger (Birleşme) : the union of two corporations to form a new corporation. l horizontal merger : two companies in the same industry combine to form a new corporation l vertical merger : when a supplier company combines with a buyer company to form a new corporation l conglomerate merger : when two unrelated (in different industries and no buyer-seller relationship) companies combine to form a new corporation 60
CORPORATIONS (Anonim Şirketler) – Acquisition (Satınalma) : the purchase of one company by another – Divestitures and Spin-Offs: l Divestiture - strategy whereby a firm sells one or more of its business units (elden çıkarmak) l Spin-Off - strategy of setting up one or more corporate units as new, independent corporations (anonim şirketin birimini yeni bir şirket haline getirmek) 61
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