conf a rance

Corpus Christi, Texas

November 1-3, 2006

Association for Small Business & Entrepreneurship 32nd Annual Conference

Corpus Christi, Texas November 1-3, 2006 1

ASBE Association for Small Business & Entrepreneurship Officers 2006 President Leslie A. Toombs School of Business University of Texas of the Permian Basin 4901 E. University Odessa, TX 79762-0001 (432) 552-2203 432) 552-2174 (FAX) [email protected] President Elect Shawn Carraher School of Business Cameron University 2800 West Gore Blvd. Lawton, OK 73505 580-581-2367 (O) 580-581-2253 (FAX) [email protected] Vice President-Programs Martin Bressler Houston Baptist University 7502 Fondren Road Houston, TX 77074 (281) 649-3448 (281) 649-3436 fax [email protected] Vice President-Membership Michael W. Boyd University of Tennessee – Martin 544 University St. Martin, TN 38238 731-881-7474 (O) 731-881-7231 (FAX) [email protected] Secretary/Treasurer Raydel Tullous University of Texas at San Antonio (210) 458-5381 (210)458-6350 [email protected]

ASSOCIATION FOR SMALL BUSINESS & ENTREPRENEURSHIP

Greetings! On behalf of the Association for Small Business and Entrepreneurship, I would like to welcome you to the Fall 2006 annual meeting! I would also like to take this opportunity to recognize the work of Martin Bressler, Vice-President Programs, who has worked diligently to put together the program for this conference. As demands on all of our time are many, I would also like to extend my sincere thanks to our membership who remain loyal to the organization. Our membership is our lifeblood and I know that we all appreciate the time and energy you continue to invest in ASBE. Our organization continues to rise to the challenge of meeting separate from the Federation of Business Disciplines. We are currently being faced by other issues, including tightened academic travel budgets as well as an increase in the number of Fall academic meetings. The officer team will be seeking the input of the membership as we address these challenges. If you have input you would like to share, please bring it to the business meeting. Enjoy the conference! Also, plan now to attend the 2007 Conference in Austin! Sincerely, Leslie A. Toombs President, ASBE

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PAST PRESIDENTS

1975-76 Robert W. Smith, North Texas State University

1977 Ann Hughes, University of Texas, Arlington

1978 Don Altman, Abilene Christian University

1979 Paul Dunn, Northeast Louisiana University

1980 Charles Neil, Texas Tech University

1981 R. Dean Lewis, Sam Houston State University

1982 John Todd, University of Arkansas

1983 Robin Peterson, New Mexico State University

1984 Ray Robbins, University of Arkansas, Little Rock

1985 Gwen F. Fontenot, North Texas State University

1986 Jude Valdez, University of Texas, San Antonio

1987 Homer L. Saunders, University of Central Arkansas

1988 Clyde Spruell, University of Science & Arts of Oklahoma

1989 Don B. Bradley III, University of Central Arkansas

1990 Walter E. Greene, University of Texas, Pan American

1991 Geralyn M. Franklin, Stephen F. Austin State University

1992 Norton E. Marks, California State University, San Bernardino

1993 Herb Lawrence, Gateway Technical College

1994 Buddy Gaster, East Central University

1995 William T. Jackson, Stephen F. Austin State University

1996 Alicia B. Gresham, Stephan F. Austin State University

1997 Louis D. Ponthieu, University of North Texas

1998 Robert D. Gulbro, Athens State University

1999-2001 Don B. Bradley III, University of Central Arkansas

2002 William T. Jackson, University of Texas of the Permian Basin

2003 Patti L. Wilber, Northwestern Oklahoma State University

2004 Corbett F. Gaulden, University of Texas of the Permian Basin

2005 Kitty Campbell, Southeastern Oklahoma State University

2006 Leslie A. Toombs, University of Texas of the Permian Basin



Acknowledgements It has been my privilege to serve as Program Chair this year for the 2006 ASBE Conference. There were many interesting papers submitted, which is a good sign that as researchers we are advancing our field and our profession by expanding the knowledge base for industry, our students, and for fellow faculty members. I could not have completed this task without the assistance of several key individuals. First, I would like to thank Dr. Leslie Toombs, ASBE President, for her help and guidance throughout this process. Second, Shawn Carraher, ASBE President-elect has also provided me with assistance throughout this year. In addition, my work study student Mary (Van) Dau has done a truly great job putting together all the papers and documents to produce excellent proceedings. Dr. Jane Licata and the editorial staff at the Journal of Business & Entrepreneurship evaluated the final papers to select the Best Paper Awards. Finally, I would like to thank the reviewers listed below for their assistance in evaluating and selecting the papers for presentation. Prof. Sergio Postigo, Universidad de San Andrés Prof. Mark Hannan, School of Management and Economics, Belfast, U.K. Dr. Tom Box, Pittsburg State University Dr. Kitty Campbell, Southeastern Oklahoma State University Dr. Leslie Toombs, University of Texas-Permian Basin Dr. Brenda Harper, Athens State University Dr. Shawn Carraher, Cameron University Dr. Naresh Kumar, Kuala Lumpur, Malaysia Thank you for the opportunity to serve as your Program Chair for the 33rd annual Association for Small Business & Entrepreneurship Conference. I look forward to seeing you all next year in Austin! Sincerely, Martin Bressler 2006 Program Chair



2005/2006 ASBE Officers

President: Dr. Leslie A. Toombs

University of Texas of the Permian Basin

President Elect: Dr. Shawn Carraher Cameron University

Vice President Programs:

Dr. Martin Bressler Houston Baptist University

Vice President Membership:

Dr. Michael Boyd University of Tennessee at Martin

Secretary/Treasurer:

Dr. Raydel Tullous University of Texas at San Antonio



2006 ASBE Conference Session Chairs

Mike Boyd University of Tennessee-Martin

Tom Box

Pittsburg State University

Martin S. Bressler Houston Baptist University

Kitty Campbell

Southeast Oklahoma State University

Shawn Carraher, Cameron University

Terry Paridon

Cameron University

Raydel Tullous The University of Texas at San Antonio



ASBE 2006 Best Paper Award An Examination of the Power of the Dark Side of Entrepreneurship

Frank S. Lockwood, Western Carolina University Russell Teasley, North Georgia College and State University

JoAnn C. Carland, Western Carolina University James W. Carland, Western Carolina University

Runner-Up Best Paper Entrepreneurship Teaching in Action----The Effects of Early Empowerment: A nine-country comparison of the same entrepreneurship action learning program in China, Korea, Malaysia, New Zealand, United States, Singapore, Germany, India and Australia

Jens Mueller (Waikato Management School, Hamilton, New Zealand) Vicki West (Texas State University, San Marcos, TX, USA)

Norela Nuruddin (Universiti Teknologi Mara, Kuala Lumpur, Malaysia) Ren Min (Shanghai Jia Tong University, Shanghai, China)

John Thornton (University of South Australia, Adelaide, Australia)

Runner-Up Best Paper Managing Golf Course Revenue Using Pace of Play Modeling Andrew A. Tiger, Southeastern Oklahoma State University Jane Licata, Southeastern Oklahoma State University Robert Howard, Southeastern Oklahoma State University

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THE ROLE OF SMALL SCALE INDUSTRY IN NATIONAL DEVELOPMENT IN NIGERIA

Ayozie Daniel Ogechukwu, Delta State University, Abraka, Delta State,

Nigeria, The Federal Polytechnic, Ogun State, Nigeria

Abstract

A business whether small or big, simple of complex, private or public is created to provide competitive prices. Business in Nigeria has been classified as small, medium and large. In both the developed and developing countries, the government is turning to small and medium scale industries, as a means of economic development and a veritable means of solving problems. It is also a seedbed of innovations, inventions and employment. Presently in Nigeria, SMEs assist in promoting the growth of the country’s economy, hence all the levels of government at different times have policies which promote the growth and sustenance of SMEs. Small scale industry orientation is part of the Nigerian history. Evidence abound in the communities of what successes our great grand parents, made of their respective trading concerns, yam barns, cottage industries, and the likes. The secret behind the success of a self reliant strategy does not lie in any particular political philosophy, so much as the people’s attitude to enterprise and in the right incentive is adequate enough to make risk worthy businesses a necessity for the nation. There had been many policy actions by the government, governmental agencies and the private sector to promote SMEs in Nigeria. Many experts recognize marketing as a major problem and relevant solution to the growth of SMEs. This paper identifies the historical development and orientation of SMEs in Nigeria, tackles the operational definition and scope, describes the role of the Nigerian government as a participant, regulator and facilitator, both legally and politically in the growth of SMEs. It identifies the marketing problems of SMEs in Nigeria, the provision and enactment of beneficial and supportive laws, the provision of infrastructural facilities, constant man-power and development, direct financial assistance to SMEs and the establishment of finance institutions to support SMEs. It identifies the roles of SMEs in Nigeria’s development and growth. It concludes by clearly specifying the role of marketing to the survival of SMEs in Nigeria, and Advances relevant recommendations. For SMEs to survive marketing practice and principles must be given prominence. Economic history is well stocked with enough insights into the humble beginnings of present great corporations. Evidence abound that almost all of the multinational giant corporations in America, Europe and even Nigeria were cottage enterprises, growing as their industry grew, and through their own sheer ability, marketing skills, and efforts to reproduce and produce existing products better and cheaply. Japan’s economy was dominated by traditional industries, cottage firms and by many SMEs, who drew their strength, not only from the abundance of capital, but from the role of marketing in guaranteeing the growth of SMEs.



SMEs have contributed greatly to Nigerians development by the provision of employment, marketing of goods and services and the growth and development of the rural areas. It has also brought about the growth of indigenous entrepreneurship in Nigeria.

Introduction A business whether small or big, simple or complex, private or public, etc is created to provide competitive prices. Business in Nigeria has been classified as small, medium and large. However, a small scale industry can be defined by the criteria of project costs, capital, cost turnover by the employee, etc. The federal and state ministries of Industry and Commerce have adopted the criterion of value of installed fixed capital to determine what a small scale industry is, in this respect, the value has varied from N60, 000 in 1972, N159, 000 in 1975, N250.000 in 1979, N500, 000 in 1986, to a fixed investment of not more than N2, 000,000 (two million Naira) in 1992. This figure is exclusive of and building and subject to government determination and land prevailing objectives of public policy. In the wake of SFEM, and SAP, this value has now been reviewed and subsequently, increased to five million naira. Since this happened, there may be a need to classify the small scale industry into MICRO and SUPER MICRO business, with a view to providing adequate incentives and protection for the former. In the meantime, any business or enterprise below the upper limit of N250, 000 and whose annual turnover exceeds that of a cottage industry currently put at N5, 000 per annum is a small scale industry. The National Directorate of Employment (NDE) concept of a small scale industry has been fixed to a maximum of N35, 000.

Historical Development and Orientation of Small Scale Industry in Nigeria Small scale industry orientation is part and parcel of Nigeria. Evidence abound in our respective communities of what successes our great grand parents made of their respective trading concerns, yam barns, iron smelting, farming, cottage industries and the likes. So the secret behind their success of a self reliant strategy does not like in any particular political philosophy, so much as in the people’s attitude to enterprise and in the right to which the right incentive is adequate enough to make risk worth taking are provided. Economic history is well stocked with enough insights into the humble beginnings of present day grand corporation. Evidences abound that almost all of the multinational giant corporations were cottage enterprises, growing as their industry grew, and through their own sheer ability either reproduce existing products more cheaply or improve their ability. Even at the international level, in the early stages of her industrialization, Japan’s economy was dominated by traditional industries, cottage firms, and by a large number of small scale firms, drawing their strength not from an abundance of capital but rather from her supply or labour. Back home in Nigeria, the respective government policies accorded and gave priority to the country’s small scale enterprises. This has been in recognition that they constitute the fountain head of vitality for the variational economy and consequently their problems have been viewed as those of the nation, by virtue of their number, diversity, penetration in all sectors of



production and marketing contribution to employment and to the prosperity of the particular areas in which they operate. In concrete terms, small scale industries constitute a greater percentage of all registered companies in Nigeria, and they have been in existence for a quite long time. Majority of the small scale industries developed from cottage industries to small enterprises and from small scale to medium and large scale enterprises. Pre-Independence Historical Development Prior to Nigerian Independence, the business climate was almost totally dominated by the Colonial and other European Multinational companies like United African Company (UAR), GB Olivant, Unilever Plc, Patterson Zechonics, Leventis, etc. These companies primarily engaged in bringing into Nigeria finished goods from their parent companies overseas. These companies have vast business experience and strong capital base, and dominated the Nigerian economy. The government of those days encouraged them to become stronger by giving incentives as favourable traffics and tax concessions. Towards the tail end of the 1950s, the Nigerian Industrial Development Bank (NIDB) was founded to assist potential entrepreneurs to get involved in Agriculture exploration of national resources, Commerce and Industrial production. This time and the early 1960s saw the massive increase in Nigeria import market, while the Nigerian economy became largely dominated by very few large foreign firms. However, few Nigerians mostly the Semi-illiterates benefited from the generous government attitude of this time. The educated Nigerians then were not interested in entrepreneurship mainly because their focus was on the positions being vacated by the expatriate staffs, who were leaving the civil service to return home because of the imminent independence in 1960. Even then, Nigerians considered the civil service to be more prestigious than business despite the creation of the colony development loans board, by the colonial administration. 1970 – 1976 A major/remarkable break through in small scale business came about through the indigenization Decree 1972 and later in Nigeria Enterprises Promotion Act 1977. These were genuine attempts by the Federal Government to make sure that Nigerians play an active and worthwhile role in the development of the economy. In its 1970-74 National Development Plan, the Federal Government gave special attention to the development of small scale industries particularly in rural areas. This was in recognition of the roles of small and medium scale industries, as the seedbeds and training grounds for entrepreneurship. The cardinal point of the development plan was: (a) Accelerating the pace of industrialization and dispersal of industries. (b) Generating substantial employment opportunities. (c) Promoting individual initiatives and entrepreneurship among the populace. (d) Developing and increasing export traders, and (e) Complementing large scale industries.



An amendment to the decree made in 1997 provided than in order to be economically self-reliant. Nigerians need to take care from economic history, which is well stacked with enough insight into the humble beginnings of the present day giant conglomerates which started as small scale industries. 1980 – 89 Within this decade, the government policy measures placed emphasis on the technological aspects of industrial development of small scale industries in Nigeria. Various Nigeria governments within this decade embarked on corrective measures to divert efforts towards the maximum exploitation or natural resources, and tried to discourage capital intensive mode of production in the light of the abundant resources available. In this regards, the industrial policy tried to focus its attention mainly on local resources utilization through various forms of incentives worked out by governments. Some of the basic policy strategy aimed at revitalizing the industrial sector included the: (a) Encouragement in the use of more local materials in our industrial development

activities. (b) Encourage greater capacity utilization in Nigerian industries.

In addition, both the third and forth national development plans, the government then tried to increase her support for and contributions on; (i) The establishment of research products development company to provide a bridge

between research and commercial development of results and cooperate with manufacturing establishment to adopt imported machines to Nigerians conditions and eventually develop the capability for fabricating such machines;

(ii) The federal institute of industrial research and other institutions as the project development agency, Enugu.

(iii) The industrial development centres (iv) The provision of funds to implement feasible projects emanating from policy paper,

prepared by the Nigerian Councils for Science and Technology (v) The Industrial Research Council of Nigeria to get organized for coordinating industrial

research efforts. The focal point of these policy measures as construed place a great emphasis on the technological aspects of industrial development and development of small scale industries in Nigeria. It is worthy of note that the introduction of the Structural Adjustment Programme (SAP) during the Babagida regime made matters worse for employers of labour and created a veritable ground for self-employment. 1990-99 The federal and state government have both contribute to the growth of small scale industries in Nigeria especially in the rural areas. Of recent time, various fiscal and non-fiscal incentives have



been established for investors and entrepreneurs in the small scale sectors of the economy. Of special mentioning was the strategy adopt by the federal government towards the training and motivation of the unemployed graduates, to be gainfully employed in out of school entrepreneurship development programmes. Thus on the presentation of viable feasible projects, approved loans are disbursed through pre-selected commercial banks assisted by the National Directorate of Employment. The Peoples Bank of Nigeria (PBN) was also in the vanguard of granting of soft loans to unemployed youths and artisans, and this aimed at diverting the attention of youths from government salaried jobs, to that of gainful self solely employment. NDE and the People Bank of Nigeria were solely charged with the responsibility of generating employment through their various programmes for thousands of unemployed Nigerians. To show its seriousness, the Federal Government through its educational agencies like the National Board for Technical Education (NBTE), the Nigerian University Commission (NUC), and the National Youths Service Corps (NYSC) programme give a directive that entrepreneurship development courses be incorporated into the curricular of tertiary institutions and NYSC programme.

Operational Definition of the Term Small Scale Business Small scale business, small scale industries and small scale entrepreneurship are used interchangeably to man a small scale industry firm. Its deliberation was to refer to the operational definition. In Nigeria and worldwide, there seems to be no specific definition of small business. Different authors, scholars, and schools have different ideas as to the differences in capital outlay, number of employees, sales turnover, fixed capital investment, available plant and machinery, market share and the level of development, these features equally vary from one country to the other. 1. In Nigeria, the Third National Development plan defined a small scale business as a

manufacturing establishment employing less than ten people, or whose investment in machinery and equipment does not exceed six hundred thousand naira.

2. The Central Bank of Nigeria in its credit guidelines, classified small scale business as these businesses with an annual income/asset of less half a million nairas (N500, 000).

3. The Federal Government Small Scale Industry Development Plan of 1980 defined a small scale business in Nigeria as any manufacturing process or service industry, with a capital not exceeding N150, 000 in manufacturing and equipment alone.

4. The small scale industries association of Nigeria (1973) defined small scale business as those having investment (i.e. capital, land building and equipment of up to N60, 000 pre-SAP Value) and employing not more than fifty persons.

5. The Federal Ministry of Industries defined it as those enterprises that cost not more than N500, 000 (pre-SAP Value) including working capital to set up.

6. The Centre for Management Development (CMD) definition of small industry in the policy proposal submitted to the federal government in 1982 defined small scale industry as, “a manufacturing processing, or servicing industry involved in a factory of production type of operation, employing up to 50 full-time workers.



Lastly, in the United States, the small business administration defines a small business as one that is independently owned and operated is not dominant in its field, and meets employment or sales standard develop by the agency. For most industries these standards are as follows. This also shows the same trend as in Nigeria, although the exchange value makes the financial criteria to be different. (a) Manufacturing: - Number of employees range up to 1500, depending on the industry. (b) Retailing: - Small if annual sales or receipts are not over 2 million to 7.5million dollars. (c) Wholesaling:- Small if yearly sales are not over 9.5 to 22 million dollars (d) Services: - Annual receipts not exceeding 2 million to 8 million dollars. Thus in general,

the specific characteristics/criteria used in describing small scale business are; (i) The number of people/persons employed. It is usually a small business, because

small number of people are employed. (ii) Annual Business Turnover: - Because initial capital is low, then annual turnover

will also be low. (iii) Local operations: - For most small firms, the area of operation is local. The

employees live in the community in which the business is located. (iv) The sales volume is minimal. (v) Financial strength is relatively minimal. (vi) Managers are independent, and they are responsible only to themselves. (vii) The managers are also the owners. (viii) The owners of the business actually participate in all aspects of the management

(i.e. the management of the enterprise is personalized) (ix) They have relatively small market when compared to their industries. (x) The amount of employees is relatively small when compared to the biggest

companies in a similar venture. (xi) The capital is mainly supplied by an individual or small group of

individuals/persons or shareholders. (xii) They usually have one, but many have several shop locations all in the same city

or metropolitan areas.

There are many enterprises in Nigeria categorized as small business. Most of them are in the commercial sector and there is also a trend now towards the service industry hotels, restaurants, fast foods, etc.

Marketing Problems of Small Business Enterprises One of the major marketing problems facing small business enterprises in Nigeria is lack of understanding and the application of marketing concept. In a study conducted by Ogwo (1991), this was conspicuously exposed. Most Nigerian small business owners equate ‘marketing’ to ‘selling’ and this is reflected in their various dysfunctional business behaviour against customer satisfaction and good business orientation. They lack the knowledge and skills of basic marketing ingredients – marketing research, market segmentation and marketing planning and control. The outcome of this is poor quality products, unawareness of competition, poor promotion, poor distribution, and poor pricing methods. They are not marketing oriented and market-focused if a marketer is defined as someone who understands and applies marketing in



order to create, build, and maintain beneficial relationships with target markets. Baker (1979) and Doyle (1985) identify lack of marketing orientation as the major factor for business failure Most Nigerian small manufacturer, in a higher degree, depends on imported equipment and raw materials for their operations. With the over-devaluation of naira, vis-à-vis other foreign currencies, they are not finding it easier to secure these items abroad. They therefore resort to poor locally produced alternatives. The result is usually poor quality products. This may be one of the factors responsible for Nigerian consumers’ unquenching appetite for imported goods, even though many of these foreign goods are equally of poor quality especially those coming from Asian and Far East countries. Porter (1980) point out that high quality raw material are important to producing high quality product. With the increasing demand for imported goods in Nigeria, dubious local and foreign importers are dumping fake products which go further to frustrate small scale manufacturers and seriously affect our hard earned foreign exchange. Besides, small-scale producers lack good quality control in their operations. In this respect, they rely mainly on replacing faulty products instead of developing good quality control system (Onwuchuruba 2001) Only very few Nigerian small manufacturers are aware of the nature of competition facing them. They estimate their success only through sales revenue without considering also their market share. Even, some do not know their market segments on which to focus their operations. Piercy (182) has emphasized the importance of good stockholding, transport, and distribution for enhancing commercial success. Many of our small manufacturers do not have properly defined criteria for appointing their product distributors. They rely mainly on trust created through relationships between the owners of the companies and the distributors. These relationships are in form of fathers and mothers, brother and sisters, friends and in-laws etc. This relationship often ends up in running the business down. High costs of vehicles and poor roads are also affecting the operations of small manufacturers in their efforts to move finished products down to consumers in both rural and urban areas. They have a complex channel of distribution with many layers which go to push the prices of their products higher. Besides, small manufacturers pay little attention to the promotion of their products. Advertising and other methods of promotion are not adequately used. There is no other way of creating awareness of their innovations and stimulating consumers to action than promotion. Even, many of them do not participate in trade fairs and exhibitions. This also inhibits their growth and ability to compete with larger companies. In a developing country like ours with low income and high level of poverty, a company that wants to succeed should offer its product at the price the consumers can bear. But often, small manufacturers set prices of their products arbitrarily without regard to this peculiar consumer characteristic in our environment. Since they do not have clearly defined criteria upon which to base their prices, they always seek to maximize profits at short runs without having a long-term view of their businesses. Farah (1980) cautions the United States car firms on setting high prices if they wish to succeed in markets around less developed countries due to low income and high level of poverty in the areas.



The Nigerian Government Participation in Small Scale Industries That there is a kind o relationship between business and government is never a dispute, the issue has always been degree of affairs, co-operation, flirting and co-operative marriage, that existing between the two society’s sub-systems. In Nigeria, it is imperative for business operators to understand that manner of relationship. This is because the type of relationship that exists between the government and business goes a long way to determine the existence, growth and development of the small scale business operator. The government is a super-body that exerts enormous power in a given nation state. By this implication, it has the capacity and ability to influence almost every institution under its jurisdiction for good or small scale business and other economic activities have its root in her major function as a resource allocator. In Nigeria, there is an implication of a mixture of command and market determined mechanism. Thence, it is often called mixed economy. The dictionary of economics defines mixed economy as an economy. The dictionary of economics defined mixed economy as an economy which contains elements of both a small, medium and large private sector, participation in business, as well as a group of large nationalized industries. Specially, in these circumstances, the role of business as multi-furious and categorized as: (a) Participatory role (b) Regulatory role (c) Facilatory role

A Government is seen as a Participated Where it actually involved in and control business enterprises by owning and managing such enterprise. Government acts as a business regulator with the overall aim of helping to maintain a climate of confidence; sanity and to stimulate the activities of the enterprises, so that they can have the respect for the rule of competition. Onuoha (1990) identified some of usual justification for government regulatory activities in business including what they hope to achieve. They are: (a) To achieve an environment permitting the enterprise to exist in an atmosphere of stability

and cooperation. (b) To fix and distribute public and social burden in a supportable and equitable manner,

taking into consideration the differences in sizes of various enterprises and the economic activity of the country.

(c) To protect the interest of the consumer against exploitative actions of business or specific measures against sub-standard of dangerous products.

(d) Government control business as part of her fundamental responsibilities towards exercising her sovereign rigor or all activities within her jurisdiction business inclusive.

(e) Government control of business is durable because it is one of the methods by which government raises revenue, the revenue comes in the form of registration fee, excise duties, educational levies, etc.

(f) Government control business as a way of ensuring that the economy is not dominated by foreigners.



Through appropriate and calculated control, government enlarge the propensity for greater indigenous participation in economic business activities. These act of governmental control in business activities come in various forms, of which the most popular and widely used in through the instrumentality of law. Relevant laws or decrees edicts and status are often used specifically to achieve a control or regulatory objectives. For instance, the following itemized laws and acts among others are targeted towards regulating business in Nigeria, with the twin objective of business and industrial developing, and maintaining sanity among the business key players and operators. 1. Registration of Business Names Act 1961, No. 1 2. Trade Mark Act 1961, No. 29 3. Factories Act capt. 1966 4. Exchange Control Acts 1961, No. 16 5. Nigerian Standard Organisation Acts 1971, No. 36 6. Trade Union Act 1973, No 31 7. Pre-shipment inspection of import Act, 1978, No. 36 8. Import prohibition order in 10, 1979, etc. Alawe Tijani (2004) opined that the Bank of Industry was established by the Nigeria government in October 2001, as a result of the merger of the National Economic Industrial Development Bank (NIDB), the Nigerian Bank for Commerce and Industry and the National Economic Reconstruction Fund (NERFUND). It major aim is to provide necessary financial assistance and incentives for the establishment of large, media and mostly small scale projects, and the expansion and diversification of existing industries. It engages in fund mobilization, project appraisals, financing, implementation and investment activities. The Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB)

established in the year 2002, is a merger of the defunct Nigerian Agricultural and Cooperative Bank (NACB), People’s Bank of Nigeria (PBN) and the Family Economic Advancement Programme (FEAP).

The federal government set up the Bank of Industry limited in October 2001. It was one of the hallmarks of the President Olusegun Obasanjo democratic government in merged the Nigerian Industrial Development bank (NIDB) the Nigerian Bank for Commerce and Industry (NBCI) and the National Economic Reconstruction Fund (NERFUND).

From 1996 till date many Community Banks (CBs) were established as self-sustaining financial institutions.

They might be owne4d and managed by a group of communities or a community, for the main purpose of providing credit, deposit banking and other financial incentives to its members and the SMEs. The promote SMEs, and rural development by providing credit and deposit services, and the increase of the productive capacities of SMEs and rural people in industry and in agriculture.

The Small and Medium Industries Equity Investment Scheme (SMIESIS) was set up on June 19, 2001 and launched in August 2001. It is the banker’s committee initiative which requires banks to set aside 10% of their profit before TAX, for equity investment in small and medium scale enterprises. Its main target is in the areas of Agro-allied business, Information Technology and Telecommunication, Manufacturing, Services, Tourism, Leisure and Construction (Alawe 2004).



Also a 10 man Advisory Committee on SMIEIS has been set up to advice the presidential consultative committee on SMIES. The committee comprises of the Central Bank of Nigeria as the Chairperson, three representatives of the Banker’s Committee (i.e. Oceanic Bank, Ecobank and the Metropolitan Bank), three representatives of the organized private sector and three representatives of the federal government which comprises of the federal ministry of industry, and the office of the secretary to the federal government.

Government as a Business Regulator

Governments all over the world do realize and recognize the indispensability of vibrant business sector to overall development of national economy most of the laws and regulatory measures are intrinsically meant to protect and assist business. In order words, the initial regulatory function is not intended to be a punitive measure, rather it is a defector intended maintain a healthy rivalry, maintain sanitary and stability among business to the overall advantage of the entire business sector. Apart from the implied facilitatory importance of the regulatory function, government specifically in so many ways through demonstrated actions beneficial investment policies, institutions capacity building, favourable economic and fiscal policies, protective business laws and direct financial incentives promote, encourage and support the growth, development and government promote and assist business in Nigeria by: A. Provision and Enactment of Beneficial and Supportive Laws

(I) The Nigeria Enterprises Promotion Act 1977, No. 3 (ii) Patent Right and Design Act 1979, No. 60 (iii) Custom Duties (dumped and subsided good Acts No. 9 of 1959) (iv) Industrial Promotion Acts 1979, No. 40 (v) Industrial Development Income Tax Acts 1971, No. 22 Tijani Alawe 2004, enumerated most of those recent facilities as; The establishment of the Finance and Research Institutions in 2001, by the federal

government. The research reports of these institutions are very useful to SMEs and business organizations, in their product choice decision, product development, approach, product or service delivery strategies, as these help to increase business efficiency and effectiveness. The most noticeable of these institutions is the Raw Materials and Research Development Council (RMRDC).

The Nigerian Government Provision of Direct Financial Assistance to Small Business Organisation through, the establishment of specific financial and non-financial institutions, for example, the Nigerian Agricultural and Cooperative Bank, Bank of Industry (2001), the Nigerian National Mortgage Bank (NINAM Bank) which is a merger of the Federal Mortgage Bank of Nigeria (FMBN) and the Federal Mortgage Finance Limited (FMFL) in 2001. The non governmental micro credit institutions consists of finance companies and community banks, that venture into the funding of micro credit schemes for SMES, rural women credit schemes, artisans credit schemes, and craftsmen.



The small and medium industries equity investment scheme (SMIESIS) established on June 19 2001, which requires banks to set aside 10% of their Profit Before Tax fore equity investment in small and medium scale enterprises (SMEs).

Direct Financial assistance and even loans to SMEs, through a package of subsidized or discounted loan portfolio, such as the small scale industrial credit scheme, and the NERFUND Scheme.

The provision of manpower development support schemes. The government established various universities and polytechnics, to provide skilled manpower for the SMES, it also set up specific manpower development and training institutions, such as the Centre for Management and Development, the Administrative Staff College of Nigeria (ACON) and the Industrial Training Fund. The services and Research Findings of these manpower institutes are mainly used by the small scale business.

The establishment of government intervention strategies in 2002. This is mostly direct and indirect. Alawe 2004, describes the direct policy as consisting of direct investment and the establishment of SMES, promotions institutions or agencies (example technological development institutions, credit lending institutions, technical and management institutions) and the provision of infrastructural facilities such as industrial estates, nationalisation of foreign firms and the provision of incentives and subsidies for the promotion of small and medium scale companies. Indirect public policy includes the regulatory provision, encouraging savings and reinvestment, restricting imports of consumer goods, introduction of measures that protect SMES and the provision of various incentives and inducements to small scale industries.

The provision of credit support schemes. The government through its agencies provides capital or loans on soft term basis to SMES. In 1973, it established the Nigeria Bank for Commerce and Industry to provide soft term loans to small scale industries, it set up the National Economic Reconstruction Fund (NERFUND) in 1989 to pool funds from various sources for lending through commercial and merchant banks to small scale industries, in 1997, the Family Economic Advancement Programme (FEAP) was established as a micro credit scheme geared towards investment promotion, and poverty alleviation.

It set up most federal polytechnics in 1979, the Administrative and Staff College (ASCON) in 1973, the Centre for Management Development (CMD) in 1973, and the Nigerian Institute of Policy and Strategic Studies in Kuru Jos. It also set up the small scale industries and graduate employment programme, which aims at encouraging participants, mainly young graduates to set up and own their small scale business. Recently the Nigerian Institute of Management (NIM) established a training programme in all the National Youth Service Corp orientation camp, aimed at inculcating in Youths, the spirit of entrepreneurship. In the past there was the graduate job creation loan scheme, and the entrepreneurship development programme, set up by the defunct National Directorate of Employment (NDE).

The establishment of industrial development centres and the industrial estate schemes, which facilitate industrialisation process and the clustering of firms for effective planning and provision of facilities

The Nigerian Enterprises Promotion Decree 1977 as amended by Acts 1987 has some definite, unambiguous declarations and postulations. It regulates and controls the ownership structure of



Nigerians business. These acts classify business in Nigeria into Schedule I, Schedule II and Schedule III. Schedule I contains categories of business that are reserved exclusively for indigenous participation and exploitation. These categories of enterprises are reserved for Nigerians only. In other words, foreigners may not be allowed to own such businesses. Although, these catalogues of businesses are those whose technical skill requirements, capital outlay and operations procedures are not complicated and require low technology. Some of the categories of these business and bread and cake making, commercial transportation commission, newspaper publishing; and printing, advertising, travel agency, etc this was the catalyst that gave rise to the involvement of Nigerians in the running of their business. Schedule II of the acts specifies other categories of business in which 40% maximum foreign participation and a 60% minimum Nigerian indigenous participation are allowed. Adewunmi (1988) observed that the category of enterprises of this class were in the main, those requiring middle level technology not adequately possessed by Nigerians. Some of the categories of business are beer, breweries, boat building, bottling and processing business, processing of fruits coastal and waterways shipping, mining and gearing among others. Schedule III allows a maximum of foreign participation to the tune of 60% and minimum of Nigerian indigenous participation of 40%. The peculiarities of business are that the technology requirement and skill are almost lacking in Nigeria. The objective is to integrate Nigerians Business into the mainstream of business activities despite the apparent differences in technical and technological requirements, e.g. manufacturer of engine and turbine, computing machineries, manufacture of auto parts/vehicles manufacture of aircraft, oil servicing, ocean transportation etc the principal body charged with the responsibility of implementing this act is the Nigerian enterprises promotion board. In all the enterprises, a promotion act as it is, does not intend to expunge foreign participation in Nigeria business as sometimes misinterpreted, it is packed to encourage and reserve for Nigerians, investments and business in those areas within the competence of indigenous expertise as well as stimulate Nigerian and foreign investors to work together in mutual trust thereby facilitating local acquisiting of skills. The enterprises promotion decree has those unique benefits of: (i) The encouragement of Nigerian indigenous participation in business through appropriate

delineation of those areas that are exclusively reserved for Nigerians alone. (ii) It makes it possible for Nigerians business to enjoy adequate control especially from

foreign incursions in expertise and skills are plentiful. (iii) It leads to a beneficially dilution of business ownership through joint participation of

foreign and indigenous investors. (iv) It encourages local acquisition of hitherto non-existent skills among business. The

approach is straight forward, it encourages co-operative approach where the skills are almost non-existent and

(v) Lastly, it promotes the development and growth of business in Nigeria, as most investors talk advantage of the decree to relaunch their investments or business packages.



B. Provision of Infrastructural Facilities Dividedi (1985) argues that the infrastructural facilities created by government helps the growth of small scale business by facilitating the accusation of required inputs, these facilities are the essential infrastructures that assist and promote investment. Some of them are; - Provision of access roads; - Increased improvement in communication facilities like telephone, postal services,

NITEL, etc; - Provision and expansion of electricity; - Water expansion schemes to service industrial of business sites. - Construction of industrial layouts/estates; - Establishment and maintenance of an Export Processing Zone (EPZ) - The provision of all these facilities help the small scale business to expand through quick movement of goods and services, expansion of markets for products and lead to a relatively cheaper investment cost. C. Provision and Constant Manpower Development Support With the establishment of various institutions, especially the universities and polytechnic, the government directly help in the provision of skilled manpower at every level of management for the economy and small scale business. Apart from the tertiary institutions, government also established and finances some specific manpower development and training institutions. Some of them are the Centre for Management and Development (CMD), the Administrative Staff College of Nigeria (ASCON) and the Industrial Training Fund. The products of these Institutions are extensively utilized by businesses. The hitherto problem of technical and management manpower requirement are drastically reduced. D. Establishment and Finance of Research Institutions The government has assisted small scale business through the provision of some helpful research institutions. The research reports of these institutes are very useful to business organizations, not only in their product choice decision, but also in product development approach, product or service delivery strategies, thereby increasing business efficiency and effectiveness. The activities of Raw Materials and Research Development Council (RMRDC) are worth of note. This council through it affiliated institute conduct research into cheap sources and of alternative raw materials for various businesses. Its role has been so tremendous as small businesses take advantage of some discoveries in the research report to boost and expand their operations, other research institutes include the Nigeria Industrial Opportunities Centre and the Investment Information and Promotion Centre. E. Provision of Direct Financial Assistance to Small Business Organisation The Nigerian Government often gives direct financial assistance to business organization, some of the specific ways by which government gives financial assistance to small businesses are:



- The establishment of specific financial institutions to serve a given or determined business factor e.g. People Bank, Nigeria Agricultural and Cooperative Bank for Commerce and Industry.

- Direct financial assistance or loans to some business through a package of subsidized or discounted loan portfolio e.g. NEBFUND Scheme, Small Scale Industrial Credit Scheme (SSICS).

- The creation and sustenance of many development and finance institutions for the purpose of providing long term funding on a generous or beneficial condition to business enterprises at Nigerian Industrial Development Bank, New Nigerian Development Company Limited, Peoples Bank of Nigeria Limited and the Northern Investment Limited.

The National Directorate of Employment (NDE) as a Guide towards Enhancing Small

Scale Industries in Nigeria

The National Directorate of Employment was set up by the Federal Government in November 1986, to work out strategies for dealing with the mass unemployment in the country, especially among school leavers and university, polytechnic and college graduates. The NDE has articulated a number of programmes to give effect to government objectives of generating employment. The programmes can be broadly categorized as follows: (a) Small Scale Industries and graduate employment programme. (b) National Youth Employment and Vocational Skill Development Programme. (c) Special public work (d) Agricultural programme The main thrust of the NDE’s programme is to assist applicants in setting up their own businesses in agriculture, small scale industries, etc and to enable them employ additional hands in their establishments, thus helping to reduce the level of unemployment. These programmes are backed up by necessary administrative, monitoring and support personnel, thus enabling optimum use of resources and prompt response to the requirements of the public.

Small Scale Industry – Its Role in the Economic Development in Nigeria Small scale industries have a lot of important contributions to make to the economic development of the country. Shokan, O. O. (1997) writes some of them as follows: The provision of employment, innovation and areas marketing for goods and services

which are offered for sales. A lot of youths, retired workers and out of school graduates are now gainfully employed, thereby reducing the unemployment rate and its attendant’s social complication of armed robbery and white collar crimes.

It helps to bring about new goods and services and supply the needs of large industries, who have to rely on the small scale operators for business success.



The represent the overwhelming majority of industrial capacity in developing countries.

A fact confirmed by Olabisi Ajayi (1977), Ayozie, Daniel O, et al (1997) and Akinseye, C. A. (1997) where it was postulated that presenting small scale business in Nigeria constitute over 80 percent of all registered companies, occupying positions in agro based and allied industries, rubber based, leather shoes industries, chemical, electronics, general merchandising, restaurants, dress making, hair dress making, cane-chairs, leather products, pomade and toiletries, animal feeds and husbandry, printing, etc.

They promote the development of indigenous manpower as well as increasing local participation in the manufacturing sector. Small scale business checks the effect of polarization by a planned and systematic development of rural areas. The much talked about urban migration is reduced by the introduction of small scale industries in rural area. The activities of small business firms have resulted in the mobilization of the resources of

the environment and thereby improving on the standard of living of the population. They contribute to the labour market by absorbing an ever growing supply. In doing this, they have sufficiently helped to curtail the rising unemployment in Nigeria. They have accounted for a large percentage of all businesses and a favourable percentage of the nations is gross national product. This fact is more relevant in the developed countries of Great Britain and United Kingdom where proper accounting system is kept. Other noticeable impacts are its contribution to the development of indigenous entrepreneurship. Mention is being made of the Dantatas, Fajemirokuns, Igbinedions, Ekene Dili Chukwus, Lodibes, Dankabos and the Amazus. Its contribution to the mobilization of domestic savings and utilization of local resources is also a noticeable factor. They serve as good agents for disposal of industrial products and some services and have contributed immensely to the production of raw materials in the form of semi-processed goods for use by bigger industries. It is a base for the development of appropriate technology and provides a veritable ground for skilled, unskilled and semi-skilled workers. It has provided productive self-employment to a number of educated and less educated young men and women coming out of schools, colleges, polytechnic, and universities. Ayozie (2001) specifically mentioned the role in the accelerated industrial development by enlarging the supply of entrepreneurs and the enlarging of small and medium enterprise sector, which offers better potential for employment generation and wider dispersal of industrial ownership.



It has assorted in improving the performance of small industries by enlarging the supply of carefully selected and trained well rounded entrepreneurs and diversifying sources of entrepreneurship and business ownership. Marshall (1970), Cole (1959), Cantilon and Schmpter (1934), enumerated that the entrepreneur viz a viz the small scale business person is the most critical factors in the economic development of any Natlon. Entrepreneur organizes, and utilizes the various factors of production and finally sets productive machinery in action towards overall economic development; consequently, the availability of the small scale industry is therefore the undisputed precondition for economic growth. Schumpeter 91934) noted that the supply of entrepreneurs depends on the rate profit at the social climate seeking out activities and opportunities which will give him profit or reward, induces the entrepreneur to be innovative and to take on purposeful calculated risks.

The Importance of a Small Business Small scale industries generate employment for a lot of Nigerian. A lot of unemployment for a lot of Nigerians. A lot of unemployed people and youths, have found employment in small scale industries. A lot of small retail shops, cottages, restaurants, poultry farms, and telecommunication/telephone shops have been established and managed profitably by Nigerians who would have been unemployed till date. The entrepreneurs have in turn provided jobs for other Nigerians, who serve as support, technical and administrative staffs for them. It has encouraged self employment for many youths both in the rural and urban areas.

The spirit of successful entrepreneurship has taken over the mind of Nigerians, who believe in themselves and in the goal of self employment, instead relying on government jobs. In the telephone retail and rental jobs, a lot of youths and Nigerian have remained self employed. Their businesses have expanded to the level of employing some other unemployed people.

Through the establishment of manpower development support schemes, and their involvement in the training and retraining of entrepreneurs, small scale industries have provided a pool of potential entrepreneurs and business people who are well equipped to start and successfully manage industries whether small or large, not only in Nigeria, but overseas. Successful business people in Nigeria like the Aliko Dangotes, the Ibrus, Mike Adenuga, Illodigwe and the Orji Kalus started as SMES, before the growth of their various businesses into conglomerates.

It has reduced the dependence on government and large firms on salaried employment. This is evidenced from the liberalisation policy of the government in the telecommunication and education sectors as a lot of companies have been established to provide support staff and employment for Nigerians.

Small scale industries have stimulated rural development and the achievement of a meaningful level of broad economic and rural development. To reduce the migration from rural to the urban centres, some infrastructural facilities which promoted small scale industries were provided in the rural areas, such as the provision of access road, increased improvement in communication facilities like telephone, postal services and the internet facilities, construction of industrial layouts and estates, and the provision of electricity and water expansion schemes.



It has uplifted the dignity of labour. There is the spirit of “ME TOO”, I can do it attitude. People deriving joy in working for themselves and seeing their businesses grow and mature to conglomerates and deriving joy in being a source of employment to other Nigerians.

It has upgraded the social status of Nigerian youths, by showcasing them as very successful entrepreneurs and operators of small scale industries. This is evidenced in the many success stories of small scale industries as recorded by the print and electronic media houses.

Special Causes of Small Scale Business Failure in Nigeria

There is the insufficient capital outlay. There is lack of capital or inadequate capital to

buy the stock and equipment. Securing of loans from the banks and Financial Institutions takes time and in most cases are only existing on paper. Many banks require the satisfaction of many conditionalities before loans are granted, and the small scale industries find it difficult to secure the loans.

There is also the use of obsolete business methods, and equipments, as a mans of maintaining stocks and inventory. These old methods do not tally with modern business procedures, making rewarding. Most business ideas are things inherited from parents, and most of the ideas die with the originators. Some are not scientific in nature and cannot be assessed easily. There is also the lack of credit control, as money could be brought in and taken out of the business easily for personnel and not for business purposes.

There is the absence of business planning. Planning is done by rule of thumb and haphazardly. This makes it difficult to detect and understand the predictable and unpredictable market changes. The non-existence of actual planning strategies makes it difficult to standing changing, dynamic and every unpredictable economic and business conditions. There is also the failure to maintain plan for emergencies, and the failure to anticipate and plan for the financial demands and needs of the small-scale industries. These problems regard growth and development.

Coupled with the above problems is that of low motivation, and lack of confidence most entrepreneurs believe they cannot make it, in the face of competition by the bigger companies. The desire and motivation to succeed is reduced.

Most entrepreneurs are even undecided about the type of business to set up and lack necessary business ideas.

Some small scale operators are undecided on how to finance their business and where to source for the funds.

Other obstacles and causes of small scale business as enumerated by Alawe 2004, includes socio-cultural obstacles which includes the lack of entrepreneurship culture and education, Nigeria’s social system limits opportunities for creative activities, and the limiting role of most relying beliefs which bars admission to initiatives and entrepreneurships. They preach perseverance, rather than risk taking and aggressiveness, necessary for business. Others includes technological backwardness of Nigerian which leads to labour inefficiency, political instability occasioned by civil unrests, political sabotage, coup de tats, local and youth restiveness,



thurggery, armed robbery. All these create insecurity in the minds of entrepreneurs. Some managerial problems as opined by Alawe (2004) includes the absence of strategic management skills and attitudes, the inability to respond to threatening environmental conditions, lack of clearly defined objectives, lack of delegation, inability to select appropriate equipments and resources, and the faulty design, implementation and evaluation by small scale businesses.

Conclusion and Recommendations

As initially mentioned, the secrete behind the success of self-reliant strategy is mainly in peoples positive attitudes to enterprise, and in the extent to which the right incentive, adequate enough to make risk worth taking rather than in any particular political philosophy. In the early stages of Japan’s Industrialization, her economy was dominated by a large number of small scale enterprises, who drew their strength not from an abundance of capital, but rather from her vast supply of labour, and the abundant advantages of small scale industries. Nigeria and Nigerians need to learn and follow Japan’s footsteps. The activities of modern marketing cover marketing research, market segmentation, marketing information systems, marketing planning and control , and other issues relating to product, price, promotion, and distribution. These activities are not properly handled in many Nigerian small business enterprises as Ogwo (1991) has rightly pointed out. One of the major advantages of marketing is that, when correctly used, subjective values may be added to a product. The consumer then perceives it as superior to that of competitors. Consequently, profit margins may be increased. But as noted already, poor quality, unawareness of competition, poor promotion, poor distribution, and poor pricing methods tend to be the major failings of small-scale manufacturers in Nigeria. The production of generic products is often considered acceptable and economical by these small business enterprises (Onwuchuruba 2001) The adoption and application of marketing concept is one sure way by which small business enterprises can grow and secure for themselves places in the 21st century commerce and industry. But marketing skills and knowledge are teachable and can only be acquired through training and experience. Unfortunately, many small scale entrepreneurs lack the necessary time and funds to embark on such training. We therefore suggest that the governments should assist them through organizing regular marketing workshops and seminars via State branches of Manufacturing Associations of Nigeria (MAN) and State Chambers of Commerce and Industries. (Onwuchuruba 2001). In order to move away from this prevailing situation and build up some dynamism in its operations, a small-scale manufacturer should also be involved in strategic marketing planning. This planning will try to answer three important and relevant questions: (i) Where are we now? (ii) Where do we want to be? (iii) How are we going to get there? At the diagnosis stage, they should endeavour to be market-focused. They should find target markets, interpret trends, and identify customer needs before assessing the firm’s strengths and



weaknesses, noting also the limitations imposed upon by local marketing environment. It is only after this can an effective marketing strategy be formulated and appropriate plan put into action. Once feasible target markets with good growth and profit potentials have been selected, marketing strategies and actions should follow. The two major advantages possessed by small business enterprises in this respect are their closeness to customers and flexibility. Also, the two common mistakes here are attempting to offer too wide a range of products and trying to compete in large markets where their size can place them at greater disadvantage compared to large companies. Chaganti (1983) reveals that small business enterprises can perform better by carving a niche in the market place. They should also consider the various product variables like quality, features, styles, brand names, and marks. Many large companies such as the Lever Brothers Nig. Plc, Nigerian Breweries Plc, Cadbury Nig Plc, to mention a few, have demonstrated the great value of brand name and mark. Branding helps to create exceptional value in the eyes of consumers provided the company’s products meet needs better than competitors. The small-scale manufacturer should also use price/quality assortment, convenience, service, and other elements of the marketing mix to promote the right image for their companies and products. Distribution in small business enterprises may be a problem due to many layers existing in the channels. But once at diagnosis stage, accurate and complete limitations in the marketing environment have been identified and assessed, appropriate distribution strategies can be formulated. The governments are also advised to assist the small scale producers by improving infrastructural facilities and environmental limitations such as road network, water, electricity, and communication. Inefficiencies in these areas create additional costs to small-scale manufacturers. After building a strong marketing base at domestic market, it is important that small business enterprises consider exporting their products abroad especially within the West African sub-region. This can help them secure much-needed foreign exchange for importing necessary equipment and raw material as supplements to locally developed ones. Through this, the quality of their products can be improved and thus place them at a better position to compete effectively in both domestic and international markets.


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SIZE, AGE AND EXPORT PROPENSITY OF SMALL OWNER MANAGED FIRMS: NEW EVIDENCE

Densil A. Williams, University of the West Indies, Mona

Abstract

This paper seeks to analyse the impact of size and age of a firm on the firm’s ability to engage in international business specifically exporting. Having reviewed the extensive literature on this subject, our interpretation is that it is fragmented and limited in geographic scope. This study aims to address these limitations by analysing the export behaviour of a group of small exporting and non-exporting firms from the Jamaican economy, a small open economy in the Caribbean. Data were collected from 92 firms and analysed using the multivariate statistical technique of logistic regression. From the analysis, we conclude that: firm size has a significant impact on export propensity but not firm age. Moreover, other variables such as the entrepreneur’s previous job experience and foreign travel experience do play an important role. These findings will have implications for the way we research the internationalization of the small firm. Furthermore, they can provide export policy makers with profiles of firms that have a greater proclivity to internationalize.

Introduction

The debate surrounding the impact of age and size on the ability of the firm to export a portion of its sales abroad is quite fragmented and limited in focus. Most studies are drawn from samples of Large or Medium sized firms from Developed economies such as US and Europe. As such, our understanding of this issue regarding smaller firms and specifically those from developing countries is very limited. Indeed, researchers at the interface of entrepreneurship and international business have called for more research outside the US and Europe that addresses the internationalization of smaller firms (e.g. Oviatt, 2005, Westhead, 2005). This paper will make an attempt to answer this call. The present wave of global capitalism has obliged all firms to participate in the global economy irrespective of their age or size. As such, the international behaviour of the smaller firm has attracted a lot of attention from both academics and policy makers. Governments across the globe are encouraging more firms to engage in exporting so as to enhance the international competitiveness of their economies. They have invested a lot of resources in trying to woo firms into the export sector. However, it appears that very few firms are able to take advantage of these export promotion programmes. In most economies, the majority of firms are small (Storey, 1994); as such, they may not have sufficient resources to enable them to seek export opportunities abroad. This therefore begs the question: will the size of the firm impact its ability to export abroad? Furthermore, since organizations generally gather resources overtime, it may therefore mean that as firms grow older they are more likely to become engaged in international business transactions. Thus we will also need to investigate if the age of the firm will impact on its ability to export abroad. These two issues will form the basis of our investigation in this paper.



The format of this paper is as follows: the next section will provide the theoretical justification for the relevance of size and age of the firm in impacting its export propensity. Here, we will survey the relevant literature looking at the firm’s export behaviour and provide the theoretical framework that will guide the analysis. Section three will address the method used to investigate the research problem. Section four will present the findings from our analysis while section five will provide a discussion and analysis of the relevant findings and provide some concluding remarks.

Research Variables and Theoretical Framework

The resource-based view of venture internationalization argues that: the greater the stock of resources that a firm possess the greater its proclivity to internationalize (Bloodgood, et al., 1996, Westhead et al., 2004). For example, if a firm has a large number of employees, it will have access to a wider pool of human capital resources, thus better able to design more effective competitive strategies. Also, with more resources, managers will tend to feel more confident in taking on uncertainties associated with doing business overseas, thus they will have a higher probability of engaging in international business activity compared to firms with less resources. Following this logic, the resource-based view of strategy can be used as a theoretical lens to investigate how the size and age of a firm will impact on its ability to export a portion of its sales abroad. Any effort to understand why small firms export has to pay special attention to the resource needs of these firms. The firm can be conceptualized as a collection of productive resources (Penrose, 1980). Resources according to various definitions comprise the assets, capabilities, processes, routines and knowledge possessed by the venture (Barney, 1991). In other words, resources refer to the stock of available factors owned or controlled by the venture (Amit & Schoemaker, 1993). Owning to the vast number of definitions of what constitutes a resource, various classifications exist. Chatterjee & Wernerfelt, (1991) for example show a body of work that classifies resources into three categories: physical, intangible and financial. Barney, (1991) categorises resources into three categories: human capital, physical capital and organizational capital. Still, Amit and Schoemaker, (1993) classify resources as: know-how, financial or physical assets and human capital. However, going back to Penrose’ seminal contribution to the theory of the growth of the firm, she classifies resources as human and physical resources. From the rich literature on the resource-based theory it seems that there is no disagreement with these categories (Anderssen & Kheam, 1998). Resources are critical in determining what actions the firm can take (Covin & Slevin, 1991, Tseng et al, 2004). They can play a critical role in moderating the way external stimuli contribute to the decision to initiate exporting. Bloodgood et al., (1996) argue that new ventures ability to enter foreign markets is directly related to their resource stock. For example, firms with a high percentage of technical and scientific employees may possess a greater ability to export than those with less of those employees. With a large number of scientific and technical workers, the firm will more than likely be more innovative thus, producing products which can give it a competitive advantage in the market place. This competitive advantage will better prepare it to



respond positively to export stimuli and thus allows it to enter export markets. Indeed, it is argued that firms that possess a combination of resources that are valuable will have a greater proclivity towards internationalization (Bloodgood et al., 1996).

Firm Size

According to the resource –based view, larger firms will have access to more resources (e.g. management know-how, financial resources etc.) that small firms do not have. Because exporting demands large amount of resources, small firms will be constrained in their ability to enter international markets. Indeed, firm size is seen as a useful surrogate measure of the firm’s resource stock (Bonaccorsi, 1992). Larger firms it is argued, because of their resource stock (e.g. financial, technology, human capital etc.) are more successful in the export market (Aaby & Slater, 1989, Katsikeas & Piercy, 1993, Philp, 1998). The empirical evidence however is mixed. For all the attention given to this resource, there seems to be very little agreement regarding its impact on either export propensity or export success (Aaby & Slater, 1989). Indeed, this resource has received quite a lot of attention in the literature on the firm’s export behaviour (e.g. Calof, 1994, Daniels & Guyboro, 1976, Andersson et al., 2004, Mittelstaedt et al., 2003, Hall & Tú, 2004, Yaprak, 1985, Keng & Jiuan, 1989, Pope, 2002, Bilkey & Tesar, 1977, Leonidou & Katsikeas, 1996, Miesenbock, 1988, Whitey, 1980, Bonaccorsi, 1992, Cavusgil,1984a, 1984b etc.). The general finding regarding the relationship between size and export propensity is that there exists a positive relationship (Miesenbock, 1988). When using size as a surrogate for the firm’s resources, studies have suggested that there is a critical minimum size for exporting to take place (Mittelstaedt et al., 2003). Their recommendation is that below 20 employees, exporting in a firm becomes infeasible. This argument finds support with that of Bilkey, (1978) who found that beyond a certain point, exporting is positively correlated with firm size, but, below a minimum point there is no correlation. Because size reflects the productive capacity of the firm, then, below a critical minimum, the firm will not have sufficient capacity to at least initiate exporting (Mittelstaedt et al., 2003). This argument however, is weakened when using number of employees to measure size. Firms with less than five employees are observed operating in the export market (e.g. Bilkey & Tesar, 1977, Philp, 1998, Calof, 1994, Moen & Servias, 2002 etc.) whereas, the proxy for sufficient productive capacity is suggested as 20 employees minimum. Size as a surrogate for productive capacity seems to be an argument which better suits continued export development than export propensity.

However, empirically, the relationship between firm size and export propensity and intensity is not always consistent. For example, Hall & Tú, (2004) looked at the impact of size on both measures of export performance (propensity and intensity) and found different results. For export intensity (the portion of sales from export as a percentage of total sales), they found a negative relationship with size, while for export propensity (whether the firm exports or not) there was a positive relationship with size. Other researchers found no relationship with size and export intensity (e.g. Czinkota & Johnson, 1983, Cavusgil, 1984b etc.). Czinkota & Johnson, (1983) conclude that size did not substantially differentiate between managers’ attitudes and the firm’s experience in exporting.



From a more critical look at the size and export propensity debate, Hall & Tú (2004) argue that it is the fixed cost associated with entry which makes size an important resource in the decision to export. The high fixed cost involved with exporting is important because small firms which are resource poor are more vulnerable to sunk costs. To elucidate, fixed cost associated with search for market, negotiation, certification (e.g. ISO 9000 or HACCP), can be exorbitant. Small firms which are resource poor will not be able to afford these costs, as such; it may dissuade them from even giving thought to exporting. While the fixed cost argument is a compelling reason to justify firm size as a significant resource that impacts the decision to enter export markets, if the firm has a highly competitive product and there is a growing demand in the export market for this product, there are methods which can be used to overcome the fixed cost problem. For example, firms may get assistance for certification from domestic governments. Some small firms may also network with larger firms which are resource rich and have already absorb the fixed cost involved in exporting (Coviello & McAulley, 1999, Bonacorssi, 1992, Lipparini & Lorenzo, 1999). Networking will help smaller firms to get their products in the export market at a lower cost than if they were to seek the market independently. Firm size is also used to reflect the level of economies of scale in production which the firm can achieve (Penrose, 1980). In the competitive environment which both large and small firms now operate, success is heavily driven by economies of scale. Economies of scale is a function of the firm’s resources and the sector within which it operates. It leads to a reduction in the unit cost of output thus allowing firms to sell products at a more competitive price. Small firms, due to their limited resource stock, will not be able to gain the same level of economies of scale as large firms. It is therefore reasoned that the larger the firm, the greater the prospects for economies of scale. This should lead to improve competitiveness, thus increasing the firm’s chance of engaging in international business activity.

Firm Age The resource-based view predicts that older firms will have considerable more resources than younger firms. This premise is based on the assumption that firms acquire resources over time (Autio, 2005). Because older firms will have a larger stock of resources than younger firms, the resource-based view of venture internationalization argues that they will be better able to build an international basis (Bloodgood et al., 1996). Process theory of internationalization posits that firms progress in a stepwise manner when moving from the domestic market to international markets (Johanson & Vahlne, 1977). Underlying this gradual process is the assumption that firms will need to develop their knowledge of the foreign market before allocating huge amount of resources there. In other words, managerial learning is a critical resource for firms which intend to export. Jovanovic, (1982) sees firm age as a reflection of learning. Learning according to the postulates of the process theory is a critical resource that will enable firms to enter export markets. International markets are very diverse and business practices are different from those of home market. To operate effectively in these markets, theorists of the incremental stage orientation argue that firms will have to develop skills relating to the foreign market (e.g. language), know the culture in these markets, and develop confidence in overseas operation before large volumes of



resources are committed. Gathering this knowledge and experience it is argued, comes overtime. As soon as the firm grows older it will gather more knowledge of how overseas markets operate. The knowledge which firms acquire over time will help them to overcome the “liability of foreignness” (Hymer, 1976) and “liability of newness” (Stinchcombe, 1965) which are factors that prevent younger firms from surviving in the international market (Rhee, 2002). However, the rise in “born globals” and “international new ventures” (Kinight & Cavusgil, 1996, Oviatt & McDougall, 1994) has led to doubts regarding the assumption that firms acquire resources over time and thus will gradually enter international markets (Moen & Servias, 2002, Oviatt & McDougall, 1994, Knight & Cavusgil, 1996, Li et al., 2004). Firms both in high technology sector and manufacturing sector are observed going international even before they start operation in the domestic market (Crick, 2004). This evidence further bemused the proponents of stage theory who argue that age is a reflection of experience, know-how, and alleviates the liability of foreignness and newness. Researchers recognise that younger firms are internationalizing at an even faster rate than older ones (Knight & Cavusgil, 1996). This fact underscores the numerous critiques that have been levelled at the stage school of thought (Johanson & Vahlne, 1990). Although there are sound theoretical arguments which suggest that firms may not necessarily enter export markets incrementally (Moen & Servias, 2002), the contention in the empirical literature as to the impact of the firm’s age on export performance (propensity, intensity etc.) continues. A recent Swedish study by Andersson et al., (2004) shows that the firm’s age is not a significant factor in determining the level of internationalization. Keng & Jiuan, (1989) found that there is no statistically significant difference between younger and older firms’ interest in exporting. They conclude that this finding does not give support to the contention that younger firms are more interested in exporting than older ones. The literature on organization theory however, provides arguments to suggest that younger firms are more interested in exporting than older ones (Rhee, 2002, Autio et al., 2000). This school of thought points to structural inertia as a result of age. It posits that structural inertia in a firm increases with the age of the firm. This therefore results in older firms being slower in responding to change compared to younger firms. Since exporting calls for important changes to be made to the firm’s operational activities, then, older firms will respond less quickly than younger ones. However, if those studies that found a positive relationship between age and export propensity (e .g. Daniels & Guyboro, 1976, Brouthers & Nakos, 2005), has any merit then, this theoretical position becomes questionable. In a Peruvian study, Daniels & Guyboro, (1976) found evidence that older firms are more likely to become exporters. Peruvian firms serve their local market first then gradually move to the export market. This finding however was before the rapid liberalization of trading systems around the world and also the massive improvements in information and communication technologies. As a result it is consistent with the features of its environment. However, today, these factors (e.g. trade liberalization, improvements in information and communication technologies etc.) have provided a strong stimulus inducing firms to enter export markets. Therefore, it may be argued that age will no longer be a barrier to exporting. More recently however, Brouthers & Nakos, (2005) although they did not measure



export performance as export propensity, showed that older firms are more likely to be more successful in the export market. From this we imply that, they are more likely to become exporters also. Moreover, because we believe that firms gather resources over time and export initiation requires large amount of resources, we expect older firms to have more resources upon which to build an international basis.

Research Method

To analyze our research issues, data were collected from small owner-managed firms1

Since a priori we had knowledge of the categories of firms we wanted to look at, we designed two sets of questionnaires; one for exporters and one for non-exporters. We used both structured and semi-structured questions to gain the relevant information from the firms. In this case, since we are dealing with small firms which generally sell one product, the firm becomes our unit of analysis. Table 1 below shows some characteristics of the firms that were used for this analysis.

in Jamaica; a small open economy in the Caribbean. Over a six month period, face to face interviews were conducted with 92 exporters and non-exporters in the productive sector in the economy. We focused on firms in both the manufacturing and agriculture sectors. To allow comparison with other research from the developed world, we focused on specific sub-sectors in both agriculture and manufacturing. The sub-sectors in manufacturing are: baked products, food beverages and tobacco, garment and textile, furniture and fixtures including wood, paper and paper products, printing and publishing, chemical rubber and plastic and non-metallic products. From Agriculture, the sub-sectors are: essential oils, fish, fruits and vegetables, tea e.g. coffee and cocoa.

1 Small Owner-Managed Firm is defined using the number of employees in the firm. In the case of this analysis, we used firms with 100 or less employees to describe small owner-managed firms. Moreover, because we want to eliminate any bias in-terms of export initiation, we ensured that the firms studied are not part of any larger organization, thus the decision to export is made by one or a few individuals who can be considered the entrepreneur (s) or owner (s) of the firm.



TABLE 1 Some Characteristics of the Firms

EXPORTER N

%

NON- EXPORTER N

%

Number of Employees < 10 11 25 26 54.2 10-19 7 15.9 9 18.8 20-29 7 15.9 2 4.2 30-39 2 4.5 1 2.1 40-49 3 6.8 6 12.25 50-100 14 31.8 4 8.3 Total 44 100 48 100

Education Level of Manager Primary - 1 2.1 Secondary 11 25 17 35.4 University 29 65.9 17 35.4 Other 4 9.1 13 27.1 Total 44 100 48 100

Year of Establishment Before 1970 8 18.2 5 10.4 1970- 1975 6 13.6 5 10.4 1976- 1981 6 13.6 13 27.1 1982- 1987 4 9.1 8 16.7 1988- 1993 7 15.9 2 4.2 1994-1999 8 18.2 10 20.8 2000-2004 5 11.4 5 10.4 Total 44 100 48 100

The data gathered from our interviews were analyzed using a quantitative approach which is the general trend in this stream of literature. Because our dependent variable is dichotomous in nature, we applied the logistic regression model to help us analyze the data. This model was chosen over the two group discriminant model because the former is less sensitive to violation of the normality assumption in the independent variable (Hair et al., 1998). We also ignored OLS because it would produce results that fall outside the probability value of 0, 1 as a result of heteroskedasticity in the error term (Gujarati, 2003, Pindyck & Rubinfeld, 1998). Moreover, from this genre of qualitative choice models, the logit model was chosen over the probit model because the latter has a cumulative distribution function which is in integral form thus making it complicated to calculate mathematically. Besides its mathematical complexity, statisticians conclude that there is no difference between both sets of models as they produce similar results (Gujarati, 2003). However, because we are aware of the weaknesses in the hypothetico-deductive approach to analyzing issues from such a dynamic unit as the small firm (Curran & Blackburn, 2001, Yin,



2003), we have also drawn on qualitative data to buttress our analysis. Both the qualitative data and our quantitative analysis have produced some interesting insights into our research problem. The next section will highlight the results from our analysis.

Results

In this section, we will report the results from the analysis of the data. Our aim is to understand the impact that size and age have on the probability of the firm engaging in the export business. However, because we recognize that other factors are also important in getting the firm to initiate exporting, we have added some control variables relating to the human capital element in the firm. They help us to capture other factors that may have an influence on the firm’s export propensity. For indeed, the resource- based view of venture internationalization notes that; firms with a higher stock of human capital will have a greater proclivity to enter foreign markets (Bloodgood et al., 1996). As such, we incorporated the following resources to be used as controls: entrepreneurs foreign travel experience and previous job experience. The table below shows the results obtained from our logistic regression with the control variables.

TABLE 2

Logistic Regression Independent Variable

β S.E. Sig

Const -1.5 .70 .03 FS .03 .01 .03* FA .01 .13 .93 PJ 1.40 .50 .01* FTE

1.08 .64 .09*

-2LL (initial model)

127.4

-2LL (final model)

106.8

χ 2 (final model)

20.5 (4)**

χ 2 (Hosmer & Lemeshow)

8.2 (8) ***

R2N .3 R2L .16

* Variables are significant at the 0.05 level of significance ** Statistic is significant at the 0.05 level of significance (p=0.000) *** Test is non-significant at the 0.05 level of significance (p=.41) R2L = 1- (Final model -2LL/ Initial model -2LL)



R2N represents Nagelkere R and R2L represents the model R or McFadden R square. Where: FS = Firm Size FA = Firm Age PJ = Previous Job Experience FTE = Entrepreneur’s Foreign Travel Experience

All the diagnostic tests (e.g. R2N, R2L, predictive accuracy, χ 2 etc.) show that the results are robust and fit well with results from other studies in the literature. The model shows that the size of the firm has a statistically significant impact on the firm’s ability to engage in exporting however, the age of the firm is not significant in this regard. Both control variables are also significant. Indeed, these results are theoretically and empirically sound. Furthermore, the model diagnostics also show that the results are robust empirically. The model achieved a fairly high predictive accuracy of 72.8 percent. This predictive accuracy falls in line and in some cases exceeds previous studies (Andersson et al, 2004). The table below shows the predictive accuracy of the model.

TABLE 3 Predictive Accuracy of the Model

OBSERVED

PREDICTED

PERCENT CORRECT

Non-exporter Exporter Non-exporter 35 13 72.9 Exporter 12 32 72.7 Overall Percentage

72.8

Furthermore, we also analyzed the level of multicollinearity in the model to ensure that the results are indeed robust. Using the Pearson R correlation coefficient, we identified that none of the coefficients reached a value of 0.9, thus multicollinearity is not a problem (Ramaseshan & Patton, 1994). The table below shows this result.

TABLE 4 Correlation among variables

Constant

EFT EPEE YCS NEC

Const 1.000 -.054 -.246 -.796 -.614 FTE -.054 1.000 .119 -.118 -.120 PJ -.246 .119 1.000 -.084 .063 FA -.796 -.118 -.084 1.000 .311 FS -.614 -.120 .063 .311 1.000



Indeed, the results from the model show that factors relating to economies of scale and social and business network are of greatest relevance to small firms that intend to pursue international business opportunities. The discussion below will focus in more detail on these issues. The fact that age is not important also sends strong support to the stream of literature looking at born globals and international new ventures. Indeed, it may mean that we will have to take non-traditional approaches in analysing small firm internationalization rather than the traditional stage approach (Oviatt & MacDougall, 1994, Johanson & Vahlne, 1977).

Discussion and Analysis

The results from our model are robust and are theoretically sound. The general interpretation of the findings is that: the ability of the firm to export a portion of its sales abroad is a function of the size of the firm and also a function of the foreign travel experience of the entrepreneur and the entrepreneur’s previous job experience. Indeed, the larger the firm, the more resources it will have at its disposal thus it can better able to overcome the fixed cost of exporting. This will allow it to scale the barriers to entering foreign markets. Most of the literature that analyze size and export propensity (e.g. Calof, 1994, Mittelstaedt et al., 2003 etc) have not focused on the fixed cost argument. This paper, by focusing on this issue has made a significant contribution to this literature. For indeed, the fixed cost of exporting (e.g. the cost to carry out market research) can be quite exorbitant, thus dissuading small resource poor firms from making the decision to enter export markets. Furthermore, the fact that we have found the entrepreneur’s foreign travel experience and previous job experience to have a significant impact on the probability of the firm to export a portion of its sales abroad; this sends a powerful signal that social and business networks are important in helping small firms to be engaged in exporting (Ellis, 2000, Zahra et al., 2004). Entrepreneurs who have worked in organizations that are engaged in exporting will more than likely have developed some business or personal contacts in the overseas market. These contacts can serve as a mechanism to help them reduce the level of uncertainty associated with entering foreign markets. As such, they will have a greater proclivity toward exporting. Foreign travel experience will also help to reduce the psychic distance associated with entering new foreign markets thus increasing the probability of the firm becoming and exporter. The fact that the age of the firm does not have a significant impact on the probability of the firm becoming an exporter is not a worrying sign. For, indeed, the stream of literature that operates at the interface of international business and entrepreneurship (International Entrepreneurship) have argued over the last decade and a half that, firms are internationalizing from inception contrary to what the traditional theories of internationalization (e.g. stage theory) have posited (Oviatt& McDougall, 1994, Caviello and Jones, 2004, Dana, 2004, Rialp et al., 2005). This development suggests that researchers looking at the internationalization of the small firm will have to adopt more novel approaches in understanding this phenomenon. Small firms, due to their idiosyncratic nature, do not generally follow the logic of the market when doing business. For example, a firm may not carry out market research, analyse market



data, writes business case etc. before it gets involved in exporting. It may be that the firm or its owner is apart of a network (business or social) and this network provides private information on an export opportunity which the entrepreneur readily takes up without doing due diligence. Moreover, some small firms also get export orders from unsolicited sources (e.g. order from foreign customers, order from a partner of the firm that is now living overseas etc.) and they fill these orders without taking any proactive approach to getting future orders. These activities take place because; in most cases, the entrepreneur(s) who is the owner of the firm is the most powerful decision maker in the firm, unlike larger firms where such decisions would have to be approved by a board of director or a management team. The role of the entrepreneur is one of the elements that distinguish the small owner-managed firm from the larger and multinational firms. In summary, this paper had set out to analyze the impact of size, and age on the probability of the firm to engage in exporting. Our interpretation of this literature is that it is fragmented and limited in geographic scope. This study has sort to address these limitations by empirically analyzing the export behavior of small owner-managed firms from a geographic location that has received very little attention in the literature. We conclude that the size of the firm is very important for export initiation. Therefore, the larger the firm, the greater is the likelihood that it will engage in exporting. However, although the age of the firm appears to be an insignificant predictor of the firm’s export behavior, it does not mean we should disregard this variable. The literature on international entrepreneurship provides sound empirical evidence to show that younger firms are internationalizing much faster today than a decade ago. As such, future researchers looking at the export behavior of the small owner-managed firm will need to pay attention to why these firms are internationalizing so rapidly and what theoretical explanation can be used to explain this phenomenon. The contribution of this work to policy is also clear. Policy makers who are interested in stimulating more small firms from their economy to export can use the findings from this study to profile firms that come to them for assistance to enter new export markets. This will help to improve the efficiency with which these export stimulation programs are run.



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MULTIPLE ASPECTS OF TRIGGERING FACTORS IN NEW VENTURE CREATION: INTERNAL DRIVERS, EXTERNAL FORCES AND INDIRECT MOTIVATION

Liang, Chyi-lyi (Kathleen), The University of Vermont

Dunn, Paul, The University of Louisiana at Monroe,

Abstract This article presents a unique approach to discovering triggering factors in new venture creation without a preconceived notion of what they are. One hundred sixty-one entrepreneurs responded to a randomly structured questionnaire including 42 questions to identify important reasons that drove them to start their own businesses. Based on entrepreneurs’ choices, personal characteristics and self-motivated reasons associated with opportunity discovery topped the list. Twelve triggering factors of venture decisions were extracted from 42 reasons using Factor Analysis. These twelve factors were combined into three aspects – Internal Drivers, External Forces and Indirect Motivation. Some factors of the Internal Drivers aspect seem to be the dominant factors, such as dissatisfaction and personal constraints in workplace. Seeking financial rewards did not seem to be critical. New triggering factors were discovered such as changes in personal and family life or some circumstantial forces that are out of entrepreneurs’ control.

Introduction Researchers have discovered clear evidence to link the concepts of entrepreneurship with economic development and production activities after reviewing the history of the economic literatures (Baumol, 1990). From ancient societies in Rome and China, to Adam Smith, to Schumpeter, to Baumol, and to recent schools of entrepreneurship study, there has been a trend for researchers to explore, examine, and analyze everything about entrepreneurship and its role in the economy. Many facets of entrepreneurship have been discussed regarding entrepreneurial individuals, entrepreneurial attributes, entrepreneurial environment and interactions among the three. The center of entrepreneurship is obviously the entrepreneurs, who identify/discover/create opportunities in which ideas are developed into production functions by utilizing limited resources effectively. Risks and uncertainties constantly combat entrepreneurs’ decisions and successful entrepreneurs are usually able to convert risks and uncertainties into new opportunities in the marketplace. But why would any individual choose to live against odds and to face the potential stress that might be associated with financial loss and personal sacrifice?

The development of scholarly investigation that derives a general theoretical framework in entrepreneurship is still in the early stage (Shane, 2002), especially when targeting on entrepreneurs and their decision making processes. Although economic theories provided some explanations for the existence of entrepreneurship, economic theories had failed to develop an illuminating conceptual approach to analyze entrepreneurship and some researchers believed that it is unlikely to happen for the foreseeable future (Baumol, 1968).



Many researchers have attempted to identify entrepreneurial traits, personalities, preferences and behaviors (Kihlstrom and Laffont, 1979; McClelland, 1961; Shaver and Scott, 1991) and have concluded that individuals are motivated by seeking higher financial rewards or achieving higher satisfaction when engaging in new venture formation. Others have discussed and explored how the economic environment has influenced individuals’ decisions in new venture formation by looking at the changes in market forces, changes in employment and shifting organizational structures (Arrow, 1962; Casson, 1982; Audretsch, 1997). There is little empirical investigation that explains why entrepreneurs decide to create their own businesses in economic theory. The decision to create a new venture should include internal drivers related to individuals’ self awareness; external forces such as changes in work/family situations, environment and economy; and indirect motivation that are not directly related to business or personal issues. Built on historical literature, this article presents the preliminary results from an on-going project to provide some insights about why individuals choose to start businesses by considering a group of triggering factors. We define triggering factors*2

Much research has discussed the characteristics and motivation of the entrepreneurs (Stevenson, Grousbeck, Roberts, Bhide, 1999; Longenecker, Moore, and Petty, 2000; Scarborough and Zimmerer, 2000; Bhide, 2000; Bygrave, 1994; Kuratko and Hodgetts, 1998; Vesper, 1996; Hodgetts and Kuratko, 1995; Timmons, 1999; Jennings, 1994; Lambing and Kuehl, 1997). Common themes to describe entrepreneurs include: high achievement drive, action oriented, internal locus of control, tolerance for ambiguity, moderate risk taking, willingness to commit,

as factors in the individuals (endogenous forces) or in the individuals’ perception of their situation (exogenous forces) that move them toward the entrepreneurial process. This study is one of the few empirical studies to directly tackle the reasons why individuals want to create new ventures from both the individual and the environmental approach. The fundamental research questions are “What triggering factors, based on entrepreneurs’ perceptions, stimulated new venture formation among different individuals who participated in the study?” And “Are we able to categorize these triggering factors into multiple aspects, based on economic and entrepreneurship literature, given a structure of randomly organized questions?”

This research project is currently in the exploratory stage, and it is not the authors’ intention to generalize the results at this point. We realize that there has been a gap in entrepreneurship theories to establish a systematic approach that could explain why and how entrepreneurs start new businesses. We also acknowledge that new venture creation is a dynamic process that will change significantly from time to time given political or economic movements in the world. The long term goal of this study is to gather sufficient data and develop research results to formulate a robust conceptual theoretical framework using a multivariate equilibrium approach to study entrepreneurial individuals.

Entrepreneurs and Motivations

2 Note that triggering factors defined in our study are different from “triggering events”. Previous research discussed some impacts of triggering events on entrepreneurs and entrepreneurial activities (Lowrey, 2003) such as economic forces, incidents, occurrences or consequences that had created reactions to entrepreneurial decisions. These triggering events were most likely occasions or results of something happened in entrepreneurs’ lives, which associated with the “exogenous factors” in our study.



optimism, opportunistic, initiative, independence, commitment/tenacity or some form of one or more of these. The motivation of entrepreneurs often involve the opportunity to gain control over personal lives/independence, to get profits/financial rewards, to enjoy what individuals are doing, to achieve personal goals and recognition and to make a difference/contribute to society. Some studies in entrepreneurship and small business fields mentioned several reasons for entrepreneurs to start their own businesses. A majority of entrepreneurs hope for financial rewards, financial self-security, societal recognition, self-satisfaction and being in control (Baumback, Lawyer and Kelley, 1973; Kihlstrom and Laffont, 1979; Longenecker, Moore, Petty and Palich, 2006). Rent-seeking theory in economics might not provide the most sufficient explanation why entrepreneurs create new ventures (Baumol, 1968), because some entrepreneurs also rely on new venture creation to maximize the utility of personal satisfaction and happiness. Unfortunately earlier researchers only provided conceptual or debatable discussions to challenge conventional economic theories, without providing any conclusive structure to study entrepreneurs and their behaviors.

Interactions Between Entrepreneurs and Environment

Kuratko and Hodgetts (2001) provided a brief but meaningful discussion of the macro and micro views of entrepreneurs and entrepreneurship. The “macro view” had three distinct schools – the Environmental School of Thought, the Financial/Capital School of Thought and the Displacement School of Thought. The Environmental School of Thought studied the environment(s) that stimulated entrepreneurs and entrepreneurship. This approach focused on the institutions, values, policies and interactions between each player and organizations that formed the sociopolitical environment that strongly influenced the development of entrepreneurs and entrepreneurship. The Financial/Capital School of Thought believed that entrepreneurs and entrepreneurship evolved around financial issues. This approach was very similar to the “rent-seeking” behavior when individuals engaged in production functions to maximize profits as described in firm theory, value theory or production theory in neoclassical models. Finally, the Displacement School of Thought emphasized the displacement of people as the source of entrepreneurs and entrepreneurship such as political, cultural, and economic displacement factors. Some factors in this group included changes of employment, change of residency or involuntary moves of individuals between marketplaces. The “micro view” theorists focused on the entrepreneurial trait theory, the venture opportunity theory and the strategic formulation theory which implied internal forces driving entrepreneurs and entrepreneurship. Limited empirical evidence existed to verify these theoretical concepts of entrepreneurs and entrepreneurship. One study conducted in two rural Iowa counties, including 80 entrepreneurs in the survey sample, attempted to examine the interaction of founder motivation and environmental context in new venture creation (Hunger, Korsching and Van Auken, 2002). Hunger, Korsching and Van Auken (2002) proposed three basic motivations for starting a new business venture: opportunity-driven, internally-motivated/decision-driven and externally-motivated/decision-driven. In the case of opportunity-driven, the founders initially discovered a viable business opportunity and decided to start a new venture to take advantage of that opportunity. In the case of internally-motivated/decision-driven, the founders initially decided to start a new business venture to satisfy her/his own satisfaction then looked for that venture to exploit. These two instances described how an entrepreneur was “pulled” into starting a new



venture because of the attractiveness of new venture creation. The externally-motivated/decision-driven case described external circumstances that initiated the process of new venture creation by forcing or pushing the founders to start a new venture to maintain a certain life style. Unlike the current study, the survey questions in this Iowa study were pre-grouped by researchers to be sorted into different driven factors. We proposed a totally different approach by providing randomly organized questions to survey respondents, and then sought potential relationships and aspects/categories among different factors.

Existing Discussions of Triggering Events

Bygrave (1989) discussed entrepreneurship as a process that involved innovation, triggering events, implementation and growth. In the triggering event stage he suggested that there should be personal, sociological and environmental factors that led to entrepreneurship. Dollinger (1995) discussed what he characterized as the “impetus for entrepreneurship.” He suggested that focusing on entrepreneurial traits would not be sufficient to explain entrepreneurship. Dollinger (1995) also introduced the “Sociological Approach” that led entrepreneurs to new venture creation, such as negative displacement, between things, positive pull and positive push. “Negative displacement” was where individuals felt that they were marginalized from society, because of who they were or being fired or not satisfied with their current employment or divorced. “Between things” included individuals between stages of their life. “Positive pull” included other people (potential collaborators, parents, customers) who provided an impetus to entrepreneurship. “Positive push” included entrepreneurs who, because of their education or situation, were pushed towards entrepreneurship by external stimuli. While the notion of push and pull forces have been bandied around, little empirical research has been conducted to identify the specific forces involved or to what degree different factors influenced entrepreneurs’ decisions. Our research attempts to provide some quantitative empirical information to explain some of the forces that triggered new venture formation, and to discover if there exist multiple aspects of triggering factors that could be grouped into internally-driven forces or externally-driven forces as described in previous literature based on entrepreneurs’ perceptions. The following sections described the research approach, survey questions and procedures, descriptive statistics that summarized sample demographics and responses, factor analysis to identify multiple aspects of triggering factors and findings and discussion.

Research Approach Contrary to other research on triggering factors (events), this research was undertaken with no preconceived notion about what those factors should be or how the factors would be categorized. The steps of the entire research are described in Chart 1. The first step of this research was to develop a questionnaire to find out the reasons that led entrepreneurs to move to new venture creation. The questionnaire was developed from multiple sources. These sources included literature review, over 100 entrepreneurs were asked to share their reasons for starting their businesses, students in college entrepreneurship programs were asked to contribute to the list of the reasons, and colleagues in entrepreneurship education were asked to add their thoughts. After screening and consolidating all reasons for new venture creation provided by these sources,



42 questions were constructed to represent 42 different reasons into a questionnaire. Other questions about personal demographics were also included in the questionnaire. The 42 questions associated with reasons of new venture creation were randomized on the questionnaire to avoid list biases (Table 1). Second, respondents were interviewed in person to indicate whether each reason for starting their new venture creation was very important (scale=4), important (scale=3), moderately important (scale=2) or not important (scale=1) to them in starting. We decide not to include a “neutral” or “no difference” level for respondents so that respondents would be forced to reveal a more specific perception on each question. The questionnaire was administered to a sample of entrepreneurs (business owners only) whose businesses were in the Louisiana Delta region. All of the participants were recruited randomly on the bases of convenience and participated voluntarily. Data were collected through personal interviews by contacting each business owner and seeking permission to collect data. The collection was during business hours; however it was sometimes necessary to collect the completed surveys while the business was closed or at a convenient time that met the business owners’ schedules. There was no direct personal relationship (family members) between the interviewers and the respondents. However, it is possible that the interviewers were acquainted with the respondents through other connections. The interviews were conducted between August 2005 and May 2006. One hundred and sixty-one questionnaires were completed and usable. Descriptive statistics of the sample demographics distribution were calculated. Summary frequencies of the most important and important reasons of new venture creation combined were provided. Since the purpose of this study was to discover multiple aspects of triggering factors that actually link to the decisions of new venture formation, we decide to report only the most important and important reasons in this paper. Third, Factor Analysis was applied in this study to identify (1) various triggering factors that might exist to include a group of similar reasons based on entrepreneurs’ responses; and (2) multiple aspects of the triggering factors, if they exist, in new venture creation. The purpose of factor analysis is to discover simple patterns of relationships among the variables (which are 42 questions in our survey). In particular, the method seeks to discover if the observed variables can be explained largely or entirely in terms of a much smaller number of variables called factors (which are the triggering factors that we attempt to find in this study)

CHART 1 Relationship Between Different Layers of Analysis of Triggering Factors

Organized 42 questions to represent 42 reasons for new venture creation

Identify various triggering factors to represent a group of similar reasons

Identify multiple aspects of triggering factors to represent internal/external/indirect drivers

The triggering factors are shown in Table 1 in order of their presentation on the questionnaire.



TABLE 1 List of Triggering Factors

I saw an opportunity I didn’t like my coworkers

My job was boring My spouse is not satisfied with our current financial situation

My spouse or other close person died My job was not financially rewarding I had to earn more money I felt I wasn’t accomplishing all I could My job was not satisfying I didn’t like my job

My boss and I didn’t see eye to eye My job didn’t allow me to reach my potential

I got laid off I wanted to earn some money My job didn’t provide excitement I retired and needed something to do I didn’t like my boss I wanted a flexible work schedule

I got a divorce I had another job/business and this idea grew out of that one

My spouse and I wanted to work together I wanted a challenge I watched someone else in this business and thought I could do better My business is based on my invention I saw a business for sale and wanted to buy it

I saw a customer need for this type business

I joined my family business I inherited the business I wanted to be independent I saw a problem and sought to solve it I wanted to be in control I had a hobby and it grew into a business

I had money and wanted to invest it Someone else pointed out a need for this type business

I wanted more time with my family I wanted to reach my full potential

I always wanted to be my own boss I wanted to change careers for my own satisfaction

Thought up an idea and pursued it I wanted to get out of the house I inherited money and needed to invest it I wanted to get rich

Findings and Results

Respondents Profile The majority of respondents were male (Table 2). About half were under 45 years old. Most of the respondents were married with children. African American respondents represented 25.5 percent and white respondents represented 74.5 percent. Fifty percent had a college degree or higher education and very few had less than a high school education. Most of the respondents had 5 or more years experience in the line of business before starting new ventures. Most of the entrepreneurs in the study were in retail followed by service firms.



TABLE 2

Demographics of Sample

Gender Frequency Percent Education Level Frequency Percent Female 45 32.6 <High School 2 1.3 Male 93 67.4 High School 36 22.8 Total 138 100.0 Some College 40 25.3

Age College 60 38.0 Under 35 40 26.0 Advanced College 20 12.7 36-45 41 26.6 Total 158 100.0

46-55 49 31.8 Years of Experience in This Line of Business

Over 55 24 15.6 Under 5 years 42.0 35 Total 154 100.0 5 - 10 years 27.0 22.5

Marital Status Over 10 years 51.0 42.5 Single 20 12.8 Total 120.0 100 Single w Children 13 8.3 Type of Business Married wo Children 16 10.3 Retail 41 33.6 Married w Children 107 68.6 Service 60 49.2 Total 156 100.0 Wholesale/Distribution 5 4.1

Ethnicity Other 16 13.1 White 117 74.5 Total 122 100.0 African American 40 25.5 Total 157 100.0

Frequencies of the Most Important and Important Reasons Combined The most popular reason to start a business chosen by our respondents was “saw an opportunity” (80.5 percent); this coincides with the opportunity-driven theory proposed in previous literature. Other important reasons included were “wanted to be my own boss” (78.6 percent), “wanted independence” (78.0 percent), “wanted control” (73.0 percent), “wanted to earn some money” (72.3 percent), and “wanted a challenge” (69.8 percent) (Table 3). Most of these reasons corresponded to internally-motivated decision-driven theory in the literature (i.e. entrepreneurs were pulled into the new venture decision). A large proportion of the respondents wanted to “reach their potential” (64.8 percent), “my previous job did not allow me to reach my potential” (55.3 percent) and “needed more money” (60.4 percent). These three reasons could be explained by the displacement of the entrepreneurs in their previous employment situation or some pressure from financial needs. Over half of the entrepreneurs saw “a customer need” (57.9 percent). Some entrepreneurs (48.4 percent) wanted a more flexible schedule. Forty-six percent of the respondents wanted a career change to achieve more satisfaction. Some respondents indicated that they saw an idea and pursued it (42.1 percent), or that they could run a business better than others they had observed (37.7 percent), or they had a hobby that grew into a business (37.7 percent).



Interestingly, only 37.1 percent of the respondents had a desire to get rich; although 38.4 percent of the respondents indeed pointed out that their previous jobs were not financially rewarding. Some had or inherited money to invest (36.5 percent). Buying a business was the reason given by 25.2 percent of the entrepreneurs. Twenty-one percent felt they were good at solving problems and wanted to try entrepreneurship. A few entrepreneurs, 13.2 percent, commercialized an invention and 7.5 percent were retired and wanted something to do. Clearly, the majority of entrepreneurs decided to go into business because they wanted to do something that would help them meet their personal needs or personal satisfaction better than their current circumstances at the time (Table 3). These reasons seemed be personal driven forces (wanted to be own boss, to be in control, to be independent, to be more challenged and satisfied) and most of these reasons were “positive.” Job related reasons seemed to be negative in nature (Table 3). Lack of accomplishment, lack of job potential, job dissatisfaction and dislike jobs were the predominant job related reasons given by respondents. A few entrepreneurs, 26.4 percent, indicated that their business ideas actually grew out of their jobs. These results indicate a feeling by some entrepreneurs that they were not achieving what they would like in their job and felt that running their own businesses offered more potential in their lives. Some of the new ventures may be started as a result of spin offs or from particular aspects of the former employment in which the entrepreneurs had special talents. Other job related reasons that triggered new venture formation were “job not exciting” (25.8 percent), “conflict with boss” (24.5 percent), “job boring” (17.6 percent), “dislike boss” (17.0 percent), “disliked coworkers” (10.7 percent), and “laid off” (7.5 percent). Some of these job related reasons could be described as pushing forces that moved entrepreneurs into creating their own businesses and were in some ways like negative exogenous factors in previous literature (Hunger, Korsching and Van Auken, 2002).



TABLE 3 Summary Frequency of the Most Important and Important Triggering Factors (Without

Specific Order)

Freq %

Freq %

I saw an opportunity 128 80.5 I didn’t like my coworkers 17 10.7

My job was boring 28 17.6 My spouse is not satisfied with

our current financial situation 36 22.6

My spouse or other close person died

8 5.0 My job was not financially rewarding

61 38.4

I had to earn more money 96 60.4 I felt I wasn’t accomplishing

all I could 103 64.8

My job was not satisfying 65 40.9 I didn’t like my job 44 27.7 My boss and I didn’t see eye to eye

39 24.5 My job didn’t allow me to reach my potential

88 55.3

I got laid off 12 7.5 I wanted to earn some money 115 72.3 My job didn’t provide excitement

41 25.8 I retired and needed something to do

12 7.5

I didn’t like my boss 27 17.0 I wanted a flexible work

schedule 77 48.4

I got a divorce 7 4.4 I had another job/business and

this idea grew out of that one 42 26.4

My spouse and I wanted to work together

31 19.5 I wanted a challenge

111 69.8

I watched someone else in this business and thought I could do better

60 37.7 My business is based on my invention

21 13.2

I saw a business for sale and wanted to buy it

40 25.2 I saw a customer need for this type business

92 57.9

I joined my family business 23 14.5 I inherited the business 11 6.9

I wanted to be independent 124 78.0 I saw a problem and sought to

solve it 34 21.4

I wanted to be in control 116 73.0 I had a hobby and it grew into

a business 60 37.7

I had money and wanted to invest it

45 28.3 Someone else pointed out a need for this type business

34 21.4

I wanted more time with my family

69 43.4 I wanted to reach my full potential

103 64.8

I always wanted to be my own boss

125 78.6 I wanted to change careers for my own satisfaction

73 45.9

Thought up an idea and pursued it

67 42.1 I wanted to get out of the house

25 15.7

I inherited money and needed to invest it

13 8.2 I wanted to get rich

59 37.1

Some of the respondents revealed a set of reasons for creating new ventures that related to other people in their lives. A few respondents mentioned “a desire for more family time” (43.4 percent), “spouse wanted more money” (22.6 percent), “someone else suggested the business” (21.4 percent), “wanted to work with spouse” (19.5 percent), “wanted to be out of the house”



(15.7 percent), “joined family business” (14.5 percent), “inherited business” (6.9 percent), “death of loved one” (5.0 percent) and “divorce” (4.4 percent). These reasons were both positive and negative and probably were in most instances partial factors in the decision to pursue entrepreneurship. Factor Analysis to Identify A Group of Triggering Factors and Multiple Aspects of Triggering Factors According to the literature review of economic theories and entrepreneurship theories, it is possible to identify different sets of triggering factors to explain why entrepreneurs start new ventures. This study used Factor analysis to first identify triggering factors given 42 reasons, then to identify multiple aspects of the triggering factors in new venture creation. In total, twelve triggering factors were extracted from 42 questions. The factor scores are presented in Table 4, Table 5 and Table 6. There seemed to be 3 major aspects that we could generate based on the principle scores of factor. These 3 aspects coincided with Internal Drivers, External Forces and Indirect motivation described earlier. In the Internal Drivers aspect, the factors corresponded to something about entrepreneurs themselves. Respondents revealed personal assessment on job dissatisfaction, people conflict at workplace, idea related incentives based on previous job or market opportunities, financial incentives, personal characteristics, aggression and entrepreneurial ego. We subjectively determined the names of each factor given what had been described in the literature. Each factor covered various perceptions that our respondents shared in the interviews. Job dissatisfaction clearly described how entrepreneurs believed that previous jobs were boring and not very exciting. Some entrepreneurs decided to start their own businesses because they had experienced difficulties dealing with their boss or coworkers (people conflict) in the workplace, even though this triggering factor had not been discussed often in other literature. Discovering opportunities and consumers’ needs in the market seemed to be commonly cited reasons for new venture formation. Financial incentive was another factor that had been common in existing literature. Finally, our respondents clearly had entrepreneurial characteristics (wanted to be independent, wanted to be more flexible, wanted to be own boss), aggression (looked for challenges) and ego (bought a business that was for sale) as analyzed in other research.



Table 4. Component Score Coefficient Matrix for In Business Respondents - Internal Drivers Personal Job People Conflict Idea Financial Personal Aggression Entrepreneurial Dissatisfaction at Workplace Related Incentives Characteristics Ego My job was boring 0.2704 I had to earn more money 0.3909 My job was not satisfying 0.2510 I didn’t like my coworkers 0.2451 My job was not financially rewarding 0.2759 I didn’t like my job 0.1929 My boss and I didn’t see eye to eye 0.3226 My job didn’t provide excitement 0.2568 I didn’t like my boss 0.3768 My job didn’t allow me to reach my potential 0.2021 I wanted to earn some money 0.3268 I wanted a flexible work schedule 0.3723 I had another job/business and this idea grew out of that one 0.3266 I saw a business for sale and wanted to buy it 0.5530 I wanted to be independent 0.2173 I wanted a challenge 0.1418 I saw a customer need for this type business 0.3602 I saw a problem and sought to solve it 0.2022 I wanted to be in control 0.3202 I always wanted to be my own boss 0.3472 Thought up an idea and pursued it 0.2530 I wanted to change careers for my own satisfaction 0.2458 I wanted to get rich 0.3114 I saw an opportunity 0.2825 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.



TABLE 5 Component Score Coefficient Matrix for In Business Respondents - External Forces

Family Change of Reconnect with Business Personal Life Community My spouse or other close person died 0.3566 I felt I wasn’t accomplishing all I could 0.1087 I got a divorce 0.2947 I retired and needed something to do 0.4336 I joined my family business 0.3164 My business is based on my invention 0.2419 I inherited the business 0.3590 I had money and wanted to invest it 0.1461 I had a hobby and it grew into a business 0.2685 I wanted to get out of the house 0.3264 I inherited money and needed to invest it 0.1073 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.

TABLE 6

Component Score Coefficient Matrix for In Business Respondents - Indirect Motivation

Indirect Other Family Impact Issues My spouse is not satisfied with our current financial situation 0.3144 I got laid off 0.4934 My spouse and I wanted to work together 0.5697 I watched someone else in this business and thought I could do better 0.2334 I wanted more time with my family 0.1699 Someone else pointed out a need for this type business 0.2037 I wanted to reach my full potential 0.1976 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.



The second aspect of the triggering factors, External Forces, included a set of factors that externally stimulated entrepreneurs to move into the new venture creation process. These factors related to entrepreneurs directly due to changes in personal situations, environment or life expectations. Joining a family business or inheriting a family business pushed some of our respondents into entrepreneurial adventures. Sometimes changes in personal lives, such as divorce or retirement, drove entrepreneurs to create new business ventures. Losing family members or seeking connections with communities were also important to our respondents, while these factors were not introduced or examined often in previous literature. The third aspect of the triggering factors, Indirect motivation, was defined as indirect drivers that were introduced to entrepreneurs by someone or something not within entrepreneurs’ control. These forces included boss’s decision to lay off entrepreneurs from their previous jobs, or observing other business owners’ behavior and production activities attracted our respondents’ interests. Family members’ requests also triggered our respondents’ decisions in new venture formation. Some entrepreneurs believed that creating their own businesses would allow them to spend more time with family members, although this perception might not be true in reality.

Summary and Conclusions

This research on entrepreneurs postulates some triggering factors that lead them to start new ventures. There has been much speculation about why entrepreneurs go into businesses. Our research was designed to provide empirical data to reveal triggering factors from entrepreneurs’ perceptions directly. Researchers have recognized that entrepreneurs do not fit the economic models (Baumol, 1968). Production theory or value theory did not include innovation or creativity in the functions to evaluate the profits or success of the firms. A satirical characterization of this “economic man” was presented by Veblen:

“A lightning calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated, definitive human datum, in stable equilibrium except for the buffets of impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact tis spent, he comes to rest, a self-contained globule of desire as before…..he is not a prime mover. He is not the seat of a process of living, except in the sense that he is subject to a series of permutations enforces upon him by circumstances external and alien to him.” (Veblen, 1919)

While we generally agree with Veblen’s implied characterization, we think it is possible to identify a consistent set of parameters to distinguish factors that trigger new venture creation. These factors should contribute to a better model that will help understand entrepreneurs and entrepreneurship. Looking at the 42 questions that we asked the entrepreneurs, the results gave us a general idea why people wanted to start their own businesses. Our respondents shared a desire to achieve something different or better from their existing condition according to the summarized



frequencies of all questions. The entrepreneurs who responded to our survey clearly demonstrated how specific personal traits, characteristics and self-contained reasons related to new venture formation. Being able to grasp and look into unique opportunities seemed to be the most important reasons for most of the entrepreneurs in our sample to start their businesses. This outcome probably implies that entrepreneurs are scanning for new opportunities regularly based on the information from other individuals or marketplaces, and need only discover an opportunity to trigger the new venture idea. Some dissatisfaction in entrepreneurs’ life or work experiences seemed to stimulate new venture creation. Many respondents in our sample mentioned that lack of accomplishment at work and lack of job potential in other jobs “pushed” them into creating new ventures. Conflicts with co-workers or boss, lack of financial rewards in their job and other job related issues also played important roles in “pushing” entrepreneurs into the new venture creation process. Many of the job related reasons seemed to be negative according to entrepreneurs’ own assessment. Family issues were mentioned by some entrepreneurs in our sample and were influential for some individuals, but less important to the internally driven reasons and job related forces. The results of the Factor analysis demonstrated that triggering factors indeed existed and could be summarized into meaningful aspects of entrepreneurship without preconception. This research was undertaken with no preconceived ideas about what those aspects were, and we were able to extract 12 factors to represent different groups of reasons for new venture creation. Entrepreneurs who decided to create their own ventures in our sample seemed to be triggered by Internal Drivers that related to entrepreneur and who they were, External Forces that were changes in their economic situation or their lives, and Indirect Motivation that included changes which occurred around the entrepreneur but were not directly imposed on them. The Internal Drivers aspect was largely based on the nature of entrepreneurs and how they felt they were treated by other people in various environments. There is an old Chinese fable in which an apple farmer looks at an apple with a worm in it and declares it bad because no one would buy it. The farmer’s friend, a philosopher by trade, looks at the same apple with the worm and declares that apple makes an excellent home with free food for the worm. Entrepreneurs, like the philosopher or the worm, seem to be inclined to see and follow opportunities that improve their satisfaction. These internal forces may imply entrepreneurs’ dissatisfaction in the workplace (displacement syndrome perceived by entrepreneurs) or the characteristics of entrepreneurs. These are similar to the “pull forces” discussed in other literature. The External Forces aspect probably pushed entrepreneurs toward finding an alternative to cope with their situation after divorce, death of a loved one, or retirement. Some external forces also involved entrepreneurs’ invention, hobby, participation in family business, and inherited businesses. Indirect Motivation was a group of things that just popped up around entrepreneurs, outside their control, and largely resulted from random events or situations. These factors, mostly from other people’s actions, stimulated entrepreneurs to create new ventures. One factor in the aspect of Indirect Motivation, being fired from other jobs, may create mixed feelings in entrepreneurs. Most of the respondents in our sample were highly educated, had years of experience, and married with children. If a potential entrepreneur was laid off from her/his job, the transition costs of finding a new job and relocating their family might be very high and might stimulate new venture creation as an alternative. Such transition costs probably include the



sacrifice of spouse’s job, changing schools for children, affordable houses in new locations, and an equivalent or better job for the entrepreneur. There are several important contributions of this research to existing entrepreneurship literature. Based on this preliminary research and analysis, both descriptive and factor analysis, the leading factor that triggered new venture creation was “opportunity”. The opportunity may be realized by entrepreneurs themselves, may be activated by inventions or a hobby, may be created by family businesses, or stimulated by other people. Some push and pull factors described in previous literature are confirmed by this research. A third category, Indirect Motivation, needs further investigation. This category has no direct push or pull effect on entrepreneurs, and the entrepreneur just tumble into the idea of creating a new venture. This research has also shown that it is possible to logically group triggering factors into Internal Drivers, External Forces, and Indirect Motivation aspects without preconceived notions of triggering factors or the categories of the factors.

Future Research Understanding why people decide to start their own businesses is a critical subject in learning about entrepreneurship. Many important aspects of triggering factors need to be investigated further. It is necessary to increase the sample size to include more types of businesses, variety of entrepreneurs, entrepreneurs in different stages of development, and over a wider geographical area to increase reliability. By increasing the dimension of the sample, researchers will be able to create better analyses to compare responses across gender, age, ethnicity, type of business, education levels and other demographics categories. Many reasons discovered in this research have not been studied before. Entrepreneur’s assessment on relationship with co-workers, boss, family members and other individuals revealed mixed signals about how these different individuals influenced the ideas of venture creation. Additional research is needed to determine if and to what extent entrepreneurs are dissatisfied in their life or in their workplace. It is also important to find out the sources of the dissatisfaction in various situations that relate to the idea of venture creation. A time series cross section research design should be developed to show how entrepreneurial predispositions might influence the decisions of new ventures and how the decisions and entrepreneurial behaviors change over time. Our research discovered twelve factors and each factor covered a group of important reasons for entrepreneurs to start their business ventures. From the statistical perspective, each reason may be treated as one variable. Future studies could be conducted to focus on one or several reasons by expanding the quantitative or qualitative levels (ranks) of the variables. For example, how much more money do entrepreneurs want to earn when they decide to start their own business ventures? It is also possible to expand the reasons in each factor by studying the nature of the reasons (i.e. to examine the probability of any given causality function) to discover whether respondents are predisposed to entrepreneurship. To some extent, it is possible that some of the triggering factors are correlated and the level of the correlation would determine the power of the stimulation when new ideas are generated for new ventures.



References Arrow, K. (1962). Economic Welfare and the Allocation of Resources for Invention, in the Rate and Direction of Inventive Activity: Economic and Social Factors, Princeton, NJ: Princeton University Press, p. 609-625. Audretsch, D. (1997). Technological Regimes, Industrial Demography and the Evolution of Industrial Structures, Industrial and Corporate Change, 6 (1), p. 49-82. Baumback, C; Lawyer, K; and Kelley, P (1973). How to Organize and Operate a Small Business, 5th Edition. Englewood Cliffs, N.J., Prentice Hall, pp. 60-61. Baumol, W. J. (1968). Entrepreneurship in Economic Theory, The American Economic Review, Vol. 58, No. 2, Papers and Proceedings of the Eightieth Annual Meeting of the American Economic Association, pp. 64-71. Baumol, W. J. (1990). Entrepreneurship: Productive, Unproductive and Destructive, The Journal of Political Economy, Vol. 98. No. 5, Part 1, pp. 893-921. Bhide, A. V. (2000). The Origin and Evolution of New Businesses, Oxford, Oxford University Press, pp. 61. Bygrave, W. (1989), The Entrepreneurial Paradigm: A Philosophical Look at Its Research Methodologies, Entrepreneurship Theory and Practice, pp. 7-26. Bygrave, W. (1994). The Portable MBA in Entrepreneurship. New York, John Wiley & Sons, Inc., pp. 7 and 20. Casson, M. (1982). The market for information, in the Entrepreneur, Chapter 11, Oxford: Martin Robertson, p. 201-218. Dollinger, M. (1995). Entrepreneurship Strategies and Resources, Burr Ridge, Illinois, Austin Press/Irwin, pp. 49-54. Hodgetts, R. and Kuratko, D. (1995). Effective Small Business Management, 5th Edition. Fort Worth, The Dryden Press, pp. 32 and 56-60. Hunger, J. D., Korsching, P. F. and Van Auken, H. (2002). The Interaction of Founder Motivation and Environmental Context in New Venture Formation: Preliminary Findings, Iowa State University. Jennings, D. (1994). Multiple Perspectives of Entrepreneurship. Cincinnati, South-Western Publishing Company, p. 159. Kihlstrom, R. and Laffont, J. (1979). A general equilibrium entrepreneurial theory of firm formation based on risk aversion, Journal of Political Economy, 87 (4), August, p. 719-748.



Kuratko, D. and Hodgetts, R. (1998). Entrepreneurship A Contemporary Approach 4th Edition. Fort Worth, The Dryden Press, p. 16, 35, and 107-109. Kuratko, D. and Hodgetts, R. (2001). Entrepreneurship A Contemporary Approach 5th Edition. Fort Worth, The Dryden Press, p. 33-40 and 41. Lambing, P. and Kuehl, C. (1997). Entrepreneurship, New Jersey, Prentice-Hall, Inc., pp. 12 and 13. Longenecker, J.; Moore, C.; and Petty, W. (2000). Small Business Management, 11th Edition. Cincinnati, South-Western College Publishing, p. 29. Longenecker, J.; Moore, C.; Petty, W. and Palich, L. (2006). Small Business Management, 13th Edition. Cincinnati, South-Western College Publishing, p. 8-9. Lowrey, Y. (2003). The Entrepreneur and Entrepreneurship: A Neoclassical Approach, paper presented January 5 at the ASSA Annual Meeting. McClelland, D. (1961). Entrepreneurial behavior and characteristics of entrepreneurs, in the Achieving Society, Chapters 6 and 7, Princeton, NJ: D. Van Nostrand, 205-258, 259-300. Scarborough, N. M. and Zimmerer, T. W. (2000). Effective Small Business Management, 6th Edition. New Jersey, Prentice-Hall, Inc., p. 30. Shaver, K. G. and Scott, L. (1991). Person, Process, Choice: The Psychology of New Venture Creation, Entrepreneurship Theory and Practices, 16, Winter, p. 23-45. Shane, S. (2002). The Foundations of Entrepreneurship Vol 1, Massachusetts, Edward Eigar Publishing. Stevenson, H.; Grousbeck, I.; Roberts, M.; and Bhide, A. (1999). New Business Ventures and the Entrepreneur, 5th Edition, Boston, Irwin McGraw-Hill. Timmons, J. A. (1999). New Venture Creation, Entrepreneurship for the 21st Century. Irwin McGraw-Hill, Boston. Veblen, T. B. (1919). Economics and Evolution, the Place of Science in Modern Civilization, New York. Vesper, C. (1996). New Venture Experience, Revised Edition. Seattle, Vector Books.



RETAIL WORD OF MOUTH COMMUNICATION MEASURES FOR SMALL BUSINESSES AND ENTREPRENEURS

Terrence J. Paridon

Abstract

This paper summarizes the conceptual relationships among hedonic and utilitarian shopping values, consumption related social self-confidence, and word of mouth communication. Research findings are summarized also and the results suggest that two modal forms of word of mouth communication occur: hedonic and utilitarian. Both forms occur in conjunction with the aforementioned social self-confidence. The note concludes with recommendations on usage and methodological issues.

Word of mouth communication in the form of opinion leadership and opinion seeking has been studied frequently in marketing within a diffusion theory framework (e.g., Feick, Price & Higie 1986; Reynolds and Darden 1971). While the findings from research into this form of interpersonal influence have contributed to the discipline’s understanding of the importance of social behavior in the diffusion of new products and ideas (e.g. Flynn, Goldsmith & Eastman 1996; Summers 1970), a significant amount of marketing focuses also upon creating marketing environments that deliver relatively new experiences to consumers. These environments, or the experiences that they create, have been conceptualized as hedonic or pleasure induced value and utilitarian or task related value (Babin, Darden & Griffin 1994; Titus and Everett 1995; cf. .Kaltcheva and Weitz 2006), and research has begun to address the influence of these environments upon word of mouth communication (Paridon, 2004; 2006).

To be sure, the occurrence of hedonic and utilitarian value effects upon word of mouth communication is embedded within a complex of other consumer self-related concepts. To be more specific, Bearden, Hardesty, and Rose (2001, p. 122) state that when consumers interact with the marketing environment, these encounters influence one’s consumption related self-confidence. This confidence, a complex of self-related constructs, was defined as “…the extent to which the individual feels capable and assured with respect to his or her marketplace decisions and behaviors,” and it embodies thoughts about the importance of social relationships. In a series of studies, social self-confidence, one manifestation of consumption related self-confidence, consistently mediated the effects of hedonic and utilitarian value upon retail information sharing, a form of word of mouth communication (Paridon, 2004; 2005; 2006).

Briefly stated, the aforementioned results indicate that when enjoyable and task related shopping environments are experienced, then the hedonic and utilitarian values generated by these environments influence word of mouth communication in the presence of consumption related self-confidence. Thus, it seems reasonable to propose that measurement of the effects of these hedonic and utilitarian environments upon shopping related behaviors should be extended to include measures of word of mouth communication and consumption related social self-confidence. Two measuring instruments are proposed. The first emphasizes the relationships



among hedonic value, consumption related social self-confidence, and word of mouth communication. The second substitutes indicators of utilitarian value for hedonic value while retaining the word of mouth communication and social confidence measures.

The specific measures proposed in this paper evolved from the aforementioned series of studies by Paridon (2004; 2005; 2006), and this paper’s statistical evaluation of the measures draws upon a more recent paper that combined the data from two studies (Paridon, Carraher, and Carraher, in press). Although minor differences between the two merged data sets were observed, combining the two sets into one set of 458 respondents did not substantially alter the nature of the mediated relationships. The present analysis of the measurement properties of the indicators is based upon two separate LISREL 8 analyses. The goodness of fit statistics for the hedonic measure are: minimum fit function chi-square 180.01, 52 df, p < .01; root mean square error of approximation (RMSEA) .07; comparative fit index (CFI) .97; and standardized root mean square error of approximation (SRMR) .05. For the utilitarian value scales, the overall statistics are comparable: minimum fit function chi-square 180.06, 52 df, p < .01; RMSEA .07; CFI .97; and SRMR .05. Both sets of statistics indicate a reasonable statistical result.

For both the hedonic and the utilitarian based instruments, all standardized factor loading exceed a value of .60. This suggests an acceptable level of construct validity (Bollen 1989). For the hedonic scale, the construct reliabilities (average variance extracted values) (Fornell and Larcker, 1981) are: hedonic value, .86 (.61); social confidence, .84 (.58); and information sharing, .83 (.55). Similar values describe the utilitarian scale: utilitarian value, .89 (.68); social self-confidence, .84 (.58); and information sharing, .83 (.55). All values indicate acceptable levels of reliability. The final sets of statistics indicate the extent to which the constructs are related. For both the hedonic and the utilitarian scales, the social confidence and word of mouth communication correlations are .69. For the hedonic/utilitarian scales, the correlation between hedonic/utilitarian value and social confidence is .49/.38.

The specific indicators are contained in Appendix 1. Although other response formats are possible, measures should be taken with seven point Likert type scales. Strongly disagree and strongly agree endpoints anchored with numeric values of 1 and 7 are recommended. It is recommended also that the measures be used as entire sets and at a minimum the correlations between the scales should be evaluated. If the correlations do not attain statistical and managerial significance, then the nature of any word of mouth communication effects should be thoroughly questioned. Alternatively, one may analyze the responses using more advanced techniques such as regression analyses, factor analysis, and structural equation modeling.



Appendix 1: Construct Measures

Hedonic Value

• The shopping trip was truly a joy.

• I had a good time because I was able to act on the spur of the moment.

• I enjoyed the shopping trip for its own sake, not just for the items I may have purchased.

• The shopping trip truly felt like an escape. Utilitarian Value The shopping trip was useful.

• I was satisfied with the items I purchased.

• While shopping, I found just the item(s) I was looking for.

• I accomplished just what I wanted to on the shopping trip.

Social Confidence

• My neighbors admire my decorating ability.

• I impress people with the purchases I make. • My friends are impressed with my ability to make satisfying purchases.

• I get complements from others on my purchasing decisions.

Information Sharing

• When we find quality service in a store, my friends and I let each other know.

• When I help a friend by telling her about my shopping experiences, I feel good about myself.

• When my friends give me shopping advice I can use, I usually act on it.

• My friends and I enjoy talking about the styles and fashions we see on shopping trips.



References Babin, Barry J., William R. Darden, and Mitch Griffin (1994), “Work and/or Fun: Measuring Hedonic and Utilitarian Shopping Value,” Journal of Consumer Research, 20 (March), 644-656. Bearden, William O., David M. Hardesty, and Randall L. Rose (2001), “Consumer Self- Confidence: Refinements in Conceptualization and Measurement,” Journal of Consumer Research, 28 (1), 121-134. Bollen, Kenneth. A., 1989. Structural Equations with Latent Variables. New York: Wiley. Feick, Lawrence F., Linda L. Price, and Robin A. Higie (1986), “People Who Use People: The Other Side of Opinion Leadership,” in Advances in Consumer Research, Vol. 13, Richard Lutz, ed., Provo, UT: Association for Consumer Research, 301-305. Flynn, Leisa R., Ronald E. Goldsmith, and Jacqueline Eastman (1996), “Opinion Leaders and Opinion Seekers: Two New Measurement Scales,” Journal of the Academy of Marketing Science, 24 (2), 137-147. Fornell, Claes and David F. Larcker (1981), “Evaluating Structural Equation Models with Unobservable Variables and Measurement Error,” Journal of Marketing Research, 18 (February), 39-50. Kaltcheva, Velitchka D. and Barton Weitz (2006), “When Should a Retailer Create an Exciting Store Environment,” Journal of Marketing, 70 (1), 107-118. Paridon, Terrence J. (2004), “Retail Opinion Sharing: Conceptualization and Measurement,” Journal of Retailing and Consumer Services, 11, 87-93. Paridon, Terrence J. (2005), “The Effects of Personal Shopping Values in Consumer Self-Confidence and Retail Information Sharing Research” Central Business Review, Vol. XXIV (1-2), pp. 20-25. Paridon, Terrence J. (2006), “Extending and Clarifying Causal Relationships in Research Involving Personal Shopping Value, Consumer Self-Confidence, and Word of Mouth Communication” Marketing Management Journal, Vol. XVI (Spring), 32-43. Paridon, Terrence J., Carraher, Shawn M., and Carraher, Sarah C. (forthcoming) “The Income Effect in Personal Shopping Value, Consumer Self-Confidence, and Information Sharing (Word of Mouth Communication) Research” Academy of Marketing Studies Journal Reynolds, Fred D. and William R. Darden (1971), “Mutually Adaptive Effects of Interpersonal Communication,” Journal of Marketing Research, 8 (4), 449- 454.



Summers, John O. (1970), “The Identity of Women’s Clothing Fashion Opinion Leaders,” Journal of Marketing Research, 7 (May), 178-185 Titus, Philip A. and Peter B. Everett (1995), “The Consumer Retail Search Process: A Conceptual Model and Research Agenda,” Journal of the Academy of Marketing Science, 23 (2), 106-119.



MANAGING GOLF COURSE REVENUE USING PACE OF PLAY MODELING

Andrew A. Tiger, Southeastern Oklahoma State University Jane Licata, Southeastern Oklahoma State University

Robert Howard, Southeastern Oklahoma State University

Abstract

The game of golf, though still popular, has experienced a decline in demand. Since golf courses are small or mid-sized enterprises, managing and increasing revenue falls on a small management team with few support employees. The key is to increase the yield of players through a course by reducing the amount of wait time. We offer here a simulation model that is designed to increase the number of players through a course during the day. The outcome should be increased revenue for the course and increased satisfaction for the player.

Introduction

Golf courses and country clubs are second only to gambling in the amount of revenue produced in the amusement, gambling and recreation industries. In 2002 there were 12,189 golf courses that produced $17.4 billion (US Economic Census, 2002). We may not think of golf courses as small business entities, but they are. On average, each golf course produced $1.39 million in receipts and employed 26 people; thus, most golf courses fall under the definition of a small business. The United States Small Business Administration size standard for the Amusement, Gambling and Recreation Industries is $6.5 million (http://www.sba.gov/size). In 2001 there were 518.1 million rounds of golf played. Since then the number has declined by 4.5 percent despite courses continuing to be developed. Scott Kauffman of Golf Business, states that golf just does not seem as in vogue as other leisure activities. The decline in players has been researched by KPMG’s golf industry practice. Managing director, Tom Bruff claims “time is the No. 1 reason why golf was ….’flat ’ and will be flat in coming years…..until the industry works through its supply-demand imbalance.” (Kauffman 2005). In 2004, 150 new courses were developed. With the number of courses increasing and the number of rounds played decreasing, the imbalance in supply and demand has many courses struggling to attract customers. The delicate balance between supply and demand is critical in a pure service setting. Based on the basic characteristics of service (intangibility, inseparability, variability and most important perishability), supply exceeding demand is particularly problematic because services cannot be inventoried or stored. Once a plane takes off 3/4s full, revenue is irreparably lost. When changes in consumer lifestyles and demographics turn an over-demand/under-supply situation into an over-supply/under- demand situation for a pure service, the demand imbalance must be addressed from many angles. One of the major factors in getting people on the golf course is the amount of time it requires to complete a round of golf (cycle time). If cycle time can be reduced, the number of rounds played during a day (throughput) can be increased. In a recent interview Lee Trevino addressed the issue of cycle time:

http://www.sba.gov/size�



“We have a tremendous amount of high-end daily-fee courses in Dallas that are in trouble. They aren’t getting the play. The harder you build the course, the more money it costs to maintain it. … If you put high handicappers on courses that take 5.5 hours to player, you’re going to lose them. And time is money when it comes to golf. You can’t get as many rounds in on a tough course (Lowell, 2004).”

From an operations management perspective, daily golf course play is a stochastic system where random events (lost balls, weather, and poor shots) and interactions (waiting for the group in front of you) heavily impact the pace of play. Although complex, the daily golf course operations are very similar to other complex systems, such as: a) a manufacturing plant where parts are moving from production process to process, b) a distribution network where transportation devices (trucks, boats, planes. . ) move from location to location, or c) an emergency room at a hospital where patients wait for treatment. In all these examples, performance is impacted by variability and interactions. However, these examples and other complex systems have been analyzed with math modeling. Therefore, a golf course system should be a candidate for math-based analysis. A golf course is also a terminal system, since it has a definite beginning and ending as a function of daylight. For terminal systems, performance is very dependent on the system’s initial conditions. For a golf course, a slow group early in the day often spells disaster for the remainder of the day in terms of the rounds played (throughput) and the round length (cycle time). A model-based decision support system (DSS), based on a simulation model that accurately represents the variability and interactions that impact pace of play on a golf course can increase throughput and control, or at least forecast, cycle time. Course managers understand that these are two important factors in revenue management (Kimes, 2000). Increasing the pace of play not only can increase throughput and course revenue but also address the player’s need regarding time – significantly reducing the time necessary to complete a round of golf.

Literature Review Recent research demonstrates that simulation models are also being used to model pace of play on golf courses (Kimes and Schruben, 2002; Tiger, et al, 2003; Tiger and Salzer, 2004; Tiger and Speers, 2006). The Kimes and Schruben model differs significantly from those developed by Tiger et al. The table below summarizes the model differences.

TABLE 1 Model Differences

Item Kimes and Schruben Tiger et al software Discrete event simulation

software Spreadsheet simulation using MS-Excel

Queue locations Queue occurs on the tee box. Queues occur prior to the tee box, tee box and fairway.

Queue logic to model course

congestion

The maximum number of groups on each hole is two.

The maximum number of groups is a function of hole type (par 3, 4, or 5) and gate methodology.

Applicability The model is specific to one course.

The model is part of a decision support system allowing generalization to any course.



The simulation model developed by Tiger, et al (2003) is the basis for this research. In Tiger et al’s (2003) paper, a modeling concept was created that offered a simple, yet powerful method for modeling course congestion, specifically, waiting for the group immediately in front to move out of the way. The concept is call gate methodology. Gates are modeling constructs used at different points of a course. The gates indicate at what point on the fairway the players behind would be able to safely hit. The location and frequency of the gates vary based on golfer characteristics (short or long hitters); hole length and design. Typically, a par 4 hole typically has one fairway gate and a par 5 hole has two fairway gates. No fairway gate is used on par 3 holes because the players behind must wait until all players leave the green to safely hit.

An Example Demonstrating Increased Revenues Using the Pace of Play Model

To demonstrate how the spreadsheet simulation can be used to increase revenue, a typical golf course is modeled to identify/manage bottlenecks and determine the optimal tee time policy. Consider an eighteen hole par 72 course designed as shown in Table 2. The course is open throughout the year, but only has 75 busy days. Busy days are days that the course is full. Typically, these are weekends and holidays. The busy day daily fee is $70, and the course has 10 hours of daylight. Golfers always play in groups of four with two in each cart. Table 3 shows the probability distribution and the parameter values for the times and rates based on course location: tee box, fairway, green, and distance to the next tee box.

TABLE 2 Hole Parameters

Hole

Par

Length (Yards)

To Next Hole

(Yards) 1 5 486 75 2 4 390 60 3 5 529 150 4 3 174 50 5 4 402 120 6 3 156 75 7 4 425 50 8 4 352 75 9 4 418 150 10 5 515 100 11 4 357 50 12 3 168 75 13 4 351 75 14 4 368 50 15 3 162 100 16 4 446 120 17 4 428 75 18 5 554 150 72 6681



TABLE 3 Pace of Play Rates and Times

Rates / Times

Mean

Standard Deviation

Distribution

On tee box (minutes /golfer) 0.77 0.22 Normal Tee box to gate (yards/minutes/golfer)

4.39 0.22 Lognormal3

Gate to green (yards/minutes/golfer) 4.14 0.21 Lognormal On green (minutes/golfer) 1.05 0.31 Normal Green to Next Hole (yards/minutes/golfer)

5.20 0.26 Lognormal

For the experiment, one hundred busy days are simulated for five different tee time interval policies (minutes): 8, 9, 10, 11 and 12. Figures 1 through 3 show the average daily rounds completed, the average round length, and expected increased busy day revenue. In all three figures, the current system is compared to two improved system scenarios: a 100% improvement and a 20% improvement. A 100% improvement is completely removing all waiting time from the system, essentially creating a perfect assembly line of golfers moving through the course. Obviously, this is unachievable; however, it does offer a ceiling for improvement. The 20% improvement is a reasonable expectation provided the course can eliminate some waiting by managing bottleneck areas more effectively.

FIGURE 1 Expected Number of Daily Rounds on Busy Days

100

110

120

130

140

150

160

170

8 9 10 11 12

Tee Time Interval (minutes)

Dai

ly R

ound

s of

Gol

f 100%Improvement(No Waiting)

20%Improvement

CurrentSystem w /oImprovement

3 For a description of normal and lognormal distributions, see any probability theory reference such as the following link: http://www.vias.org/tmdatanaleng/cc_distri_lognormal.html, http://www.stat.vt.edu/~sundar/java/applets/Distributions.html, and http://www.stat.vt.edu/~sundar/java/applets/Normal.html.

http://www.vias.org/tmdatanaleng/cc_distri_lognormal.html�

http://www.stat.vt.edu/%7esundar/java/applets/Distributions.html

http://www.stat.vt.edu/%7esundar/java/applets/Normal.html



FIGURE 2 Expected Round Length (Hours) on Busy Days

4.00

4.20

4.40

4.60

4.80

5.00

5.20

5.40

8 9 10 11 12


Rou

nd L

engt

h (H

ours

) 100%Improvement(No Waiting)

20%Improvement


FIGURE 3 Expected Annual Increased Revenue Due to Waiting Time Reduction

$0

$50,000

$100,000

$150,000

$200,000

$250,000

8 9 10 11 12


100%Improvement(No Waiting)

20%Improvement


Figure 1 shows the average daily rounds completed. As expected, for shorter tee time intervals, more rounds are completed; however, for very short tee time intervals of eight or nine minutes, bottleneck improvements are required to improve throughput. Figure 2 shows that in the best case scenario of no waiting, an average round can be completed in about 4 hours and 15 minutes. However for an eight minute tee time interval, if no bottleneck improvement occurs, an average round takes 4 hours and 59 minutes, which is 44 minutes of waiting. For some golfers and courses, this is reasonable; however, for others, this may not. Figure 3 shows that a reasonable 20% reduction in waiting time can increase annual busy day revenue by over $42,000 for an eight minute tee time interval, which is almost a 7% increase in revenue.



The next step is to run a break even analysis to determine if the cost of reducing waiting time is worth the expected increased revenue. To determine, the course bottlenecks must be identified. Figure 4 shows the hole-specific times for an eight minute tee time interval. Obviously, the par 3 fourth hole is the bottleneck. The expected total time to complete this hole is 26 minutes; however, over 15 minutes of this is simply waiting. Any reduction in this waiting time will reduce the overall round length; thus, improvement throughput revenue. How do you alleviate the bottleneck? That is for the course management experts to determine. Redesign, adding marshals, raking the bunkers for the players, and many other opportunities exist. The advantage of the model is the identification of the bottleneck. Also, as improvements are made, new bottlenecks surface, and the model will identify these as well.

FIGURE 4

Hole Specific Expected Time in System, Waiting Time and Time to the Next Hole (minutes)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Hole

TISWaitingTo Next Hole

Conclusion

From a marketing perspective, increasing the pace of play might help to improve the popularity of the game of golf, thus bringing back some players that have felt too time pressed to enjoy a round of golf. Based on the decline in the number or rounds played each year, it would appear that the beauty of the setting, the camaraderie and interactions, and the challenge of the game are benefits that cannot offset by the negatives of long golf rounds due to waiting. The pace of play model permits the golf course manager to now become more sophisticated regarding marketing strategies. Whereas prior marketing strategies were limited (price based solely on time of use, segmentation based on usage only), the course manager can use two dimensions for segmentation – usage (time of use, peak or non peak) and benefits (the acceptable speed of play). Considering some of the complicated pricing structures offered by many golf courses, the pricing could be simplified, thus offering the player an additional incentive to return to the game.



References Kassarjian, H. H. (1973). Field theory in consumer behavior. In S. Ward & T S. Robertson (Eds.), Consumer behavior: Theoretical sources (pp. 118-140). Englewood Cliffs, NJ: Prentice Hall. Kauffman, S. (2005). State of the industry – Is the wild ride over? Golf Business, March, 2005. Retrieved February 17, 2006 from http://www.golfbusiness.com/pageview.asp?m=3&y=2005&doc=1241. Kimes, S. E. and L. W. Schruben (2002) Golf Course Management: A Study of Tee Time Intervals, Journal of Revenue and Pricing Management, 1(2), 111-120. Kimes, S. E. (2000) Revenue Management on the Links: Applying Yield Management to the Golf-Course Industry, Cornell Hotel and Restaurant Administration Quarterly, 41(1), 120-127. Lewin, K. (1951). Field theory in the social sciences. New York: Harper and Row. Lowell, R. (2004). One Last Stand for the Merry Mex, PGA Tour Partners, March/April 2004 p 40-45. Tiger A. and Salzer D. (2004) Improving Golf Course Throughput by Restricting Early Tee Times to Faster Golfers, Academy of Information and Management Science Journal, 7(1), 115-126. Tiger A. and Salzer D. (2004) Daily Play at a Golf Course: Using Spreadsheet Simulation to Identify System Constraints, INFORMS Transactions on Education, 4(2), http://ite.pubs.informs.org/Vol4No2/TigerSalzer/index.php Tiger, A.; Speers, J., Simpson C., & Salzer, D. (2003) "Using simulation modeling to develop a golf course flow DSS", Issues in Information Systems, Volume IV (2), 2003. US Economic Census (2002), Amusement, Gambling, and Recreation Industries: 2002, Washington, DC: U. S. Department of Commerce, Economics and Statistics Administration.



QUALITY FUNCTION DEPLOYMENT: THE FINANCIAL PERFORMANCE EFFECTIVENESS OF A NEW PRODUCT DEVELOPMENT TECHNIQUE

Kent Byus, Texas A&M University-Corpus Christi

Thomas M. Box, Pittsburg State University

Abstract

This paper reports the measured effectiveness of Quality Function Deployment (QFD), a well-known New Product Development technique, in a sample of 131 entrepreneurial firms from the ABI database. QFD was originally developed by Drs. Yoji Akao and Shigeru Mizuno in the early 1960s. It has been employed in a wide variety of industries including tire manufacturing, military aircraft, the automotive industry and, quite recently, in software design and development. QFD transforms the Voice of the Customer (needs, wants and desires) into engineering characteristics and specifications and then prioritizes the resulting correlations between the Voice of the Customer and engineering requirements.

Introduction

Quality Function Deployment (QFD) is a product development or improvement methodology, wherein an organization clearly specifies customer wants, needs, and expectations, and then systematically translates each customer requirement throughout the entire firm and directly into the product design and development process. The goal of QFD is enhanced customer satisfaction, organizational integration of expressed customer wants and needs, and improved profitability (Griffin 1992). The marketing concept, a customer-centric business philosophy, has been credited with turning the American enterprise system toward the marketplace and away from the production line. The concept entails three fundamental theoretical principles (Jaworski and Kohli 1993; Houston 1986; Bell and Emory 1971; Felton 1959). The first of these principles is an external customer orientation. The second principal is organizational integration or what could be called a firm wide-operational effort. Finally the marketing concept is predicated on the basic notion that financial success will originate from long-term profits and not short-term sales volume. QFD’s customer focus is comparable to the first fundamental of the marketing concept, which requires that an organization know the customer and satisfy him or her (Houston 1986). The systematization of QFD provides the procedural set of steps needed to integrate the expressed needs, wants, and expectations of the customer throughout the entire organization (Cohen 1995; Guinta and Praizler 1993; Bossert 1991; Hauser and Clausing 1988). This methodical process contributes to each organization member’s being keyed-in to his or her role in meeting the “true and ultimate qualities demanded by customers in their own words” (Akao 1990, p. 12). This organizational interrelationship resembles the intention of the second essential element of the marketing concept, which advocates the “integration and coordination of all the marketing functions being melded with other corporate functions” (Felton 1959, p. 55).



QFD strategically distributes customer input throughout the design, manufacture, and delivery of goods and services for the purpose of reducing costs, reducing distances (spatial and chronological), and thereby providing an opportunity for improved profitability (Griffin 1992). This potential for improved profitability is the long-term reward for the implementation of QFD. In other words, long-term profitability is the reward of QFD; the same reward posited by advocates of the marketing concept. The purpose of this inquiry is to assess Quality Function Deployment (QFD) as a market oriented new product development technique which incorporates the fundamental concepts which appear to parallel the marketing concept as measured by the firm’s profitability; two critical survival criteria for entrepreneurial innovation. Also, this article will introduce QFD as one systematic process available for implementing the marketing concept within small growth-oriented organizations seeking to produce profitability as effectively and efficiently as possible

Background

Under the marketing concept, an organization places the customer at the center of all of the firm’s operations. This essential “pivot-point” (Lusch and Laczniak 1987, p. 1) position of the customer suggests that the best interests of all participants, internal and external, in the exchange process will be served when all efforts are focused on serving the customers needs and wants (Houston 1986; McNamara 1972; Barksdale and Darden 1971; Bell and Emory 1971; Felton 1959). QFD is a product development methodology wherein an organizationally integrated team clearly specifies customer’s wants and needs, and is then able to evaluate each product feature systematically in terms of both its impact on organizational competencies in meeting the articulated needs and wants of customers (Guinta and Praizler 1993). The process involves the construction of one or more matrices, called “quality tables,” which act as guides in the development, as the product is transported throughout the entire organization (Cohen 1995; Guinta and Praizler 1993; Bossert 1991; Hauser and Clausing 1988; Akao 1988). The first of these quality tables is called “The House of Quality” (HOQ), and it displays the customer’s wants and needs, and the organization’s technical response to meeting those wants and needs (Cohen 1995; Guinta and Praizler 1993; Bossert 1991; Hauser and Clausing 1988; Akao 1988. Within the HOQ the customer wants and needs, also referred to as the “Voice of the Customer” (VOC) contains information determined by collecting and analyzing qualitative marketing research. By design, the HOQ forces the organization to consider all aspects then integrates the project and provides new opportunities for insights and possibility perspectives on how things should be formulated in the product development or improvement process (Bossert 1991). The HOQ is a rectangular matrix with the VOC as entries in the rows and engineering requirements represented by the column entries. The “roof” of the house shows the correlations (or relationships) between the VOC entries and the engineering requirements. It is also common to display (on the left and bottom of the HOQ) assessments of competing products on each of the dimensions (Hauser and Clausing, 1988).



Methodology The models used in this article are hypothesized to identify significant differences within and between firms that have implemented QFD. One aspect of this assessment examines differences between the QFD implementing firm’s profitability return on assets (ROA) and their respective industry (SIC) average level of profitability (ROA). Another aspect examines the relationships which might exist between a firm’s use of QFD and its acknowledged implementation of characteristics which can be associated with the marketing concept. Each model used is intended to depict consistency with the theoretical proposition that QFD is an effective method for implementing the marketing concept. This preliminary study is classified as exploratory since it is intended to provide insights into, and an understanding of the relationships surrounding new information, relationships, and phenomena. As is the case with most exploratory research, this study’s adherence to basic assumptions is somewhat flexible since the relationships being evaluated have not previously been scrutinized within the context of the study’s purpose. This article will report on data collected using the results of a self-administered, computer assisted survey and data from financial information reported to shareholders with necessary computations performed to derive specific ROA profitability ratios. The second assessment comes from data gathered by surveying a sample of entrepreneurial firms identified in American Business Information database of publicly traded corporations. The sample frame is limited to firms that operate within the borders of the United States. Firms which have implemented QFD in other countries will not be considered because of the difficulty in extracting financial data and the difficulties with and confounding impact of accounting practices, culture, language, and governmental interaction, restrictions, and regulations. Further, the authors acknowledge that because of the slowness that is associated with the implementation of QFD these results may not capture some of the profitability differences as well as the researcher might desire. Still, given the exploratory nature of the study, the information provided might prove useful and influential in further inquiries into the profitability of the marketing concept and QFD. Several statistical procedures were used to conduct the analysis of data collected from the sample. Students’ t-tests were used to evaluate the equality of mean values associated with return on assets of both QFD and non-QFD user populations. Additionally, there are analyses using conditional odds ratios. The particular analyses to be performed using these probability estimates will evaluate the absolute differences which exist when comparing the probability of a firm obtaining higher levels of profitability (ROA) than their respective industry’s average level of probability (ROA) both pre and post implementation of QFD. The initial sample was defined as publicly owned and traded U.S. firms which reported gross annual revenues less than $100 million and which were included in the American Business Information (ABI) electronic database. These firms are considered to be more entrepreneurial than firms with higher gross annual revenues. Using these criteria provided an original sample of eight-hundred and eighteen (818) firms. Of these firms, one-hundred and thirty-one (131) firms were identified as QFD user firms from consultant referrals or published reports. No prior knowledge, concerning the use or non-use of QFD was established with the remaining six-hundred and eighty-seven firms. Of the one-hundred and thirty-one (131) pre-identified QFD



user firms, eighty (80) were referred from a single source QFD consultant. The remaining 51 firms were identified from published transactions from the symposia on QFD held annually in Novi Michigan. Additionally a computer assisted interview (CAI) survey was constructed and mailed to plant managers of firms identified in the original sample, including all of the 131 pre-identified QOF user firms. A total of sixty-five (65) completed survey diskettes were received from respondents. The response rate for this CAI mailing was computed to be .26. A 26 percent response rate is acceptable for this type of exploratory study. Although the total number of usable responses is low, constraints, personal and financial limit further solicitation. In addition, of the responses received, all provided information and insight into this study. The survey instrument consisted of 31 individual questions concerning the firm’s new product development procedure (QFD) and the firm’s managerial emphases. The results of this survey are not included in the discussion presented herein. Upon identifying all respondent firms, the researcher extracted the appropriate financial data using Disclosure’s “Financial and Business Information on U.S. Publicly Traded Companies,” an electronic data base of financial information available on CD-Rom. Industry average data was obtained from Dun and Bradstreet’s “Industry Norms & Key Business Ratios” editions. In addition, the researchers assigned the firm’s primary Standard Industrial Classification (SIC) code to the data base information as defined by the Disclosure data-base. SIC codes are used to extract the average ROA for each SIC identified industry group.

Results and Comments

Prior to specifically testing each hypotheses enunciated in the study, the researcher analyzed the data by cross tabulating the survey information to determine if differences existed between firms actively using QFD and those not using QFD. When analyzing the cross-tabulations several aspects of the firms operations indicated areas where statistical differences exist at a .05 level of significance. These areas of difference deserve more discussion and are the subject of additional future research. Because firms implement QFD in different years, the preliminary examination and testing of financial data is reported on a year by year basis, with firms being compared based on their use of QFD during the specific year under consideration. Firms which initiated the use of QFD during 1998 would also be included in the evaluation of firms using QFD during 1999 and so forth, with each subsequent years evaluation including all subsequent user firms and the addition of new QFD implementing firms. This process will eventually cover all firms during a particular year, being evaluated as either a user firm or a non-user firm for that particular year. This situation can be easily seen by keeping track of the respective number of cases under consideration. The statistical results are as follow



Year

Mean ROA OFD

Mean ROA non-OFD

t-value

1997

Significance

.1022 .0599 -.82 .414 1998 .0971 .0671 -2.57 .128 1999 .0450 .0525 .39 .702 2000 .0289 .0407 .52 .610 2001 .0142 .0448 1.35 .182 2002 -.0004 .0283 .94 .351 2003 .0009 .0592 1.24 .221 2004 .0721 .0451 -.93 .360

1997-2004 .0424 .0510 .53 .596 Although the authors believed and the QFD literature appears to indicate that firms implementing QFD would benefit financially (i.e. have higher levels of profitability), the data does not support this notion. Even within the exploratory nature of this study, it appears that firms which use QFD do not have higher profitability (ROA) than firms which do not use QFD. Herein, the data implies that all responding firm’s profitability is rather evenly distributed. These results indicate that the ability for QFD or any other new product development process requires time to implement and therefore time to evaluate. Probing deeper, the authors believe that it is reasonable to assume that the implementation of QFD within an organization would be approximately one year. Further, it is equally reasonable to assume that any impact on the firm’s profitability, as a result of QFD, would occur approximately one year after the implementation of QFD. Therefore, to examine changes in ROA based on the firm’s use of QFD are measured at two points in time; one (1) year prior to implementing QFD and one (1) year after implementing QFD. These two points in time are then compared to the firm’s respective industry, as specified by the firm’s primary SIC code, with the industry’s average level of ROA. These industry average levels of ROA were collected for each SIC code from the data base from the Almanac of Business and Industrial Financial Ratios published by Prentice Hall Company. Each firm’s ROA was then compared against their industry average level of ROA for one (1) year previous to implementing QFD and also one (1) year after implementing QFD. If the firms ROA was greater than the industry average ROA, the response was coded as a one (1). If the firm’s ROA was less than the industry average, the response was coded as a zero (0). This coding allowed the researchers to be able to construct a contingency table which compiled the absolute frequencies for having higher than their respective industry levels of ROA both prior to and after the implementation of QFD. The following table provides the results of the binomial probabilities computations and the paired sample t-tests of the differences of the computed probabilities.



Year

Analyzed

Years Measured

p(<Avg) p(>Avg)

Paired t-value

1999

Sig. Level

1998 .80 .20 -1.00 .374 2000 .60 .40

2000 1999 .60 .40 1.00 .374 2001 .80 .20

2001 2000 .75 .25 1.48 .166 2002 .9167 .083

2002 2001 .8333 .167 -.54 .611 2003 .333 .667

2003 2002 1.00 .0 -1.00 .500 2004 .50 .50

2004 2003 .0 1.00 * * 2005 .0 1.00

* The standard error of the difference is 0. This analysis cannot be computed.

As the data suggests, firms which use QFD do not gain higher ROA after implementing QFD. Although there are ample reasons for such an inference, including small sample size, the data appears not to indicate such financial improvement thereby potentially contradicting the assertion that QFD improves financial performance; at least within the constraints of this study.

The notion that firms that use QFD will have higher levels of profitability fail to be supported by this exploratory data. Instead, the data suggests that there exists inadequacy in the use of traditional measures of profitability for evaluating the performance of the firm’s adoption of a new product innovation technique (Chakravarthy 1986). Although the researchers continues to argue that it is important that theories and techniques be evaluated against the cold realities of business, the results of this study only provides another example of why strategic decisions must to be made in response to the perspective of the manager of efficiency seeking entrepreneurial enterprise. The authors believe that the entrepreneurial implications of this study are more important than the statistical results, or lack of such. This study provides additional knowledge that will enable the entrepreneurial manager to discover that there exist mechanisms that will operationally help the firm become more market oriented, which do not immediately reflect significant financial efficiency, regardless of theory. Future research on the relationship between QFD and financial performance should be focused on the evaluation of individual projects that are managed through the QFD process. This might require a case study approach.



References

Akao, Yoji (1988), Quality deployment: A Series of Articles, Lawrence Massachusetts: G.O.A.L., Inc., Translated by Glen Mazur, 1987. Akao, Yoji (1990), Quality Function Deployment, Cambridge MA: Productivity Press. Barksdale, Hiram C. and Bill Darden (1971), “Marketers’ Attitudes Toward the Marketing Concept,” Journal of Marketing, Vol. 35, (October), pp. 29-36. Bell, Martin L. and C. William Emory (1971), “The Faltering Marketing Concept,” Journal of Marketing, Vol. 35, (October) pp. 37-42. Bennett, Roger C. and Robert G. Cooper (1979), “Beyond the Marketing Concept,” Business Horizons, Vol. 22 (June), pp. 76-83. Bossert, James L. (1991), Quality Function Deployment: A Practitioners Approach, New York, NY: ASQC Quality Press, Marcel Dekker, Inc. Chakravarthy, Balaji S. (1986), “Measuring Strategic Performance,” Strategic Management Journal, Vol. 7 (July), pp. 437-458. Cohen, Lou (1995), Quality Function Deployment: How to Make QFD Work for You, Reading, MA: Addison-Wesley Publishing Company. Felton, Arthur P. (1959), “Making the Marketing Concept Work,” Harvard Business Review, Vol. 37, (July/August), pp. 55-65. Griffin, Abbie and John R. Hauser (1992), “Patterns of Communication Among marketing, Engineering and Manufacturing - A Comparison Between Two New Product Teams,” Management Science, Vol. 38, No. 3, (March), pp. 360-373. Griffin, Abbie (1992), “Evaluating QFD’s Use in US Firms as a Process for Developing Products,” Journal of Product Innovation Management, Vol. 9, pp. 171-187. Guinta, Lawrence R. and Nancy C. Praizler (1993), The QFD Book: A Team Approach to Problem Solving and Satisfying Customers Through Quality Function Deployment, New York, NY: AMACOM. Houston, Franklin S. (1986), “The Marketing Concept: What It Is and What It Is Not,” Journal of Marketing, Vol. 50, (April), pp. 81-87. Industry Norms & Key Business Ratios, Desk Top Edition, Murray Hill, NJ: Dun and Bradstreet. Jaworski, Bernard J. And Ajay K. Kohli (1993), “Market Orientation: Antecedents and Consequences,” Journal of Marketing, Vol. 57, (July), pp. 53-70.



Lusch, Robert F. and Gene R. Laczniak (1987), “The Evolving Marketing Concept, Competitive Intensity and Organizational Performance,” Academy of Marketing Science, Vol. 15, (Fall), pp. 1-11. Mc Namara, Carlton P. (1972), “The Present Status of the Marketing Concept,” Journal of Marketing, Vol. 36, (January), pp. 50-57. Urban, Glen L. and John R. Hauser (1993), Design and Marketing of New Products

, Second Edition, Englewood Cliffs, NJ: Prentice Hall, Inc.


ONLINE SMALL BUSINESS OPPORTUNITIES AND DETERMINANTS OF SUCCESS WITH EBAY

Gregory S. Black, Texas A&M University—Corpus Christi

Abstract

Researchers have endeavored to identify and understand factors that influence the adoption of e-commerce by small businesses. However, once a small business has adopted e-commerce as a part of its business model, identification of specific factors that predict online success for those small businesses has been largely neglected. This study investigates transactions of two eBay sellers of consumer goods to determine if certain demographics and geographics related to individual consumers can be utilized to predict retail sales and the average value of those sales. A sample of 753 transactions was analyzed and many variables were identified as reasonable predictors of eBay sales and the average value of the sale. Significant variables include consumer gender, whether the consumer lives in a rural or urban area, and the region in the U.S. in which the consumer resides.

Introduction

Electronic commerce is becoming increasingly more important to both sellers and buyers, including small, medium, and large enterprises. Though still considered to be in its infancy, Internet usage and online marketing are growing explosively. During 2003, approximately 40 million households in the U.S. alone made at least one consumer purchase from the Internet, up from only six million in 1994 (Hof 2003). Online retailing has become, and will continue to become, a full and complete business model for some companies. Internet firms such as Amazon.com, eBay, Yahoo!, and Netscape, have proven this type of business model can be very successful. Black Friday, the day after Thanksgiving, has long been recognized as the most important day for many brick-and-mortar retailers. With the advent of e-commerce, a new phenomenon known as Cyber Monday has now become the most important day for many online retailers. Cyber Monday is the Monday after Thanksgiving and online sales on this day have increased steadily, recently growing by more than 25% per year (The Economist 2005). One of the most powerful of the many players in e-commerce is eBay. According to eBay’s recent report of its 2005 financial results, it had approximately $4.552 billion in revenue in 2005, up 39% from 2004. In addition, 1.9 billion products were listed for sale on eBay in 2005 and the total value of all successfully closed listings on eBay was a record $44.3 billion. EBay has grown faster than any other company in history, including Microsoft, Dell, and Wal-Mart. Some 71.8 million active users bought and sold merchandise on eBay in 2005 (eBay Annual Report 2005). This is more than the gross domestic product of over half of the world’s countries. If eBay was a brick-and-mortar retailer, rather than the world’s largest on-line marketplace, it would be larger than Best Buy and Lowe’s. If eBay actually employed the 500,000+ people who earn all or most of their income selling on the site, it would be the second largest employer on the FORTUNE 500, with only Wal-Mart employing more people.



EBay reported at its latest “eBay Live” convention in Las Vegas that more than 1.3 million of its sellers now make their livings primarily off the site (Creamer 2006). Just in eBay’s Consumer Electronics Category, more than $7.3 billion in gross merchandise is offered for sale annually (Wiley 2005). EBay offers small businesses access to millions of buyers and allows sellers many options to customize their eBay offerings, eBay stores, etc. Consumers are also increasingly finding the value of utilizing eBay to obtain items more inexpensively, more conveniently, etc. As the economy continues to be in a state of flux and consumers are uncertain about gas prices, the future of interest rates, etc., will they turn more to eBay as a means of reducing financial risk? If some increase their utilization of eBay and some do not, what factors can be utilized as reliable predictors of consumer participation on eBay? This research uses transaction data from two current eBay sellers. One of the sellers is a full-time online retailer and uses eBay as the primary source of income while the other seller uses consumer sales on eBay to supplement income. Each transaction is considered to be an independent case so the details of the transaction can be examined. Specific data was generated for each case, such as the gender of the buyer, whether the buyer lives in a rural or urban area, in which of the six U.S. regions the buyer resides, and the value of the transaction. These data provide the information necessary to achieve the objectives of this research—to examine certain geographic and demographic determinants of eBay consumers to determine if these factors have an impact on their eBay purchasing behavior.

Literature Review The world is changing quickly thanks to the unstoppable forces of the digital revolution. The opportunities for small businesses have grown exponentially recently because of this digital boom. Researchers have been diligent in identifying factors that make online retailing attractive for small businesses. One important factor is centered around the fact that many small businesses are limited in both their financial resources, and their technical resources. Therefore, the opportunity to participate in e-commerce inexpensively and simply is attractive to small businesses and encourages them to more quickly adopt e-commerce into their business strategies (Al-Qirim 2006; Marketing Week 2006). EBay offers both simplicity and the ability to get involved with e-commerce inexpensively to these small businesses, so many are turning to eBay. It is clear that eBay itself is doing what it can to increase its revenues, but it also seems to be buying into the relatively new concept of relationship marketing. EBay wants to design itself in such a way that both buyers and sellers can use and benefit from it as much as possible. One way eBay is trying to make the site better for online small businesses is that it now offers eBay Express which will aggregate those fixed-price listings rather than have them scattered among the auction listings (Hof 2006). It is clear that eBay is doing its part; however, there are many factors outside of eBay’s control that impact whether the small businesses using eBay will be successful. Recent research shows consumer demographics, such as location of residence, gender, age, etc., is helpful in predicting eBay utilization by consumers (e.g., Black 2005a; Black 2005b; Black 2005c). Other factors are also likely to be related to individual consumers’ utilization of eBay, such as their personalities and attitudes.



Advances in technology and increasing ease of using the Internet are leading to a proliferation of on-line business. Consumers who have access to computers can now research products easily and in a fraction of the time that was required in the past. However, a considerable gap exists between the practice of internet-based marketing and sound theory-based insights and principles for guiding that practice. Parasuraman and Zinkhan (2002) suggest that understanding online customer behavior is one of the key factors causing this gap. Other factors these authors suggest, and factors that influence online consumer, are marketing mix differences on the Internet, customer loyalty, online relationship marketing, e-tailing issues and online delivery of services (Parasuraman and Zinkhan 2002). In a study of Internet pharmacies, Yang, Peterson and Huang (2001) identified and examined six dimensions of consumer perceptions of service quality. These included ease of use, content on the Web site, accuracy of the content, timeliness of responses, aesthetics or attractiveness of the site, and privacy. Other researchers also echo concerns over similar issues that have a significant impact on online consumer behavior. For example, there is concern among consumers for being able to assure the security and privacy of Internet transactions (Rust, Kannan, and Peng 2002; Zeithaml, Parasuraman, and Malhotra 2002). Also, managing customer relations and influence on consumer behavior through effective on-line communication has been examined (e.g., Stewart and Pavlou 2002). Further, the ease of navigating a Web site has been shown to influence consumer behavior (Luna, Peracchio, and de Juan 2002). Another study provided evidence that the content of the Web site was a factor in determining consumer behavior and satisfaction (Burke 2002). There have even been attempts to identify what the differences should be in the marketing mix for online businesses (e.g., Kalyanam and McIntyre 2002). These factors are directly controllable by the businesses sponsoring the Web sites and eBay, does as much as it can to excel in these dimensions in order to increase the likelihood that consumers will make purchases. However, certain factors that online retailers cannot control, such as consumer geographics and demographics, also have the potential to significantly impact the behavior of online consumers. Consumer Characteristics and Online Shopping Behavior A recent study identified four categories of online shoppers and four categories of online non-shoppers, along with characteristics for each of these eight categories (Swinyard and Smith 2003). Characteristics shared by these online consumers (about 42% of the U.S. population) were average household incomes of $58,300-$64,400, average ages of 44.0-49.6 years, above average education levels, an enjoyment of Web browsing, a preference for merchandise being delivered to their homes, a desire for keeping purchases private, a propensity to search for the lowest prices possible, a sensitivity to high shipping prices, and a concern about online credit card risk (Swinyard and Smith 2003). Auction Buying Behavior Although auctions have been examined extensively in disciplines such as economics, and to some degree in marketing, on-line auctions are only beginning to receive research attention. Further, in both economics and marketing, the research on auctions has relied primarily on rational, economic theories (Gilkeson and Reynolds 2003). However, the findings of this



research are inconsistent. The findings from the few studies of on-line auctions, especially from the purchasers’ perspective, are not only inconsistent, but are negligible, with only a few examples of sizable studies. For example, Haubel and Popkowski-Leszczyc (2000), conducted a large field study using eBay and manipulating certain variables to examine general factors related to auctions in general, but not to on-line auctions specifically. Consumers Residing in Six U.S. Regions Americans often speak of their country as one of several regions. These regions are cultural units rather than governmental units formed by history and geography and shaped by the economics, literature, customs and traditions that all the parts of the region share. What makes one region different from another? A region’s multicultural heritage as well as distinct demographic characteristics, such as age, resources and industries, make regions unique. Within several U.S. regions, language is used differently and there are strong dialects. There are also differences in outlook and attitude based on geography (U.S. Diplomatic Mission 2003). New England includes the following states: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. It has played a dominant role in American history. Until well into the 19th century, New England was the country’s cultural and economic center. The earliest European settlers of New England were English Protestants who came in search of religious liberty. They gave the region its distinctive political format (town meetings) which were an outgrowth of meeting held by church elders, in which citizens gathered to discuss issues of the day. Education is another of the region’s strongest legacies. Without, however, large expanses of rich farmland or a mild climate, many New England settlers turned from farming to other pursuits. In their business dealings, New Englanders have a reputation for hard work, shrewdness, thrift and ingenuity (U.S. Diplomatic Mission 2003). As can be seen in Table 1, New England contains 4.88% of the population of the United States (Census 2000).

TABLE 1 Summary of Population and eBay Data

% of US # of eBay % of Total $ Value of % of Total Variable Population Purchases Purchase Purchases Purchase Region New England 4.88% 21 2.79% $284.85 2.46% Mid-Atlantic 16.22% 85 11.29% $1,057.10 9.12% South 24.69% 190 25.23% $2,991.94 25.81% Midwest 22.58% 241 32.01% $3,639.46 31.40% Southwest 11.32% 90 11.95% $1,527.63 13.18% West 20.32% 126 16.73% $2,090.49 18.03% Rural/Urban Urban 83% 373 49.54% $6,201.97 53.50% Rural 17% 380 50.46% $5,389.50 46.50% Gender Male 48.85% 245 32.54% $4,361.44 37.63% Female 51.15% 508 67.46% $7,230.03 62.37%



The Mid-Atlantic includes the following states: Delaware, Maryland, New Jersey, New York and Pennsylvania. If New England provided the brains and dollars for 19th century American expansion, the Mid-Atlantic States provided the muscle. The region’s largest states—New York and Pennsylvania—became centers of heavy industry. This region was settled by a wider range of people than was New England. Into this area of industry came millions of Europeans who made of it what became known as the “melting pot.” As heavy industry spread throughout the region, major rivers in the area were transformed into vital shipping lanes. Cities on waterways grew dramatically. New York is still the nation’s largest city, the nation’s financial hub, and its cultural center. Even today, the visitor who expects only factories and crowded cities is surprised. In the Mid-Atlantic, there are more wooded hills than factory chimneys, more fields than paved roads, and more farmhouses than office buildings (U.S. Diplomatic Mission 2003). As can be seen in Table 1, the Mid-Atlantic contains 16.22% of the population of the United States (Census 2000). The South includes the following states: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. This region is perhaps the most distinctive region of the United States. The American Civil War devastated the Old South socially and economically. Slavery was the issue that divided the North and the South. To northerners, slavery was immoral, but to southerners, it was integral to their way of life and their plantation system of agriculture. The scars left by the war took decades to heal and some of the attitudes existing both before and during the war still exist today. The “new” South has evolved into a manufacturing region and high-rise buildings crowd the skylines of its large cities. The region is also blessed with plentiful rainfall and a mild climate. Crops grow easily in its soil and can be grown without frost for at least six months of the year. Owing to its mild weather, the South has become a Mecca for retirees from other regions (U.S. Diplomatic Mission 2003). As can be seen in Table 1, the South contains 24.69% of the population of the United States (Census 2000). The Midwest includes the following states: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. This region is known as the nation’s “breadbasket.” The fertile soil of the region makes it possible for farmers to product abundant harvests of cereal crops. Corn is the most important of all American crops and the annual harvest of corn in this region exceeds the annual harvest of wheat, rice and other grains combined. Farms are normally located separate from one another, close to fields, and often beyond the sight of neighbors. The town is principally a place where the farm family travels to buy supplies, to attend church and to go for entertainment or political, social or business meetings. Midwesterners are praised as being open, friendly, and straightforward. Their politics tend to be cautious, but the caution is sometimes peppered with protest (U.S. Diplomatic Mission 2003). As can be seen in Table 1, the Midwest contains 22.58% of the population of the United States (Census 2000). The Southwest includes the following states: Arizona, New Mexico, Oklahoma and Texas. This region’s climate is drier than is that of the adjoining Midwest. The population is less dense and, with strong Hispanic-American and Native-American components, is more ethnically varies than neighboring areas. Outside the cities, the region is a land of open spaces, much of which is desert. The population of the region is growing rapidly and portions of it now rival parts of the



South as a destination for retirees in search of warm climates. Through irrigation, the land is being increasingly utilized for crops and through damming some of the major rivers flowing through the region, once small town have become major cities (U.S. Diplomatic Mission 2003). As can be seen in Table 1, the Southwest contains 11.32% of the population of the United States (Census 2000). The West includes the following states: Alaska, Colorado, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington and Wyoming. Americans have long regarded the West as the last frontier; yet, California has a history of European settlement older than that of most of the Midwestern states. In much of the West, the population is sparse and the federal government owns and manages millions of square miles of undeveloped land. Americans use these areas for recreational and commercial activities. Hawaii is the only state in the union in which Asian Americans are the largest ethnic group. The region is also known to have a large Mexican-American population. The second largest city in the nation—Los Angeles—is known to be the entertainment capital of the world, while other area of the west have nurtured and fostered the computer age and explosion of technology. Over the history of the West, people from outside the region have moved there to make a new start. As a result, many Western cities are known for their tolerance and a very strong “live-and-let-live” attitude (U.S. Diplomatic Mission 2003). As can be seen in Table 1, the West contains 20.32% of the population of the United States (Census 2000). Because of the cultural differences between these regions of the United States, the researcher expects consumers to behave differently when utilizing eBay to obtain needed/wanted products. This research examines consumer differences in several areas. First, the proportion of the number of purchases made in each region to the total number of purchases was compared to the proportion of the U.S. population residing in each region. Second, the proportion of the value of the purchases made in each region to the total value to the total value of all purchases was compared to the proportion of the U.S. population residing in each region. Third, the differences between the number of purchases and the value of the purchases were examined to determine if people in each region spent significantly more per purchase. Fourth, the average price paid for an item in each region was compared to further determine if people in each region spent significantly more per purchase than people in other regions. Consumers Residing in Urban or Rural Areas The U.S. Census Bureau classifies as “urban” all territory, population and housing units located within a core census block group that has a population density of at least 1,000 people per square mile and surrounding census blocks have an overall density of at least 500 people per square mile. The Census Bureau’s classification of “rural” consists of all territory, population and housing units located outside these urban areas. People residing in urban areas may have more access to brick-and-mortar stores where name-brand items can be more easily purchased than people residing in rural areas. Table 1 shows that 83% of the nation’s population resides in urban areas, while 17% resides in rural areas.



Because of the cultural differences between these urban and rural areas and possible differences in access to products, the researcher expects consumers to behave differently when utilizing eBay to obtain needed/wanted products. This research examines consumer differences in several areas. First, the proportion of the number of purchases made in each type of area to the total number of purchases was compared to the proportion of the U.S. population residing in each type of area. Second, the proportion of the value of the purchases made in each type of area to the total value of all purchases was compared to the proportion of the U.S. population residing in each type of area. Third, the differences between the number of purchases and the value of the purchases were examined to determine if people in each type of area spent significantly more per purchase. Fourth, the average price paid for an item in each type of area was compared to further determine if people in each type of area spent significantly more per purchase than people in the other type of area. Consumer Gender Because of commonly-known differences between male and female consumer when they are making purchase decisions at brick-and-mortar stores, similar differences may occur when consumers shop and make purchase decisions on eBay. Table 1 shows that 51.15% of the population of the U.S. are females and 48.85% of the population are males. Because of these expected gender differences, the researcher expects consumers to behave differently when utilizing eBay to obtain needed/wanted products. This research examines consumer differences in several areas. First, the proportion of the number of purchases made by each gender to the total number of purchases was compared to the proportion of the U.S. population in each gender. Second, the proportion of the value of the purchases made by each gender to the total value of all purchases was compared to the proportion of the U.S. population in each gender. Third, the differences between the number of purchases and the value of the purchases made by each gender were examined to determine if people of each gender spent significantly more per purchase. Fourth, the average price paid for an item by each gender was compared to further determine if people of each gender spent significantly more per purchase than people of the other gender.


TABLE 2 Results of eBay Comparisons

Variable Comparison Z-Score Region New England # of Purchases -2.66*** Value of Purchases -3.08*** Difference -0.55 Mid-Atlantic # of Purchases -1.65** Value of Purchases -2.37*** Difference -1.88** South # of Purchases 0.34 Value of Purchases 0.71 Difference 0.37 Midwest # of Purchases 6.19*** Value of Purchases 5.79*** Difference -0.36 Southwest # of Purchases 0.55 Value of Purchases 1.61* Difference 1.04 West # of Purchases -2.45*** Value of Purchases -1.56* Difference 0.96 Rural/Urban

Urban # of Purchases -

24.44*** Value of Purchases 21.55*** Difference -2.17** Rural # of Purchases 24.44***

Value of Purchases -

10.10*** Difference -2.17** Gender Female # of Purchases 8.73*** Value of Purchases 6.16*** Difference -2.98*** Male # of Purchases -8.95*** Value of Purchases -6.16*** Difference 2.98*** *Statistically significant at p < .10 **Statistically significant at p < .05 ***Statistically significant at p < .01



Results Regions Table 1 reveals differences in population proportions and the proportion of eBay purchases. New England contains 4.88% of the population and accounted for 2.79% of the total number of eBay purchases, while accounting for 2.46% of the total value of those eBay purchases. Table 2 indicates the differences of both the number of purchases (z = 2.66, p = .0039) and the value of the purchases (z = 3.08, p = .0010) are statistically lower than New England’s proportion of the nation’s population. However, the difference between these two New England proportions is not statistically significant, indicating that New Englanders do not spend a different amount on each purchase than do people from other regions. To further examine this relationship, Table 3 shows no significant differences between the average prices paid by New Englanders and those in other regions.

Looking at Table 1 again, the Mid-Atlantic contains 16.22% of the population and accounted for 11.29% of the total number of eBay purchases, while accounting for 9.12% of the total value of those eBay purchases. Table 2 indicates the differences of both the number of purchases (z = 1.65, p = .0495) and the value of the purchases (z = 2.37, p =.0089) are statistically lower than the Mid-Atlantic’s proportion of the nation’s population. Further, the difference between these two Mid-Atlantic proportions is also statistically significant, indicating that Mid-Atlantic residents spend less each purchase than do people from other regions. To further examine this relationship, Table3 shows significant differences between prices paid by residents of the Mid-Atlantic (less) and Southerners (t = 4.728, p = .031), residents of the Mid-Atlantic (less) and Southwesterners (t = 5.038, p = .026), and residents of the Mid-Atlantic (less) and Westerners (t = 7.736, p = .006).


TABLE 3 Results of Average Price Analysis

Variables Compared N Average Price T-Value New England/ 21 $13.56 Mid-Atlantic 85 $12.44 0.088 New England/ 21 $13.56 South 190 $15.75 0.895 New England/ 21 $13.56 Midwest 241 $15.10 0.25 New England/ 21 $13.56 Southwest 90 $16.97 1.03 New England/ 21 $13.56 West 126 $16.59 1.51 Mid-Atlantic/ 85 $12.44 South 190 $15.75 4.728* Mid-Atlantic/ 85 $12.44 Midwest 241 $15.10 1.583 Mid-Atlantic/ 85 $12.44 Southwest 90 $16.97 5.038* Mid-Atlantic/ 85 $12.44 West 126 $16.59 7.736** South/ 190 $15.75 Midwest 241 $15.10 0.601 South/ 190 $15.75 Southwest 90 $16.97 0.268 South/ 190 $15.75 West 126 $16.59 0.046 Midwest/ 241 $15.10 Southwest 90 $16.97 1.108 Midwest/ 241 $15.10 West 126 $16.59 0.292 Southwest/ 90 $16.97 West 126 $16.59 0.517 Urban/ 373 $16.63 Rural 380 $14.18 9.853** Female/ 508 $14.25 Male 245 $17.89 11.028** *Statistically significant at p < .05 **Statistically significant at p < .01

Looking at Table 1 again, the South contains 24.69% of the population and accounted for 25.23% of the total number of eBay purchases, while accounting for 25.81% of the total value of those eBay purchases. Table 2 indicates there are no significant differences of the number of purchases and the value of the purchases to the South’s proportion of the nation’s population.



Further, the difference between these two Mid-Atlantic proportions is also not statistically significant. However, further investigation shows a significant difference between prices paid by Southerners (more) and the residents of the Mid-Atlantic, as discussed in the previous paragraph (Table 3). Looking at Table 1 again, the Midwest contains 22.58% of the population and accounted for 32.01% of the total number of eBay purchases, while accounting for 31.40% of the total value of those eBay purchases. Table 2 indicates the differences of both the number of purchases (z = 6.19, p = .0000) and the value of the purchases (z = 5.79, p = .0000) are statistically higher than the Midwest’s proportion of the nation’s population. However, the difference between these two Midwest proportions is not statistically significant. Further, Table 3 shows there is no significant difference between the average prices paid by Midwesterners and people residing in other regions. Looking at Table 1 again, the Southwest contains 11.32% of the population and accounted for 11.95% of the total number of eBay purchases, while accounting for 13.18% of the total value of those eBay purchases. Table 2 indicates no difference between the number of purchases made in the Southwest and the Southwest’s proportion of the nation’s population; however, the value of the purchases (z = 1.61, p = .0537), is statistically higher than the Southwest’s proportion of the nation’s population. However, the difference between these two Southwest proportions is not statistically significant. Further investigation, however, shows a significant difference between prices paid by Southwesterners (more) and the residents of the Mid-Atlantic, as discussed above and indicated in Table 3. Finally, looking at Table 1 again, the West contains 20.32% of the population and accounted for 16.73% of the total number of eBay purchases, while accounting for 18.03% of the total value of those eBay purchases. Table 2 indicates the differences of both the number of purchases (z = 2.45, p = .0071) and the value of the purchases (z = 1.56, p = .0594) are statistically lower than the West’s proportion of the nation’s population. However, the difference between these two Western proportions is not statistically significant, indicating that Westerners do not spend a different amount on each purchase than do people from other regions. Further investigation, however, shows a significant difference between prices paid by Westerners (more) and the residents of the Mid-Atlantic, as discussed above and indicated in Table 3. Urban/Rural Table 1 reveals differences in proportions of the U.S. population residing in urban or rural areas and the proportions living in those areas of eBay purchases. Urban areas of the U.S. contain 83% of the population, but accounted for only 49.54% of the total number of eBay purchases, while accounting for only 53.50% of the total value of those eBay purchases. Table 2 indicates the differences of both the number of purchases (z = 24.44, p = .0000) and the value of the purchases (z = 21.55, p = .0000) are statistically lower than the proportion of the U.S. population living in urban areas. Further, the difference between these two urban proportions is also statistically significant, indicating that urbanites spend a different amount on each purchase than do people from rural areas (z = 2.17, p = .0150). To further examine this relationship, Table



3 also shows that t-testing indicates a significant difference between the average prices paid by urbanites (more) and those living in rural areas (t = 9.853, p = .002). Rural areas of the U.S. contain only 17% of the population, but accounted for as much as 50.46% of the total number of eBay purchases, while accounting for 46.50% of the total value of those eBay purchases. Table 2 indicates the differences of both the number of purchases (z = 24.44, p = .0000) and the value of the purchases (z = 10.10, p = .0000) are statistically higher than the proportion of the U.S. population living in rural areas. Further, the difference between these two rural proportions is also statistically significant, indicating that people residing in rural areas spend a different amount on each purchase than do people from urban areas (z = 2.17, p = .0150). To further examine this relationship, Table 3 also shows that t-testing indicates a significant difference between the average prices paid by people from rural areas (less) and urbanites, as discussed in the previous paragraph. Gender Table 1 reveals differences in proportions of the U.S. population who are females or males and the proportions of the two genders making eBay purchases. Males account for 48.85% of the population, but accounted for only 32.54% of the total number of eBay purchases, while accounting for 37.63% of the total value of those eBay purchases. Table 2 indicates the differences between both the number of purchases (z = 8.73, p = .0000) and the value of the purchases (z = 6.16, p = .0000) are statistically lower than the proportion of the U.S. population who are male. Further, the difference between these two male proportions is also statistically significant, indicating that males spend a different amount on each purchase than do females (z = 2.98, p = .0014). To further examine this relationship, Table 3 also shows that t-testing indicates a significant difference between the average prices paid by males (more) than females (t = 11.028, p = .001). Females account for 51.15% of the U.S. population, but accounted for as much as 67.46% of the total number of eBay purchases and 62.37% of the total value of those eBay purchases. Table 2 indicates the differences of both the number of purchases (z = 8.95, p = .0000) and the value of the purchases (z = 6.16, p = .0000) are statistically higher than the proportion of the U.S. population who are female. Further, the difference between these two female proportions is also statistically significant, indicating that females spend a different amount on each purchase than do males (z = 2.98, p = .0014). To further examine this relationship, Table 3 also shows that t-testing indicates a significant difference between the average prices paid by females (less) than males, as discussed in the previous paragraph.

Discussion and Conclusions Several significant findings were discovered in this study. Consumers from different regions of the United States tend to behave differently when it comes to eBay purchasing. There are many important implications for both eBay sellers and for managers of companies offering their products for sale over the Internet. For example, this study clearly shows that people from both the Southwest and the West are willing to pay significantly higher prices for the same types of products. Also, people from New England, the Mid-Atlantic and the West regions are less likely



to make purchases on eBay (and maybe the Internet) than are people from other regions of the country. Also, people from rural areas are more likely to purchase products on eBay than are people living in urban areas, though urbanites are likely to be willing to pay higher prices for products purchases on the Internet. Finally, females are more likely to purchase on eBay, while males are more likely to pay higher prices for similar items. This study does have limitations. The eBay sellers whose information was obtained for this study sold mostly new and used name-brand clothing. Though clothing accounts for as much as 35.3% of consumer online purchases (Swinyard and Smith 2003), these findings may not apply to other types of products being sold on eBay. Additionally, consumer behavior regarding eBay purchasing may vary from Internet purchasing in general. Finally, only U.S. eBay retailers and consumers were examined in this study. As in the United States, eBay and other online auctions are quickly becoming popular in other countries; therefore, the results of similar studies in other countries may vary from the results of this research. There are many areas of future research that might shed further light on the behavior of eBay consumers. The eBay sellers indicated they suspected a difference in buyer activity depending on the weather patterns in certain areas of the country. It would also be useful to examine other consumer demographics, such as income, education, level of crime in their communities and whether they pay over the Internet or by snail mail.



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BUSINESS MODELS FOR ALLEVIATING POVERTY IN TIMES OF WAR: MICROENTREPRENEURSHIP STRATEGIES FOR SURVIVAL

Warner Woodworth, Marriott School, Brigham Young University

In this paper I attempt to draw on my personal action research experience, observations in the field of other nongovernmental organizations (NGOs) which use business models in the midst of war, as well as report on the experience of other authors, analysts and policymakers. This paper illustrates some of the complexities in managing microfinance institutions (MFIs) under combat conditions. What are the tough issues? How do they cope? I attempt to identify some programs that seemed to succeed, as well as others that failed, or did not have much success. We will address a few complex issues and try to assess how MFIs dealt with them. What practical lessons may be gained from trying to empower microentrepreneurs in reducing poverty during and after conflicts?

War and Post-Conflict

In spite of the end of the Cold War between the USSR and the West, armed fighting around the globe has continued, perhaps even escalated, in the past 15 years. In fact, in some countries, internal civil wars have occurred over many decades, factors which breed distrust and resentment even today. Within the Third World, over 50 long-term wars have been fought in recent years. Virtually every country on the African continent has either been directly involved in one conflict or another. If not fighting a war directly, they have suffered the invasion of millions of refugees from areas where armed wars have occurred. A variety of factors are associated with internal and external conflicts: Territorial disputes, ethnicity, culture clashes, religious factors, civil unrest, poverty, lack of access to land, factionalism, terrorism, racism, and separatism. As tragic as wars are in and of themselves, today’s conflicts are even worse for some groups of population more than others: Women more than men, children more than adults. One of the grimmest facets of modern wars is the reality that many youngsters are forced to become combatants. According to one report, over 300,000 children are currently fighting in the many conflicts around the globe including Uganda, Congo, Colombia, and Sri Lanka (Save the Children, 2006). Suffice it to say, war and post-conflict problems exact a heavy toll on human beings and families, as well as regional and national economies.

Microfinance Challenges during War

For NGOs and for-profit MFIs, there are numerous challenges to be faced in conflict settings as organizations seek to invent new business models and strategies for their clients, as well as for their own organizational survival. From time to time the dangers of doing microcredit in such circumstances lead to tragic outcomes. For instance, two of World Relief’s staff were killed in Cambodia in 1996 for a paltry $150 they were carrying (NEXUS, 1996). In other countries, microcredit staff have been robbed or threatened because they were known to have bank loan funds with them as they traveled to group meetings. At times, MFI offices have been burglarized



because thieves knew that money was inside. Of course, common acts of robbery may occur in any country, but under conditions of conflict, instability makes the danger worse. For microcredit practitioners, the consequences of conflict lead to a number of problems: Poor infrastructure; agriculture and trade is hindered; disruption of the financial system; rising crime and/or gangs; high rates of joblessness; low levels of income; the disruption and/or distortion of markets; rise of refugees suffering from high mobility; shut-down schools and educational opportunities; deterioration of cities in terms of buildings, industry, roads, water supply, and electric power. While human conflicts and their aftermath result in deaths, wounded masses, and much tragedy, they may also offer a chance to respond and/or rebuild with a better future. I have been struck by the deep commitment of the poor to be responsible for their microloans, even in the face of death or other factors. Years ago, I was starting an MFI program in West Africa, through our NGO, the Ouelessebougou-Utah Alliance. One of our first borrowers suddenly died only weeks after receiving his initial loan. We went to his compound to offer condolences and inform the family that they did not need to pay off their father’s microloan. It was the least we could do, we reasoned, and it would take pressure off the family during their time of grief. I was shocked when the daughters said they would pay off his loan because it was the honorable thing to do, something their father had always taught them. In another African case I once heard about, several hundred loans were given out to refugees after 15 years of civil war ended. Suddenly the borrowers learned they could safely travel back to their home villages. Instead of departing immediately, however, they stayed until they had earned enough from their microenterprises to pay back the balance still owed in each case. Hundreds of impoverished people were involved in this case, and the MFI officials assumed the worst—that the money would be gone and the staff would be holding an empty bag. But it did not happen. Instead, a hundred percent of the debt was repaid, with interest, before families moved back to their homelands. In general, war grows from competition and scarcity, as well as being rooted in racism, religious differences, and cultural conflicts. While many bemoan the extent of war’s victims, optimists suggest that conflict also offers the opportunity to change people’s behavior. It may even provide a blank slate to start over, creating the possibility that cities may be rebuilt, neighbors may become reconciled, and a fresh start can lead to economic growth and social justice. Such perspectives may be overly optimistic, but if a community or nation is willing to try, they have the chance to take advantage of terrible circumstances and produce something better. On the other hand, war and civil conflicts exact a huge toll on a region, communities, families and individuals. Beyond the dead and wounded in war, the displaced survivors become a huge challenge. For instance, some 70 million individuals have been dislocated in recent years (Holtzman, 1995). If and when they are able to return to their homes and communities, the scenes of such occurrences suggest to the mind the large-scale Diasporas of the past. The ability to rebuild economically through microcredit and other strategies is often complicated by destroyed infrastructure, political in-fighting, the lack of capital, as well as resentment from evils perpetrated and distrust of other parties based on past experience during the periods of conflict.



The section below attempts to illustrate several core issues and how they were dealt with by MFIs. Drawing on personal observations, interviews and existing literature, we examine several cases: Bosnia-Herzegovina in Central Europe and Palestine in the Middle East. Bosnia-Herzegovina Microentrepreneurship The armed conflict among regions of the former Yugoslavia had disastrous consequences for many people, outsiders as well as insiders. Bloodshed, torture, the collapse of political institutions and material infrastructure characterized the late 1980s-early 1990s. Among other difficulties, the country was afflicted by the placement of an estimated four million land mines. Finally, the Dayton Peace Agreement of 1995 ended the fighting and allowed for massive interventions from the outside to rebuild the region and jump-start the fledgling new nation. However, by that time poverty was endemic. Surveys showed that approximately three-fourths of the population could not afford basic family necessities. Some 37 percent of all households were unemployed, a tragic legacy to the war years. Pensioners, disabled people, and children suffered the most because they were the weakest. Over 28 percent of the people were refugees, another critical factor in explaining poverty. With respect to gender, 24 percent of men were unemployed while the rate for women was 42.3 percent (PRSP-I, 2001). A number of microcredit constraints existed: Poor bank credits, no sound business environment, lack of innovation, unskilled managers, high distrust, unreliable transportation systems, and so on. Financial corruption was a huge difficulty. The U.S. General Accounting Office estimated that outside donors gave over $4 billion to facilitate rebuilding efforts between 1996 and 1999. Yet corrupt officials still ran the country and sought access to outside funding. According to The New York Times, almost one billion dollars ended up in the pockets of officials who were eventually charged with genocide and crimes against humanity (Hedges, 1999). A major World Bank study of the Bosnian post-conflict situation found that the region’s populace considered itself “have-nots,” a sharp change from the 1970s and 80s when most viewed themselves to be middle-class (or the “haves”). Industry was blown up or shut down; black market (underground) income was desperately needed by many simply to subsist; uncertainty and insecurity were rampant; hunger and poor health became commonplace, along with psychological concerns and stress. While those at the top of the economic pyramid enjoyed all the fruits of war-profiteering, the masses in the middle declined rapidly. They suffered from housing insecurity, including many who were forced to reside in collective centers or refugee camps. There was very little upward mobility, but instead, mass mobility downward for the majority. People did not trust their new government, outside donors, or other ethnic groups. They seemed to have positive feelings only for family and friends (Djipa, undated). From a population of 4.4 million, the three-year war left a million displaced people within the country, 800,000 who fled to the outside, and more than 200,000 who were killed. So-called ethnic cleansing has resulted in enclaves still today of one group or the other, with very little mixing. Prior to the war, in 1988, inflation had already risen to 340 percent, a terribly high rate. During 1989, it mushroomed to over 2,000 percent, largely due to the instability and ravages of the entire country. All this was occurring during a time of growing tensions in which industrial



production almost disappeared, functioning at only 5-10 percent of pre-war levels. Approximately 60 percent of livestock and 70 percent of agriculture equipment was destroyed. About half of all homes were badly damaged. With such a backdrop, achieving microcredit success might have seemed doubtful. But, in fact, the opposite is true. Beginning shortly after the Dayton Accords, MFI organizations began to set up shop in Bosnia-Herzegovina, focusing largely in urban areas. Officials of the financial sector accepted NGOs that were giving loans, feeling they were not a threat to the emerging banking industry. Government regulators felt no need to control the new MFIs, and they also made the registration process for NGOs quick and simple. The small, new country of 4 million people has seen the creation of over 40 MFIs since 1996 including Mikrofin, Mi-Bosporo, Sunrise, and World Vision (Vemic, 2005). These MFIs today are some of the largest in Eastern Europe, are highly profitable and enjoy a healthy competitive environment. The MFI, Prizma, is one of the greatest successes of post-conflict microcredit anywhere. Prizma: This MFI obtained seed capital from the U.S. and the U.N. and started operations in the city of Bihac in 1997. Focused on training and financial services for low-income ethnic minorities and refugees, most of whom are women, the NGO has grown rapidly in pursuing long-term social impacts and sustainability. By 2001 Prizma had become financially self-sufficient and it was selected as the first MFI in Eastern Europe to receive an external rating of a “G 4 ++ institution.” In spite of horrendous obstacles facing the Newly Independent States (NIS) as they moved from federal bureaucratic control toward democracy, Prizma has enjoyed success. Even in the case of Bosnia moving through phases of stability to civil war and then to reconstruction, Prizma has had a great impact on household well-being. Currently it has spread to five major branch offices and over 35 small satellite offices. Its staff of more than 90 individuals works in over forty low-income communities. It has a loan portfolio of $13.3 million spread among 18,606 microentrepreneurs, 97 percent of whom are poor women (Prizma, 2006). Palestinian Microentrepreneurship The population in the Palestinian Territories totals 4.1 million people, two-thirds in the West Bank and a third in the Gaza Strip. During 2002 some 41.2 percent of the working age population was unemployed. Lack of peace, stability and security are all factors leading to economic difficulties. MFIs in the region have attempted to build the informal economy and improve the quality of life of poor families. Below we examine some of the challenges faced by MFIs in Palestine. The Arab Center for Agricultural Development: ACAD was established as an NGO in 1993 and recognized by the Palestinian Authority in 2001. The focus is on channeling capital to rural areas where the poverty rate is high. Headquartered in Ramallah, it has four field branch offices as it attempts to target families affected by the political difficulties—joblessness, lack of food insecurity, and inability to travel to other regions because of the “police state” created by Israeli troops. ACAD’s products consist of 1) Invested loans to pay for greenhouse construction,



irrigation systems, and farm equipment; 2) Loans for working capital for business start-ups (seed, fertilizer, salaries, etc.). The NGO also offers training in small business skills, agricultural topics, and capacity-building, such as how to defend clients’ rights. Palestine for Credit and Development: The second case is known by its Arabic acronym, FATEN, an NGO in the Middle East (FATEN, 2006). It grew out of the NGO Save the Children in 1995, becoming an independent MFI in 1999. Approximately 50 percent of its clients are in Gaza with the other half in the West Bank. Although its loan portfolio suffered as the intifada began, its staff assessed its problems and analyzed potential solutions, with the result being that its portfolio tripled within 3 years. The problems were severe: The Israeli wall being built; growing incursions of occupying troops; daily bombings and attacks on FATEN staff and client homes; complete closure of many areas; deaths of FATEN family members; restricted movements that often consist of 25-30 checkpoints; inability to transport raw materials or finished products—all combine to make economic transactions difficult, if not impossible. Yet, in spite of such circumstances, FATEN has 4,908 clients, having given a total of $41 million in loans to 71,235 clients (99 percent female), at an average of $577. It has 15 offices in the Palestinian Territories operated by a staff of 67 individuals. The MFI uses a sophisticated MIS system to track all necessary information. Impressively, FATEN has achieved 117 percent operational sustainability. Caritas Jerusalem: The third case is that of a faith-based program in Palestine that is but a small MFI of worldwide Caritas, a Catholic federation of 162 organizations operating in over 200 nations (Caritas, 2005). The program only gives individual loans and the microentrepreneur must have two qualified guarantors in case of default. In contrast to most other MFIs, Caritas’ 500 or so yearly borrowers are largely male, while women receive a modest ten percent of income-generating funds. Some 80 percent of loans are for new start-ups. United Nations Relief and Works Agency:

One of the ways several Palestinian MFIs cope with all this is to create a write-off subsidy fund for loans that are far behind, or that may never be repaid due to one’s microenterprise being

UNRWA was started after the first Gulf War in 1991. Its focus is in urban centers where there is a density of Palestinian refugees. Most of the microentrepreneurs UNRWA helps are impoverished people trying to eke out an existence through economic trade, services, or small manufacturing in the informal economy (UNRWA, 2005). All four of these NGOs we reviewed have suffered greatly since the 2001 intifada. Caritas, for instance, reported that the short ten kilometer trip its staff traveled daily between Bethlehem and Jerusalem used to only take 15 minutes. But with the repression of Israeli soldiers, it began to take several hours due to checkpoints. That could mean a decline of MFI staff productivity eight times what the travel costs used to be. Caritas was required to develop security measures for its staff members who faced threats of robbery, injury and murder as regional anger grew. A high conflict area where such weapons as guns, grenades and other explosives are readily available meant the need to be continuously aware of rumors, plans and violence, as well as the need to often change travel patterns to lessen the likelihood of kidnappings and ransom demands.



destroyed, or the borrower becoming severely wounded or dying. Israeli security measures were increased, economic repression was intentional and widespread, and tragic results occurred. Microenterprises went bankrupt, and even survivors had to reduce capacity. For the MFIs, the demand for microloans plunged because people were in fear of trying to start microenterprises with such turbulence. The economy broke completely down in 2002 when the occupying forces set up their “Defensive Shield” of military control, road closures and curfews. The impact on UNRWA was devastating. From 9,000 loans in the 2001 portfolio of $7 million, it dropped to merely a few thousand the next year. Loan repayments were in arrears for all these MFIs, many clients simply unable to make any payments at all. A number of the large loans to SMEs were not repaid as firms went bankrupt and employees were laid off because they could not even get to the workplace, to say nothing of the disappearance or deaths of customers. UNRWA reacted by revamping its marketing, emphasizing the provisions of loans to growing numbers of street vendors and other microenterprises in the informal sector. Consumer loans were cut to just a few hundred annually. In spite of portfolio disintegration, the Israeli military shield, and a crisis economy, UNRWA’s new strategy enabled it to recover and, in fact, grow its outreach to $8.7 million in loans to some 12,000 clients. The lesson from all this? In times of tense conflict, MFIs must change their strategies to cope with geopolitical economic shifts. War-torn conditions are difficult, but they may also become the prime time for galvanizing resources in the midst of strife. During years of intifada, when there is political repression and prolonged violence, the informal economy can not only survive, but even grow. Palestinian NGOs must increasingly struggle in environments of uncertainty and hostility. Although they seek to calm borrowers’ fears and express hope that peace will come to the region, they know much of the future is unknown. Unfortunately, in fact, the future will be an era of a new, young generation that is angry, having grown up in a high conflict culture of violence and dangerous weapons on both sides of the situation. Today’s global conflicts suggest several types of factors that impede the doing of successful microcredit. Physical factors: Damaged buildings, interruption of such services as electricity, water and fuel, closed schools, disrupted sanitation services, health problems; Emotional factors: Confusion that arises from unpredictability, fear due to violence, uncertainty because of media reports and rumors, inability to make future plans, family geographical disbursement, social isolation, injuries or death of a loved one, cynicism, distrust, etc.; Financial factors: Job loss, property damage or complete destruction, loss of shelter, economic decline, layoffs, unwillingness to invest even if one has resources, dependency on outside aid money that may lead to expectations of welfare.



With several or all of the above factors brought into play, how may microcredit programs continue, begin, or re-start? The prevailing mindset may be that the time is not “right,” that conditions need to improve, that there is too much uncertainty for launching microcredit services. But the opposite may actually be true. Perhaps it is out of struggle and conflict that MFIs can, indeed, continue. The Palestinian cases of UNRWA and FATEN suggest that the two NGOs not only survived, but thrived. I believe part of it was due to the sheer will to not only reverse their losses, but overcome them with creative new strategies for coping with the intifada. It required a confronting of the myth that things will only get worse; a shift to a new business paradigm, and the result was the generation of innovative change.

Conflict Implications for MFIs

The stresses on microfinance during war can hamper potential clients in many ways, as seen in part by the preceding cases. They include emotional trauma, breakdown of the family, decline of assets, social stigma, divorce and/or abandonment by one’s spouse, if not death, lack of self-esteem (especially in women), dysfunctional markets, geographic isolation because of having to flee to a refugee camp, disruption of social networks essential for transacting business, legal constraints, distrust and fear, and loss of educational skills. These factors may all combine to exacerbate human suffering for various groups: the victims of war who survive, returnees, ex-combatants, refugees and their host governments, NGO leaders, and so on. Virtually no one is immune to the terrible fruits of war and violence. If we were to summarize the best practices for doing microcredit in a war-torn nation like Palestine, it seems that an MFI doing business there must be careful about risks—be able to walk the delicate line between viable borrowers who can succeed versus perpetrators of genocide (or victims) who may not be able to do well. The latter may need other types of development aid before they can operate with microcredit. After all, an MFI that tries to help everyone after a crisis may end up going under itself unless it operates efficiently and manages its risks adequately. Another factor is the need to consider the greater costs of MFI work in post-conflict situations—items such as increased security, steeper travel costs and higher compensation for staff. It is important to partner with other NGOs and perhaps government agencies that can give the new MFI insight and the benefits of experience. Not reinventing the wheel may save time and money, as well as help to avoid pitfalls after the conflict has subsided so that potential borrowers are not confused, assuming that microcredit is just one more handout. This distinction should be made explicitly. I well-recall a high-ranking military leader in Asia, when I began discussing microcredit, telling me he was going to give a new TV to each family whose house had been destroyed. That was his definition of microcredit relief. When I inquired about repayments on such financing of colored televisions, he replied that recipients were too poor so there would be no payback required. In my mind this was either a humanitarian relief project, or a scheme to secure votes in the country’s next elections. But it certainly did not fit the paradigm of microcredit as a reality-based finance program for building self-reliance. This implies another critical aspect of doing microcredit during or after conflicts. The experience of embedding microcredit within a larger program of humanitarian relief after war



may confuse it with grants. In other words, if an NGO is handing out food and water, providing shelter, or doing other types of aid work, and then starts to create an MFI, loans may be considered to simply be another form of aid.

Post-War Lessons In reviewing the cases of the above countries, along with others not mentioned, the following MFI best practices are suggested. Security: The safety of MFI staff, offices, and microcredit clients is essential. Steps must be taken to ensure that dangers are minimal. If tensions from the era of conflict are still problematic, microcredit should not be started, or re-started. Suggestions that may be helpful, assuming a relatively safe environment, are: 1) MFI offices are located in secure areas; 2) Money not be left in offices overnight, but deposited in regular banks; 3) Staff travels in pairs so they are less vulnerable than being alone; 4) Personnel travel routes should be varied so criminals cannot predict a pattern; 5) Staff should not wear jewelry or other items of value; 6) Village bank meetings ought to be during daytime hours only, and held in public places; 7) MFI officials should not wear uniforms or other symbols that imply they are bankers or have money. Transition: Providing microcredit during or after conflict needs to be viewed as a long term investment, not a quick fix. Modest start-ups are preferred in order to learn what works best. Pilot projects may be the ideal way to start because they are viewed as experiments. If it does not succeed in one instance, another model or another location can be tried without losing credibility. Various cases suggest that the MFI should start slowly and grow gradually, learning as the organization develops and the client base builds. Making adjustments or tweaking the program bit by bit allows MFI staff to improve as they proceed. Organizational Learning: Many MFIs in conflict settings need to consider bringing in ex-patriots to help get the systems functioning. To start with, more human resources are usually needed. Having native staff with expats can lead to benefits for both parties. The expats learn from natives how the local culture may receive and enjoy microcredit and what will or will not work because of cultural values and habits. Conversely, local staffers are able to quickly learn microcredit best practices from the global experience of the expats. In so doing, the MFI can move toward becoming a professional organization and increase the likelihood of success. Client Targets: After the end of a war, some MFIs attempt to immediately offer credit to refugees who may be returning, or soldiers who seek to restart their lives. Clearly such groups have suffered. But the reality is that, in the case of demobilized soldiers, they still usually have weapons, may be more aggressive than the average person, may harbor feelings of hate or resentment, and so forth. The end of conflict usually does not mean the disappearance of violence, threats and lawlessness. Generally speaking these people tend to lack education and/or job skills. Hence, the NGO needs to be cautious in offering credit because MFIs cannot take a chance on non-payments, late payments, complete defaults, or other risks (Doyle, 1998).



Microcredit advocates need to see the contradiction between doing everything to build peace (helping returning soldiers) versus economic development. In the case of refugees and disabled persons, the risks are not so high. A number of NGOs offer microcredit to such groups with quite successful results. Usually such individuals are highly motivated to rebuild their lives. The most common difficulty occurs when disputes arise over ownership of property, such as a house or one’s land, that someone else took control of while the owners were forced to flee. Cost Structures: Many MFIs have found that doing microcredit in war or post-conflict settings is more expensive than in more peaceful environments. This is simply due to the fact that it requires more staff, greater matters of security, and a longer time frame to become sustainable. It is worth mentioning that because of conflicts, large aid donors who are anxious to secure the peace may give even more monies to the MFI than typical amounts in the past. So doing microcredit in such settings may yield greater availability of capital than usual, thereby compensating for the higher cost structure. Pre-Conditions for Microentrepreneurship: Brief No. 4 of the Microenterprise Best Practices group (MBP) claims that several essentials have to exist for post-conflict MFIs to succeed. First, there needs to be “an absence of chaos” such that business transactions can occur and profits are generated, while MFI staff and clients feel relatively safe. In other words, there should be adequate security that derives from political stability. MBP suggests that it may be unrealistic to expect 100 percent nonexistence of conflict, however. In a country where there was calm in the capital but skirmishes in the jungle, one NGO starting up in Liberia simply focused its efforts in the capital city until conflicts in other areas subsided (MBP, 2001, p. 2). Client Mindsets: As noted earlier, often after war ceases, the rush of large donor aid can overwhelm impoverished families. If MFIs soon enter the fray with microlending programs, a client mentality may arise in which loans are interpreted as yet another humanitarian donation. To counter such assumptions, the NGO must labor strenuously to differentiate its financial services from the handout mindset. It takes considerable time and energy to do so. However, charging market rate interest instead of subsidized lower rates also serves to reinforce the difference. MFI Image: Because of devastating circumstances and the upward spike in poverty following war, various suggestions may apply. One would be the desirability of having scaled back facilities. Rather than looking like a rich traditional bank, the emphasis should be on simplicity and modesty. The same holds for MFI vehicles. There is nothing so contradictory for me as when I see U.N. and World Bank officials pull up to scenes of starvation and desperation in a huge, luxurious Mercedes, or step from their air-conditioned Range Rover to meet impoverished refugees. Credibility: As civil conflict subsides and outside donors begin to revive or start up microcredit services, MFIs need to enter the system as a neutral third party. If they or their donor base is seen to support one side of the conflict, or the other, they will encounter resistance, and perhaps even attack from local entities. For instance, in Iraq after the U.S. forces toppled Hussein, CHF



(formerly known as the Cooperative Housing Foundation), a Maryland-based NGO, discovered quickly the need to disconnect itself from the U.S. military. The staff spent much of its first few months in Bagdad meeting with top Iraqi opinion-makers: Muslim clerics, business leaders, bankers, and appointed government officials. In each case they disavowed all connections with the so-called coalition forces. Had they not done so, they would never have succeeded in providing microcredit for the poor of that country (CHF, 2006). Timeframe: MFIs laboring in conflict regions need to understand from the outset that their efforts will generally take years in order to succeed. Microcredit in the best of circumstances often requires 24-36 months to begin having a measurable impact. Conflict settings also mean larger amounts of money, careful planning for contingencies, worried clients, and occasional dangers for the staff. If the intent is to move quickly and scale up easily, MFI leaders will generally be disappointed. There is no quick fix. Communication and MIS: In instances in which conflict continues, some NGOs have found it necessary to add hi tech capabilities so that if necessary, their staff can work from home. For example, Asala, the Palestinian MFI, now has all its data online. If car bombs explode or roads are barricaded, its staff can go online at home or a nearby cyber café to access its office files and continue to be productive (Asala, 2006). Efficiencies:

Conclusions

Microcredit becomes a real adventure when trying to operate during war. I am amazed at the heroic commitment of MFI staff that bravely face real dangers every day of their lives. Organizations like CARE, Mercy Corps and World Relief have set explicit policies that they are committed to continue their work in spite of conflict and insecurity. They see microcredit as a critical element in national reconstruction. Catholic Relief Services (CRS) has gone so far as to declare that they are willing to lose everything, if need be, to labor for the empowerment of war’s victims (Doyle, 1998). Conclusions regarding microcredit in war and post-conflict environments suggest several key points. First, microcredit is viable in many such settings. When designed correctly, it has an important role to play in helping to enable war’s victims to rebuild their lives. But it is certainly not a panacea. Other interventions are usually required such as restoring the formal economy and investing in infrastructure such as roads, electricity and clean water. There may be a need for vocational training, as well as other types of skill development.

Because of the higher costs of operating an MFI after conflict, organizational practices usually require streamlining. The challenge often is how to do more with less, while at the same time ensuring excellence. Processes should be simplified and/or streamlined to keep overhead in check. Acceleration or scaling up to achieve large numbers of borrowers is also helpful because the more clients, the more quickly the MFI may reach operational sustainability.

Another concluding observation is that good MFI practices are even more essential in times of war than times of peace. This means the MFI should probably charge market rate interests, build a highly-skilled staff with multiple organizational efficiencies, work toward becoming



sustainable, and operate superb portfolio quality. It will not succeed if it is confused with post-war humanitarian aid. Portfolio risks need to be assessed and strategically planned for. Client ambiguity needs to be eliminated. Delinquent clients should experience sanctions they were warned about, or the program may quickly unravel. Ground rules must be “imprinted” on all potential clients in order to ensure complete and on-time repayment rates, and the successful growth of the MFI. Two other factors are critical for success. One is that there must clearly be a demand for microcredit. Even after war, economic rules must operate. Second, eventually legal frameworks must be established in the formal sector so as to begin to operate mainstream banks on the one hand, and government regulation and policy on the other. Both are necessary in order to protect clients and their MFIs. If the above analysis and suggestions are implemented, post-conflict reconstruction for the poor may be successfully achieved. But it should not be confused with social and political objectives per se. Rather, microcredit must stand on its own legs as a coherent and independent financial strategy. Clearly more research is needed on the complexities of managing MFIs in times of war. How to best prepare beforehand, ways of coping during such problems, and strategies for rising above difficult conditions—all cry out for better data. Because of the heavy responsibilities practitioners have in operating their NGOs, others, such as universities, governments, and think tanks need to fund studies and channel scholars to address these matters. The predicted trends over the coming years seem to portend more disasters that will do greater damage and generate rising costs. So, too with human disputes. In spite of the euphoria surrounding the end of the cold war, there appear to be increasing tensions among nations, and within them. The microcredit movement will benefit greatly from well-conceived field research that is relevant to these challenges and helps us understand how to better prepare for future difficulties. Insightful policies and the formulation and implementation of successful MFI strategies must be informed by good data. We must come to understand the best practices for confronting tough realities. Our task is to build the organizational capabilities of our microcredit NGOs so as to produce economic self-reliance among poor families and develop long-term, sustainable communities around the globe. But microcredit holds the promise of becoming a countervailing force that pushes back the constant specter of poverty. While MFIs alone cannot fully stop the flow of crises in today’s world, they hold much promise in lessening their impacts. Indeed, much has already been achieved by microcredit practitioners to diminish the devastation, and to accelerate the processes of recovery. As we learn more and more about best practices and the use of innovative strategies and tools, microcredit will more fully empower impoverished families around the world, even in troubling circumstances.



References Asala. At www.asala_pal.org Accessed June 23, 2006. Caritas. At www.caritas.org See also www.saa.unito.it/medial/cases.htm Accessed April 22, 2006. CHF. Microfinance in Iraq. At www.chfinternational.org/section/success_stories Accessed May 2, 2006. Conroy, John D. “Timor-Leste: Independent Review of the Credit Component of the Community Empowerment Project.” Social Development Papers, Washington, D.C.: Conflict Prevention and Reconstruction (CPR) Unit, World Bank, No. 11, March 2004. De Vletter, Fion. “Microfinance in Mozambique: Are Donors Promoting Regional Feminization of Poverty?” ILO/SAMAT, Discussion Paper No. 16, Geneva: ILO, 2001. Djipa, Dino, and others. “Consultations with the Poor: National Synthesis Report/Bosnia and Herzegovina.” Washington, D.C.: World Bank, undated manuscript. Doyle, Karen. “Microfinance in the Wake of Conflict: Challenges and Opportunities.” Microcredit Best Practices. Bethesda, MD: Development Alternatives, Inc., 1998. FATEN. At www.faten.org/performance.html Accessed July 5, 2006. Hedges, Chris. “Leaders in Bosnia Are Said to Steal Up to $1 Billion.” The New York Times, August 17, 1999. Holtzman, Steven. “Post-Conflict Reconstruction.” Washington, D.C.: World Bank, Social Policy and Resettlement Division, 1995. MBP. “Environmental Preconditions for Successful Post-Conflict Microfinance. Microenterprise Best Practices, Bethesda, MD: Development Dimensions, Inc., 2001. NEXUS. Washington, D.C.: SEEP Network. No. 35, December 1996. Prizma. At www.prizma.ba/external/english/main.htm Accessed April 29, 2006. PRSP-1. “Bosnia and Herzegovina: Interim Poverty Reduction Strategy Paper.” Sarajevo: Ministry for Foreign Trade and Economic Relations, 2001. Roullet, Lue. Microfinance in Palestine. Cambridge, MA: Harvard University, Kennedy School of Government, August 2005. Save the Children. “Emergencies and Protection.”

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A STUDY OF THE DEVELOPMENT OF SOCIAL ENTREPRENEURSHIP AMONG NONPROFIT VENTURES IN HOUSTON

Martin S. Bressler, Houston Baptist University

Abstract

Entrepreneurship typically refers to independent commercial ventures that are designed to benefit oneself, whereas social entrepreneurship exists to benefit society while foregoing personal profit. Various forms of social entrepreneurship are emerging, though a clear definition of social entrepreneurship does not exist. In some cases, social entrepreneurship takes the form of incubators that assist in the development of small business enterprises for the local population. Thomas (2004) and others report of the role social entrepreneurship plays in community development. Although social entrepreneurship may mean different things to different people, Gentile (2002) considers social entrepreneurship as for-profit enterprises in the pursuit of a social mission. Despite social entrepreneurship being a relatively new concept without an exact definition, Mair and Marti (2006) offer a working definition: social entrepreneurship as a “process involving the innovative use and combination of resources to pursue opportunities to catalyze social change and/or address social needs” (p.37). For the purpose of this paper, the author defines social entrepreneurship as nonprofit groups which engage in commercial activities. Not long ago, it would be difficult to find a college or university that offered a course in social entrepreneurship. Over the years however, a number of colleges and universities have developed courses and even entire programs dedicated to social entrepreneurship. Most notably, Harvard University’s Initiative on Social Enterprise and the Social Enterprise program at Columbia University have emerged in part, as a response to the nonprofit sector need for business and management skills. The trend in such activity is on the rise, as nonprofits cannot depend on sufficient philanthropic funding to sustain and accomplish their mission. Government attempts to meet social needs falls short of societal expectations and often proves inefficient, even when effective (Dees, 2001). In addition to providing additional funding, such commercial enterprises may provide added services to members and employment for those whom they serve. An example of this is Good Works, Inc. of Athens, Ohio, which provides shelter for the homeless. The shelter also operates a bed and breakfast which provides revenues and a training opportunity for shelter residents to transition to the hospitality industry workforce. Other revenue-generating ventures include recreational facilities rentals and a gift store called Good Gifts which imports merchandise from developing countries through 10,000 Villages, a Mennonite ministry. Another example of nonprofit commercial ventures can be found at First Baptist Church in Houston, Texas, which operates a café, a bookstore, and a fitness center. The church has developed a Christian community for the members while increasing revenues and providing employment opportunities.



In one of the poorest sections of Los Angeles, Break Away Technologies was established to improve education and the quality of life among poor, inner-city children. Break Away provides computer access and helps children develop computer skills. Revenue generating activities range from computer instruction, web design, and facility rental. Together, these activities account for approximately $192,000 per year, or nearly 40% of Break Away’s total income (Buttenheim, 1998). The Veteran’s Administration in Los Angeles is another example of social entrepreneurship. Veterans are assisted in their rehabilitation and training through working on a 15-acre farm where they produce flowers, fruit, and vegetables for sale. In 1997, the Vets Garden generated revenues in excess of $128,000, enough for the program to be self-sustainable (Buttenheim, 1998). This research project examines the on-going commercial activity of the nonprofit sector to determine the answers to several research questions. First, how prevalent is entrepreneurship among nonprofit organizations? Second, what is the nature and scope of their commercial activities? Finally, what percentage of revenues is derived from those commercial activities? In order to determine the answers to these questions, the researcher developed a survey questionnaire sent to more than 100 nonprofits in the greater Houston area, including churches and social service agencies. Results from this research may provide educators and funding providers with information necessary to assist in developing management skills within nonprofit organizations.



References Buttenheim, A. (1998, November). Social Enterprise Meets Venture Philanthropy: A Powerful Combination. Los Angeles Business Journal, 20 (46): 16-22. Dees, J. (2001, May). The Meaning of Social Entrepreneurship retrieved August 24, 2006 from http://www.fuqua.duke.edu/centers/case/documents/dees_SE.pdf. Gentile, M. (2002, Fall). Social Impact and Social Enterprise: Two Sides of the Same Coin of a Totally Different Currency? Retrieved August 24, 2006 from http://www.aspeninstitute.org/AspenInstitute/files/CCLIBRARYFILES?FILENAME?0000000223/SocImpactSocE(c20051521). Mair, J. and Marti, I. (2006). Social entrepreneurship research: A source of explanation, prediction, and delight. Journal of World Business. (Vol. 41, pp. 36-44). Thomas, C. (2004, February). The Role of Social Entrepreneurship in Community Development. Master’s thesis submitted to the faculty of The University of Witwatersrand, Johannesburg, South Afric

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A COMPARISON OF SOCIAL WITH TRADITIONAL ENTREPRENEURSHIP

Andrew Svilokos (student), U.S. Army & Cameron University Shawn M. Carraher, Cameron University

Entrepreneurs of the past have greatly impacted societies, economies, and industries into what they are today. The mission of the entrepreneur has been to create wealth and business growth. Accomplishments of these missions result in additional benefits to members of society, whether intended by the entrepreneur or not. For instance, customers benefit because they are able to fill a need through the purchase of a product or service. Second, venture capitalists, lenders, and shareholders benefit by attaining returns on investments or interest through the entrepreneur’s business. Third, employees benefit by earning income through the business’s growth and prosperity. As a result, employees then become customers that have purchasing power to buy goods and services that entrepreneurs produce. Over time, many entrepreneurs began to focus on a new, specific mission towards improving society. This new mission helped to develop and define social entrepreneurship. Although social entrepreneurship is virtually a new concept with no clear and concise definition, Johanna Mair and Ignasi Marti (2006) propose a broad, working definition: Social entrepreneurship is a “process involving the innovative use and combination of resources to pursue opportunities to catalyze social change and/or address social needs” (p.37). In today’s society, the role of social entrepreneurship is vastly increasing through both, nonprofit and for-profit businesses. Society’s desire for philanthropy has created many new opportunities for entrepreneurs. Ethics and a focus toward the common good are key concepts that are vital in today’s business world. Success of entrepreneurs such as Andrew Carnegie, Henry Ford, and Bill Gates created both personal wealth and public wealth. Although these were not social entrepreneurs their innovations greatly enhanced society. Their products aided in the progress and advancement of an improved society. In this paper, we will examine what differentiates social entrepreneurs from other types of entrepreneurs. Entrepreneurship enables one to become both wealthy while improving society at the same time. Therefore, what motivates one to become a social entrepreneur instead of an entrepreneur for a profit seeking venture? Can social entrepreneurship invigorate society in ways that conventional entrepreneurship cannot? The intention of this paper is to answer these questions and to invoke a better understanding of the differences between an entrepreneur and a social entrepreneur. As we enter into a new hypercompetitive global economy, there becomes a greater need to focus on society. The fast pace of the business world has left behind much of society with unyielding hurdles and relentless struggles. Furthermore, the gap has widened between those that have wealth and those that do not. The intention of social entrepreneurship is to aid in solving such problems with a direct approach. Social entrepreneurs pursue goals and objectives that relate to solving specific problems within the social economy. Although they possess similar characteristics to conventional entrepreneurs, they are more concerned with satisfying social needs rather than commercial needs (Roberts & Woods, 2005). Similar to conventional entrepreneurs, social entrepreneurs must be innovative, creative, and motivated to pursue their venture. Characteristics between the two types of entrepreneurs are very similar; however, differences fall in the purpose and motivational aspects. While the conventional entrepreneur is



concerned with making money and growing their business, the social entrepreneur is concerned with satisfying a social need and helping society to be better than it was yesterday. Social entrepreneurs believe there is more to life than business and making money. Caring for people and providing them opportunities are critical components towards the progression of a better world. Social entrepreneurs face many of the same challenges that conventional entrepreneurs face. They must develop a business plan and execute it successfully. In addition, they must attain the necessary resources to start their venture. If they are unable to do this, then failure will be imminent. “Essential to the founding and establishing of any social venture are the individuals and groups with the vision, drive, and perseverance to provide answers to social problems and needs, whether educational, welfare, environmental or health related” (Sharir & Lerner, 2006, p.7). These individuals or groups must spend a considerable amount of time and energy towards defining the vision, mission, and strategies of the social venture. They must also outline specific goals and objectives for the social venture. Social entrepreneurs must pursue proper strategies in order to provide answers to specific societal problems or needs. They must formulate the strategies in a clear and effective manner. In addition, they must gather sufficient resources to start and operate the new venture. Society must be able to easily comprehend the entrepreneur’s offerings so that it may realize the potential benefits. Once the social entrepreneur entertains each of the preceding factors, then initial entry into the market will be the next critical step. The appropriate timing of initial entry is a key element in attaining the forecasted results and goals. Social entrepreneurship has been labeled caring capitalism because the achievement of relevant social goals relies on competitiveness in the marketplace (Hibbert, Hogg, & Quinn, 2005). Similar to conventional entrepreneurship, social entrepreneurs must first identify their competition and then develop strategies for competing effectively. Furthermore, they must realize that competition is not limited to nonprofit or social-oriented competition. For instance, the YMCA is a nonprofit organization that provides many different programs to its members. One such program is the opportunity for members to improve their physical fitness through the use of exercise equipment. The YMCA must compete with other establishments such as Gold’s Gym and Powerhouse Gym. The appropriate marketing mix is critical for the YMCA, as it is for many other social organizations. Social entrepreneurs must consider product, price, promotion, and place when developing their marketing strategy. These factors will enable the social entrepreneur to differentiate its offering from that of its competitors. Currently, the opportunities for social entrepreneurs are increasing relative to increases in societal needs. Many entrepreneurs are acknowledging these opportunity increases by establishing themselves in the social arena. Their dreams of benefiting society can become reality through the establishment of not-for-profit organizations (NFPs). As more and more entrepreneurs look to enter into the social arena, however, barriers to entry such as competition become more prevalent. “Today NFPs are operating in a highly competitive environment that is characterized by increasing needs in their target communities, and a generally tighter funding environment with growing competition for donors and grants” (Weerawardena & Mort, 2005, p.21). Society has a greater social need than ever before; however, society will select the organization that best suites their needs. Commercial providers, NFPs, and other social entrepreneurs realize that there is a large opportunity for them to accommodate society’s needs



and thus, are entering into the market. Their entrance leads to increasing competition and the unwillingness of consumers to accept products and/or services of social entrepreneurs that are substandard. The market demands that NFPs are society-oriented similar to the way for-profit businesses are consumer-oriented. Similarly, donors and providers of grants are tightening their funding allocations to the organizations that they feel are best suited to satisfy society’s needs. In the past, many NFPs and non-governmental development organizations (NGDOs) depended on public resources provided through these donors and grantors to help support their mission. The tightening and diminishing allocations from these providers created a shift in financial dependence for many social entrepreneurs. Currently, “non-profit making organizations are being challenged to reduce their expectations of tax-based funding for social ends and to generate more self-finance for their operations” (Fowler, 2000, p.645). Although this self-reliance takes away one benefit of entering into a NGDO, it provides social entrepreneurs with a greater motivation and interest in their organization’s future success. Social service nonprofit organizations are no longer operating in the comfortable environment that they once knew. Financing, competition, and globalization are all factors that pressure these organizations to change their strategies and adapt to a new, more challenging environment. Similarly, trends are changing from a sector once dominated by these traditional social service nonprofit organizations to one that requires a more entrepreneurial approach. Barriers are high, but opportunities are higher for those that are creative, innovative, and resourceful. Social entrepreneurs must respond to the changing environment that affects their organization’s sector by designing new ways to create value for their organization (Lasprogata & Cotton, 2001). If they are able to create value, then their organization will be better equipped to meet the growing needs of society. Social entrepreneurs can create value in many unique ways. Some social entrepreneurs create value by involving those that are less fortunate in the operations of the organization. For instance, one British publisher sells its magazines to the public through homeless people. This enables homeless people to earn an income without receiving a handout. Other social entrepreneurs are searching new untapped markets where they can contribute to a cause by using information and communication technologies (ICT) or by breaking through domestic barriers. Social entrepreneurs are becoming more and more like traditional entrepreneurs; however, their difference lies in mission. Social entrepreneurs are concerned with creating and maintaining social value while traditional entrepreneurs are concerned with maximizing profits and growth. Furthermore, social entrepreneurs do not establish purely philanthropic organizations nor do they establish purely commercial ones (Herman & Rendina, 2001). They establish organizations that are uniquely in the middle of this spectrum. In fact, with the limitations placed on philanthropic organizations, they tend to lean closer to commercial establishments at times. Nevertheless, social entrepreneurs remain focused on improving society and helping those folks that are unable to assist themselves. Whether they establish profit or nonprofit businesses, social entrepreneurs are willing to forgo profits and growth for a higher social value. As stated earlier, the intent of social entrepreneurship is to enhance society; however, Cook, Dodge, and Mitchell argue that the Social Entrepreneurship movement (SEM) is based on two major false premises and also has some alarming implications with regards to unemployment and welfare (2003). They believe that proposals established through the SEM do not provide



solutions to unemployment or welfare but instead threaten potential solutions posed by other entities. Their argument is well organized; however, they seem to interpret social entrepreneurship as being based on the premise of curing mass unemployment and solving all welfare problems. Unfortunately, social entrepreneurship is unable to solve all of society’s problems rather its design is to aid in reducing such problems. Additionally, social entrepreneurs do not necessarily intend to replace government programs but may intend to distinguish themselves or supplement other programs. Social entrepreneurship establishes a motive for enhancing society through the innovativeness and resourcefulness of individuals or groups. These individuals or groups create new and improved ways for tackling society’s problems similar to the way conventional entrepreneurs create new and innovative products that enrich, advance, and promote an improved society. The success of a social entrepreneur depends on properly addressing the social need their organization encompasses. Social entrepreneurs are increasingly adopting the strategies, concepts, and practices of the business world to better develop their organization (Dees & Anderson, 2003). Social entrepreneurs realize that their operations must run efficiently if they are to meet their goals. Reasonable price and quality are key elements that consumers expect just as they would in the business world. In this day and age, social organizations may not be able to be run as they were in the past. The distinguishing features between a nonprofit organization and a for-profit organization are becoming more blurred than they were in the past. These organizations are crossing lines into each one’s sector so that performance and execution improve. Business entrepreneurs recognize that their venture’s success depends on them becoming more socially vigilant while social entrepreneurs understand they must be more innovative and aggressive in attracting resources and warding off competitors. Changes in societal needs, competition, government, supply, and finance have compelled social entrepreneurs to improve in all operational areas. In recent years, the government has decreased its role in responding to social problems. Budget cuts, conflict, and social complexity have led to this diminished role and have created opportunities for other entities to enter into the sector. The particularly difficult situations where goals are in conflict and means are in doubt call for entrepreneurs to bring about helpful change (deLeon, 1996). Fortunately, many entrepreneurs are responding to these situations and focusing their business efforts towards improving them. Evidence of social entrepreneurship exists in healthcare, welfare, and environmental relief. Social entrepreneurs deeply involve themselves within these areas along with many other areas. They may work solely or with government agencies on solving problems in each area. For instance, slow reaction by the government to Hurricane Katrina created different problems for many people. Social entrepreneurs worked with the government and solely in assisting many of the people affected by Hurricane Katrina. Today, social entrepreneurs are still working on ways to solve problems created by the devastation of this hurricane.



Entrepreneurs can exist in government; however, such public entrepreneurs differ from social entrepreneurs in the following manners as depicted by Sandra Waddock and James Post (1991): “1) the fact that social entrepreneurs are citizens, not public servants, 2) their focus on

raising public awareness of an issue of general public concern, and 3) their hope that increased public attention will result in new solutions eventually emerging, frequently from those same organizations already charged with dealing with the issue” (p.394).

Social entrepreneurs are responsible for many governmental changes in public policy with respect to social issues but they are not responsible for the creation of social entities within government. They may, however, work hand in hand with government on solving many of society’s problems. Social entrepreneurs focus on a specific societal issue and attempt to improve the issue through the most efficient means possible. Government cannot provide, on its own, all of the services necessary to satisfy society’s needs. The recent government policy changes and cutbacks make this even more prevalent today. The demands for social entrepreneurs to create initiatives that satisfy societal needs are greater than ever before. Social entrepreneurs are also necessary to create new needs that society has not yet realized. The ability of philanthropists or social entrepreneurs to create and develop value that will gratify tomorrow’s needs is a feature that further distinguishes these individuals from the government and others. Their vision on how to improve society’s of the future enable them to lead the way into a new social marketplace. Advancing technologies such as the Internet enable social entrepreneurs to communicate these new breakthroughs to people world-wide. Furthermore, globalization enables social entrepreneurs to market and deliver their breakthroughs world-wide. “Due both to globalization and the increasing ease of access with the Internet, social entrepreneurship is gaining wider notoriety as a means to assist individuals and societies adjusting to new circumstances, as well as to promote economic development” (Christie & Honig, 2005, p.1). Social entrepreneurship is not restricted to solving domestic problems rather it is greatly expanding to solve world-wide problems. The heightened role of entrepreneurship, business, and technology has advanced much of society; however, it has also widened the wealth gap between those that have and those that do not. Social entrepreneurs recognize this disparity and attempt to do their part in narrowing this gap. Many developing and third world countries are lagging farther and farther behind. Hunger, housing, and healthcare are issues that are not being resolved by governments or local social organizations. These are issues that need more attention and resolution. The business world is already aligning itself within a global marketplace. The Internet and less global barriers enable social entrepreneurs to do the same. For many years, government has had a large part in assisting other nations. The time has come for more social entrepreneurs to look at globalizing their organizations. In order for social entrepreneurs to achieve their goals, they must be able to attain a viable amount of financial resources. “A lack of financial resources or capital can constrain social entrepreneurship and restrict the ability of social entrepreneurs to create social capital” (Thompson, Alvy, & Lees, 2000, p.330). Similar to traditional entrepreneurs, social entrepreneurs possess the astonishing propensity for raising financial capital. Many social



entrepreneurs find that they must initially invest much of their own funds or their family’s funds into the new enterprise. If grantors, lenders, and other venture capitalists recognize the importance and potential social value of the enterprise, than they may be inclined to invest during the start-up, growth, and/or other phases of organizational development. Once the social entrepreneur gathers sufficient financial resources the organization can implement its business plan and begin generating social capital. As with entrepreneurship, educational facilities play a critical role in developing social entrepreneurs. Even though it takes certain inherent qualities to become a successful entrepreneur, education can cultivate one to be better prepared for the challenges that lie ahead. As Winfield (2005) explains: “The social sciences, as part of a liberal education, can play an important role in

supporting nascent social entrepreneurs by providing a way of seeing the world that goes beyond individual experience and a way of explaining human behavior in the context of the social, political, economic, and cultural systems of a time and place” (p.15).

The highly advanced and complex society that we are quickly becoming deems it necessary that entrepreneurs are well-educated with respect to the above cited notations. Entrepreneurs are not born with knowledge concerning changes in laws and policies. Education provides social entrepreneurs with such knowledge and with a better understanding for what their role may be and how they will get there. Through lectures, cases, reports, and exams potential social entrepreneurs can gain real world knowledge and training with respect to operating a social enterprise. Students are able to gain all this without taking the risk that new entrepreneurs must take every day. Students will be able to learn what potential risks are and how to overcome them before they actually occur. As a subject, social entrepreneurship is growing; however, similar to entrepreneurship in its infancy, social entrepreneurship is still largely phenomenon-driven (Mair and Marti, 2006).

The influence of education and other matters concerning social entrepreneurship are increasing and becoming more widespread because society warrants that business acknowledges its significance. “The ecological urgencies of our times and the public outcry in response have made it impossible to separate the best interest of business from the best interest of society” (Sfeir-Younis, 2002, p.43). Business can no longer concern itself with only revenues and profits. Business must also consider the community, environment, and employees in its decision-making process. All businesses, whether for for-profit or not-for-profit, must understand that they have a large responsibility to a great number of people. Business decisions may affect investors, government, consumers, employees, and environmentalists. Business’s must recognize the needs of each group and do its best to concur with those needs. One primary goal of business has been to maximize shareholder’s wealth; however, should business maximize shareholder’s wealth at the expense of others in society? The answer is no! Perhaps, the goal of business should be to maximize benefits on society.

Many new business entrepreneurships struggle and eventually fail within the first three to five years of operation. Unfortunately, social ventures also bear this reputation because of inefficient management and inadequate planning. Social entrepreneurs must train and prepare management for their upcoming responsibilities. In addition, social entrepreneurs must thoroughly plan the



entire framework of their venture through a business plan. They must actively prepare and plan for their venture to enter new markets, pursue new customers, and combine resources in creative ways (Zietlow, 2002). A good business plan will outline all elements of the venture so that those involved can develop a clear understanding of the organization and its purpose. Social entrepreneurs will parallel traditional entrepreneurs in their development of a business plan; however, reviewers of this plan may differ because of the venture’s social nature.

Certain characteristics, challenges, and the desire to benefit society are motivational factors that may lead one to become a social entrepreneur. Although social entrepreneurs possess characteristics similar to other entrepreneurs, they desire to satisfy what they believe is a higher need. Their motivation is not monetary but instead it is social. Their desire to fill this need requires them to be more multidimensional than other people. Consequently, social entrepreneurship is multidimensional in nature because it must simultaneously factor in the overlapping commonality of different issues that exists within a shared space (Mort, Weerawardena, & Carnegie, 2002). In other words, social entrepreneurs must actively balance different issues that are all relative to the organization and its mission in order to enhance society’s well-being. Social entrepreneurs must identify social opportunities and create ways to pursue those opportunities. They must be able to compete effectively and make decisions that will benefit the organization and society. Decisions that they make regarding a new innovation can also appear to be multidimensional. For instance, a social entrepreneur may identify a new need and have an idea on how to satisfy the need. Multiple issues may have to be resolved, but may or may not be resolved simultaneously. Such decisions to consider include target market, resource availability, resource requirements, product/service delivery, and time constraints.

Throughout time, the nonprofit sector has contributed greatly towards a strong civil society. Through their activities, nonprofit organizations have had a leading role in assisting society with welfare programs, housing projects, humanitarian aid, and disaster relief. Management, donors, and contributors helped provide guidance and structure for these organizations. Recently, changes in government, competition, and other environmental factors have caused nonprofits to look beyond that guidance and become more entrepreneurial in nature. Consequently, many nonprofits are changing their operational approach and becoming more adaptable. These nonprofits believe that they can no longer adhere to their strict and structured past role if they are to be successful in their mission. Marketization and commercialization are trends that many are considering in an effort to fulfill society’s changing needs. Eikenberry and Kluver believe the following:

“For the nonprofit sector, marketization trends such as commercial revenue generation, contract competition, the influence of new and emerging donors, and social entrepreneurship compromise the nonprofit sector’s civil society roles as value guardians, service providers and advocates, and builders of social capital” such changes will negatively affect society” (p. 138).

Their dismal viewpoint of this new, emerging nonprofit sector fails to recognize that such trends may lead to greater innovations and better solutions to societal problems. Commercial revenue generation will provide additional resources to nonprofit organizations which could fund more projects and better services. Ultimately, the development of more projects and the improvement of services will have a positive impact on society. An increase in contract competition and other



competition in the nonprofit sector implies that nonprofit organizations will need to become better at what they do. Otherwise, organizations that are able to serve society better will replace those that cannot. Increases in competition will inevitably cause nonprofits to meet more of society’s needs. Similarly, nonprofits attempting to find a niche will attend to needs and problems previously unanswered. The influence of new and emerging donors will provide additional resources to current nonprofits and induce new ones to enter the sector. Finally, social entrepreneurship would not compromise the nonprofit sector’s civil society role but instead will complement that role. Social entrepreneurship encourages creativeness, innovativeness, resourcefulness, and change with respect to satisfying society’s needs. As previously discussed, Eikenberry and Cluver believe that organizations should distinguish themselves with a mission focused towards either economics or sociology. Many other people understand that the world is rapidly changing and organizations must be flexible if they are to remain successful in the future. Social entrepreneurs understand this and recognize an increasing societal need for their visions. They have a social mission and distinguish themselves from those individuals who participate in community or social groups by initiating some form of new activity or venture to achieve social objectives towards that mission (Harding, 2004). Social entrepreneurs attempt to pursue their mission through economical and social means. They do not restrict themselves to what others define them as. They do not see their social cause limited by resources or by the label others place on them. If resources are not enough through grants or donations, then social entrepreneurs will search elsewhere for resources. Although their business may be not-for-profit, social entrepreneurs will attempt to generate revenues if they are unable to attain a sufficient amount of funds elsewhere. Social entrepreneurs will overcome obstacles and break through barriers to create new value.

Although nonprofit organizations may partake in commercial activities to aid in the accomplishment of their social mission, they must do so with caution and acknowledge potential side effects. “A social service nonprofit organization that over-commercializes risks undermining its legitimacy” (Lasprogata & Cotton, 2003, p.100). Social entrepreneurs should understand that commercializing may cause their organization to lose its nonprofit classification and tax exempt status. Furthermore, social entrepreneurs must balance commercialization appropriately so that they do not lose sight of the mission. They must not forget that the social mission not profits was their principal purpose for initiating the venture. Support they receive towards the venture is one key element to success. Social entrepreneurs must encourage their supporters by maintaining focus and showing benefits of their operation. A second key element of success is resource allocation. “Both the emergence of for-profits delivering social goods and services and the increase of nonprofits generating earned income can lead to better resource allocation and more effective use of scarce philanthropic funds” (Dees and Anderson, 2003, p.18-19).

Although many social entrepreneurs pursue their visions through nonprofit organizations, organizational structure does not constrain them. “The boundaries are far more blurred, particularly as commercial businesses become more socially responsible and develop triple bottom line reporting measures” (Roberts and Woods, 2005, p. 50). Social entrepreneurs focus on a social mission and research the best ways to realize it. Social entrepreneurs may exist in commercial businesses as individuals that primarily focus on a social mission but achieve profits



simultaneously. They understand that profits will enable them to continue pursuing their social mission towards the improvement of society. Everyday, more and more commercial businesses are becoming socially conscious. For instance, we can acknowledge this in numerous automobile manufactures that produce fuel efficient vehicles. Although we may not categorize these automobile manufacturers as social entrepreneurs we can concede that they are socially conscious. As society demands that commercial businesses become more environmentally friendly, many businesses develop strategies towards satisfying that demand. Socially cognizant individuals and/or businesses do not constitute them as being social entrepreneurs; however, the evolution of social entrepreneurs can develop through those that become more socially cognizant. For instance, as commercial businesses become socially mindful, employees begin to understand that there is a new type of market progressing. This new market has unequivocal social needs that present a great opportunity for creative, proactive, and unrestrained employees. Employees that possess such qualities and are looking for a career change will surely find these opportunities through social entrepreneurship. Once they decide to become social entrepreneurs, they must translate the opportunities into reality through planning and execution.

Regardless of organizational structure, the main focus of social entrepreneurs should be on benefiting society. An emphasis does not need to be placed on legal forms of organization, such as nonprofit, for-profit, or governmental, rather emphasis should be placed on communities of practice that include different organizational forms serving a common purpose (Dees and Anderson, 2003). Social entrepreneurs should converge with others to further enhance the offering of their ventures. Decisions on how their venture can benefit society to the greatest extent are inquiries that social entrepreneurs must fully explore. Research and communication with other businesses serving a similar purpose may give the social entrepreneur greater insight into this issue. In addition, social entrepreneurs should try to build relationships with others that have knowledge and experience with the social issue at hand. Social entrepreneurs have a greater opportunity than ever before because of globalization. Not only are there more social problems but there are also more opportunities to rectify or reduce such problems. Advancements in information and communication technologies enable social entrepreneurs to reach societies that were previously unreachable. Social entrepreneurs in one nation can communicate ideas with social entrepreneurs in other countries to evoke potential solutions. The ability to transfer information and resources, throughout the world, at a greater pace further emphasizes the scope of opportunities. As a result, endeavors towards these opportunities have become more entrepreneurial in nature. In fact, Drayton (2005) states that “the social half of the world—health, environment, human rights, rural development, literally half of the world’s operations—in a mere two and a half decades has become as entrepreneurial and competitive as business” (p. 8). While true to some extent, the global social market appears to still be in high demand for socially-focused businesses and social entrepreneurs. Evidence of this materializes each day through news broadcasters such as CNN, Fox News, and BBC World. These broadcasters continuously show us people that are not able to find food or shelter; people with disease that are not receiving healthcare; and people with no relief after a natural disaster. Neither entrepreneurial activity nor competition has extended its reach with respect to these folks.



The future of social entrepreneurship will be challenging yet rewarding. Through the delivery of satellite radio, satellite television, and the Internet, world-wide social problems will increasingly become our problems at home. New social problems will arise as a result of war, adverse disruptions in the environment, and policy changes in government. War and environmental disruptions shall create disasters that will require major relief. Social entrepreneurs will be in great demand to offer such relief and to uplift societies affected by these disasters. As the government spends more to finance combat operations and other non-social projects, society will see fewer contributions made towards social issues. Many other countries are also adopting a liberal ideology of less government involvement with respect to the economy and society (Sharir & Lerner, 2006). These factors open up opportunities for individuals to fulfill dreams of living a meaningful existence and accomplishing something significant. Consequently, social entrepreneurs will continue to emerge with the motivation to change the world for the better. Social entrepreneurship invigorates society in ways that conventional entrepreneurship cannot by examining specific societal problems and addressing those problems through creative, innovative, and social-specified activities. While conventional entrepreneurship may aid with society’s problems during its quest for profits, social entrepreneurship facilitates social enterprise as its chief purpose for existence. Unlike business, public, and spiritual entrepreneurs, social entrepreneurs will stop at nothing in their pursuit of a world with fewer problems. Social entrepreneurs will focus on those falling behind from the fast pace set by the business world and the rapid advances in technology. Social entrepreneurs will develop business plans and secure resources so that they can execute their venture successfully. Competition from new and existing social organizations will instill ingenuity in these entrepreneurs. Furthermore, competition combined with a reduction in government contribution will further create both challenges and opportunities for social entrepreneurs of both nonprofit and profit-seeking ventures.

Acknowledgement of social entrepreneurship as a contribution but not a solution to society’s problems is critical for understanding its role in the social sciences. The intention of social entrepreneurship is not to directly solve problems but to spur other efforts at problem solving by increasing awareness of the problem and beginning to make linkages among organizations that did not previously exist (Waddock and Post, 1991). Eventually, solutions to society’s problems may transpire through changes that evolve through social entrepreneurs; however, one must understand that social entrepreneurship is just now beginning to define itself. Full comprehension will emerge as social entrepreneurs further distinguish themselves and successfully contribute to society’s well-being. Furthermore, contributions will not be limited to domestic borders. Reductions in global barriers and advances in information and communication technology (ICT) enable social entrepreneurs to contribute their efforts toward a global cause. New educational programs with a social emphasis will provide many of these social entrepreneurs with the foundation they need to be successful.



References

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Peredo, A. and McLean, M. (2006). Social Entrepreneurship: A critical review of the concept. Journal of World Business. (Vol. 41, pp. 56-65). Roberts, D. and Woods, C. (2005). Changing the world on a shoestring: The concept of social entrepreneurship. University of Auckland Business Review. Sfeir-Younis, A. (2002). The spiritual entrepreneur. Reflections. (3rd ed., Vol. 3, pp. 43-45). Sharir, M. and Lerner, M. (2006). Gauging the success of social ventures initiated by individual social entrepreneurs. Journal of World Business. (Vol. 41, pp. 6-20). Thompson, J., Alvy, G., & Lees, A. (2000). Social entrepreneurship – a new look at the people and the potential. Management Decision. (5th ed., Vol. 38, pp. 328-338). Waddock, S. and Post, J. (1991). Social Entrepreneurs and Catalytic Change. Public Administration Review. (5th ed., Vol. 51, pp.393-401). Werawardena, J. and Gillian, S. (2006). Investigating social entrepreneurship: A multidimensional model. Journal of World Business. (Vol. 41, pp. 21-35). Winfield, I. (2003). Fostering social entrepreneurship through liberal learning in the social sciences. Peer Review. (pp. 15-17). Zietlow, J. (2002). Releasing a new wave of social entrepreneurship. Nonprofit Management & Leadership. (1st ed., Vol. 13, pp. 85-90).



ENTREPRENEURSHIP TEACHING IN ACTION - THE EFFECTS OF EARLY EMPOWERMENT: A NINE-COUNTRY COMPARISON OF

THE SAME ENTREPRENEURSHIP ACTION LEARNING PROGRAM IN CHINA, KOREA, MALAYSIA, NEW ZEALAND, UNITED STATES, SINGAPORE, GERMANY,

INDIA AND AUSTRALIA

Jens Mueller, Waikato Management School, Hamilton, New Zealand Vicki West, Texas State University, San Marcos

Norela Nuruddin, Universiti Teknologi Mara, Kuala Lumpur, Malaysia Ren Min, Shanghai Jia Tong University, Shanghai, China

John Thornton, University of South Australia, Adelaide, Australia

Abstract

We report on an initiative between global firms and universities worldwide to empower university students to teach ethical and sustainable business principles in their communities. These community-based entrepreneurship educational projects span the globe, and we document significant effectiveness, both for the community recipients and students. New skills are developed by both groups and are reported through outcome interviews with faculty members and corporate mentors. We conclude that the Students in Free Enterprise (SIFE) empowerment program can be equally effective in highly developed industrialized nations such as Germany, the United States, South Korea and Australia, as well as in developing countries such as China, Malaysia and India. We further find that such an action-learning program in entrepreneurship can effectively connect business leaders to their future managers, after earlier reports with a smaller sample size indicate the favorable reaction of business leaders to the SIFE project outcomes (Mueller, Anderson, Patkar, 2005).

Background

There is evidence of a strong correlation between educational level achieved and high income over a lifetime (De Faoite et al, 2003), and we ground our efforts in entrepreneurship education in the assumption that taught skills will translate into greater job opportunities. However, not all education is immediately transferable to useable practical skills, and literature has described education institutions and business organizations as two isolated learning arenas (Leitch & Harrison, 1999). It is of interest to investigate a program where the emphasis is on self-generated practical managerial skills of students, through a program of empowering these students to perform challenging community education projects. A desire for the shift from classroom-based teaching to facility action learning has been widely expressed for entrepreneurship education (Shepherd and Douglas, 1996; Formica, 2002; Gorman et al, 1997), and we are curious if such action-learning approaches can develop suitable skill in a discipline where many elements are creative (Jack and Anderson, 1999).



Action learning has been underpinning an increasing amount of training practice throughout the world for nearly seven decades since its genesis in the work of Reg Revans (Zuber-Skerritt, 2002). These environments have ranged from private companies (Marquardt, 2004) to public sector organisations (Blackler and Kennedy, 2004) and even to development programs in Third World nations (Mayoux, 2005). Furthermore, in recent decades, it has been introduced either as a complementary and/or alternative means of educational instruction in some schools (Wilson, 1992) and tertiary institutions throughout the world (Brunetti et al, 2003). As a concept, the action-learning approach provides opportunities for participants to meaningfully reflect on academic subjects (Meyer and Jones, 1993). Starting with simple tasks, possibly in class, the effort then develops into long-term projects (Bonwell and Sutherland, 1996), and our review has considered projects which were performed over a period from a few weeks in duration, to more than 18 months. The complexity of these projects is quite high, ranging from the introduction of new harvesting methods to older farmers, to the creation of self-sustaining businesses to impoverished women. . For this closer working relationship, action learning seems to an effective connector. The number of multinational corporations who use action learning for managerial, professional, team and workforce development is diverse, ranging across such well known names as Samsung, Dow, GE, Deutsche Bank, Boeing, Sodexho, Novartis and Nokia (Marquardt, 2004). This would create a level of acceptance by business leaders for young managers who have received part of their education via action learning. Attractive for these corporate recruiters is without a doubt the assumption of responsibility by students during the realistic conclusion of tasks by transforming and constructing knowledge (McKeachie, 2002; Cuthbert, 2001). Action learning is not without its critics, and we speculate that the divide between business expectations of practically relevant education outcomes will clash more intensely in the future, as government-driven funding mechanisms place greater pressure on business schools to engage in traditional academic publishing efforts. Consistent with Pedler (1983) and Mumford (1995), several authors find that the existing definitions either over emphasize, or miss, one element of action learning due to its flexibility and widespread usage. This raises the issue of how action learning can be introduced to business school curriculum as an effective complement to traditional teaching methods. As an entrepreneurship education technique, action learning is different from, and more comprehensive than, any kinds of management education approaches. It advocates a focus on the learners rather than on the teachers (Mumford, 1984) and challenges the passive approach to learning characterized in the traditional teaching/learning techniques (Leitch and Harrison, 1999). The action learning approach, on the other hand, has its critics. Some challenges include those to the psychological and political processes intrinsic to action learning, and that it also promotes practice at the expense of theory, thereby, promoting concerns about its philosophical base (Raelin, 1998). Smith (1988) identified and analyzed a weakness of action learning for lacking a balance between knowledge and practice – which has been an ongoing debate in the field of management development (Silver, 1991). Given this focus on action learning and its obvious interest to entrepreneurship educators who often focus on practice teaching, we investigate how this Students In Free Enterprise effort can effectively connect



business leaders and managers, after earlier reports with a much smaller sample size indicate positive reports from business leaders (Mueller et al, 2005). Many entrepreneurial characteristics, such as self-confidence, persistence and high energy levels, cannot easily be acquired in the classroom (Miller, 1987), and these projects can resemble real-life managerial challenges, similar to those students would be expected to perform once they have left their university and have begun to work as junior-level managers. A recent study (Stutts, West 2005) indicated students felt strongly that competitive project-based experiences significantly helped them develop job-related skills. As part of this action learning challenge, participants need to create an effective internal governance system, develop fundraising techniques to remain fiscally solvent, create a sales approach for their projects and think about succession planning within the transient world of student life. We speculate that this comprehensive set of real-life managerial challenges is one of the reasons why CEO-level senior executives of some of the largest firms worldwide (HBSC, Unilever, PepsiCo, Wal-Mart, etc.) support this effort. It is a short step from performing under real-life conditions. Our interest was not merely in assessing such a uniformly administered program in different country for effectiveness, but we are keenly aware of the cultural difference among these countries. While Germany, the United States, Australia and New Zealand have been ‘free market’ countries for all of their existence, China and Singapore business leaders operate with a strong recognition of political dogma overshadowing economic activity. Although values in China are changing, and resilience and resourcefulness will continue to elevate them towards success (Liao and Sohmen, 2001), not all commonly measured entrepreneurship values easily transfer from West to East. Some entrepreneurial attributes, a positive response to change, initiative and profit orientation, appear to be in conflict with Chinese values (Kirby and Ying, 1995) and more recent work found that a sharp contrast existed between Chinese entrepreneurs and Chinese managers regarding individualism, risk and openness to change. In some areas, particularly risk tolerance, Chinese entrepreneurs scored higher than their American counterparts (Holt, 2000). Equally important, entrepreneurship is on the rise in South Korea, with one out of 11 people working for relatively young companies in 2000, firms that were established less than 3 1/2 years ago (Park et al, 2001). The SIFE approach actively encourages gender inclusion, and thus we connect this work to the growing trend of women in business in Asia, i.e. in South Korea, where more women are participating in business, with about 33.9% of all business establishments in South Korea were owned or headed by women in 2000 (Korea National Statistical Office, 2001). In an attestation to the close interest executives have in the outcomes of such an effort, HSBC’s Chief Executive Officer, Paul Lawrence, in Singapore hopes to “help university students in Singapore to expand their skills and outlook, and to prepare themselves for the opportunities presented by businesses in the global economy” (Lawrence, 2005) and Wal-Mart’s President in Korea, Santiago Roces, expects the students “make positive progress to build a better world of business” (Roces, 2005). At the end of each year of student performance, SIFE teams compete in front of senior executives for the right to represent their country during a global competition, undoubtedly adding an incentive to students with these global events being held in places like Toronto, Barcelona, Paris, etc. KPMG’s Director of Global Markets in China says, "I am amazed by the enthusiasm and quality of the young people who participate in SIFE. Their



projects are typically innovative and bring value to the communities and environments in which they operate. The business exposure they gain through SIFE certainly positions the students well for their future careers" (Thomson, 2006). The interaction between the executives and the student participants creates an innovative forum for leaders to evaluate prospective new staff members, and for students to better understand the needs of the firms. Anecdotal evidence suggests that several of these participating students are hired into supporting firms, bypassing the traditional recruitment pathways.

Methodology

We have asked nearly 1,000 participants of the Students in Free Enterprise program in nine countries to complete a web-based survey (www.sifeaction.com/survey), and we have assured ourselves that web access was available to all of those students in their respective countries. The survey was in English, since the SIFE presentations are also operated in English. The response rate varied country-by-country. While it was significant in Korea, Singapore and China (with more than 60% of all SIFE students completing the survey), the participation rate dropped for Australia (18%) and New Zealand (30%) and was low in the US, where we sampled the responses mainly from one large university, and in Germany, where the effort had just started. The total survey population numbers 927. In addition, we have also interviewed more than 30 senior executives of multi-national organizations in New Zealand, Australia, South Korea, Singapore, United States, Germany and China to investigate how effective a program is, through which those firms create practical entrepreneurship experiences for students, and then recruit those program participants as young managers into their organizations. We have confirmed these student reports by collecting data from faculty advisors in several countries, with a similar on-line survey instrument and then applied the PETE (Practical Entrepreneurship Teaching Engagement) model (Mueller/Thornton et al, 2005) to validate the approach of this program and to reconcile it with the requirements of the market place. The PETE model describes ingredients of an effective interactive managerial learning program and seeks to explain that the presence of several factors can improve the effectiveness of practically relevant entrepreneurship education.

Study Results

The students come from a broad cross-section of education programs, with a heavy emphasis on business management, given the entrepreneurial/business focus (Graph 1). It is part of the criteria of this program for students to represent different societal groups so that they can bring in their respective understandings of the community needs in their backgrounds. This presumably makes it easier for the students to connect with the community members when they approach women to assist them with business education. It is hard for students to have credibility when they approach much older community members, especially in cultures where young age is a detriment, and tell them they know better ways of doing things. It speaks for the salesmanship

http://www.sifeaction.com/survey�



and cultural/adaptive abilities of these students to get beyond a polite introduction and to then be able to interact with these women as educators.

GRAPH 1

Graph 1: Who joins in this program? Students join this program for different reasons, with some similarities throughout these diverse cultures. While students in China, Singapore, Germany and South Korea were interested in the travel opportunities offered through this activity, ‘curiosity’, ‘having fun’, ‘making friends’ and ‘meeting employers’ were ranked highly throughout the sample (Graph 2). Of greater significance is that the traditional academic connections of a university-based activity, ‘getting academic credit’ and ‘being part of a course’ were very uniformly ranked as poor motivators for students. We speculate that students attach value to the fact that this program is not part of the school offering, and that they actively look for an engagement which reaches beyond the boundaries of conventional academic teaching. Conversely, this threatens our traditional beliefs that learning opportunities offered within the confines of a university setting are appreciated.



Graph 2: Why did you join this program?

In reviewing the expectations of students, we find that the majority of all students, are looking to learn ‘new skills’ and to ‘meet executives’ (Graph 3). To a lesser degree they indicate an interest in ‘making new friends’ and ‘getting a job’, although that intent is likely also reported in the response of wishing to ‘meet executives’. Respondees in the US, where this program has been operational for more than 25 years, focus on job opportunities which are offered during large job fairs attached to SIFE competition events. Thousands of students pour into the national US competition event where more than 100 firms have recruitment booths, and large numbers of students are hired on the spot by brand-name companies, such as Wal-Mart, Walgreens, HSBC, AIG, etc. "When you come to a SIFE event, there is a belief that this is the future generation that really does have the potential to change the world, and to be a part of that is very extraordinary.” says Denise Morrison, President of Campbell USA (Morrison, 2005), and we have interviewed several dozen executives who attribute significant skills to these students. We have not yet reviewed enough long-term data to form an opinion on whether program participation results in tangible job search advantages, and we suggest those areas as valuable additional investigations in the future. Chinese and Korean students, culturally more focused on creating large networks of friends and family, value the opportunity to enlarge their circle of friends, consistent with the ‘guanxi’



concept of contributing to and then becoming a beneficiary of, strong and long-lasting relationships among local friends in family and commerce.

Graph 3: How important was this program for you?

The interest of these students to engage in these extracurricular projects is not just a passing fad, but ranks highly in terms of importance for them. The majority of students, consistently across these different cultures, report they consider participation either ‘quite’ or ‘very’ important. Consistent with that importance is the sacrifice of giving up mainly leisure time (Graph 4) or, in Germany and Malaysia, both leisure and academic time.



Graph 4: What time did you give up to participate?

How much time did these participants invest? To the chagrin of educators who can often hardly motivate students to the minimum level of class participation, these students invested an average of 9.6 hours per week in this effort (Graph 5). Especially in cultures where students are more-than-fulltime engaged in their studies and fight for every decimal of their grade point average (China, Korea, Singapore), this time commitment appears extraordinary. Especially in India, Germany and Korea the time commitments were significant, with a large number of students investing more than 20 hours per week.



Graph 5: How much time per week did you invest?

With this significant investment in time comes the question of what the students got out of the experience. What pay-off drives them to divert such a large portion of their busy study time and their scarce leisure time to participate in a community entrepreneurship teaching program? Students report effective results through outcomes for their ‘clients’ in the communities (Graph 6). While students in Germany and US focused on outcomes that creates monetary wealth for their clients, students in India mainly built self-confidence in their community members, and all groups reported they helped create additional skills and effectively networked clients in the community. We note that these new skills generated, whether they are specific to a project or general networking and business abilities, are likely to remain with these community clients for much longer than the students’ involvement, thus creating a sustainable effort that extends beyond the transiency of the students.

Graph 6: What effects did your work have for others?



Hoping for a ringing endorsement that this kind of activity would be perceived as a good addition to the teaching activities at the universities, we asked to what extent this action learning work assisted the teaching efforts (Graph 7). The results were consistent with the earlier findings that this kind of work is clearly considered an extra-curricular activity. The minority of students found this action learning activity contributed ‘a lot’ to the teaching, and we come to the conclusion that there clearly is appreciation for this kind of work among students, especially since it is generally operated outside the class room and seemingly adds complementary skills.

Graph 7: Did this project work assist with the teaching? Nearly 80% of all participants ranked this activity as ‘quite important’ or ‘very important’ to them (Graph 4), which is consistent with the number of hours invested. This likely rivals the ranking they would give traditional university assignments and supports the notion that such an effort can mobilize students not only to perform the quantity of work required but to also commit to quality output. With a peculiar exception in China and Malaysia, students across the three continents report of ‘largely met’ or ‘exceeded’ expectations, which appears to be a good result given the many hours the students have invested in their work (Graph 8). The lone outliers of China and Malaysia, where more than 50% and 60% respectively of the students indicated their expectations were ‘only’ “somewhat met”. Follow-up interviews with those students clarified their response. These achievement-focused students were frustrated that their team did not win their SIFE national competition, and thus they missed out on the (all expenses paid) travel to the world cup



competition event in Toronto. We know from contact with the students in all of these countries that nearly all of this year’s participants have re-enrolled to participate next year again, and we take this as a confirmation of the reported high level of satisfaction.

Graph 8: To what extent did this activity meet your expectations? Are these results based on overly enthusiastic students who are swayed by the lure of free travel, or is there substance to these extraordinary claims of achievement and satisfaction? We asked the faculty advisors in four countries (selected purely on the basis of quantity of replies) to comment on the skills the students developed through participation in this program. Highly ranked responses were team building and team management skills, as well as presentation skills at a professional ‘real-life’ level (Graph 9).

Graph 9: What skills did the students learn (Faculty opinion)



Reason dictates that the integration of such a demanding program into the standard university curriculum, both in time and quality of effort would not be without its problems. Teaching staff are perennially busy, administrators fear any abrupt changes in syllabi might affect accreditation outcomes and student satisfactions, and students are a notoriously transient and fickle lot when it comes to the development of long-running, sustainable programs. To that extent, this action learning program meets common definitions, and we see it consistent with the Practical Entrepreneurship Teaching Engagement (PETE) model (Mueller/Thornton, 2005), developed to guide school faculty to the creation of effective action learning environments. This entrepreneurship teaching model attempts to isolate factors which can contribute to high student engagement and outcome levels by creating a sense of: Belonging by creating a committed and motivated sub-group of students with a special group membership in an organization; Challenging the students to practical work outside the classrooms and requiring significant personal commitment to achieve acceptable outcomes; Including a real-life competition in front of senior corporate executives of world-class corporations; Connecting students to the corporate environment before they leave university; Creating a signal effect among other universities, academic mentors and students (and, as they indicated in the responses, also among their friends) Producing a sustainable community benefit which educates the performing students as well. The involvement of faculty in this action learning program is one of innovation from both an organizational and educational perspective. At the heart of the program is a team of multinational CEOs and Presidents who can expose participants to the “real world” and offer practical assistance (including financial support) and advice to the ongoing assignment issues of SIFE. The participating executives from companies such as Unilever, HSBC, Philip Morris, Wal-Mart, Metro, KPMG, Bayer, Asahi Shimbun, etc. are universally supportive of this effort. These senior executives comment positively on the quality they have seen when the students present their materials. Two of these comments are shown below, and are suitably representative: “KPMG is proud to have been a founding supporter of SIFE in China. With the expansion to more than 30 teams this year, we are excited about the many new Chinese students who have participated in SIFE. The ability to develop, deliver, measure and manage projects is essential for successful business leaders, and I am delighted to see the growth of SIFE in China introducing more and more future business leaders to the skills required to be successful in both local and global organizations.” (Kennedy, 2004)



“Wal-Mart is a fast-growing company and committed to sustainable global business and people development. Wherever we are, we see SIFE students participating in important community work. They educate our communities about business opportunities, and we congratulate them for their efforts. We also welcome your joining the team with passional interests and grow with us.” (Hatfield, 2005). The Human Resource Director Asia for Cadbury Schweppes, Lesley Staples (Staples, 2005), reports that the company identified at least two students from the Australia SIFE teams who they would otherwise likely have not been in contact with. Those students were hired, performed above-average, and one was sent recently on fast-track development program in Singapore, where he excelled.

Graph 10: PETE Model

Conclusion

We have investigated an action-learning based entrepreneurship program in nine countries on three continents, which attempts to give students the opportunity to apply their academic learning in a practical environment. These students have grown up with different cultural norms governing their rules of interaction and with different economic systems favouring/disfavouring free market enterprise. It is therefore remarkable for these participants to uniformly and consistently report outcomes which propel their learning ahead of those who do not engage in action learning events like these. The outcomes, in this study focused on women entrepreneurs, appeared rich in content and diversity and of a lasting nature for the participants in the communities. These students work in teams for which they establish self-governance, must create and ‘sell’ their own design of projects, and then perform those projects. At the end of each program year, student teams from each country compete before senior executives and the winning team travels to a world event.



Executives appear attracted to this program and support this work through their personal attendance at competition events, as mentors to students and with corporate financial contributions. Future research could focus on a longitudinal investigation into the lasting career benefits of action learning education at universities. An international survey of business executives involved in SIFE and not involved in SIFE could serve as a tool for evaluating the practical effectiveness of students’ skill-sets when entering the corporate world.

Appendix

Case Review 1

The native population in Guizhou province in China are the Miao

people, living mainly in Qiandongnan State. They live relatively

isolated on average incomes of less than $150/year, with women

representing 75% of the casual laborers. Their communication is

hindered by a unique dialect, and 10 out of the 12 cities in the state

are declared poverty areas. Miao women wear elaborate traditional

costumes and hand-made silver jewelry. Every year, many foreigners

visit this region. The students from Tsinghua University in Beijing

traveled to the region, sought out a group of Miao people and

explained market economics. They then educated them on creating a

‘branded’ line of jewelry to sell in their own roadside stalls and rather

than immediately using all profits for improvement of their living

conditions, the villagers set some funds aside for investment into their

sales operation.



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ALWAYS BE POSITIVE: AN APPROPRIATE MANAGEMENT STRATEGY?

C. W. Von Bergen, Southeastern Oklahoma State University Kitty Campbell, Southeastern Oklahoma State University

Lawrence S. Silver, Southeastern Oklahoma State University

Abstract

Many people, including professionals, believe in the power of being positive. Such a broad endorsement of this aphorism is challenged in this paper. It is suggested that certain misbehavior of employees should not be met with positive consequences and that punishment might be acceptable if it generates behavior of long-term utility to the individual and the organization. We emphasize the necessity of managers or supervisors using both positive and aversive control mechanisms to foster behavior in the long-term interest of the individual and the workgroup and offer a number of suggestions for managers using aversive control.

“Always be positive is the worst advice you could ever give or receive.” --Daniels (2001, p. 44).

Traditional college graduates entering the supervisory ranks for the first time have been overwhelmingly influenced with the importance of being positive. Positivity is presented in many guises, all being labeled by some combination of words with “positive,” such as: “attitude,” “thinking,” “self talk,” “demeanor,” and others. Often supervisors and staff personnel voice approval of the unquestioned benefits of unbridled positivity as a management technique claiming it is simply “common sense.” With such an emphasis on being positive, many of these individuals may feel unfamiliar and uncomfortable with regard to aversive control, which despite conventional wisdom that suggests that it should be avoided, remains an important aspect of virtually all managers’ jobs (Butterfield, Trevino, Wade, & Ball, 2005). Indeed, humans may be predisposed to use aversive control methods because of their evolutionary value. Researchers have determined that cooperation and altruistic behavior have survival value for humans (Axelrod, 1986; Henrich, 2006; Henrich & Boyd, 2001; Sober & Wilson, 1998) and that one mechanism in stabilizing human cooperation at high levels is the punishment of norm violators, defectors, and individuals inclined to free ride on the efforts of others. Conversely, cooperation often diminishes when punishment of such individuals is ruled out or is not an available option (Fehr & Fischbacher, 2003; Fehr & Gächter, 2002; Fowler, 2005; Gürerk, Irlenbusch, & Rockenbach, 2006; Yamagishi, 1986). This view was supported by Henrich, McElreath, Barr, Ensminger, Barrett, Bolyanatz et al. (2006) who found from 15 diverse populations that all peoples demonstrated some willingness to administer punishment as unequal behavior increased and that punishment positively covaried with altruistic behavior across populations. This paper questions the broad endorsement of “always be positive” and the prominence on positivity and suggests that under some circumstances such advice may be problematic. Indeed, in some situations it is in the best interest of others to use punishment. The paper begins with a review of how new managers or soon-to-be supervisors having modest organizational experience



have been strongly influenced by such a positive emphasis throughout their lives, discusses the utility of these inexperienced work leaders using both positive and aversive control mechanisms to foster behavior in the long-term interest of the individual and organization, and concludes with a number of guidelines designed to make discipline more effective.

Elements Influencing the Importance of Positivity

A number of factors have contributed to the emphasis on positivity including cultural influences, childrearing and family considerations, religious factors, and educational effects. Each of these is discussed below. Cultural Influences There is perhaps no virtue more desirable in Western civilization than being positive. Philosophers, theologians, teachers, counseling psychologists, sports psychologists, and popular management gurus have placed a premium on being positive as a means of achieving satisfaction, happiness, productivity (Judge, Erez, & Bono, 1998), and personal growth and effectiveness (Neck & Manz, 2007). French psychologist Émile Coué created a sensation in the United States in the 1920s with his book Self-mastery through Conscious Autosuggestion and its famous mantra “Every day, in every way, I am getting better and better.” Consistent with this cultural emphasis has been the explosive growth of self-help books, motivational tapes, and inspirational seminars emphasizing positive thinking, positive energy, positive affirmations, success, growth, happiness, fulfillment, and actualization (Salerno, 2005). American pop psychology has always been explicitly positive with the Dale Carnegies, Napoleon Hills, Werner Erhards, Zig Ziglers, and Tony Robbinses of this world holding high honor. Indeed, we are told that “…if your life does not get better, it is your fault—your thoughts were not positive enough” (Shermer, 2006). Religious Emphasis on Positivity Some of America’s most well-known clergymen preach as much positive thinking and happiness as they do Scripture. For example, Reverend Norman Vincent Peale, gained fame for his sermons on a positive approach to modern living. He applied Christianity to everyday problems and is the person who is most responsible for bringing psychology into the professing Church, blending its principles into a message of The Power of Positive Thinking (Peale, 1952). Reverend Robert H. Schuller, founder of Crystal Cathedral Ministries, includes a congregation of over 10,000 members and the internationally televised “Hour of Power.” He has authored a number of books on the positive aspects of Christianity (e.g., Move Ahead with Possibility Thinking, Schuller, 1967; The Be (Happy) Attitudes: 8 Positive Attitudes That Can Transform Your Life, Schuller, 1985). Rather than condemning people for the sins he believes they have committed, Schuller has tried to convince individuals that by positive thinking they can fulfill their dreams.



Childrearing and Family Considerations As children, many of us heard of these words spoken by the Little Engine That Could, “I think I can, I think I can, I think I can… (Piper, 1930, p. 33-34). It was implied that the positive way the little engine talked to itself influenced its ability to get over the mountain. Recently Twenge (2006) has documented that the belief in the importance of being positive and happy is ingrained in Generation Me (children born in the 1970s, 1980s, and 1990s). Twenge indicated that this emphasis on happiness became particularly important in the late 70s when there was a pervasive, society-wide effort to increase children’s self-esteem. The mission statements of many schools explicitly announce that they aim to raise students’ self-esteem and that self-esteem can and should be taught. Students are encouraged to believe that it is acceptable and desirable to be preoccupied with oneself and praise oneself. Most of these school programs encourage children to feel positive about themselves irrespective of a legitimate rationale. In one program, teachers were told to discourage children from saying things like “I’m a good soccer player” or “I’m a good singer” because these statements make self-esteem contingent on performance. Instead, “we want to anchor self-esteem firmly to the child…so that no matter what the performance might be, the self-esteem remains high” (Payne & Rolhing, 1994, p. 6). In other words, feeling good about oneself is more important than doing good. Thus, there has been a movement against “criticizing” children. Some schools and teachers do not correct children’s mistakes, afraid that this will damage the child’s self-esteem. Teacher education courses emphasize that creating a positive atmosphere is more important than correcting mistakes. In 2005, a teacher proposed eliminating the word “fail” from education. Rather than hear they have failed; instead of hearing that they have failed students should hear that they have “deferred success” (BBC News, 2005). Nevertheless, young people who have high self-esteem built on shaky foundations might run into trouble when they encounter the harsh realities of the real world. Unlike a teacher, a boss may not care about preserving employees’ self-esteem. The self-esteem emphasis leaves children ill-prepared for the inevitable criticism and occasional failure that is real life. If an employee presents a bad report at the office, the supervisor will not typically say, “Hey, I like the color of the paper you chose for the report.” Setting students up like this is doing them a tremendous disservice in the long run. Higher Educational Influences The value of being positive has been taught in business for some time and may have begun with Carnegie’s How to Win Friends and Influence People in 1937 which is still offered today as an essential text on interpersonal skills. Management and business books appear to stress positive emotions and positive managerial behavior and barely address punishment at all (e.g., Daft, 1994; Griffin, 1993), indirectly suggesting that discipline is not an essential part of the managerial role. For example, a cursory review of a current popular organizational behavior textbook, Organizational Behavior and Management (7th ed.) by Ivancevich, Konopaske, and Matteson (2005) revealed that the authors dedicated five pages to punishment-related topics and seventy-seven pages to reward-related subject matter. Furthermore, in many textbooks, the discussion of punishment has focused primarily on the presumed negative side effects such as



anger, resentment, avoidance, and retaliation (Luthans, 1995; Moorhead & Griffin, 1995; Northcraft & Neale, 1994; Organ & Hamner, 1982). This has lead many readers to conclude that punishment should be avoided, regardless of its effectiveness in controlling behavior. Positive Aspects of Aversive Control The efficacy of aversive control is why we button our coats when the temperature drops and loosen our ties when it rises. It leads us to come in out of the rain, to blow on our hot coffee before we drink it, and to keep our fingers out of electrical outlets. The presence of aversive control in these cases is clearly advantageous. Likewise, the absence of aversive control can be problematic. A dramatic example of this was provided by Scripture (1895) who noted that when a frog was placed in a beaker of water which was then heated at a rate of 0.002ºC per second that it “never moved and at the end of two and one half hours was found dead. He had evidently been boiled without noticing it” (p. 120). Clearly, the absence of aversive control was not in the frog’s long-term best interest. Skinner (1971) likewise acknowledged that the absence of aversive consequences may have long term deleterious effects for an individual and that positive reinforcement may have negative consequences that occur after a delay: “A problem arises…when the behavior generated by positive reinforcement has deferred aversive consequences. The problem to be solved by those concerned with freedom is to create immediate aversive consequences” (p. 33). Indeed, Skinner (1983) laid down draconian rules prohibiting himself from engaging in certain reinforcing activities: “Exhausting avocations are a danger. No more chess. No more bridge problems. No more detective stories” (p. 79). Other examples of positive experiences being dangerous specifically because they do not generate avoidance, escape, or their emotional counterparts, even when the contingencies are ultimately detrimental might include gambling and drug use. Social learning theorists posit that learning occurs not only from the consequences of one’s own actions, but also from information obtained vicariously from observing others (Bandura, 1986; Kreitner & Luthans, 1984). Accordingly, punishment is being studied as a social phenomenon that influences the cognitions, emotions, and actions of the administrator of punishment, as well as those of recipients and observers. Trevino (1992) contended that when considering the implications of punishment, members of the broader social group (e.g., coworkers or observers) and their interpretations of the event must be taken into account. Because observers have a vested interest in the outcome of punishment, they attend and react to the meaning of the event for them (Niehoff, Paul, & Bunch, 1998; Trevino & Ball, 1992). As such, observers may react to others’ discipline differently than the recipient (Trevino & Ball, 1992). Thus, there are important implications for managers. Perhaps managers should be weighing which reactions (those of the disciplinee or others) have the most potential impact upon the organization. Trevino (1992) argues that observers’ reactions are potentially more meaningful than those of recipients because they represent a greater number of people, and generally those not being disciplined are the more committed and productive employees.

This positive aspect of punishment enables managers to promote vicarious learning by delivering a message to other employees that certain types of misconduct will not be tolerated. Punishment



thus provides cues to other members of the work group on what is unacceptable behavior and should be avoided (Trevino, 1992). These cues help to establish and perpetuate formal and informal expectations, rules, and behavioral boundaries (Arvey & Jones, 1985).

Niehoff et al. (1998) noted that when supervisors impose severe punishment on a violator who is seen as clearly deserving of punishment, observers perceive agreement between their definition of a violation and the supervisor’s definition. Third parties (e.g., other employees) find such agreement reassuring and sense that justice has been served. Where such agreement does not exist, as in cases where a manager fails to punish a slacker or punishes a strong contributor, observers will sense injustice with subsequent decreases in satisfaction and performance.

Therefore, aversive control is necessary tool for managers to align behavior with the organization’s purpose. Behavior that obstructs or deters organizational objectives needs to be punished. Thus, actions deserving of negative sanctions should be defined in terms of organizational goals and clearly communicated to employees prior to any unwanted behavior.

Increasing Punishment Effectiveness Given that aversive control is appropriate under certain circumstances, how can it be administered more effectively? This section provides a number of guidelines to enhance punishment’s usefulness. Punishment is tied Directly and as Obviously as Possible to the Particular Undesirable Behavior. This guideline refers to the issue of contingency. Previous research has shown that contingency is associated with punishment effectiveness (Arvey & Jones, 1985). Past research has also associated punishment contingency with perceptions of the leader. Podsakoff, Todor, Grover, and Huber (1984) found that contingent punishment did not adversely influence satisfaction with the supervisor. Only when non-contingent punishment was used did satisfaction with the supervisor suffer. Therefore, managers can be expected to recognize the importance of contingency and to evaluate a punishment event as more fair to the extent that the punishment was contingent on a specific infraction. Importance of Constructive Criticism Research has also supported the notion that constructive criticism is beneficial and leads to the establishment of higher goals and an improved leader-subordinate relationship (Baron, 1988). Such criticism generally means that managers provide alternate incompatible behaviors to the problematic actions of the disciplinee. This can be more effectively achieved when supervisors help employees progress by establishing a behavioral contingency often in the form, stated or implied, that “when you do A, you get or can do B.” However, when explained in these terms, contingency raises the specter of bribery in some people’s minds. Certainly there is no bribery because there is nothing illegal, unethical, or immoral about stating a desired behavior and its consequence. What is incorrect is wanting to be



positive and giving the salesperson a commission when the paperwork has not been done because this will create problems getting paperwork done in the future. Providing a Rationale for the Punishment Research has also demonstrated that punishment is more effective when a clear rationale is given that explains why punishment is necessary (Arvey & Ivancevich, 1980; Parke, 1972). An employee who is punished for no discernible reason may believe the punishment to be non-contingent. That is, he or she will believe the punishment was random or a personal reaction by the supervisor rather than for unwanted behavior. The employee will likely have a negative emotional reaction and the punishment may have an undesired affect on work behavior (Podsakoff et al., 1984). The effect on work behavior initiated by this perceived non-contingent punishment is grounded in social exchange theory (Blau, 1964) and equity theory (Adams, 1963). In terms of exchange theory, Blau (1964) contends that people reciprocate rewards or gifts they receive from others. Thus, a reward from a manager is reciprocated with increased effort and/or organizational commitment. In the same sense, punishment that is perceived to be unjust may cause retaliation and result in decreased effort and reduced organizational commitment. People also desire equity in the workplace (Adams 1963). Punishment believed to be non-contingent is seen as unfair and inequitable. Employees in this situation will take actions to restore what they perceive as equity. For example, one method of restoring equity is social-loafing in a team or group environment (George 1995). Thus, punishment administered without unambiguous rationale will be perceived to be non-contingent. Employees will retaliate in order to reciprocate for the injustice or to restore equity. Managers need to have clear guidelines as to what behavior is unacceptable and communicate these guidelines to employees. Additionally, managers should explain to employees which specific guideline has been violated when administering punishment. Immediacy of Punishment Timeliness is also important for punishment because it increases the perceived connection between the punishment and the misconduct (Arvey & Ivancevich, 1980; Arvey & Jones, 1985). Punishment tends to work immediately and so if a behavior needs to stop without delay, as in matters of ethical and safety violations, then punishment can be used as an effective strategy (Daniels & Daniels, 2005). Indeed, one reason that unethical behavior occurs is because management does not punish employees for behaving unethically (Zey-Ferrell & Ferrell, 1982). Failure to punish for engaging in unethical behavior sends a message that unethical conduct is acceptable (Jansen & Von Glinow, 1985). Nonetheless, immediacy may need to take a back seat if the manager is not sure how to administer discipline correctly or if his or her emotional state would likely lead to mistakes in the disciplinary interaction. Atwater, Waldman, Carey, and



Cartier (2001) found that both managers and recipients recognized that managers often make mistakes in the discipline process. Mistakes, as reported by recipients, occurred because managers were “out of control” (p. 267) or because they did not know how to administer discipline properly. Additionally, managers in the Butterfield et al. (1996) study expressed many concerns with punishment procedures. Combined, these results suggest that some managers are likely to need training in how to properly administer discipline and how to control their emotions when employee behaviors cause them to get angry or lose control. In this last case, delaying the conversation may lead to a more effective discussion. Privacy of Punishment Researchers also suggest that punishment should be carried out in private whenever possible (Arvey & Ivancevich, 1980; Arvey & Jones, 1985). Evidence has suggested that punishment tends to create less defensiveness and to be more instructive to the subordinate when carried out in private (Sims, 1980). In addition, private punishment may be considered more benevolent since employees are not humiliated in front of co-workers (Butterfield et al., 2005). Nevertheless, supervisors must be concerned with group performance and so punishment may provide an opportunity for the work leader to deter others from engaging in future instances of the offense (Carlsmith, Darley, & Robinson, 2002). Accordingly, it is important that a supervisor give some consideration to publicly punishing wrong doers so that other potential offenders learn by example and discover the consequences of violating the rule. The justification for punishment lies in its ability to minimize the likelihood of future transgressions. Late 18th century philosopher, Jeremy Bentham (1962) argued that “general prevention ought to be the chief end of punishment, as it is its real justification” (p. 396). Less eloquently, but perhaps more realistically, are the words of one manager who indicated that when discipline was imposed, other workers learned that “they can’t get away with anything like that in the future” (Butterfield et al., 1996, p. 1493). Interestingly, Atwater et al. (2001) found that punishment recipients were more likely to report positive outcomes resulting from discipline than were managers. For example, problem behavior may be corrected, the recipient and others may become more cautions and aware, and larger problems can be solved as a result of a discipline event. In addition, in some cases, discipline can work to the advantage of either the disciplinee or the organization by removing the disciplinee from the organization. Often a new job for the recipient is a better situation, and a welcome relief for the manager. Consistency and Fairness of Punishment Researchers have also found that consistency of punishment is important, that is, individuals are not only concerned with the outcomes they receive but also with the fairness by which that outcome is allocated (Thibaut & Walker, 1975). Employees want to be treated like everybody else. They expect the decision maker to react to each case in the same way and to apply the rules consistently (Leventhal, 1976; Tyler & Bies, 1990). When this happens, punishment can result in desired behavior changes without negative side effects as Ball, Trevino, and Sims (1994) discovered in their field study. They found that punishment that is viewed as appropriate in amount and as consistent with what others have received resulted in improved subordinate performance. Similarly, other field research has supported the idea that employees dislike capricious, inconsistent punishment and become angry and distrustful of those instituting it



(Arvey, Davis, & Nelson, 1984). Bennett (1998) likewise indicated the importance of consistency. Participants in her study who were disadvantaged by inconsistently allocated punishments behaved aggressively toward their subordinates by giving them poorer performance evaluations. This implies that individuals who feel unfairly treated may often react by taking their anger and frustration out on a weaker target. Hence, it appears that unjust procedures can have far-reaching effects. It seems that victims of unfair punishment allocations decide to “even the score” between themselves and the beneficiary of the inconsistency. One implication of this finding is that managers, by punishing subordinates inconsistently, risk inciting competition and aggressive behavior between subordinates. This is certainly not a management style conducive to positive work-group morale and cooperation among team members. Related to the issue of consistency is fairness. Observers need to perceive that the punishment given to the recipient was fair. If observers perceive the punishment as fair, rarely do they have negative attitudes concerning the event. Employees tend to assess fairness from two perspectives: distributive and procedural justice (Greenberg, 1987). In terms of distributive justice, people judge the punishment imposed (e.g., temporary suspension, fine, etc.) and decide if it is fair in terms of consistent application and level of offense. Procedural justice refers to the fairness of the process used in determining the punishment rendered (Cropanzano & Rupp, 2003). Employees tend to judge a distributive outcome as fair when it is favorable to them (Conlon, 1993; Wade-Benzoni, Tenbrunsel, & Bazerman, 1996). However, if employees are likely to accept unfavorable outcomes as fair if they perceive the procedure to be fair (Cropanzano, Byrne, Bobocel, & Rupp, 2001). That is, the process of determining if punishment is necessary may be more important to the employee than the punishment itself. However, even when the punishment occurrence is perceived as unfair, some positive outcomes can occur (Atwater et al., 2001). Nevertheless, as Greenberg (1990, P. 116) noted, “a manager who does what he or she believes to be fair—whatever that may be—may learn that others are not necessarily likewise convinced.” Certainly, “others” include subordinates. Greenberg (1983) also found that people sometimes do things to convince themselves of the fairness of their own actions. Fairness then, like beauty, may be in the eye of the beholder, and may differ between those delivering the action and those receiving it. More importantly, managers should be aware that many subordinates perceive discipline to be unfair and should factor this in their thinking (Atwater et al., 2001). Likewise, observers in the Atwater investigation felt that at times discipline was administered to demonstrate the manager's authority or power rather than to mitigate some unwanted behavior and thus managers should be prepared to deal with this issue. While, in most cases, the manager will believe his or her actions are fair, he or she may consider spending some time thinking about the discussion of fairness with the person receiving the discipline. Managers should also be aware that punishment for violating formal rules resulted in greater acceptance by recipients than punishment for violating informal rules (Atwater et al., 2001). This is important because Schnake (1987) found that when the punished worker claimed the punishment was unfair, production among observers of the event did not increase, and satisfaction with supervision decreased. Much of the basic research on punishment has been incorporated in the hot stove rule.



Hot Stove Rule

An effective way to incorporate the guidelines that are described above is to adopt the hot stove rule. This rule provides an analogy based on a person touching a hot stove: an advanced warning, immediacy, consistency, and impartiality (Hill, 1984). The result is impersonal because whoever touches a hot stove is burned. The burn was caused by the act of touching the stove, not because of who the person is. Discipline should be directed against the act, not against the person and each violator should be treated in the same way. The comparison between the “hot stove rule” and disciplinary action is obvious.

Conclusion

The power of positivity is pervasive in American society but there are others who would caution otherwise. Woolfolk (2005), for example, declared: I would submit negative thinking is not only valuable, but indispensable, and suggest that we give much too little attention to acknowledging, confronting, accepting, and perhaps even embracing suffering and loss. I want to suggest also that there may be worse things in life than experiencing negative affect. Among those worse things are ignorance, banality, credulity, self-deception, narcissism, insensitivity, philistinism, and isolation… (p. 20). Similarly, in the professional organizational research literature Fineman (2006) has expressed concern about what he perceives as the overemphasis on positivity and psychologist and well-known author, Joyce Brothers (2005), recently discussed constructive aspects of a decidedly un-positive emotion, shame, and suggested that some forms of shame (what she calls “good shame”) can be virtuous. For example, she indicated that shame may be proper when calling to task an individual for inappropriate behavior. Furthermore, Brothers (2005) indicated that good shame often leads to self-discovery and growth by providing new insights, encouraging new improvements, expanding ones value system, and making individuals more sensitive to others. Thus, the admonition to always be happy, advice cavalierly dispensed to inexperienced organizational leaders by well-intentioned but uninformed others is not particularly effective and can in some situations lead to deleterious results for the individual manager and his or her organization. The seeming overemphasis on avoiding punishment and other aversive organizational control techniques should be tempered and understood that at times they are necessary. Scholarly and anecdotal evidence indicate that discipline and punishment are significant components of organizational life. This paper contributes to the erosion of the conventional wisdom regarding the use of punishment to manage behavior. Many researchers and teachers have warned against the use of punishment because of the feared undesirable side effects (Luthans, 1995; Moorhead & Griffin, 1995; Northcraft & Neale, 1994; Organ & Hamner, 1982; Skinner, 1953). Reward is frequently proposed as a substitute motivator because it is more effective, longer lasting, and results in fewer negative side effects. In many



situations, however, it could be argued that reward is not more effective or more long-lasting than punishment and that, often, reward is an inappropriate response for appropriate behavior. For example, in the context of ethical decision making, rewarding individuals who act according to ethical standards may be viewed as infeasible and foolish. It says, “We don’t really expect you to be ethical and if you do, we’ll be so surprised that we’ll give you a reward” (Bennett, 1998, p. 260). Imagine how expensive this practice would be to employers and governments because they expect everyone to act ethically. Punishment, conversely, signals to employees and citizens that unethical behavior is wrong and will not be tolerated. Regarding ethical conduct, some research has even demonstrated that direct punishment for unethical actions led to more ethical behavior than did rewards for ethical behavior (Trevino, Youngblood, Sutton, & Woodman, 1985). On the other hand, the recommendations on the productive use of aversive control should not be interpreted as implying that managers should become sadistic, blissfully punishing every undesired behavior. It does suggest, however, that punishment can be an effective tool for suppressing employee misbehavior when used appropriately. As Arvey and Jones (1985) indicated, “A good manager is not necessarily one who seldom or never disciplines employees, but is rather one who administers discipline in a constructive or ‘fair’ manner” (p. 383). We believe as most human behavior professionals that managers should overwhelmingly use positive reinforcement; we believe in the power of positive self-talk, positive expectations, and positive mental practice. In many cases we can deal more constructively with problem behaviors by studying them, removing the rewards that support them, and rewarding related behaviors that are desirable. The goal should be to take constructive action to correct these behaviors and not to demoralize and psychologically paralyze others by dwelling on them. Nevertheless, we believe that non-positive or aversive strategies may be useful at times. There are occasions when if we care for a person we must do something to stop behavior that is detrimental to that person. Not doing something to stop inappropriate behavior is a way of saying, “I don’t care about your long-term happiness.” Dr. Laura Schlessinger of talk radio fame indicates that a parent who supports a child when the child is wrong is not a very good parent and we would agree. Similarly, a manager who supports a supervisor when he or she is wrong is a poor manager and a union steward who supports a union member when he or she is wrong is no better. There are occasions when letting employees experience the negative consequences of their behavior is the best thing a supervisor can do to support their long term adjustment. However, if managers find themselves using aversive consequences more and more, then they are probably in a counterproductive situation. By the same token, it is an incorrect generalization to suggest that under all circumstances work leaders should be positive in dealing with their employees. Seldom is it noted that there are qualifiers in applying such broad counsel.



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AN EXAMINATION OF THE BENEFITS OF LEGAL BUSINESS ENTITY TRANSFORMATION: CAP ROCK ENERGY

Leslie Toombs, University of Texas-Permian Basin Jack Ladd, University of Texas-Permian Basin

Abstract

Business law classes, management classes, classes in small business and entrepreneurship, business owners, legal and accounting advisors, and others give careful consideration to choosing the type of legal entity to be used at the point of a business’s creation. A new business owner may select from a smorgasbord of for-profit and not-for-profit organizations, c corporations, s corps, limited liability companies, cooperatives, limited and general partnerships, sole proprietorships, and business trusts. During formation, care should also be given to the strategic issues related to the legal form that will be faced in the early phases of entity life. The creation of a business is not the only time that management should consider the appropriateness of legal form necessary to carry a business into the future. It is also important to evaluate and reevaluate the type of business entity for adding or unlocking value for equity holders. Further, different forms may enhance the businesses’ ability to function in changing business environments or in response to changed tax laws. A review of the academic literature reveals a desert landscape of information about strategic planning and the appropriate legal form of business once the business has been in operation for some period of time. Alfred D. Chandler and many others have engaged in continuing debate over the role of organizational structure and strategy, yet legal structure has not been included in these discussions. An example of how creative thinking in business entity planning can unlock value for the equity holders and provide access to much needed additional equity capital in the changing environment of electric utilities at the turn of the millennium can be found in the story of Cap Rock Electric Cooperative, a rural electric cooperative in the state of Texas. The paper provides of illustration of how Cap Rock Electric Cooperative transformed from a cooperative to a corporation. The discussion examines how this transformation was necessary to secure funding needing to grow the company. Additional funding was only one of the benefits gained from the change in legal entity status. In addition, details on how this plan was “sold” to the cooperative membership and the legal challenges encountered are provided. The paper concludes with a discussion of the most recent development of all of the shares of Cap Rock Energy being acquired by a private investment firm. Collectively, this action resulted in the creation of $168 million in wealth for the former cooperative members through the conversion. Other business entities should regularly assess their own legal structure as part of the strategic planning process. It is possible that a change in legal structure or the addition of new arms to that legal structure could unlock value, create currency, provide access to markets, meet financial goals of equity holders, reduce the risk of liability, lessen tax burdens, or in some other way benefit the business entity. In every instance, the result is worth the effort because it keeps management and the organization fresh and growing and it contributes to the long-term wealth of shareholders.



SERVANT-LEADERSHIP FOR SMALL BUSINESSES

Dillard B. Tinsley, Stephen F. Austin State University

Abstract The small number of employees that characterizes most small businesses means that such firms are especially suited for managers to use the theory of servant-leadership. It is a type of behavioral management that is increasingly used to deal with the nature of modern employees. Many of its tenets stem from insights regarding a manager’s capabilities for fulfilling the firm’s needs by meeting the needs of employees. Its philosophy is generally congenial to small business managers, and effectiveness can be enhanced by utilizing the flow experience in the workplace.

Introduction

Generally accepted truisms regarding small businesses are (1) that business founders are not always good managers and (2) that most small business managers face more constraints than do corporate managers (Longenecker, Moore, & Petty 2003, pp.448-449). Although many small businesses do have excellent managers, the challenges faced by small business managers should make them interested in any approaches that might improve their effectiveness. One of the most important skills for managerial effectiveness lies in the practice of leadership, which determines the manner in which employees respond to their managers on a personal level. Poor leadership can cause poor performances by employees. Leadership affects both the effectiveness of employees and their willingness to remain with a firm. Recognition of the importance of motivating and retaining employees as vital assets is becoming more common due to a number of factors, e.g., (1) technological demands increasing the need for employee skills and (2) work attitudes of young employees becoming conditioned by lives spent in an affluent society. Such factors increase the importance of managerial leadership and consideration of ways to improve it. One of the most-promising approaches to leadership is embodied in the concept of the “servant-leader.” (Spears 2004, p.11). This approach is increasingly recognized in American culture, as shown, for example, by recent (1) recommendation in a leading professional journal (Locander & Luechauer 2006) and (2) appreciation in a major news magazine (Gergen 2006). This paper will show why servant-leadership is particularly well-suited for use by managers of small businesses. This paper goes on to show how its effectiveness can be improved by combination with workplace application of the “flow experience” (Csikszenentmihalyi 2003, p.39).

Servant-Leadership

The concept of the servant-leader was developed in the 1970s by Robert K. Greenleaf, who spent forty years with AT&T, followed by twenty-five years as a management consultant. After reading a book in which the servant of a group of travelers functions as the group’s actual leader, Greenleaf concluded that “...the great leader is first experienced as a servant to others, and that



this simple fact is central to the leader’s greatness.” (Spears 2004, p. 11) Servant-leadership’s intellectual center of support for a number of years has been The Greenleaf Center for Servant-Leadership (www.greenleaf.org.), which offers more than 120 books, essays, and videotapes, as well as sponsoring research and conferences. The Center’s CEO, Larry C. Spears asserts that servant-leadership puts the leader’s emphasis on serving other people. Its application involves “...a holistic approach to work, promoting a sense of community, and the sharing of power in decision making.” Its core “...is a long-term, transformational approach to life and work - in essence, a way of being....”(Spears 2004, p. 12) Aspects of servant-leadership have been applied by a number of business organizations, including Toro Corporation, Southwest Airlines, and Starbucks (Spears 2004, p. 17). Warren Bennis (2004, p.xiv) thinks that servant-leadership addresses the major attributes of leadership today, which he sees as integrity, trustworthiness, and authenticity; and he asserts that “The most important thing to keep in mind is this: never let your ambition surpass your moral compass.” The need for trustworthy managers is especially obvious for small businesses because most managers and employees will be interacting often enough to form relationships that facilitate accurate evaluations of personal traits. Becoming a servant-leader in the sense that the Greenleaf Center advocates is an option that managers may or may not choose. Managers can understand its philosophy and use its techniques without having to become transformed into a certain state of being. Many of servant-leadership’s tenets are already familiar to managers because they are incorporated in various modern theories of behavioral management. One of servant-leadership’s unique aspects is its role as a philosophy for living. Appropriate techniques for its implementation are thought to emanate from the inner nature of the manager. As will be seen below, servant-leadership has much in common with the widely-recognized five components of Emotional Intelligence, i.e., Self-Awareness, Self-Regulation, Motivation, Empathy, and Social Skill (Goleman 2004, p. 88). For an entrepreneur, social skills can be very important in the founding and growth of a company as the entrepreneur tries to attract resources to the new venture, which often involves drawing on personal relationships and “selling” ideas about the company (Brush, Greene, & Hart 2001). As in all human interactions, such relationship approaches to leadership are fully effective only if managers are sincere about their positive intentions towards employees. Employees must perceive managers as individuals and company representatives who sincerely seek to address the needs of their employees, e.g., needs to be valued, respected, consulted, developed, and rewarded in a sincere and fair manner. Servant-leadership is congruent with other management theories that take such a principled approach to valuing employees and addressing their needs. For example, the keynote speaker of the Center’s 2007 conference in Dallas, Texas, will be Stephen Covey, author of The Seven Habits of Highly Effective People.



Basic Characteristics of Servant-Leadership

The basic concept for managers to remember is that servant-leaders have a philosophy of service - not just to employees - but to all of a firm’s stakeholders. This paper’s primary focus is on leader-employee relationships because our concern is with servant-leadership as a theory of management within small businesses. However, comments will be included on managers’ relationships with other types of stakeholders. Different analysts of servant-leadership emphasize different aspects of the approach, as can be seen in recent compilations of writings on the subject - Focus on Leadership (Spears & Lawrence 2002) and Practicing Servant Leadership (Spears & Lawrence 2004). Some of these different emphases stem from applying it to different organizations. Some analysts see it as a philosophy to be applied in all aspects of one’s life. Larry Spears (2004, pp. 13-16) has listed and discussed the following ten common characteristics that he sees as communicating its promise - characteristics that seem to be especially applicable to business organizations: 1. Listening - Effective personal relationships require two-way communication. Take time to learn the opinions of the group and to clarify one’s own thoughts. 2. Empathy - A manager can understand employees’ perspectives and try to modify their behaviors without attributing bad motives to them or rejecting them as people. 3. Healing - When managers recognize that something is lacking in the lives of themselves or their employees, they may assist healing by using such techniques as encouragement, recognition or offering hope. 4. Awareness - General awareness, especially self-awareness, allows emotional intelligence and considering issues in terms of intangibles and implications for people’s lives and relationships. 5. Persuasion - Rather than using managerial authority, leaders should use reasoning and persuasion. For example, Cialdini (2001) indicates that persuasion is increasingly needed in modern business organizations and offers guidance in effective techniques. 6. Conceptualization - Managers should look beyond the short-term results of handling a situation. A leader’s vision or firm’s mission statement can help to conceptualize a situation in comprehensive, long-term implications. 7. Foresight - Related to conceptualization, foresight involves intuition, which has not been studied to any extent in business. Foresight sees the “...the lessons of the past, the realities of the present, and the likely consequences of a decision for the future.” (Spears 2004, p. 15) 8. Stewardship - Servant-leaders hold their organizations in trust for the good of others, i.e., society in general, as well as stakeholders. 9. Commitment to the growth of people - Servant-leaders are interested in helping employees to fulfill their needs. Growth is generally recognized as an employee need, as will be discussed below with regard to Csikszentmihaly’s (2003) concept of the “flow experience” in the workplace. 10. Building community - Servant-leaders seek to foster the feelings of employees that the organization is a community that fulfills employees’ needs to belong to a group that esteems and supports them. The list given above does not mention the need for managers to have appropriate amounts and types of workplace experience. However, capabilities such as foresight, healing, and conceptualization can be developed only over a period of time in workplace situations. A



manager must have an appreciable amount of experience to gain the maturity for the accurate insight into people that is necessary for empathy, persuasion, and discerning the real needs of employees. Even though servant-leaders are concerned with employees as people, situations do arise in which it is necessary to terminate the employment of certain employees. The stakeholders’ needs for a productive company - or even just for a company to survive - may depend on removal of unqualified, disruptive, or unproductive employees. A failing company cannot serve anyone’s needs. In many cases, however, a servant-leader’s approach may lead to rehabilitation of a problem employee, e.g., use of retraining, appropriate, work assignments, or counseling. Servant-leadership embodies behavioral management approaches, especially the need to respect and value employees, which “...numerous rigorous studies” reveal can result in “enormous economic returns.” (Pfeffer & Veiga 1999, p. 37) It involves Emotional Intelligence, which “...has been shown to be positively related to job performance at all levels.” (Robbins & Coulter 2002, p.379) It also seems suited for developing the interpersonal trust levels that are essential to effective business performance (Wicks, Berman, & Jones 1999).

Servant-Leadership in Small Businesses

Servant-leadership is a philosophy that leads managers to consider and fulfill the needs of employees so that the employees will be motivated fulfill the organization’s needs. It seems especially well-suited to deal with some of the emerging trends in business that reflect the changing nature of American culture, e.g.,(1) how to handle workplace expressions of spirituality (Cash & Gray 2000) and (2) dealing with the incivility that is growing between employees (Anderson & Pearson 1999). Its potential effectiveness suits it for all sizes of organizations. Small business managers should be interested in servant-leadership because it promises to be effective, but also because it is particularly suited to small businesses. Perhaps the most-obvious reason is that the number of employees in a small firm is small enough for everyone to interact with each other to some extent. Servant-leadership is facilitated by the tendency of most employees to personally know each other and their managers. Such relationships lead to a managerial knowledge of employees that facilitates managerial placement of employees in jobs where they will be most effective. Appropriate development training and advancements in job responsibilities are facilitated. The understanding that develops between managers and employees in such relationships also facilitates effective applications of the principles of servant leadership, such as listening, empathy, and healing. Servant-leaders’ relationships with employees also facilitate evaluations of the effectiveness with which employees are performing their jobs. This increases the probability that compensation will be equitable - and perceived as so by employees. Equity in rewards is a vital element in developing equity and justice perceptions in employees. Failure to make sure that rewards promote long-term effectiveness of the company may be more common than many managers realize. Reichheld (2001, p.81) asserts that employee loyalty requires equity in such rewards, but, unfortunately, that “...companies often reward employees who grab short-term profits and short change those who build long-term value and customer loyalty.”



The Conceptualization characteristic listed above for servant-leadership also helps to assure that rewards are equitable in terms of long-term effectiveness of the company. This includes nonfinancial - as well as financial - rewards. Understanding of employees by servant-leaders means that they are able to follow Cooper’s (2000, p. 15) suggestion that “sincere” recognition and encouragement be “personalized.” Servant-leaders are able to give appropriate compliments and performance awards to the truly deserving employees. This is especially valuable if the top manager is a servant-leader. In many small firms the top manager has a personal relationship with every employee - at least enough for them to know many personal characteristics that extend beyond job performance. Recognition and attention from the top manager is a special motivator that most employees in large firms cannot experience. It is evidence to all employees that the small firm values them - even at the very highest levels. A top manager with the servant-leader philosophy can be especially important in developing the trust between employees that is so important in today’s workplace (Wicks, Berman, & Jones 1999). In most small firms it is very likely that all employees know whether or not their managers can be trusted not to mislead or exploit them. The top manager’s example is known by all, serving as an influence on company culture. It is very likely that most employees in a small business will feel that they know a top manager well enough to complain directly about unfair or unethical situations - especially a top manager with a reputation of integrity. Reichheld (2001, p. 81) asserts that managers should “Listen hard, talk straight” to customers, as well as employees, going on observe that “Long-term relationships require honest, two-way communication and learning. True communication promotes trust, which in turn engenders loyalty.” Recent research indicates that honesty is not only important within the firm, dishonesty in dealing with customers has many harmful effects that outweigh any short-run gains (Cialdini, Petrova, & Goldstein 2004). External dishonesty is especially degrading to small business managers because they often have personal relationships with many or most of their customers, which is difficult for large firms with many customers. Servant-leadership can carry over to benefit customers with the same servant concern that is provided for employees. Actually, small business managers are more likely to be in regular contact with any type of individual stakeholders than managers in large companies. In contrast to large corporations, privately-held firms are likely to have only a few owners - or only one - that managers can know on a personal basis. The limited number of stakeholders allows small business managers to apply many of servant-leadership’s principles in the resulting personal relationships with customers - and often with suppliers and regulators. Just the idea of service to the needs of others can be a positive influence on stakeholders relationships, especially with combined with servant-leadership’s emotional intelligence aspects, such as listening and empathy.

Job Satisfaction

Another of the special benefits of servant-leadership is that it can help small business managers to draw more satisfaction from their roles as managers. This comes from conditioning the way



in which small business managers think about themselves. Most small business managers work many more hours than do other employees. This also tends to be true for managers in large firms; but small business managers receive much less pay for their hours, especially in comparison with managers in large corporations. Small business management is also likely to require more versatility because of the lack of support staffs. Small business managers, therefore, can easily see themselves as sacrificing their personal time for the firm’s success, i.e., they are servants of the other stakeholders who are drawing benefits from the managerial sacrifices. Adopting the philosophy of servant-leadership reflects what many small business managers are already doing. It should be easy for small business mangers to think of themselves as servant-leaders. Realizing that the firm’s stakeholders depend on their sacrifices should increase their job satisfaction. Other people are being helped by their sacrifices. In addition, managers can draw further satisfaction because they have personal relationships with many of the very people that they are helping. The servant-leadership approach offers a systematic philosophy for making the most of their sacrifices. Not only do relationships with employees improve and the firm becomes more effective, servant-leaders can feel that society approves of their activities. Such managers can see themselves as meeting the increasing calls for social-responsibility in business. Small business managers are making a sacrifice of effort and personal time as they help society function effectively. In the case of family-owned firms or when a owner-manager’s family is working in the firm, a servant-leader view should be even more congenial. Servant-leadership may be especially congenial to entrepreneurs, who tend be driven by a vision of something that they seek to accomplish. Entrepreneurs usually want to offer some sort of improvements to the world. They may devote enormous amounts of time and efforts to their visions - often more hours than monetary compensation would justify, i.e., they are servants who are bettering the lives of others. In any case, the servant-leadership approach is a constant reminder that entrepreneurs should not let their visions of what they wish to accomplish blind them to employee needs. Their employees need to be valued so that they will provide effective assistance in accomplishing the visions. Servant-leadership philosophies may be especially valuable for a small business that has been founded by a group of entrepreneurs. A great deal of “...research on entrepreneurship shows that teams are significantly more likely to achieve success than individual entrepreneurs.” (Brush, Greene, & Hart 2001, p. 70) As individuals, a group of entrepreneurs need complementary skills. However, they may have different experiences and expectations that may interfere with their abilities to work together effectively. A servant-leader philosophy can facilitate their relationships because it is less likely for someone to seek to dominate at the expense of others. With regard to human resources, as entrepreneurs grow their organization, they will have to attract, motivate, and retain effective employees. A growing organization will also have to



develop its employees to handle the expanded responsibilities, which are often more challenging to employees. Employee development is not only important in companies that are growing, it is also important for companies in relatively stable situations.

Employee Development

The changing nature of business means that companies need to keep changing. Such changes often involve improvements in the capabilities of employees, especially with the regard to technological change. Employee development is a continuing concern in a great many companies. One of the concerns in developing employees is that an improved set of skills will allow an employee to change to another employer who offers better compensation. This can be more detrimental to a small business than a large one because the large companies can afford to give several employees the same developmental opportunities at the same time. A small firm does not have as many employees with the new capabilities. This, in itself, is a reason why small business need to consider servant-leadership as a way to retain employees by adequately meeting their needs, especially to assure (1) that their pay levels are appropriate and (2) that they know that the firm recognizes and values them. Employee development in a small firm is a also a special need because an employee may handle several different function, whereas a large firm would assign a specialist to each function. When an employee is on vacation, sick, or otherwise not available to perform customary duties, a large firm often has several other employees who are doing the substantially the same job. This is often not so in small businesses. In order to handle important functions when the assigned employee is not available, a small firm may train at least one backup employee for each function. Servant-leaders are not only prime candidates to serve as backups, they are able to select the employees who would best be able to serve as backups to the various functions. Servant-leaders are also attuned to the reactions of employees to such backup assignments. Some employees may like the variety, and some may not. The opportunities for managers in small businesses to have personal relationships with most employees is obviously an advantage in employee development. Relationships in which managers really understand their employees will facilitate the tailoring of employee development activities to each individual employee. Servant-leaders would seem to have a special advantage in tailoring such activities, as well as in conducting them. For example, both coaching and mentoring can be very important to small businesses, especially those whose human resources departments have limited capabilities. In his book on how to acquiring coaching and mentoring skills, DuBrin (2005) has chapters on trust, empathy, and listening - all of which are tenets of servant-leadership. Coaching helps “...workers grow and improve their job competence by providing suggestions and encouragement....” and mentoring also does this through “...a greater range of helping activities and skills than coaching.” (DuBrin 2005, pp.ix-x) A servant-leader’s comments should tend to be more insightful - or at least more acceptable - for an employee. Mentoring, which DuBrin (2005, p. x) asserts is increasingly



important in the modern workplace, should also be facilitated. Servant-leaders should be very effective mentors. Tailoring employee development to individual employees is also facilitated by using Csikszentmihalyi’s concept of the “flow” experience. Csikszentmihalyi (2003, pp. 42-56) explains eight characteristics that generally constitute the flow experience. For business application, the flow experience can be seen as tending to occur when enjoyment of an experience flows from an activity where the challenge involved in the activity matches an employee’s capabilities. The need is to fully engage an employee’s capabilities without overmatching them. However, once a person becomes so proficient in an activity that it no longer challenges capabilities, the employee tends to become bored; and there is a need for psychological growth. The employee will want to move on to a new challenge that will - once again - fully engage the employee’s capabilities (Csikszentmihalyi 2005, p. 67) This is a situation that can occur in an organization of any size. A servant-leader is prepared to recognize this need for further growth in an employee. Such an employee can be moved into a new assignment that promises to develop a new flow experience - the employee will once again will enjoy the work. This may not be possible for all employees. Small businesses, however, have a need for versatile and multifunctional employees. By giving appropriate development opportunities to talented employees, a small firm may be able to develop all the backup capabilities that it will need. At the same time, fewer talented employees will quit the firm because of a lack of challenge. In a growing firm, the opportunities for employee growth are even more numerous. Servant-leadership may even become a path for self-development of its users. Implicit in all of modern management’s calls for motivating employees by using positive techniques is the need for a leaders to sincerely be honest, caring, and trustworthy. To be sincere, a manager must actually possess such traits. Without them, a manager cannot sincerely communicate honestly and openly. A leader who seeks to serve others cannot be seeking personal advancement at others’ expense. Once servant-leaders appropriate the positive traits, they will tend to develop more positive views of themselves and of other people. A positive appreciation of oneself and others has been long advocated as providing a viable path to successful relationships, e.g., the practical applications of Transactional Analysis in I’m OK - You’re OK (Harris 1967). Servant-leadership, therefore, may well be a path to self-development - perhaps improving the leader’s relationships even away from the workplace.

Conclusion

The flow experience offers insight that may be useful with almost approach to management or size of company. The servant-leader approach to management should facilitate its application, and the servant-leader concept is growing more popular. At the very least, it promotes emotional intelligence and reminds managers to take the needs of employees into account. It also seems to offer some special benefits to small businesses. Small business managers may decide to only use some of the insights that the servant-leader approach provides. Its promise, however, should induce them to take some time to investigate it.



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Robbins, S.P., & Coulter, M. 2002. Management, 7th ed., Upper Saddle River, N.J.: Prentice Hall. Spears, L.C. 2004. The understanding and practice of servant-leadership. In L.C. Spears & M. Lawrence (Ed.), Practicing Servant-Leadership, San Francisco, CA: Jossey-Bass. Spears, L.C., & Lawrence, M. (Ed.) 2002. Focus on Leadership, New York, NY: John Wiley & Sons, Inc. 2004. Practicing Servant-Leadership. San Francisco, CA: Jossey-Bass.



DIVERSITY: THE FUTURE FACE OF ENTREPRENEURSHIP?

Carl A. Kogut, University of Louisiana at Monroe Larry E. Short, University of Louisiana at Monroe

Abstract

This paper analyzes U. S. Census data to determine the future face of entrepreneurship as determined by the diversity of its members. Results suggest that demographic variables such as gender, age, minority status, and English-speaking ability may be changing the face of entrepreneurship while foreign birthplace and US citizenship have little impact on the propensity to enter entrepreneurship.

Introduction

Entrepreneurship is a term scholars have argued over for years. Cantillion introduced the term entrepreneur as a person who organizes business activities and assumes the risks of business in return for profits. (Kilby, 1971) Schumpeter (1934) redefined the term to mean someone who uses innovation to destroy the existing economic order by introducing new products or services, by creating new forms of organization, or by exploiting new raw materials. Carland, Hoy, Boulton, and Carland (1984) differentiated entrepreneurship and small business by suggesting that the key to entrepreneurship is the use of innovation to grow the venture while small businesses may be content to remain small. Although academic scholars may argue over the true meaning of the word entrepreneurship, the real world probably relates the term entrepreneurship more with Cantillion=s original concept as someone who assumes risks for return of profits. A recent review of the Small Business Administration=s web site (sba.gov) shows that both the President of the United States, George W. Bush, and the SBA=s top administrator, Hector V. Barreto, use the terms entrepreneurs and small business owners synonymously. This paper will ignore the controversy over the true definition of words and assume the term entrepreneur (and the research literature that accompanies the term) is close enough to the concept of self-employment as defined by the U.S. Census bureau to accommodate Cantillion=s original concept of the term. Regardless of how you define the concept of entrepreneurship, its influence has had a significant impact upon economic development in the United States. The U.S. small business sector is the world=s largest economy, trailing only the economies of the United States and Japan. (NFIB Small Business Policy Guide, 2000) In 1969, entrepreneurs created 274,000 new corporations; today the number of new corporations exceeds 800,000 per year. (The State of Small Business, 1999) When you include non incorporated businesses, entrepreneurs start more than 3.5 million businesses each year in the United States. (NFIB Small Business Policy Guide, 2000) Fifty years ago, scholars were convinced that competitive conditions favored large businesses and that the key to the future creation and distribution of wealth was in the hands of large, centralized bureaucracies. Two influential books supported the importance that large firms played in economic development. William Whyte=s (1956) book, The Organization Man, suggested that the Great Depression and military training in World War II created a society willing to accept



employment in, and obedience to, large organizations. John Kenneth Galbraith (1967) in his book, The New Industrial State, suggested that large organizations, working in coordination with governments and labor unions, would run nations in the future. Business schools, following the recommendations of a Ford Foundation-sponsored study by Gordon & Howell (1959), reorganized their curricula to support the development of young people for specialized jobs in large corporations. Today, competitive conditions appear to favor the smaller more agile companies. Scarborough and Zimmer (2003) suggest that nimble, fleet footed, small companies can dart into and out of niche markets as they emerge and recede; they can move faster to exploit opportunities; and they can use modern technology to create within weeks products and services that once took years by large corporations. It=s interesting to note that one of the fastest growing areas of study in business schools today is entrepreneurship! Clearly, in the 21st Century, the balance has tipped in the favor of small entrepreneurial companies. Early research in the field of entrepreneurship often focused on identifying what personality characteristics distinguish entrepreneurs from non-entrepreneurs, entrepreneurs from managers in large firms, and successful entrepreneurs from unsuccessful entrepreneurs. (Brokchaus, 1982) For example, Kihlstrom & Laffont (1979), found that entrepreneurs are more willing to bear risk. Palich & Bagby (1995) found that entrepreneurs frame information more positively and Cooper, Woo, & Dunkelberg (1988) found entrepreneurs are more optimistic. Entrepreneurs have also been found to have greater self-efficacy and more internal loci of control (Chen, Green, & Crick, 1998), have greater tolerance for ambiguity (Begley & Boyd, 1987), and possess a high need for achievement (McClelland, 1961). In a review of 50 academic studies, Timmons (1985) summarized the most commonly identified entrepreneurial characteristics as: total commitment, determination, and perseverance; drive to achieve and grow; opportunity and goal orientation; taking initiative and personal responsibility; persistent problem solving; realism and a sense of humor; seeking and using feedback; an internal locus of control; calculated risk-taking; low needs for status and power; and integrity and reliability. Kets de Vries (1977), in a review of 11 empirical studies, support McClelland=s (1965) theory that entrepreneurs have a high need for achievement, but additionally concludes that autonomy, independence, and moderate risk-taking are important. In addition, entrepreneurs appear to be inner-directed, present themselves as self-reliant, and tend to de-emphasize or neglect interpersonal relations. Entrepreneurs are also anxious individuals, nonconformists, poorly organized, and are not strangers to self-destructive behavior. As evident from the research above, Kets de Vries concluded that developing a clear understanding of the entrepreneurial personality is sometimes conflicting and confusing. Sexton and Brown (1986) have suggested that empirical research has not proven which individual characteristics differentiate entrepreneurs from non-entrepreneurs. Shaver and Scott (1991) have noted that many of the perceived individual characteristics of entrepreneurs have been debunked or at least have been found to have been measured ineffectively. They suggest that the result may be a tendency to concentrate on other factors such as economic conditions, available financing, public assistance, etc. Learned (1992) has concluded that the environment does affect the entrepreneur=s eventual decision to start a new venture. Shapero (1984) has suggested a variety of factors exist in the environment that can impact an entrepreneur=s



decision to start a new venture. These include such factors as societal attitudes toward starting a business, societal attitudes toward business in general, the economic climate of the market, and the availability of accessible funding. Thus, the decision to behave in an entrepreneurial manner appears to be influenced by a number of factors. Naffziger, Hornsby and Kuratko (1994) have suggested five variables impact an individual=s decision to behave in an entrepreneurial manner. These are (1) an entrepreneur=s personal characteristics; (2) the individual=s personal environment; (3) the relevant business environment; (4) the specific business idea; and (5) the goals of the entrepreneur. This study will examine only two variables of the Naffzieger, Hornsby and Kuratko model of entrepreneurial behavior, i.e., the individual=s personal characteristics and the individual=s personal environment, and only those demographic variables in the individual=s personal characteristics and individual environment that can be determined from the U.S. Census data. The study is further limited to studying only those individuals that are self-employed. Although we recognize that the diversity of employees in governments and private companies may also be changing, the emphasis of this study is to ascertain if the diversity of people who are self-employed (in incorporated or unincorporated businesses) is significantly changing.

Purpose of Study The purpose of this study is to examine the impact of individual demographic variables, as measured by the U. S Census, on the propensity of individuals to be self-employed. In particular, we are interested in those personal variables that differentiate individuals in the self-employed population from the rest of the working population. Does a person=s gender, minority status, age, foreign birthplace, citizenship, or English-speaking ability influence the propensity of a person to become self-employed? And, are these people changing the face of entrepreneurship?

Research Methodology

The Small Business Administration has invested significant resources to make business ownership more accessible for women and minority group members. Has this investment been effective? According to SBA reports (Minorities in Business, 2001 and Women in Business, 2001) both minority group members and women have made significant strides in business ownership in recent years. A cursory analysis of self-employment in the 2000 U.S. Census, however, is not very convincing. Minority group members make up almost 27 percent of the workforce but only 16 percent of the self-employed; while women make up 48 percent of the workforce and only 35 percent of the self-employed. A static analysis of self-employment would give some insight into how things have changed between 1990 and 2000. However, more important are the growth rates overtime. This study will present the two Asnapshots@ from 1990 and 2000, but will use a dynamic analysis to measure the increases in employment between 1990 and 2000 to ascertain the rate of growth in self-employment and compare this growth rate to the growth rate of employment by governments and private companies among populations with selected demographic attributes.



Sample The 1990 and 2000 U.S. Census 5% Public Use Microdata Samples were used as the data sources for this study. Analysis was restricted to individuals who listed themselves as either self-employed in incorporated or unincorporated businesses, employed in local, state, or federal governments, or employed in private for-profit or private not-for-profit companies. Persons less than 16 years of age, persons who were unemployed with no work experience in the previous five years, and persons who listed themselves as unpaid family workers were excluded from the study.

For the purpose of identifying a person=s minority racial group, persons have been classified into four minority group categories: • African American (except Hispanic). A person having origins in any of the black racial

groups of Africa. • American Indian or Alaskan Native (Native). A person having origins in any of the original

peoples of North America, and who maintain their culture through a tribe or community. • Asian or Pacific Islander (Asian). A person having origins in any of the original people of

the Far East, Southeast Asia, India, or Pacific Islands. • Hispanic. A person of Mexican, Puerto Rican, Cuban, Central or South American, or other

Spanish culture or origin, regardless of race. This classification system follows the EEOC guidelines that specify that the term minority is used to mean four particular groups who share a race, color or national origin. (EEOC, 2003) The 2000 U.S. Census 5% Public Use Microdata Sample includes two other categories of minorities, Asome other race alone@ and Atwo or more major race groups@ that are not included in this study, since they do not fall easily into the four distinct minority categories identified by EEOC. In addition, since the category of Atwo or more major race groups@ was not included in the 1990 U.S. Census, grouping people into another minority category would not provide useful data for a meaningful comparison between 1990 and 2000. Thus, we have knowingly eliminated 0.07% of the minority population in the analysis of 1990 data and 1.57% of the minority population in the analysis of 2000 data. The overall demographics of the workforce in the 1990 U.S. Census 5% Public Use Microdata Sample (consisting of 7,346,117 people) and the 2000 U.S. Census 5% Public Use Microdata Sample (consisting of 8,259,041 people) were similar in some ways but quite different in other ways. As can be seen in Table 1, in both 1990 and 2000, about 10% of the working population were self-employed, 52% were male, 93-95% were US citizens, 87-90% were born in the USA, and only about 3% did not speak English well. The two major differences in demographics between 1990 and 2000 are the ethnicity and age of the population. Minority participation in the workforce grew from 20% in 1990 to almost 27% in 2000. The workforce also aged with 56% of the population 35 years or older in 1990 compared to 62% in 2000.



TABLE 1 Demographic Characteristics of the Workforce, 1990 and 2000 1999 2000

Self-Employed 9.7% 9.9%

Government Employment 15.9 15.0

Private Employment 74.4 75.0

Males 52.2 51.9

African Americans 9.1 10.0

Asians 2.6 3.5

Hispanic 7.5 10.8

Natives 0.8 0.8

Whites 80.0 73.4

Age

0-24 17.8 16.4

24-34 26.2 21.2

35-44 23.3 24.6

45-54 15.3 20.4

55-64 11.0 11.6

Over 65 6.3 5.8

U.S. Citizen 95.1 92.9

Foreign Born 9.6 13.4

English Speaking Ability

English Only 87.4 83.3

Very Well 7.3 9.2

Well 2.8 3.6

Not Well 1.9 2.7

Not at all 0.6 1.1

Sources: 1990 and 2000 U.S. Census 5% Public Use Microdata Samples.



Hypothesis

One general hypothesis is tested in this study. Hypothesis: The face of entrepreneurship is becoming more diverse. This general hypothesis will be assessed through the testing of four sub-hypotheses. These sub-hypotheses will look at the composition of self-employment in 1990 and compare this data with self-employment in 2000 to ascertain if significant changes have occurred over the decade of the 1990s. The rates of these changes will then be analyzed to predict the long-run impact of these changes on the composition of the self-employed. The SBA claims that women have made great strides toward economic equality, primarily due to their entrepreneurial endeavors, and that these advances in economic equality can be partially accounted for by the considerable increase in women-owned business in recent years. (Women in Business, 2001) Thus, our first sub-hypothesis is:

H1: Self-employment of women is increasing and increasing at a faster rate than for men.

The SBA states that the economic well-being of America=s minority communities is inextricably linked to their involvement in business activities and that business ownership by minority group members has increased rapidly in recent years. (Minorities in Business, 2001) Thus, our second sub-hypothesis is:

H2: Self-employment of minority group members is increasing and increasing at a faster rate than for non-minority members.

Scarborough and Zimmer (2003) claim that people born between 1965 and 1980 are the most entrepreneurial generation in history and are responsible for 70 percent of all business start-ups. Surveys have found that 60 percent of 18- to 29-year-olds hope to launch their own business. Scarborough and Zimmer conclude that Generation X may be more appropriately called Generation E B E for entrepreneurship. Thus, our third sub-hypothesis is:

H3: Self-employment of young people (i.e., 34 and younger) is increasing and increasing at a faster rate than for older people (i.e., 35 and older).

Our last hypothesis tests the rationale that people with cultural disadvantages, such as foreign birthplace, non-US citizenship, or lack of English-speaking ability, may be at a disadvantage in acquiring employment in governments and private companies. Thus, in order to achieve economic equality, they will open their own businesses and face the marketplace directly. Our fourth sub-hypothesis states:

H4: Self-employment among people who are foreign born, non-US citizens or speak English poorly is increasing and increasing at a faster rate than for similar people working for governments and private companies.



Findings

Table 2 presents the characteristics of the self-employed in 1990 and 2000. A cursory inspection of Table 2 shows that the percentage of female workers who are self-employed is higher in 2000 than in 1990, the percentage of self-employed who are white is lower in 2000 than in 1990, self-employed workers in 2000 appear to be older than they were in 1990 and the percentages of non citizens, immigrants and those whose English-speaking ability is poor have all risen between 1990 and 2000. Thus, this static comparison provides some evidence that the ranks of the self-employed are more diverse now than they were in 1990. However, as noted above, the more important question is the rate of change in these measures.

TABLE 2

Characteristics of the Self-Employed, 1990 and 2000. 1999 2000

Sex

Females 32.7% 34.7%

Males 67.3 65.3

Race

African Americans 3.5 4.6

Asians 2.6 3.4

Hispanic 4.8 7.4

Natives 0.5 0.6

Whites 88.6 84.0

Age Groups

16-24 4.5 4.2

35-34 18.9 13.7

35-44 26.7 26.1

45-54 20.5 26.0

55-64 16.4 17.5

65+ 13.0 10.0

Citizens/Immigration/English Ability

Non-US Citizen 4.2 5.9

Immigrant 9.5 13.0

English Only 88.2 84.9

Very Well 6.8 8.0

Well 3.0 3.8

Not Well 1.6 2.5

Not at All 0.4 .08

Sources: 1990 and 2000 U.S. Census 5% Public Use Microdata Samples.



Table 3 presents the percentage rate of growth in the self-employed, employees of governments, and employees of private companies between 1990 and 2000. Self-employment grew by 15.2% between 1990 and 2000, while employment in governments and private companies grew by only 12.1% in the same period. Thus, self-employment increased from 1990 to 2000 at a faster rate than the growth of employees who worked for others. This appears to support the popular concept that entrepreneurship is a growing phenomenon in the United States.

TABLE 3

Distribution of the Self-Employed and Employees of Governments and Private Companies, 1990 and 2000

Percentage Growth

1990 2000 1990-2000

Self-Employed 712,062 820,243 15.2% Employees of Governments 1,167,503 1,241,071 6.3 Employees of Private Companies 5,466,552 6,197,727 13.4 Total EG&PC* 6,634,055 7,438,798 12.1

*Employees of Governments and Private Companies. Sources: 1990 and 2000 U. S. Census 5% Public Use Microdata Sample Table 4 presents the percentage rates of growth by gender between1990 and 2000. Analysis of the data reveals two patterns concerning women entrepreneurs. First, self-employment of women has increased over the past ten years and it is increasing at a faster rate than employment of women by governments and private companies. The growth rate of self-employed women of 22.5% between 1990 and 2000 is significantly higher than the growth rate of women employees of governments and private companies of only 13.3%. Second, the growth rate of 22.5% for females in self-employment is nearly twice as high as the growth rate of men of only 11.7%. Thus, we can conclude that the participation rate of women in self-employment is growing faster than the participation rate for men.



TABLE 4 Distribution of Employment by Gender, 1990 and 2000

Percentage Growth

1990 2000 1990-2000

Females 3,487,967 3,971,988 13.9% Self-Employed 232,615 284,917 22.5 EG&PC* 3,255,352 3,687,071 13.3

Males 3,858,150 4,287,053 11.1

Self-Employed 479,447 535,326 11.7 EG&PC* 3,378,703 3,751,727 11.0

Self-Employed 712,062 820,243 15.2

Females 232,615 284,917 22.5 Males 479,447 535,326 11.7

EG&PC* 6,634,055 7,438,798 12.1

Females 3,255,352 3,687,071 13.3 Males 3,378,703 3,751,727 11.0

*Employees of Governments and Private Companies. Sources: 1990 and 2000 U. S. Census 5% Public Use Microdata Sample The growth rates of minority group members in self-employment activities can be seen in Table 5. Self employment of minority group members grew at a rate of 60.3%, while minority employment by governments and private companies grew at a rate of only 40.2%. Further, the growth rate in minority self-employment exceeded the growth rate of minority employment in governments and private companies over the past ten years in all categories of minority groups except Asians. Perhaps even more interesting is that the growth rate for African-Americans in self-employment (51.1%) is more than twice the growth rate for African-Americans in governments and private companies.



TABLE 5 Minority* Distribution of Self-Employed Persons, 1990 and 2000 and

Percentage Distribution of Minority Employees of Governments and Private Companies, 2000

Self-Employed EG&PC** Percentage Percentage Growth Growth

1990 2000 1990-2000 1990-2000 African American 24,728 37,367 51.1% 22.3% Asian 18,606 27,672 48.7 52.3 Hispanic 34,042 60,314 77.2 60.2 Natives 3,626 4,518 24.6 18.9 Total Minority 81,002 129,871 60.3 40.2 *The Asome other race alone@ and the Atwo or more major race groups@ categories are omitted since they make up only 0.04% of the 1990 and 1.41% of the 2000 working population. * *Employees of Governments and Private Companies. Source: 1990 and 2000 U.S. Census 5% Public Use Microdata Samples

As can be seen in Table 6, when the growth rates of self-employment by ages are compared with the growth rates of ages of employees of governments and private companies, it becomes apparent that self-employment is becoming an attractive alternative for the very young and for older workers. During the past ten years, self-employment of young persons ages 16-24 grew at a rate of 8.2%, while employment by governments and private companies of these young persons grew at a rate of only 3.6%. Self-employment of workers ages 55 and older also grew at a higher rate than their employment by governments and private companies. The demographic shift in the overall age of the workforce led to a much greater decline in self-employment for those aged 25-34 than for those employed by governments and private companies. Further, employment by governments and private companies increased faster the self-employment for those in the 45-54 age group. Thus, it appears that the very young are more attracted to being self-employed, but then their priorities shift to less risky employment opportunities while they are in their late twenties through mid-50s, before returning to the ranks of the self-employed. Since the period of time when individuals are between the ages of 25 and 54 are the prime Afamily-building@ years, this would seem to be consistent with the notion of obtaining less risky employment.



TABLE 6

Distribution of Self-Employed Persons by Age Groups, 1990 and 2000 and Percentage Distribution of Employees of Governments and Private Companies by Age

Groups, 2000

Self-Employed Percentage EG&PC*

Growth Percentage Growth 1990 2000 1990-2000 1990-2000

16-24 31,800 34,406 8.2% 3.6% 25-34 134,970 112,650 -16.5 -8.2 35-44 190,064 214,379 12.8 19.4 45-54 145,900 213,293 46.2 50.0 55-64 116,510 143,400 23.1 16.9 65 + 92,818 102,115 10.0 0.4

*Employees of Governments and Private Companies.

Sources: 1990 and 2000 U. S. Census 5% Public Use Microdata Samples Table 7 shows the growth rates of self-employed by foreign birthplace, non-US citizenship, and English-speaking ability. An analysis of Table 7 suggests that only poor English-speaking ability appears to have an influence on a person=s choice of employment during the past ten years. A comparison of the growth rates of foreign born and non-USA citizens in self-employment and employment by governments and private companies over the past ten years show similar rates of growth. Self-employment of foreign born grew at a rate of 57.5% versus 57.1% for the growth of these employees in governments and private companies. Self-employed US citizens grew at a rate of 61.7% versus a growth rate of 63.0% for employees of governments and private companies.



TABLE 7 Distribution of Self-Employed Persons by Place of Birth, USA Citizenship, and English

Speaking Ability, 1990 and 2000 and Percentage of Employees of Governments and Private Companies by Place of Birth, USA Citizenship, and English Speaking Ability, 2000

Self-Employed EG&PC*

Percentage Percentage Growth Growth

1990 2000 1990-2000 1990-2000

Place of Birth Not Born in USA 67,655 106,541 57.5% 57.1%

Citizenship Not Citizen of USA 29,855 48,290 61.7 63.0 English Ability

The most significant aspect of this study is the determination that the growth rates of women, minority group members, the very young and older members in self-employment are significantly higher than their growth rates in governments and private companies, thus making them a larger part of the self-employed in the future. Self-employment grew by 15.2% between 1990 and 2000. During this same period, self-employment of women grew by 22.5%, African Americans by 51.1%, Hispanics by 77.2% and Natives by 24.6%. The self-employment of people aged 55-64 and 65 and over grew by 23.1% and 10.0%, respectively; while self-employment of people aged 16-24 grew by 8.2%. These growth patterns exceed the growth

English Only 628,127 696,688 10.9 6.8 Very Well 48,520 65,595 35.2 42.4 Well 20,993 31,059 47.9 43.7 Not Well 11,499 20,650 79.6 66.0 Not at All 2,923 6,251 113.9 99.3 *Employees of Governments and Private Companies. Source: 1990 and 2000 U.S. Census 5% Public Use Microdata Samples The growth rates in self-employment by persons with limited English-speaking ability is 79.6% for those who do not speak English well and 113.9% for those who do not speak English at all. This is in contrast to growth rates of employees in governments and private companies of 66.0% and 99.3%, respectively. Thus, it appears that while foreign birthplace and US citizenship does not have an impact on a person=s choice of employment, a person=s lack of English-speaking ability may have had more of an influence on a person=s choice of employment over the past ten years.

Discussion and Implications



patterns of employees of governments and private companies for these selected population variables. Self-employment of people with limited English capabilities grew by more than 80% (i.e., 79.6% for those who do not speak English well and 113.9% for those who do not speak English at all). Clearly the new faces in entrepreneurship in the future will consist of more women, more minority group members, more very young and older members, and more people with limited ability in English. The findings of this research support the general hypothesis that the face of entrepreneurship has become more diverse in the past ten years. The self-employed population in the United States has a larger percentage of female and minority group members than it did ten years ago and this population is growing at a faster rate than the increase in self-employment. Interestingly, the increase of minority group members who are self-employed is reflected across all minority groups (i.e., African Americans, Hispanics, and Natives) except Asians. Thus, Hypotheses 1 and 2 are supported. Hypothesis 3 has also been supported, since our findings show that a larger percentage of young people and a larger percentage of older people choose self-employment over employment in governments and private companies. Although Hypothesis 3 suggests that only the very young were increasing their interest in self-employment, our findings reflect the fact that entrepreneurship has become more diverse with respect to age B only not as we expected. Cultural disadvantages such as foreign birthplace or lack of USA citizenship do not appear to impact the choice of self-employed, at least as compared to those choosing government or private employment, but the lack of English-speaking ability does appear be an increasing reason for self-employment. Thus, Hypothesis 4 is partially supported by these findings. Overall, these findings suggest that entrepreneurship may become, as suggested by the SBA, an avenue to economic equality for those persons who are different from the majority population of the USA. Self-employment removes the artificial barriers to success that can be placed on individuals by prejudice or organizational bureaucracies and replaces them with the free market system. In this free marketplace, individuals have the opportunity to face competition directly and succeed or fail based on their ability to meet or beat the competition. It could be that efforts to encourage entrepreneurship by the U. S. Small Business Administration B such as the Small Business Development Centers, the SBA 7(a) loan guaranty program, the 504 Certified Development Company program, and the SBA 8(a) program to help small companies obtain government contracts B may be a contributing factor for the larger self-employment growth rates for women and minorities. Another possibility could be the changing culture in the United States. For example, an awareness in equal employment opportunity in the 1960's and 1970s increased enrollment of women and minorities in business schools in the 1970s and 1980s that eventually resulted in an increase in employment of women and minorities in professional and managerial positions. Thus, an awareness in the 1980s and 1990s that the USA economy is becoming more entrepreneurial and that opportunities exist for self-employment may be encouraging a more diverse group of people to take advantage of these opportunities by starting their own businesses. Regardless of the causes for these changes, it is evident that the face of entrepreneurship is becoming much more diverse with an increasing representation of women, minority group members, the very young and older members of society.



References

Begley, T. & D. Boyd (1987). Psychological characteristics associated with performance in entrepreneurial firms and smaller businesses. Journal of Business Venturing, 2, 79-93. Brokchaus, R.H. (1982). The psychology of the entrepreneur in C. Kent, D. Sexton, and K.H. Vesper (eds.), Encyclopedia of Entrepreneurship, Englewood Cliffs, NJ: Prentice Hall.

Carland, J.W., F. Hoy, W.R. Boulton, and J.A.C. Carland (1984). Differentiating entrepreneurs from small business owners: A conceptualization. Academy of Management Review, (9)2, 354-359. Chen, C., P. Greene, & A. Crick (1998). Does entrepreneurial self-efficacy distinguish entrepreneurs from managers? Journal of Business Venturing, 13, 295-316. Cooper, A., C. Woo, & W. Dunkelberg (1988). Entrepreneurs= perceived chances for success. Journal of Business Venturing, 3, 97-108. Gordon, R.A. and J.E. Howell (1959). Higher Education for Business. NY: Columbia

University Press. Galbraith, J.K. (1967). The New Industrial State. Boston, MA: Houghton, Mifflin. Kets de Vires, M.F.R. (1977). The entrepreneurial personality: A person at the crossroads. Journal of Management Studies, 14(1), 134-157. Kihlstrom, R., & J. Laffont (1979). A general equilibrium entrepreneurial theory of firm formation based on risk aversion. Journal of Political Economy, 87, 719-748. Kilby, P. (1971). Entrepreneurship and economic development, New York: Free Press. Learned, K.E. (1992). What happened before the organization? A model of organization formation. Entrepreneurship Theory and Practice, 17(1), 39-48. McClelland, D.C. (1961). The Achieving Society. Princeton, NJ: Van Nostrand. McClelland, D.C. (1965). Achievement motivation can be developed. Harvard Business Review, 43(6), 6-24, 178. Naffziger, D.W., J.S. Hornsby, & D.F. Kuratko (1994). A proposed research model of entrepreneurial motivation. Entrepreneurship theory and practice, (18)3, 29-42. NFIB Small Business Policy Guide (2000). NFIB Education Foundation, Washington, DC. 15 and 33.



Palich, L. & R. Bagby (1995). Using cognitive theory to explain entrepreneurial risk-taking: Changing conventional wisdom. Journal of Business Venturing, 10, 425-438. SBA U.S. Small Business Administration Office of Advocacy, 2001. Minorities in Business, 2001, Washington, DC. SBA U.S. Small Business Administration Office of Advocacy, 2001. Women in Business, 2001, Washington, DC. (October 2001). Scarborough, N.M. and T.W. Zimmer, (2003). Effective Small Business Management, 7th ed. New Jersey: Prentice Hall, 2-3. Schumpeter, J.A., (1934). The theory of economic development, Cambridge, MA: Harvard University Press. Sexton, D.L. & N.B. Brown (1986). Validation of a personality index: Comparative psychological characteristics analysis of female entrepreneurs, managers, and entrepreneurship students and business students. In R. Ronstadt, J.A. Hornaday, R. Preston, 7 K.H. Vesper (Eds.), Frontiers of Entrepreneurship Research, Wellesley, MA: Babson College, 40-51. Shapero, A. (1948). The entrepreneurial event. In C.A. Kent (Ed.), Environment for Entrepreneurship, Lexington, MA: D.C. Heath, 21-40.

Shaver, K.G., & L.R. Scott (1991). Person, process, choice: The psychology of new venture creation. Entrepreneurship Theory and Practice, 16(2), 23-45.

The State of Small Business: A Report of the President (1999). Washington, DC: U.S. Government Printing Office. p. 28. Timmons, J. (1985), New Venture Creation, Homewood, IL: Richard D. Irwin.

Whyte, W.H. (1956). The Organization Man. New York: Simon and Schuster.

Association for Small Business & Entrepreneurship 32ndAnnual Conference


SOCIOLOGICAL FACTORS, PSYCHOLOGICAL TRAITS AND ENTREPRENEURIAL ORIENTATION: A STUDY OF USED CAR DEALERS

J. R. Smith, Jackson State University

Donatus A. Okhomina, Fayetteville State University Alisa L. Mosley, Jackson State University

Abstract

The entrepreneurship literature is replete with empirical studies addressing psychological traits (e.g. need for achievement, internal locus of control, tolerance for ambiguity and risk taking propensity) impacting entrepreneurial orientations that have resulted in preliminary theory development and controversy defining an entrepreneur. Sociological influences are an important factor in the success of an entrepreneurial venture. Sociological factors such as education and a supportive environment may have a moderating impact on the relationship between psychological traits and entrepreneurial orientations. Sample respondents were used car dealer entrepreneurs situated in a Southern capitol city. Results of the study support significant positive relationships between psychological traits and entrepreneurial orientations. Moderated regression results lend support to levels of education moderating the relationships of three of the four sub-constructs of psychological traits and entrepreneurial orientations. A discussion of the findings, gaps in the literature and avenues for future research are advanced.

Introduction

The entrepreneurship literature is replete with controversy on discerning appropriate precise definitions of an entrepreneur and entrepreneurship. Focusing on definitional inconsistency and vagueness in understanding who is an entrepreneur and what features constitute entrepreneurial orientation, Cole (1969, p. 17) had this to say:

My own personal experience was that for years we ran a research center in entrepreneurial history, for ten years we tried to define the entrepreneur. We never succeeded. Each of us had some notion of it – what he thought was, for his purposes, a useful definition. And I don’t think you’re going to get farther than that.

Theoretical and data based research efforts continue to debate the definitional issues in the entrepreneurship literature (Aldrich & Kenworthy, 1999; Aldrich & Martinez, 2001; Busenitz & Barney, 1997; Carland, Hoy, Boulton, & Carland, 1984; Cole, 1969; Gartner, 1988, 2001; Knight, 1921; Lee & Peterson, 2000; Lumpkin & Dess, 1996; Lyon, Lumpkin & Dess, 2000; Schumpeter, 1934; Shane & Venkataraman, 2000). Lumpkin and Dess (1996, p. 135) asserted, “.... efforts have served to point out the various dimensions of the entrepreneurial process, they have not led to any widely held consensus regarding how to characterize entrepreneurship. This lack of consensus has impeded progress for researchers toward building and testing a broader theory of entrepreneurship, and has made it especially difficult for them to investigate the



relationship of entrepreneurship to performance.” Hornaday (1992, p. 12) denotes “there is no accepted definition–working or otherwise –of the terms” “entrepreneur” and “entrepreneurship”...the lack of consensus...ensnares nearly every empirical or theoretical research effort.” Gartner (1988, p.57) is in the affirmative with Vesper (1980) in suggesting that the creation of an organization is a complex process and a contextual event, the outcome of many influences. Vesper (1980) goes on to note that the more education and experience an entrepreneur has had in business (especially small business), the more likely it is that the current venture will be a success. Experience enables the entrepreneur to identify potential problems and deal with them before they destroy the venture. To some extent, managerial ability will be a function of the entrepreneur’s education and experience, but it is also an inborn skill, which some entrepreneurs are not able to develop. Hence, from an analysis perspective, this study purports that personality traits viewed alone are inappropriate to explain the phenomenon of entrepreneurship.

Purpose of Study

This study was conducted to determine to what extent, if any, sociological factors moderate the relationship between psychological traits and entrepreneurial orientation of the used car entrepreneur sample respondents located in a Southern capitol city.

Study Hypotheses

Three sets of testable sub hypotheses were formulated:

H1a Need for achievement is positively related to entrepreneurial orientation. H1b Internal locus of control is positively related to entrepreneurial orientation. H1c Tolerance for ambiguity is positively related to entrepreneurial orientation. H1d Risk taking propensity is positively related to entrepreneurial orientation. H2a Levels of education moderate the relationship between need for achievement and

entrepreneurial orientation. H2b Levels of education moderate the relationship between internal locus of control

and entrepreneurial orientation. H2c Levels of education moderate the relationship between tolerance for ambiguity

and entrepreneurial orientation. H2d Levels of education moderate relationship between propensity for risk-taking and

entrepreneurial orientation.



H3a Supportive environment moderates the relationship between need for achievement and entrepreneurial orientation.

H3b Supportive environment moderates the relationship between internal locus of

control and entrepreneurial orientation. H3c Supportive environment moderates the relationship between tolerance for

ambiguity and entrepreneurial orientation. H3d Supportive environment moderates the relationship between risk-taking

propensity and entrepreneurial orientation.

Method Measures

Need for achievement H1a was measured using a three-item, 7-point Likert type scale that was originally developed by Edwards (1959) to measure achievement motivation. The mean score of achievement motivation among respondents was 5.88, which indicated that, on the aggregate, used-car entrepreneurs possess a high level of achievement motivations. Internal locus of control H1b was measured using a four-item, 7-point Likert type scale that was originally developed by Rotter (1966) to measure generalized expectancies. The mean score of internality among respondents was 5.70, which indicated that, on the aggregate, used car entrepreneurs possess a high level of internal locus of control. Tolerance for ambiguity H1c was measured using a three –item, 7-point Likert type scale that was originally developed by Budner (1962) to measure tolerance for ambiguity.

TABLE 1

Descriptive Statistics of Variables StATISTI

CS Supportive

Environment Need

Achievement

Internal Locus of Control

Tolerance for

Ambiguity

Risk Taking

Propensity

Entrepreneurial

Orientation Mean 5.61 5.88 5.70 5.24 3.11 4.15

Median 5.67 6.00 6.00 5.33 3.00 4.46 Mode 6.30 6.30 6.00 5.33 3.00 4.46

Std. Dev. 1.38 1.27 1.09 1.18 1.21 1.41 Kurtosis 0-.15 5.50 2.95 0.44 1.21 -0.07

Skewness -2.48 -1.05 -1.42 -0.77 -1.10 -0.017 Minimum 2.00 1.33 1.00 2.00 0.00 1.38 Maximum 7.00 7.00 7.00 7.00 5.00 7.00

Range 5.00 5.67 5.50 5.00 5.00 5.62



The mean score of tolerance for ambiguity among respondents was 5.24, which indicated that, on the aggregate, used car entrepreneurs possess above average level of tolerance for ambiguity. Risk-taking propensity H1d was measured by a two-item scale that was developed by Kogan and Wallach (1964). The mean score for risk taking propensity among respondents was 3.l1, which indicated that, on the aggregate, used car entrepreneurs have an average level of risk-taking propensity. Entrepreneurial orientation dimensions were measured using an eleven–item, 7-point Likert-type scale that was designed to measure respondents’ entrepreneurial orientations. The mean score value among respondents was 4.15, which indicated that, on the aggregate, used car organizations are entrepreneurially oriented. This result is consistent with previous research studies (Chadwick 1998; Covin & Slevin, 1989; Knight 1997; Naman & Slevin, 1993). Table 1 summarizes the descriptive statistics of the study variables. Supportive environment factors H2a-d and H3a-d were measured using a three–item, 7-point Likert type scale that was designed to assess the adequacy of institutional and legal frameworks, government policies, availability of universities, training and research services to the used car business community. The mean score of supportive environment among respondents was 5.61 which indicated that, on the aggregate, used car entrepreneurs perceived their business environment as supportive in terms of having adequate legal and institution frameworks, favorable government policies, availability of universities, training, research and counseling services, for efficient functioning of private enterprises. The Sample

A mailing list of the registered used auto dealers and owners of used car lots comprised the sampling frame for this study. Three hundred fifteen (315) self-reported questionnaires with a self-addressed, stamped return envelope were mailed to the randomly selected auto dealers from the original four hundred and forty (440) registered population list. A total of ninety five (95) questionnaires were returned, completed and usable, representing a 30.16 percent response rate of the 315 mailed questionnaires.

Results

Psychological Characteristics and Entrepreneurial Orientation Hypotheses H1a-d were tested employing hierarchical regression analysis. Hierarchical regression is the statistical technique of choice when a single metric dependent variable is presumed related to one or more metric independent variables (Hair, Anderson, Tatham, & Black, 1995). Statistical analyses were performed on the complete study framework (achievement, internal locus of control, tolerance for ambiguity and risk- taking propensity) employing the hierarchical procedure of SPSS (Morgan & Griego, 1998). Hypothesis H1a states that need for achievement is positively related to entrepreneurial orientation. The results of the regression analysis are shown in Table 2. The first independent variable entered in the hierarchical regression was need



for achievement. A significant relationship was found (b = .369, p<. 001), and it explained 13 percent of the variance in entrepreneurial orientations.

TABLE 2 Regression Results: Psychological Traits and Entrepreneurial Orientation

Independent

Variables Beta SE F R2

Need for

Achievement .369*** .093 13.74 .13

Internal Locus

Of Control .081 .106

Tolerance for

Ambiguity .305** .091

Risk taking

Propensity .174 .032

R2 .28

Adjusted R2 = .25 Change in R2 .15

Only standardized regression coefficients are shown

N = 94

*** P < 0.001

** P < 0.01

Hypothesis H1b states that internal locus of control is positively related to entrepreneurial orientation. Hypothesis H1c states that tolerance for ambiguity is positively related to entrepreneurial orientation. Hypothesis H1d states that risk-taking propensity is positively related to entrepreneurial orientation. Results showed significant relationships between tolerance for ambiguity and entrepreneurial orientation (b = .305, p < .01) with additional variance change of 11 percent explained in entrepreneurial orientations. The positive relationship between risk-taking propensity and entrepreneurial orientations was not significant (b = .174, p. < .10). The



positive relationships between internal locus of control and entrepreneurial orientations were not significant (b = 0.081, p. = .394). Need for Achievement and Entrepreneurial Orientations Hypothesis H1a states that need for achievement is positively related to entrepreneurial orientation. Results of the Pearson’s correlations suggest significant orientations (See Table 3). Hierarchical regression results suggest significant positive relationships between need for achievement and entrepreneurial orientations. The results indicated that need for achievement had a standardized coefficient beta of = .36, p. < .001. Thus, hypothesis H1a is supported.

TABLE 3 Correlation Coefficients

Entrepreneurial Need for Internal Locus Tolerance for Risk Taking Levels of Supportive Orientation Achievement of Control Ambiguity Propensity Education Environment Entrepreneurial Orientation Need for Achievement .36** Internal Locus of Control .22* .29** Tolerance for Ambiguity .32** -.05 .10 Risk-Taking Propensity .19* -.09 -.01 Levels of Education .26** .25** .27** .05 -.00 .41** Supportive Environment .31** .18* .24* .28** .06

** = Significant at 0.01 level • = Significant at 0.05 level These findings are consistent with other prior empirical research studies that linked need for achievement to entrepreneurial process (Begley & Boyd, 1986; Johnson, 1990; McClelland,



1961, 1965a; Shaver & Scott, 1991). Miner, Smith, & Bracker (1989) advanced the notion that achievement motivation was positively related to firm growth and personal innovativeness in a sample made up of actual entrepreneurs.

Internal Locus of Control and Entrepreneurial Orientations Hypothesis H1b states that internal locus of control is positively related to entrepreneurial orientations. Results of the Pearson’s correlations suggest significant weak positive relationships between internal locus of control and entrepreneurial orientations. However, results of the hierarchical regression did not suggest significant positive relationships between internal locus of control and entrepreneurial orientations. Thus, Hypothesis H1b is not supported. Tolerance for Ambiguity and Entrepreneurial Orientations Hypothesis H1c states that tolerance for ambiguity is positively related to entrepreneurial orientation. Results of the Pearson’s correlations suggest significant moderate positive relationships between tolerance for ambiguity and entrepreneurial orientations. Results of the hierarchical regression also suggest significant positive relationships between tolerance for ambiguity and entrepreneurial orientations. Thus, hypothesis H1c is supported. Tolerance for ambiguity with a standardized beta coefficient of .31 at a significance level of p. < .01 suggests a significant explanatory power for the twenty five percent variance (R2 adj.=.25) explained by the psychological traits equation of entrepreneurial orientations. These findings lend support to prior research studies that linked tolerance for ambiguity to entrepreneurial behavior (Tegano, 1990; Tsui, 1993). Risk Taking Propensity and Entrepreneurial Orientations Hypothesis H1d states that risk-taking propensity is positively related to entrepreneurial orientations. Results of the Pearson’s correlations suggest a significant weak positive relationship between risk taking propensity and entrepreneurial orientations. Results of the hierarchical regression also suggest positive relationships between risk taking propensity and entrepreneurial orientations but not significant at a specified level. Thus, hypothesis H1d does not have significant support. Moderated regressions analysis has been recommended as an appropriate statistical technique for testing hypothesized contingency relationships (Schoonhoven 1981; Arnold 1982; Darrow & Kahl 1982; Covin and Slevin 1989. Finally, moderated regression analysis is an appropriate method for identifying interaction effects in a format that the significance of the interaction terms are tested only after other independent variables are entered into the equation. Thus, interaction effects are interpreted as being significant only if they explain a greater portion of the variance in the dependent variable than that which is explained by individual independent variables (Covin & Slevin, 1989). The statistical significance of interaction effects were tested by first regressing the dependent variable on the independent variables, and the hypothesized moderator variables and then adding the interaction terms that represent the cross product of the independent variable and each of the



proposed moderator variables (Sharma, Durand, & Gur-Arie, 1981). The moderated regression equations implemented to test sub hypotheses 2 and 3 followed closely the analysis of Sharma et al. (1981).

Education and Entrepreneurial Orientation H2a, H2b, H2c, H2d The results of the moderated regression analyses are presented in Table 4. The interactions terms of the levels of education and psychological traits were computed using SPSS by multiplying the levels of education variable and each of the four sub constructs of psychological traits (need for achievement, internal locus of control, tolerance for ambiguity and risk taking propensity) to ascertain whether the variance of the two products provided incremental explanatory power of entrepreneurial orientations. The interactions of need for achievement and levels of education variables provided negative variance change of -.007 at a significance level of p < 0.01.



TABLE 4 Regression Results: Education Moderating the Relationships Between

Psychological Traits and Entrepreneurial Orientations

Entrepreneurial Orientation (Dependent Variable) Beta R2 Change in R2 Independent Variables Need for Achievement (NA) .342*** .130 Internal Locus of Control (C) .051 .014 Tolerance for Ambiguity (T) .300*** .108 Risk-Taking Propensity (R) .173 .029 Levels of Education (E) .143 .018 R2 0.299 Need for Achievement X Levels of Education .351** .123 -.007 Internal Locus of Control X Levels of Education .297** .088 .074 Tolerance for Ambiguity X Levels of Education .367*** .134 .026 Risk Taking Propensity X Levels of Education .268** .072 .043 ______ _______ 0.417 0.136 R2 =0.417 Change in R2 =0.136 Only standardized coefficients are shown *** p < 0.001 ** p < 0.01

The interactions of internal locus of control and levels of education provided incremental R2 change of .074 at a significance level of p<0.01. The interactions of tolerance for ambiguity and levels of education provided incremental R2 change of .026 at a significance level of p<0.001.



The interactions of risk taking propensity and levels of education provided incremental R2 change of .043 at a significance level of p<0.01. Overall, the moderated multiple regression results suggest that, the interactions of levels of education and three of the four sub constructs of psychological traits (internal locus of control, tolerance for ambiguity, risk taking propensity) provided incremental R2 change or higher explanatory powers of entrepreneurial orientations as hypothesized in H2b, H2c, and H2d.

Supportive Environment and Entrepreneurial Orientations

H3a, H3b, H3c, H3d

The results of the moderated regression analyses are presented in Table 5. The interaction terms of the supportive environments and psychological traits were also computed using SPSS by multiplying the supportive environments variable and each of the four sub constructs of psychological traits (need for achievement, internal locus of control, tolerance for ambiguity and risk taking propensity) to ascertain whether the variance of the two products provided incremental explanatory power of entrepreneurial orientations. The interactions of need for achievement and supportive environments variables provided incremental variance change of .027 at a significance level of p < 0.001. The interactions of internal locus of control and supportive environments variables provided incremental variance change of .096 at a significance level of p < 0.01. The interactions of tolerance for ambiguity and supportive environments variables provided incremental variance change of .044 at a significance level of p < 0.001. The interactions of risk taking propensity and supportive environments variables provided incremental variance change of .041 at a significance level of p < 0.05.



TABLE 5 Regression Results: Supportive Environments Moderating the Relationships

Between Psychological Traits and Entrepreneurial Orientations.

Entrepreneurial Orientation (Dependent Variable) Beta R2 Changes in R2 Independent Variables Need for Achievement .348*** .130 Internal Locus of Control .055 .014 Tolerance for Ambiguity .265** .108 Risk-Taking Propensity .169 .029 Supportive Environment .151 .020 R2 0.301 Need for Achievement X Supportive Environment .396*** .157 .027 Internal Locus of Control X Supportive Environment .332** .110 .096 Tolerance for Ambiguity X Supportive Environment .390*** .152 .044 Risk Taking Propensity X Supportive Environment .264* .070 .041 ______ _______ .489 0.208 R2 =0.489

Change in R2 =0.208

Only standardized coefficients are shown

*** p < 0.001

** p < 0.01 p < 0.05 Overall, the moderated multiple regression results suggest that, the interactions of supportive environments and the four sub constructs of psychological traits variables provided incremental variance change or higher explanatory powers of entrepreneurial orientations as hypothesized in H3a, H3b, H3c, and H3d.



Discussion Hypotheses were formulated to discern whether sociological factors moderated the relationship between psychological traits and entrepreneurial orientations of used car dealers. Results of the Pearson’s correlations largely support significant positive relationships between psychological traits and entrepreneurial orientations. However, the results of the hierarchical regression only provide support for significant relationships for two of the four sub constructs of psychological traits (need for achievement, tolerance for ambiguity) and entrepreneurial orientations. Thus, hypothesis (H1a), which states that need for achievement is positively related to entrepreneurial orientations, and hypothesis (H1c), which states that tolerance for ambiguity is positively related to entrepreneurial orientations are supported. Hypotheses (H1b) and (H1d) are not supported. Moderated regression results support that, levels of education moderate the relationships of three of the four sub-constructs of psychological traits (internal locus of control, tolerance for ambiguity, and risk taking propensity) and entrepreneurial orientations as hypothesized in H2b, H2c, and H2d. Moderated regression results also suggest that supportive environments moderate the relationships between psychological traits and entrepreneurial orientations as hypothesized in H3a, H3b, H3c, and H3d.

Limitations and Directions for Future Research The study was conducted in the service industry, sampling used-car entrepreneurs and owners of used-car lots where no research efforts have previously taken place. Also, the sample was a one time collection of data in one southern metropolitan statistical area of the continental United States. Also, an inappropriate representation of used car dealers with respect to race was not proportionately distributed to get a fair understanding of psychological traits impacting entrepreneur orientations in metropolitan areas where the dealers may be largely African, Hispanic, Asian-American, White or multiracial. Obviously, the findings are inherently limited for generalization purposes. Future data-based studies addressing the impact of psychological traits on entrepreneurial orientations should employ a more representative sample from multiple industries with provisions for inter-industry variations in life cycles.

Another issue of major concern is the length of the questionnaire used in this study. Future researchers addressing psychological characteristics and relationships to entrepreneurial orientations should use a shorter questionnaire to improve the mail questionnaire response rate.

Lastly, the psychological construct scales employed in this study have been used in prior entrepreneurship studies. However, the low reliability values for some of the psychological constructs are source of concern. A multiple-item scale should be adapted to measure the respective psychological constructs instead of the single-item scale employed in this study



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AN EXAMINATION OF THE POWER OF THE DARK SIDE OF ENTREPRENEURSHIP

Frank S. Lockwood, Western Carolina University

Russell Teasley, North Georgia College and State University JoAnn C. Carland, Western Carolina University James W. Carland, Western Carolina University

Abstract

"Never underestimate the power of the Dark Side!" Luke Skywalker learned that lesson well in a galaxy far, far away and long, long ago, but modern entrepreneurship theorists may be less well informed than the characters in Star Wars. Like the “Force,” Entrepreneurship is a tremendous power for good. But, like the “Force,” Entrepreneurship does have a Dark Side and it is powerful, indeed. With rare exceptions, the literature about entrepreneurship is positive and supportive and implies that uniform benefits accrue to the economy, to businesses, and to individuals as a result of entrepreneurship. This is only half the story. A small number of researchers have examined the dysfunctional aspects of entrepreneurship and pointed out that a Dark Side definitely exists (Kets de Vries, 1985; Solomon & Winslow, 1988; Winslow & Solomon, 1987; 1989). This paper will look at those who turned to the Dark Side for their very existence. The authors have surveyed prisoners who have been convicted of a felony and who are serving sentences in a Federal Prison in the Midwest. The participants were enrolled in a continuing education course involving entrepreneurship and small business startup ideas and they all espoused a desire to “go straight” when their sentences had been served. How did they become criminals? Did they view their criminal activities as entrepreneurial ventures? Will they become legitimate entrepreneurs in the future? Can entrepreneurship education alleviate the problems faced by these offenders when released and is there a greater or lesser chance of recidivism when these inmates are given the opportunity to study entrepreneurship while still incarcerated? If they exist, are Dark Side Entrepreneurs different from main stream Entrepreneurs? These were the questions which drove our research.

Introduction A major problem facing society today is the impact that the growing number of inmates serving sentences have on the economic vitality of our nation. The problem has been exacerbated because our jails are not only filled with first time-offenders but with a large population of repeat offenders, those returned to prison because they were unable to maintain a crime-free lifestyle after being released. According to the Bureau of Justice (2000), in the United States released prisoners were re-arrested at an average rate that was greater than 60%. The high percentage of re-arrested former prisoners is a clear indication that just serving one’s sentence is not a deterrent to committing more criminal acts. The economic cost to society and to those directly affected by criminal activity is tremendous. According to the Bureau of Justice (2000), one of every fifteen people in the U.S. will be incarcerated. That figure is staggering. During the past 25 years, the



penal system in the United States has implemented a strategy of “lock ‘em up and throw away the key.” As a result, there has been an unprecedented growth in the prison population in the number of incarcerated inmates even though the crime rate has been decreasing. Further exacerbating the situation is that incredibly high rate of recidivism. According to the Three State Recidivism Study (Steurer, Smith, and Tracy, 2001) released inmates reported that less than half had a job awaiting them after they were freed from prison. While most (about 87% of those who had received training while in prison and 83% of those who did not participate in training) believed that they had a place to stay after they were released, the remainder were released as homeless, left to roam the streets, mostly in urban areas. The economic cost of incarceration and the cost to society of criminal activity, plus the lost wages due to imprisonment of convicted workers and the cost of providing welfare for their families is creating a substantial burden on local, state and federal budgets. The combination of rising costs multiplied by an ever greater number of incarcerated inmates is putting pressure on the penal system to find an alternative, better strategy for success after release. Is there a strategy that can lead to a lower prisoner population through a decrease in recidivism? Is there a strategy that can help released inmates generate income to support themselves and their families?

Recidivism Research Mounting evidence is demonstrating the potential for education and training programs to reduce the number of incarcerated inmates by reducing the rate of recidivism among those inmates released to return to society. One example of such evidence is the well regarded Three-State Recidivism Study published through a partnership between the Correctional Education Association and the Management and Training Corporation. In this study, Steurer, Smith, and Tracy (2001) demonstrated empirical support for educating incarcerated offenders. Their conclusions were that: 1) although the effect of education on recidivism varied across states, all states showed a reduction in recidivism for prisoners participating in education; and, 2) that post-release, the earnings of the education participants were higher than non-participants, implying that higher wages result in higher standards of living for the released inmates and their families. The pressure ensuing from increased costs of incarceration relative to a growing prisoner population, as a result of high rates of recidivism has led to a new effort to learn about post-release behavior and employment of former inmates. The hypothesis would be that increased exposure to training and educational programs will result in a lower rate of recidivism, thus a lowering of the repeat offenders in the prison system. Several studies over the last twenty five years have had significant results. Table 1 recaps the results of some of these research efforts.



TABLE 1 Research Results of the Effect of Education and Training on Recidivism

Name of Study Type of Training Employment Potential Effect on Recidivism

University of Victoria (Acers, et al, 1980) (Duguid, Hawkey & Knights, 1981)

College Education Program Participants

No Data 14% Recidivism

College Education Non Participants


Illinois Study (Anderson, Anderson & Schumaker, 1988)

Vocational Training High Employability Lower Re-Arrest Rate

Vocational Training and Academic Training

High Employability Lower Re-Arrest Rate

No Vocational Training Low Employability Highest Re-Arrest Rate

Academic Training Only Lower Employability Higher Re-Arrest Rate

Five Year Outcome Study: Factors Associated with Recidivism (Eisenberg, 1991)

GED Completers No Data Lower Recidivism than Non Participants

Alabama Corrections Education Research (Gainous, 1992)

Post-Secondary Course Completers


Post-Secondary Course Non Participants


Post-Release Employment Project (Saylor & Gaes, 1992)

Vocational Program 72% Employed 7% Recidivism

No Program (Control Group)

63% Employed 10% Recidivism

Texas Department of Corrections (Glenn, 1995)

Post-Secondary Vocational Training Graduates

Greater Employability Lower Recidivism Than Non Participants

Maryland Study (Jenkins, Steurer, & Pendry, 1995)

Formal, Post-Secondary

77% Employed ≥ Estimated Minimum Wage

No Data

Louisiana Study (Elbert, 1999)

Vocational Program Completers

No Data Lower Recidivism

Vocational Program Non-completers

No Data Higher Recidivism

Virginia Department of Correctional Education (Hull, et Al, 2000)

No Program (1,307 of 3,000)

55% Employed for at Least 90 Days

49% Recidivism

Did Not Complete Program (786 0f 3,000)


38% Recidivism

Program Completers (907 of 3,000)


20% Recidivism

Three State Recidivism Study (Steurer, Smith, & Tracy, 2001)

Education Program Participants


Education Program Non-participants


Hamden County House Of Corrections Study (Burke & Vivian, 2001)

Community College (Complete at Least 3 Hrs)

No Data 22% Lower Recidivism Than Non Participants



The Three State Recidivism Study issued in 2001 by the Correctional Education Association, and noted above, is an excellent example of the quality of current recidivism/education research. The methodology of the Three State Recidivism Study was well-designed. This study collected data on about 3,200 inmates who were released from prisons in the states of Minnesota, Ohio, and Maryland. The participants in the study were divided into two groups: prisoners who had participated in education and training programs while incarcerated (1,373 prisoners); and prisoners who did not participate in education and training while in prison (1,797). Each prisoner who participated in the study completed a pre-release survey that included information about his family life, education and training background, criminal history, and work experience. Three years of follow-up data were collected to measure rates of released prisoners being re-arrested, re-convicted, and returned to jail. The study found that three years after being released, the group that had participated in education and training programs had a significantly lower rate of recidivism. Also, the wages earned by this same group were higher than those earned by non-participants. As described in Table 1, other such studies over the period of 1980 to 2001 also indicated that some type of educational intervention resulted in lower rates of recidivism. The Federal Bureau of Prisons has found that there is an inverse relationship between education and recidivism (Harer, 1994). Another study found that prisoners who had two-years or more of college education had only a 10% re-arrest rate as compared to the average 60% rate (Marks, 1997). As such, there is promise that an education directed at helping prisoners to become specifically employed and at a higher level should result in even higher levels of success on the outside. This leaves us to wonder whether entrepreneurship education, which is directed toward the creation of businesses, might be utilized for even greater levels of success.

Criminal Entrepreneurs Do Dark Side Entrepreneurs exist? If so, are they different from the entrepreneurs that we normally study? To explore this question, the authors administered established instruments to a convenience sample of convicted felons incarcerated in a Federal Prison in the Midwest. All of the participants were male, and all were participating in a continuing education course involving entrepreneurship. Every participant in the course, 34 men, agreed to participate in the study. The instrumentation included demographic questions dealing with the traditional data, but also included questions about the participant’s criminal activities and criminal history. We also wanted to know whether any of the participants were actually involved in ownership of a legitimate business prior to incarceration, and we specifically addressed whether the participant considered his criminal activities to be a business. The entrepreneurship courses were taught by an inmate instructor who has extensive experience as an entrepreneur, using textbooks and educational material obtained from academic institutions. As indicated, the authors were particularly interested in knowing if the inmates viewed their criminal activities as entrepreneurial ventures: were they Dark Side Entrepreneurs? As we will discuss later, these criminals described their activities in terms of sources of supply, channels of distribution, effect of supply and demand on price, the value of creating a brand identity, and



efforts to obtain competitive advantage. They clearly had a firm grasp of the concepts of first mover advantage and the value of working capital. Therefore, the perceptions and activities of the surveyed inmates were clearly similar to those of entrepreneurs, small businessmen, and business managers.

Personality Traits and the Dark Side Personality traits of entrepreneurs have been examined by many researchers citing such attributes as a need for power (Peay & Dyer, 1989); and, the pursuit of freedom of expression and of spirit (Cole, 1989). Entrepreneurs have been characterized as confident, optimistic, not prone to take great risks or to be reckless, unwilling to have their performance judged by others, especially willing to be independent and self-reliant, and, as more than non-conformist, in fact, mildly sociopathic (Solomon & Winslow, 1988; Winslow & Solomon, 1987; 1989). At least one author has posited that entrepreneurship can be hazardous to one’s health (Buttner, 1988). Many characteristics of entrepreneurs such as risk taking propensity (Mill, 1848; McClelland, 1961; Mancuso, 1975; Timmons, 1978; Brockhaus, 1982; Watts, 1989; Carland & Carland, 1991) have been explored. Innovation has also oft been cited as a central characteristic of the entrepreneurial endeavor (Schumpeter, 1934; McClelland, 1961; Williams, 1981; Martin, 1982; Drucker, 1985; Carland & Carland, 1991). Other researchers have studied the need for achievement in entrepreneurs (Hornaday & Aboud, 1971; Liles, 1974; DeCarlo & Lyons, 1978; Carland & Carland, 1991) and cognitive influences have been examined as well (Carland & Carland, 1983, 1987, 1991, 1992; Barbato & Durlabhji, 1989). In most of the literature in which a portrait of the entrepreneur is drawn, only the positive aspects are vigorously outlined; and yet for every burst of brilliance, there is a negative or dark aspect: a Dark Side. Few have examined the aspects of the Dark Side of entrepreneurship. Osbourne (1991) identified the Dark Side as the "corrupting power of ownership" and cited examples of situations in which the power of ownership corrupted the organization. Cole (1989) described the entrepreneurial self and alluded to the reality that often entrepreneurs are “displaced persons” who are entering the pursuit of ownership for less than sterling goals.

Instrumentation Several instruments were utilized to determine the characteristics of the sample employing traditional constructs of the entrepreneurship literature. We employed tests which measured the entrepreneurial psyche involving cognitive or managerial style (i.e., Hoy & Boulton, 1983; Ginn & Sexton, 1989; 1990; Brodzinski, Scherer & Wiebe, 1990; Dugan, Feeser & Plaschka, 1990; Carland, Carland & Stewart, 1996; Pollard, 2006; Brice 2006). Carland, Carland and Hoy (1992) combined that stream of research with more traditional research on entrepreneurial personality traits, a body of literature which includes many contributions (i.e., Hartman, 1959; Davids, 1963; Hornaday and Aboud, 1971; Palmer, 1971; Liles, 1974; Borland, 1974; Mancuso, 1975; Gasse, 1977; Timmons, 1978; Sexton, 1980; Vesper, 1980; Welsh and White, 1981; Williams, 1981; Dunkelberg and Cooper, 1982; Carland, 1982; Carland, Hoy, Boulton & Carland, 1984; 1988; Ginn & Sexton, 1990; Stewart, 1996; Stewart, Watson, Carland & Carland, 1999; Gaulden, Jackson & Gaster, 2002; Envick & Langford, 2003; Brockman, Becherer &



Finch, 2006). They concluded that entrepreneurship was best understood as an individual drive: the drive toward entrepreneurial behavior. In that same vein, Carland, Carland and Stewart (1996) described the entrepreneurial psyche as a gestalt of multiple personality factors including the need for achievement, the propensity for risk taking, the preference for innovation, and cognitive style. They suggested that the varying strengths of the traits in an individual entrepreneur combine to affect that individual’s behavior. It is this gestalt of drives which produces differences in entrepreneurial behavior (Carland, Carland & Stewart, 1996). Achievement Scale of the Personality Research Form The instrument used to measure the need for achievement is the Achievement Scale of the Personality Research Form (Jackson, 1974). The instrument has been shown to have reliability (Jackson, 1974), to display convergent and discriminant validity, and to possess high correlations with self and peer ratings (Jackson & Guthrie, 1968). It consists of 16 forced choice questions which may be scored by untrained people. Odd-even reliabilities for two groups (N = 83 & N = 84) were .57 and .66 after the Spearman-Brown correction had been applied (Jackson, 1974). In a test for validity, Jackson and Guthrie (1968) reported correlations with self ratings and peer ratings of .65 and .46 respectively, and reported that the form possessed convergent and discriminant validity. Risk Taking Scale of the Jackson Personality Inventory The instrument selected to measure risk taking propensity was the Risk Taking Scale of the Jackson Personality Inventory (Jackson, 1976). The instrument consists of 20 forced choice questions, may be scored by untrained people, and has been reported to display high reliability and validity and to exhibit high correlations with self and peer ratings (Jackson, 1976). Jackson (1976), in a test involving two samples (N = 82 & N = 307), reported internal consistency reliability values of .93 and .91 using Bentler's coefficient theta and .81 and .84 using coefficient alpha. In a test for validity, Jackson (1976) reported (N = 70) correlations with the completion of an adjective checklist, with self rating and peer rating of .75, .77 and .52, respectively. Innovation Scale of the Jackson Personality Inventory The instrument selected to measure preference for innovation was the Innovation Scale of the Jackson Personality Inventory (Jackson, 1976). This instrument also consists of 20 questions in a forced choice format and can be scored by untrained people. It has been reported to display high reliability and validity and to exhibit high correlations with self and peer ratings (Jackson, 1976). Jackson (1976), in tests involving two samples (N = 82 & N = 307), reported internal consistency reliability values of .94 and .93 using Bentler's coefficient theta and .83 and .87 using coefficient alpha. In a test for validity, Jackson (1976) reported (N = 70) correlations with the completion of an adjective checklist, with self rating and peer rating of .79, .73 and .37, respectively.



Myer-Briggs Type Indicator The instrument selected to measure cognitive styles was the Myers-Briggs Type Indicator (Myers & Briggs, 1962). The MBTI is an objective instrument with four dimensions measuring dichotomous preferences derived from Carl Jung's (1923) theory of psychological types. These preferences measure how one employs perception of people, problems and environment in a cognitive process which is intricately involved in decision making and in managerial style. The MBTI classifies people into four temperaments, comprising 16 typologies. It enjoys wide acceptance and use, excellent test-retest correlation, internal consistency and reliability (Mendelsohn, 1965; Buros, 1970; Keyser & Sweetland, 1984) and has been shown to have satisfactory content, predictive and construct validity (Carlyn, 1977). The Carland Entrepreneurship Index The Carland Entrepreneurship Index (Carland, Carland & Hoy, 1992) is a forced choice format instrument which deals with the four constructs evolved from the elements of entrepreneurship espoused in the literature explicated above: personality, preference for innovation, risk-taking propensity, and strategic posture. A principal component factor analysis using varimax rotation resulted in 33 elements. Self ratings produced a score of .417 for a probability of <.001 and a test-retest correlation of .80 was obtained with a probability of <.001, indicating that the index was consistent over time in producing unique scores for respondents. The split-half, odd-even reliability examination resulted in a correlation of .78 and was statistically significant at the <.001 level as well (Carland & Carland, 1996). The Kuder-Richardson test for inter-item reliability was .73 (Carland & Carland, 1996) which means that the test was accurately measuring some characteristic of the people taking it and that the individual items in the test were producing similar patterns of response in different people (Nunnally & Bernstein, 1994). To test the convergent and discriminant validity of the Carland Entrepreneurship Index, the findings were compared with established personality instruments. Tests for discriminant and predictive validity as well as normality indicated that the CEI performed as expected, and an application employing a sample of inc. 500 entrepreneurs supported the power of the index to discriminate among growth oriented entrepreneurs (Carland, Carland & Ensley, 2001).

Results of the Study The demographics of the sample employed in this research are displayed in Table 2. The table also displays the distribution of the sample with regard to the type of crime for which the prisoner was incarcerated, and whether the inmate had previously been arrested. The demographics contained several surprises for the researchers, the first of which was the educational attainment level of the sample. Six of the respondents did not have high school educations, but 8 did hold high school diplomas, and a surprising 19 of the 34 had more than a high school education. These included two baccalaureates and one JD. Most of the participants were incarcerated for drug related crimes, 23 of the 34, while 6 of the 34 had committed violent crimes. Fifteen of the participants reported that they had been self employed at some point in time, but only 9 of these were self employed at the time of arrest.



TABLE 2

Sample of Study Respondents (N=34)

Age 20-29 30-39 40-49 50-59 60+

3 12 11 6 1

Education <12 12 12+

6 8 19

Race White Black Hispanic

9 21 4

Crime Violent Drug Fraud Other

6 23 2 3

Previously Self Employed at some point 15 Prior Arrests None

1 prior arrest 2 prior arrests 3 or more prior arrests

18 6 8 2

To investigate whether the sample of inmates displayed any of the traditional characteristics of entrepreneurs, we administered an abbreviated version of the Myers-Briggs Type Indicator (MBTI), the Carland Entrepreneurship Index (CEI) and the Jackson Personality Inventory (JPI). The results of that survey are displayed in Table 3, and these results were startling to the researchers. The results could have been expected in any sample of entrepreneurs, managers, or other stalwart members of society.



TABLE 3

MBTI Distribution Respondents (N=34)

NT SJ INTJ 4 ISTJ 12 INTP 1 ESTJ 7 ENTJ 3 ISFJ 2 Total 24% 8 Total 62% 21

SP NF ESTP 2 ENFJ 1 ISTP 1 INFJ 1 Total 9% 3 Total 6% 2

Carland Entrepreneurship Index Scores Average CEI Score 23 out of a possible score of 33

Jackson Personality Inventory Risk Taking Propensity 12 out of a possible score of 20 Preference for Innovation 16 out of a possible score of 20 Need for Achievement 12 out of a possible score of 16

Note that Table 3 shows the primary characteristics of our sample as being Sensing-Judging “SJs”, with 62% of the sample displaying that temperament. Contrast that with the expected distribution of SJs in the national population, 38% (Keirsey & Bates, 1984), and one can see how striking the results truly were. Further, the group was dominated by the ISTJ typology, with 35% of the group displaying those traits in contrast to the expected distribution of 5% (Keirsey & Bates, 1984). Keirsey and Bates (1984) describe the SJ as:

being a traditionalist or stabilizer; liking to establish policies, rules, schedules, and standards and create company rituals; being patient, thorough, steady, reliable, orderly; having a strong sense of social responsibility; having a need to serve, to be needed, and to do one's duty; being resistant to change and being decisive; having common sense; being a hard and steady worker, thorough and loyal; and, known to be pessimistic.

Further, Keirsey and Bates (1984) describe the ISTJ as:

driven by a sense of responsibility;



focused inwardly, concentrating on the objective and concrete; extremely demanding; doing what should be done; neat and orderly, tasteful and reserved, believing that there is a place for everything and

that everything should be in its place; dutiful in work and play, believing that an idle mind is the Devil’s playground and that

honest work is good for all; and, exhibiting a sense of duty and responsibility that is greater than any other type.

The typology descriptions of the SJ and the ISTJ certainly did not fit the stereotype which we had possessed relative to incarcerated prisoners prior to this study. The results of this survey painted a picture of a group of men who should have been law abiding citizens. As Table 3 further indicates, the prisoners scored high on the CEI, with scores well above the mean (16 out of 33), suggesting that the group displayed a high drive toward entrepreneurship. Scores on the subsets of the Jackson Personality Inventory were also surprising. Table 3 indicates that the group scored high on the need for achievement, and high on preference for innovation, but barely above the mean on risk taking propensity. None of these findings are consistent with our preconceived ideas about the group, and, we suspect, are not consonant with the expectations of the majority of readers. We turned to an examination of a series of open ended questions which we had included in the survey. The most important of these questions dealt with whether the prisoner considered his criminal activities to be a business, and if so, why. Seventy-five percent (75%) of the respondents did, in fact, consider their criminal activities to be a business. They provided such illuminating comments as the following:

I employed the same logistics as Wal-Mart Selling drugs is like a business because you have employees Business is anything that has supply and demand My involvement was for profit I used organizational skills I was selling a product I used bookkeeping and management principles Location is key and I had a targeted market It’s like selling any other product I advertised and distributed There was supply and demand The principles are the same:

supply and demand; management and staffing; minimize the costs; and, maximize the profits

At the very least, these felons used the language of business to describe their activities; consequently, we are left with the conclusion that our research identified this group of felons as



strongly oriented toward entrepreneurship. Darkside Entrepreneurs truly do exist, and the participants in the study truly are in every sense of the phrase. Are Darkside Entrepreneurs different? The participants in our study are certainly different from successful entrepreneurs in society in only one respect: the activities in which they engaged were illegal and detrimental to our economy. Implications of the Findings How can the most responsible and dutiful of all typologies turn to crime and openly describe their activities as business ventures in every sense of the word? The answer could lie in the society to which the SJ feels that traditional sense of duty and responsibility. Fifty percent (50%) of the respondents reported that a member of their family had previously served time in prison, and 47% of the group had a close friend who had previously served time in prison. Forty seven percent (47%) had been arrested for a felony prior to the current conviction, and 37% had served time in prison previously. Further, 10 of the respondents, 29%, reported that their first arrest came before the age of 20 years. Our anecdotal conclusion is that a heartbreaking number of the prisoners in this study grew up in a society in which criminal activity was normal. If our findings are at all typical, then anecdotally we must learn how to demonstrate to our children and youth that the society to which one owes one’s duty is the dominant society of our world, not some criminal subset of society. We greatly fear that until we learn how to do this, our subcultures will continue to breed Darkside Entrepreneurs and our dominant culture will suffer for it. Conclusion There is a strong ray of hope in this study. One final question which we asked the participants had to do with their plans for the future upon their release from prison. Twenty three of the respondents, 68%, indicated that they intended to start a legitimate business in the future. Nineteen of these, 58%, had taken previous courses in prison that they believed would help them achieve this goal. The dreams of starting a venture were more fully formed than one might believe as indicated by the listing of businesses that the prisoners provided. A carwash or shoe store I would like to start a small restaurant and plan for future growth Disaster relief - removal of debris Financial consultant Import auto parts I'm planning on starting up a marketing or advertising company in Poland Auto repair, used car sales, and auto financing Aviation oriented I am going to trade equities, buy several businesses, and invest in real estate Professional personal trainer business; also, real estate holding company Trading stock options Real estate



Store or gas station, some real estate Mail order pharmaceuticals, incentives, import/export Talent promotions Real Estate and Investment firm – I plan to buy, sell, and rent affordable housing Real estate development and building Hope to process exportable raw materials before export An electronics manufacturing or information brokerage business Trucking and real estate development Restaurant, entertainment and clothing business Construction

Musician – after a lifetime of working as a musician, I'll do what comes naturally to a 66 year old person just released from prison – sing the blues

In fact, one young man was released shortly after our survey was completed and made good on his dreams. He wrote a letter to the instructor of the program one year later. He had relocated to Florida and established a real estate business. Here is an excerpt from his letter.

“When I got to Florida I started doing the things that I learned from you. Though I did not actually initially get into the project I wanted, it got me noticed and in position to meet like-minded individuals. I remember you telling me how investors with greater insight than me would sometimes try to shape or reshape the plan and my need to be ready and willing. That is exactly what took place. No, I didn’t learn how to acquire and sell vacant property, but I did learn the etiquette of business. I learned from a wise man how to present a plan and, more importantly, myself. I learned about developing a reputation for good returns and so much more. I really want to emphasize those mock presentations [required as part of the program of study].”

“In my first year in business I made over $1.4 million in sales and over 20% gross profit. I started to look into rehab housing. I asked a guy to finance me as I cannot pay interest for personal reasons [his religion prohibits this]. He thought that this would be a risky investment with someone that had no previous experience, so he suggested I buy a vacant piece of property. He knew the property here appreciated quickly and he thought it would help me get on my feet after a few months. Problem was I didn’t know that I wasn’t supposed to turn the property around immediately. I sold the first property in about a week for 50% more than what I bought it for. Then I got two more. The rest is history. I developed several techniques to acquire properties and several categories of buyers.”

We are not naive enough to believe that this young man was typical in any way, but his story is certainly encouraging. The authors understand that this is a convenience sample of small size; consequently, the results cannot be extrapolated to any larger population. Nevertheless, the study did give us a kernel of hope that through entrepreneurship education, we can change lives as well as provide for a lower rate of recidivism and higher economic success for people who all too often are completely forgotten. We completed our research hoping that many members of



this group would find success in legitimate entrepreneurial ventures: that more of these Darkside Entrepreneurs would be turned to the light.



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FAMILY BUSINESS: A NEW FOCUS, THE SAME RESEARCH DELIMMA

William T. Jackson, Dalton State College Mary Jo Jackson, Dalton State College

Abstract

Research currently focused on family business appears to be experiencing similar difficulties of that witnessed with entrepreneurship. In this paper, we present an extension of several studies that have attempted to provide definitions of types of small businesses (Jackson & Vaughan, 2004; Jackson & Gaulden, 2001; Carland, Carland & Ensley, 2001; Jackson, Watts & Wright, 1993; Carland, 1982; and Carland & Carland, 1997). While each of these previous studies had the purpose of improving entrepreneurial research, all left gaps in terms of family business as a part of group identification. It is suggested in the model that small family businesses exist along a continuum of entrepreneurial activity. The advantages and/or disadvantages of where the family business rests on this continuum are explored thus suggesting a focused approach for future research.

Introduction Family business is one of the most popular areas of interest in today’s business world. Academicians and business people recognize that family business is much more than just “mom and pop”. The Institute for Family Owned Business reports that over ninety five percent of all businesses in the United States are family-owned According to Chua, Chrisman and Steier (2003), they account for between 40 to 60 percent of the U.S. gross national product and generate half of the wages paid in this country. Considering the impact of this segment on our economy, it is surprising that there remains difficulty in clearly understanding its makeup. This is not to say family business has not been defined. Litz (1995) provided a definition that many have adopted: “…a business firm may be considered a family business to the extent that its ownership

and management are concentrated within a family unit, and to the extent its members strive to achieve and/or maintain intra-organizational family-based relatedness” (Sharma, Chrisman & Chua, 1996, p. 185).

A family business does not necessarily have to be a small business. In fact, family businesses make up about 35% of the companies listed on the Standard and Poor (S&P) or the Fortune 500 Index (Anderson & Reeb, 2003) But most will agree that the majority of current family businesses (even those that are now classified as large firms) either began small or are still classified in that manner. Based upon this assumption, the focus of this article is on the small family business sector. For many years, definitional problems involving entrepreneurship have plagued progress toward achieving a meaningful understanding of the phenomena. Some have argued that identifying the characteristics of the entrepreneur was unnecessary as long as we accepted that anyone that self-



ventured was an entrepreneur (Gartner, 1984). Instead of improving the results of the research in the field, this mentality has only caused researchers to drift further away from a clear understanding of the entrepreneurial community. A disturbing and parallel situation appears to be surfacing in the related field of family business. The purpose of this article is to offer a framework of study to allow a more focused approach to the exploration of this very important segment of our economy—family business. The approach to be taken will focus on the entrepreneurial emphasis of different small business types and their relationship to family business. To accomplish this goal, the authors will provide an overview of the general state of family business. Next a correlation of prior research on the entrepreneur is provided to highlight the parallel nature of the research dilemma. A model is then provided to guide further inquiry into the activities of family businesses. Last implications and discussion are provided.

Family Business Research Overview

“…similar to other entrepreneurial and established firms, family firms must develop an entrepreneurial mindset that allows them to identify and exploit opportunities present in

uncertainty” (Simon & Hitt, 2003, p. 352). In a recent article, Hoffman, Hoelscher and Sorenson (2006) suggest that prior research has confirmed that family businesses are more successful than non-family businesses for a number of reasons. They cite examples of this research with studies in the area of recruitment and human resource costs (Levring & Moskowitz, 1993), employee empathy and loyalty (Ward, 1988), better communication (Tagiuri & Davis, 1996), motivation and trust (Tagiuri & Davis, 1996), lower transaction cost (Aronoff & Ward, 1995), and greater creativity and research and development (Pervin, 1997; Ward, 1997). Another group of scholars points to the advantages family businesses have in terms of the resource-based view (RBV). Many of these, using the initial work of Barney (1996) as a basis, contend that through the unique and inimitable resources held by family firms, superior performance can be achieved (Simon & Hitt, 2003; Chrisman, Chua, & Zahra, 2003; and, Priem & Butler, 2001). One of the unique resources often cited is the strong value set held by family businesses (Gersick, Davis, Hampton & Lansberg, 1997; Williams & MacMillan, 2001; Post, 1993; Fiegenbaum & Thomas, 1988). The strength of this resource is exemplified in that many family businesses have concerns that go far beyond the simple notion of profit maximization. Others point to the idea of the unique human capital (or the closely related social capital) that exists within family units (Coleman, 1988; Hitt, Ireland, Camp & Sexton, 2001 and 2002; Lounsbury & Glynn, 2001; Peredo, 2003; and, Hoffman, Hoelscher & Sorenson, 2006). Still others specify the unique relationship of pooled resources that often exists within families that allow for loans, contributions or sharing (Haynes, Walker, Rowe & Hong, 1999; Horton, 1986; and, Dreux, 1990). This has been titled “survivability capital” (Simon & Hitt, 2003). In light of all of the advantages specified for family businesses there still appears to be an underlying theme (one that has been seen in much of the entrepreneurship research for a number of years) that there are still too many gaps in the framework of this field of study. Habbershon &



Williams (1999) summed up that concern when they stated that “…there is no clear and cohesive theoretical framework that can provide a structure for analysis and a lens through which to assess family influence on firm performance and capabilities” (p. 1). This has naturally resulted in what Hoffman et al (2006) found after a thorough review of the literature—“…it is not clearly understood why this performance advantage exists” (p135). Or, why so many still feel that family businesses do not have an advantage at all, but are hindered by the relationships that exist in a family business (Morck & Yeung, 2003).

Entrepreneurship Research Overview

“Attempts to differentiate entrepreneurs from small business owners or to categorize business owners in any fashion present an incomplete picture of the entrepreneur. A full portrait must recognize that entrepreneurship is a continuum and new words may be required to help researchers differentiate individuals under study along that continuum” (Carland, Carland & Ensley, 2001, p. 52).

In spite of the effort of numerous researchers in the field of entrepreneurship there remains an absence of a consensus of what the term means. In fact, the state of thinking on the entrepreneur, in general, remains “up-in-the-air”. No theoretical consensus has been developed. We all say we will know one when we see it. We know, in fact, that we have seen them. But, the eyewitness accounts vary significantly dependent largely on the point of view of the observer. This lack of a universally agreed upon definition and subsequent framework of study has gained considerable attention since the early 80s (Carland, Hoy, Boulton & Carland, 1984; Wortman, 1987; MacMillan & Katz, 1992; Herron, 1992; Jackson, Gaulden & Gaster, 2001; and Carland, Carland & Ensley, 2001). Even a limited review of the literature over the past thirty years will reveal that part of the problem lies in operationalizing “Entrepreneurship” consistently across individuals. This remains bitterly obvious from a review of special entrepreneurial issues in Journal of Management, Entrepreneurship T&P, and Strategic Management Journal. A deeper problem, however, exists in entrepreneurship data in general. A number of empirical studies and analytical models contribute to understanding the elements of entrepreneurship. For the most part, however, the extant research lacks empirical specifications for the full spectrum of this phenomenon. This prior research has another common attribute: the studies all lack evidence of the factors that drive entrepreneurial activity across all types of small businesses. In a recent article, Carland, Carland and Ensley (2001) attacked the persistent problem of unfocused research in the field of entrepreneurship. As many have stated before them, inconsistencies in measures still represents one of the greatest limitations of the field (Herron, 1992; MacMillan & Katz, 1992; Sandberg, 1986; Gartner, 1988). The Carland study provided promising possibilities for addressing this dilemma. These authors offered a viable solution to “explain differences in the entrepreneurial behavior of individuals” (p. 51). The research model advocated by the authors included a multiple scale approach to the enigma of entrepreneurial drive. These scales included the Carland Entrepreneurial Index (CEI) (Carland, Carland & Hoy,



1992), the Myers Briggs Type Indicator (Myers & Briggs, 1962; and Myers & McCaulley, 1985), the Jackson Personality Inventory and the Jackson Research Form (Jackson, 1974; Jackson, 1976). Each of these scales had previously received considerable testing as independent measures of entrepreneurial activity, but only limited exposure with multiple scale analysis (Carland et. al., 2001). Carland, Carland and Ensley (2001) suggest testing of multiple scales had isolated entrepreneurial activity to a continuum of motivational drives. This idea of a continuum of entrepreneurship is not new. The idea was originally raised by Carland (1982). This position, unfortunately, runs counter to much of the research being done in the field where entrepreneurship was seen to exist as a discontinuous phenomenon (Dunkleberg & Cooper, 1982; and Vesper, 1980). Others agreed with a continuum if enough data points could be identified (Wright, 1987). While assuming a priori that entrepreneurial activity (and therefore entrepreneurship) exists on a continuum, this study will attempt to fine-tune existing thought of this continuum and show the application of this model to the small family business entity. To accomplish this, the authors will draw direct relationships between strategies available to small business owners; personal motivations or focus of small business owners toward action; and the overlap between the small family business and the entrepreneurial venture.

Previous Research of Small Business Types

As mentioned previously, the proposed typology for small business is an extension of several earlier studies (Jackson et al, 1993; Carland & Carland, 1997; Carland, Carland & Ensley, 2001; and Jackson & Gaulden, 2001). An overview of these studies will provide the rationale for this typology. Jackson et al (1993) proposed three types of small business firms—marginal small businesses, successful small businesses, and entrepreneurial small businesses (see Figure 1). These authors also suggested two other pertinent issues for this current study. The authors defined three types of strategies that could be pursued by small businesses: marginal firms pursued a low-cost focus strategy; successful small businesses chose a combination focus strategy; and, the entrepreneurial firm pursued a differentiation focus strategy. It was also proposed that franchising activity occurred only at the successful and marginal firm level. These three types of small businesses were described by Jackson et al as follows:



FIGURE 1 Entrepreneur Types and the Product Life Cycle

Marginal Firms

Marginal firms enter the market with limited resources, and because of these low start-up costs, evaluation of risk using traditional measurement may be conflicting. In one respect, there is little to lose since little was invested. However, since (1) funds used to start the business likely represent life savings or loans from friends or relatives; and, (2) limited options for employment exist if the business fails, the marginal firm owner will have high financial and psychological risk. Identification of their place within the franchising system is easy to pinpoint. Because of the low initial capital available, firms in this group will be forced to pursue franchise ventures that provide very limited potential. These opportunities will usually be for less expensive choices. These firms will also choose industries that are late in their life cycles. The reason behind this is very simple—usually these are going to be the least expensive and require less skill. Successful Small Businesses

Because this group is concerned with consistent and continuous returns of their investments, the successful small business owner will shun high risk ventures. This would appear to be logical—risk suggests variability. However, because this group has a better chance of commercial financing and they are better prepared ability wise to pursue other avenues of employment, risk is typically lower. In the franchise system they will usually pursue higher cost (thus higher potential returns) ventures. Many of these will draw upon these individuals’ pre-existing expertise.



Entrepreneurial Firms

In relation to risk, this group will demonstrate little difference from successful small businesses. Initial investments would often be as large or larger for this group, but also composed of funds from outside sources (commercial lenders as well as venture capitalists). Psychological risks might also be smaller since this group should be composed of owners with marketable skills. Entrepreneurial firms will have a propensity to pursue innovation and elect often to enter an emerging industry. This group will also by the nature of the venture be less concerned about costs. See Figure 1 for a graphic representation of this relationship. In the Carland and Carland (1997) paper, three distinct definitions for entrepreneurship were provided in terms of “dreams” and what motivates an individual small business owner (See Figure 2). Table 1 sums up the findings of their study.

FIGURE 2 Entrepreneurs Defined



TABLE 1

Entrepreneurial Dreams as a Paradigm

Classification Dreams Behavior Outcomes Consistency Macroentrepreneur

Dreams of Revolutionary Change

Innovative

New markets, Services, products and industries

Never stops Striving for Dominance

Entrepreneur

Dreams of personal success, wealth and accolades

Ingenious

Enhanced markets, services, products and industries

Shifts interest at perceived success level

Microentrepreneur

Dreams of personal freedom

Traditional

Small, stable, slowly changing family businesses

Shifts interest at perceived comfort level

Source: Carland and Carland, 1997

Jackson and Gaulden (2001) highlight the importance of the life cycle when considering a merging of these two typologies. The marginal firm (microentrepreneur) will be found most commonly at the late maturity or decline phase of the life cycle. The successful small business will be found at the late growth or maturity phase of the life cycle. Finally, the entrepreneur (macroentrepreneur) will be that individual firm found at the introduction phase of the life cycle (Figure 3).

FIGURE 3 Entrepreneur Types in Emerging Markets



Proposed Model for Entrepreneurial and Family Business Study

Careful reflection on the previously discussed typologies indicates a partial classification of possible entrepreneurial types. It is obvious that what drives an individual to open multiple ventures (Carland, Carland & Stewart, 2000) is different than a single attempt at venturing. It is just as transparent (especially when reflecting on prior research) that no three or even four points can capture the complex nature of entrepreneurship. This second concept seems to represent the same type of dilemma encountered when classifying firms by business unit level strategies (Wright, 1987). It is proposed first, like generic entrepreneurial firms, small family business ventures exist on a continuum--each business is unique in his/her own right (Carland, 1982; Carland, Carland & Ensley, 2001). The same conclusion can also be drawn regarding the business unit level strategies that are chosen. In an attempt to describe this continuum, (Jackson, Gaulden & Gaster, 2001; and, Carland et al, 2001), a framework of small business types was proposed. While small family owned businesses possess unique traits that have often been referred to as the “familiness” of the firm (Cabrera-Suarex, De Saa-Perez & Garcia-Almeida, 2001; Habbershon & Williams, 1999), they still are a small business entity. As with all small businesses, the small family business must identify and exploit opportunities in a dynamic market while achieving a competitive advantage. Others share the view of the similarities of small business operations and have proposed the use of strategic management as an organization framework in family business research (Sirmon & Hitt, 2003; Sharma, Chrisman & Chua, 1996). Because of the basic similarity of small family businesses to generic small businesses it is proposed that they too can be conceptualized along this same continuum. As is the case for studying generic business unit level strategies, and to understand strategy in general, ends of a continuum must be explored. This will be the beginning point for explanation of the proposed model (See Figure 4).



FIGURE 4

Small Business Types – A Differentiation/Low-Cost Continuum

FIGURE 5 Small Business Types



As can be gleaned from Figure 4 and Figure 5, three main areas of strategic choice, low-cost, mixed, or differentiation, are available for the small family business owner who is operating in a fragmented industry. These choices extend Porter’s (1980) contention that firms in fragmented industries compete with a focus strategy, either low cost or differentiation, by including a mixed entrepreneurial focus. Low-Cost Entrepreneurial Focus

The small family business owner might elect (usually out of necessity) to pursue a low-cost focus strategy. In most cases, this decision is caused by several possible reasons: the owner has limited capital; the owner has limited skills or employment choices; or the owner is in the business due to succession. In all of these cases, the internal drive of the owner is moderated by the marginal possibilities that exist using this strategy, as well as, possibly the lack of managerial/educational experience. It could be that this group is most responsible for the high percentage of business failures that are often reported in the small business literature.

Differentiation Entrepreneurial Focus

The small family business owner that has a drive for discontinuous growth as well as the desire for creativity will select a differentiation entrepreneurial focus. The choice is more elective than with low-cost. This individual as described in Jackson et al (1993) has many more options as well as the freedom to express his/her creativity. These individuals are typically responsible for new ideas, products, or delivery systems. Mixed Entrepreneurial Focus

The final group and the true major addition to existing frameworks is the clarification of the “mid-point” area of small family business activity. As acknowledged by Carland, Carland and Stewart (2001), “individuals near the midpoint of the continuum, may be the hardest to describe of all” (p. 52). This mixed entrepreneurial focus completes the continuum. Two choices, impacted by differing drives, can be found within this group—the differentiation/low-cost entrepreneurial focus and the low-cost/differentiation entrepreneurial focus. The characteristics of these two groups will lean toward the dominant end of the continuum for that group—differentiation/low-cost toward differentiation, low-cost/differentiation toward low-cost. The personal drive of this individual will also align with the dominant ends of the continuum. A major avenue for expression of his/her innovative spirit, the small family business owner with a differentiation/low-cost focus will be more interested in multiple ventures—a serial entrepreneur. Those small family business owners with a low-cost/differentiation focus will typically be content with a single venture and the consistency of returns this approach will afford—a non-serial entrepreneur. In summary, the small family business with a low-cost entrepreneurial focus will be primarily concerned with maintenance of existence; while the small family business with a differentiation entrepreneurial focus is concerned with discontinuous growth, innovation and the discovery of voids in the market. The mixed entrepreneurial focus on this continuum is represented by two



groups of small family businesses -differentiation/low-cost and low-cost/differentiation entrepreneurial focus. The first more attuned to characteristics of the traditional entrepreneur and the latter toward consistency of high returns.

Conclusion and Discussion

There have been numerous recent inquiries into the phenomenon of both small entrepreneurial ventures and small family business. But does the “familiness” of the small family firm differentiate it completely from other small business entities? Is it important to consider family business? (Chua, Chrisman & Steiner, 2003), or the differences in venture creation decision contexts? (Simon & Houghton, 2002). The answer is yes. But, to what detriment? With an integrated research model addressing both entrepreneurial drive and strategic orientation, we might be able to provide a comprehensive framework encompassing the total population of small business – both family and non-family. .

The purpose of this paper was not to rehash the old argument of whether all small business owners were entrepreneurs (Gartner, 1988; Carland, Hoy, Boulton & Carland, 1984). Rather, it is to provide a workable framework to advance the recommendation for consistency in research put forth by Carland, Carland & Ensley (2001). As those authors suggested, additional clarification of those entrepreneurs found in the midpoint of entrepreneurs needed to be provided. The framework put forth in this paper does just that—the serial versus non-serial mixed entrepreneurial focus. This extension thus identifies four distinct entrepreneurial types that fall on the continuum. Each of the four entrepreneurial types can be isolated for testing, thus greatly increasing the generalizability of research data for all forms of small business ventures.



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FINDING WORKING CAPITAL AND FINANCING FOR SMALL BUSINESSES

Jonathan Keith Gober, The State of Arkansas Bureau of Legislative Research Don B. Bradley III, The University of Central Arkansas

Abstract

Many small business owners are inexperienced in financial matters and find it difficult to borrow money. However, if the owners are prepared and organized on how much money they need, why they need it, and how they will pay it back, they will find they have a number of financial solutions. There are many different sources of financing for a small business owner to choose from in the market. Financing options range from common sources such as, start-up financing, bank-term loans, and angel investors, to uncommon sources such as royalty financing. This research was intended to help the small business owner, but also to help the Small Business Institute Director.

Introduction

Small businesses are an extremely important part of the American economy and culture. They provide many functions, such as innovation, employment, and competition. For example, small businesses represent 99.7 percent of all employer firms and pay more than 45 percent of total U.S. private payroll. An entrepreneur starts a new business for many different reasons and often finds the business venture is rewarding and challenging. One of the most important concepts that a new business owner should know is how working capital and financing helps them survive and grow in a competitive world. Working capital is the amount by which the current assets exceed the current liabilities of a business. The difference between current assets and current liabilities is known as “net working capital.” It is better to have positive working capital than negative working capital for the financial strength of the business. Equity, trade credit, and short-term loans are some of the best ways for a small business to find short-term working capital financing. Small business entrepreneurs can look to the federal, state, and local levels of government for business financing and planning. The Small Business Administration (SBA), established in 1953, maintains and strengthens the economy by aiding, counseling, assisting, and protecting the interests of small businesses. In Arkansas, the Department of Economic Development helps small businesses with financing, technical assistance in marketing plans, and product and service development. There are also local level programs, such as the Little Rock Downtown Partnership, that develop and promote areas as a great place to eat, shop, and live. There are many struggles and obstacles that an entrepreneur can face when they start, develop, and expand a small business. Competition, financing, and quality of labor are some of the major problems that small businesses deal with every day. Planning, business skills and knowledge, and finding financing are some areas that entrepreneurs should develop before starting a small business. Increasing interest rates and gasoline prices are some new issues that small businesses are struggling with in their journey to success or failure.



A small business can improve their financial foundation by growing gradually or seeking external funds. In doing so, the small business will spend a lot of time and effort on finding the proper source of financing. However, many businesses will struggle with rejections and hardships along the way. There are ways to make the journey to business success a reality. For example, a small business should first consider self-financing options before looking to external sources to get the right amount of money needed for a successful business. Finding working capital and financing for small businesses can be a challenge for an entrepreneur but with the proper amount of knowledge, commitment, and determination, one can turn an idea into a successful opportunity.

Small Business Background

The legal definition of a small business is determined by the U.S. Small Business Administration (SBA) in Title 13, Part 121 of the Code of Federal Regulations. This part of the code sets forth in detail the criteria to be used by the SBA in making small business determinations. Examples of these criteria include the number of workers employed by a business, annual receipts, and the nature of the business relationships with affiliates. Businesses wishing to be designated as a small business for government programs must meet size standards specified by the U.S. Small Business Administration – Office of Size Standards. The SBA establishes small business "size standards" on an industry-by-industry basis using statistics from a wide range of sources. There are size standards in each industry that a business must meet in order to be considered small. For example, the SBA – Office of Advocacy defines a small business for research purposes as an independent business having fewer than 500 employees.

Small businesses in the United States are vital to the financial strength of the Nation’s economy and culture. They provide technical innovation, employment, competition, and fill the needs of society and other businesses. Their contribution is essential for the economic growth and improvement since they make up almost all employer firms, and generate half of U.S. non-farm private output. Studies show that small business owners represented a diverse group in 2004 and continued to keep the economy productive. According to the United States Bureau of Census and the Department of Commerce, small businesses represent 99.7 percent of all employer firms; employ half of all private sector employees; pay more than 45 percent of total U.S. private payroll; and generate 60 to 80 percent of net new jobs annually over the last decade. Another interesting fact is that small businesses employ 41 percent of high-tech workers, such as scientists, engineers, and computer workers. (Source: http://www.sba.gov/advo/stats/sbfaq.pdf) In 2005, there were approximately 25.8 million businesses in the United States, according to the Office of Advocacy estimates. 2003 U.S. Census data show there were 5.8 million small businesses with employees and 18.6 million without employees in 2003. That is a growth rate of 0.1 percent for businesses with employees and a 2.2 percent growth rate for businesses without employees. In Arkansas, there was an estimated 222,542 small businesses in 2004. Of the total number of small businesses in Arkansas, 60,007 were employer businesses and 162,535 were non-employer businesses. (Source: http://www.sba.gov/advo/research/profiles/05ar.pdf)



According to recent studies, two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years. In other words, two out of three new businesses close within the first five years. Most people think that restaurants fail much more frequently than firms in other industries. However, leisure and hospitality establishments, which include restaurants, survived at rates only slightly below the average business success rate. (Source: http://www.sba.gov/advo/stats/sbfaq.pdf). Earlier research has focused on the main reasons for a new business’s survivability. Major factors in a small business remaining open include a sufficient supply of capital; being large enough to have employees; the owner’s education level; and the owner’s reason for starting the firm in the first place, such as freedom for family life or wanting to be one’s own boss. For the business to survive and grow, the owner must be committed and determined to the business opportunity. With commitment and determination, the small business can overcome incredible obstacles and compensate for other weaknesses.

Small Business Working Capital Finance

Working capital is one of the most difficult financial concepts to understand for the small-business owner. The definition of working capital is the amount by which current assets exceed current liabilities. Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of certain materials into finished goods. The finished goods are then sold by the business for payment. Working capital is a measure of both a small business’s efficiency and its short-term financial health. The working capital calculation is: Working Capital = Current Assets – Current Liabilities

A positive working capital means that the company is able to pay off its short-term liabilities. However, a negative working capital means that a company is currently unable to meet its short-term liabilities (accounts payable, notes payable, accrued expenses payable, and taxes payable) with its current assets (cash, accounts receivable, inventory, and marketable securities). The difference between current assets and current liabilities is known as “net working capital.” In looking at the difference, the levels of inventory, accounts receivable, and accounts payable are among the most important items of working capital. If a small business’s current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short-term. A declining working capital ratio over a longer time period is a sign that warrants further analysis. For example, a business could be more aggressive with its sales efforts and, as a result, have a harder time collecting on their accounts receivables. As mentioned earlier, working capital gives investors a general idea of the small business’s underlying operational efficiency. Money that is tied up in inventory or accounts receivables cannot be used to pay off any of the business’s short-term obligations. Therefore, if a small business is not operating in the most efficient manner, it will show up in the working capital ratio. This can be seen by comparing the working capital ratio from one period to another. A

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slow collection may signal an underlying problem in the small business’s operations. Good management of working capital will generate cash, help improve profits and reduce risks. However, if this lifeline begins to deteriorate, so does the business’s ability to fund operations, reinvest and meet capital requirements and payments. Working Capital Cycle A useful mechanism for the small-business owner is the working capital cycle. The working capital cycle can be defined as the period of time which elapses between the point at which cash begins to be expended on the production or purchase of a product and the collection of cash from the customer. The working capital cycle analyzes accounts receivable, inventory, accounts payable, and equity and loans. As shown in the diagram below, the cash flows in a cycle into, around and out of a business. The faster a small business grows, the more cash it will need for working capital and other investments. Owners need to understand that the cost of providing credit to customers and holding inventory can represent a substantial proportion of a business’s total profits.

To help explain the diagram above, some items need to be covered. The two main elements in the working capital cycle that absorb cash are inventory and receivables. In-stock products or work-in-progress items are examples of inventory. Receivables are established when customers owe the business money. Finally, the main sources of cash are payables, equity and loans. Payables are established when the business owes a creditor money. Each component of the working capital cycle (inventory, payables, and receivables), has a time dimension and a money dimension. When it comes to managing working capital, most business owners will say that time is money. If an owner can get money to move faster around the cycle by collecting money due from customers more quickly or reduce the amount of money tied up by reducing inventory levels relative to sales, the business will generate more cash or it will need to

Source: Planware.org

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borrow less money to fund working capital. As a consequence, a business owner can reduce the cost of interest or have additional money available to support additional sales growth or investment. As a helpful guide to small business owners, below are some “if – then” statements.

If a business owner ……

Then ……

collects receivables from customers faster, they can release cash from the cycle.

collects receivables from customers slower, the receivables soak up cash.

can get better credit from suppliers, they can increase their cash resources.

can move inventory faster, they can free up cash.

can move inventory slower, they consume more cash.

Finding Short-Term Working Capital Financing The better a business manages its working capital, the less the business needs to borrow. Even businesses with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors, if any. However, most businesses cannot finance the working capital cycle with accounts payable financing alone. Consequently, working capital financing is needed. The operating deficit is usually covered by the net profits generated within the business, by borrowed funds, or by a combination of the two. At some point in their operations, most small businesses need short-term working capital. For example, a small retail business must find working capital to fund seasonal inventory buildup between September and November for Christmas sales. This seasonal fluctuation creates a need for working capital to fund the resulting inventory and accounts receivable buildup. Some small businesses have enough cash reserves to fund seasonal working capital needs. However, this is very rare for a start-up business. If a small business experiences a need for short-term working capital during its operations, they will have several sources of funding. The important thing for a small business to know is to plan ahead. The business magazine, Entrepreneur, published five common ways to finance short-term working capital. Below are those five most common sources of short-term working capital financing:

$ Equity: If a small business is in its first year of operation and has not yet become profitable, then they might have to rely on equity funds for short-term working capital needs. The primary source of capital for most new businesses comes from the savings and other forms of personal resources. While credit cards are often used to finance business needs, there are better options available as seen below. Many small business owners look to private sources such as friends and family members when starting out a



new business. This could include parents, grand-parents, siblings, neighbors, professors, business associates, church members, and past contacts. Most often, this source of capital is loaned interest free or at a low interest rate, which can be extremely beneficial when getting a small business off to a successful start. These funds should be injected into the business so that the following sources of short-term financing are not needed.

$ Trade Creditors

$

: If a small business has a good relationship established with trade creditors, then they might be able to solicit the trade creditor’s help in providing short-term working capital. Trade credit gives the small business the ability to buy goods and services and have 30, 60, or even 90 days to pay for them. If a small business paid their creditors on time in the past, a trade creditor would likely extend financing terms to enable the small business to meet a big order. For example, if a business fills a big order and ships it out with the expectation of the customer to pay within 60 days, the small business could obtain 60-day terms from their supplier if 30-day terms are normally given. Trade credit usually represents 30 to 40 percent of the current liabilities of non-financial businesses, with generally higher percentages in smaller companies. Factoring

$

: Factoring is another resource for short-term working capital financing. Factoring is a form of accounts receivable financing where the receivables are sold, at a discounted value, to a factor. Once a small business has filled an order, a factoring company buys the account receivable and then handles the collection. This type of financing is typically more expensive than conventional bank financing but is often used by start-up businesses. Factor brokers can be found as near as your local conventional bank or financial market. Line of Credit Loans

$

: Lines of credit are not often given by banks to new businesses. A line of credit is a formal or informal agreement between a conventional bank and a borrower with regards on the maximum loan a bank will allow the borrower within a certain amount of time. If a new business is well capitalized by equity and has good collateral, the business might qualify for a line of credit. A line of credit allows a business to borrow funds for short-term needs when they arise, such as seasonal fluctuations. The line of credit is generally repaid once the business collects the account receivables that resulted from the short-term sales peak or a reduction of short-term assets they financed. Lines of credit typically are made for a one-year time period and are expected to be paid off for 30 to 60 consecutive days during the year to ensure that the funds are used for short-term needs only. Short-Term Loans

It is important for business owners to know that working capital has a direct impact on the cash flow in a small business. Since cash flow is the name of the game for all business owners, a good understanding of working capital is imperative to make any business successful.

: While a new business may not qualify for a line of credit from a bank, they might have success in obtaining a one-time short-term loan (less than a year) to finance their temporary working capital needs. If a business has established a good relationship with a financial institution, they might be willing to provide a short-term note for one order, a seasonal inventory, and/or accounts receivable buildup.



Small Business Financing

It is often said that small business owners have difficult time borrowing money; this is not necessarily true. However, the inexperience of many small business owners in financial matters often prompts banks and investors to deny financial requests. To be successful in obtaining financing, a small business must be prepared and organized. They must know exactly how much money they need, why they need it, and how they will pay it back. The small business must be able to convince the lender or investor that they are a good credit risk. According to Entrepreneur magazine, the table below shows the 18 various funding sources that a small business can choose from to find financing. (Source:www.entrepreneur.com/howto/raisemoney/1,5964,,00.html) An overview of each funding source will follow the table.

18 Funding Sources

1. Start-Up Financing 2. Equipment Leasing 3. Community Development Financial Institutions (CDFIs) 4. Micro-Loans 5. Asset-Based Loans 6. Bank-Term Loans 7. SBA-Guaranteed Loans 8. Private Loan Guarantees 9. 504 Loans 10. Royalty Financing 11. Federal Government Venture Capital 12. Angel Investors 13. Business Incubators 14. 401(k) Financing 15. Direct Public Offerings 16. Reverse Merger 17. Initial Public Offering 18. Institutional Venture Capital



Start-Up Financing

Most of the start-up financing options were covered under the finding short-term working capital financing section. However, a quick overview of start-up financing is meaningful. Startup financing is the initial infusion of money or investment that advances an idea or an intention into something tangible. Appropriate for: This type of financing is appropriate for any kind of business. Supply: Even though the supply of start-up financing is everywhere, it is sometimes hard to find for small businesses. Best Use: It is best used when commencing initial operations to the point where external investors can see and feel where the small business is leading, as well as understand that the owner took some risk getting it to that point. Cost: Startup financing will possess two of the following three qualities: good, cheap and fast. However, it will never possess all three qualities. Ease of Acquisition: If a small business has nothing, it's difficult. If the owner has personal assets, the hard part is putting them at risk of collection. However, for a small business owner that does so is the rite of passage to both success and failure. Range of Funds Typically Available: Varies widely depending on many variables.

Equipment Leasing

Equipment leasing is a loan in which a lender buys and owns equipment and then "rents" it to a business at a flat monthly rate for a specified number of months. At the end of the lease, the business may purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing, lease new equipment or return it. Appropriate for: This type of financing is appropriate for any business at any stage of development. For start-up businesses with no revenues, small-ticket leases, those of $100,000 or less, are feasible on the personal credit of the founders or owners -- if they are willing to make the monthly payments. Supply: The supply of equipment financing is abundant. Of the billions of dollars individual and institutional investors pour into the capital markets each month, a good hunk finds its way to leasing companies that use these funds to purchase equipment for small businesses. With more and more money flowing into the small business markets, leasing companies are flush with capital. As a result, leasing companies are eager to do business and respond to competition with lower monthly rates. Best Use: It is best used for financing equipment purchases. Leasing options can also finance the costs often associated with equipment purchases, such as installation and training services.



Cost: Equipment lease financing is generally more expensive than bank financing, but in most instances it's more easily obtained. Ease of Acquisition: For small businesses, it is easier to obtain leases of less than $100,000. An application for a small-ticket lease is generally no more complex than a credit card application. Equipment leases for more than $100,000 require detailed financial information from the small business, and the leasing company conducts a more thorough credit analysis than it would for a smaller transaction. Range of Funds Typically Available: The range of funds for equipment leasing is unlimited.

Community Development Financial Institutions (CDFIs) Community Development Financial Institutions (CDFIs) primarily provide loan financing to businesses in areas that need economic development. A CDFI is a unique entity that was established to provide credit, financial services, and other services to underserved markets or populations. CDFIs make loans that are generally not bankable by traditional industry standards. Under the general definition of a community development financial institution as set forth by the Community Development Financial Institutions Fund at the U.S. Department of the Treasury, a CDFI has a primary mission of community development, serves a target market, is a financing entity, also provides development services, remains accountable to its community, and is a non-government entity. Appropriate for: This type of financing is for start-ups to established businesses that can demonstrate the ability to repay a loan but whose loan proposal is not bankable because of past credit problems, the size of the loan request, limited equity from founders or limited collateral. Supply: The supply of Community Development Financial Institutions is good. There are nearly 1,000 CDFIs in urban, rural and reservation-based communities with billions of dollars to lend to small businesses. Unfortunately, despite their numbers, CDFIs can be difficult to track down because they aren't as well publicized as mainstream financing sources. The best way to find them is by networking with other entrepreneurs, local businesses, and governmental offices. Best Use: It is best used for starting a new business or expanding an established one. Also, the application of the proceeds can create community job creation through the introduction or preservation of a service that is vital to a community or stabilizing a community in decline. Cost: Most CDFI loans are priced according to the individual risk or the business as opposed to the cost of funds. Since CDFI loans tend to be riskier than conventional bank loans, they may cost more as well. Typical pricing may be from 0.5 to 3 percentage points higher than conventional loan rates, but, in some instances, CDFI loans may be less expensive than mainstream financing. For example, a CDFI loan for a child-care facility is generally less costly than conventional loans or credit.



Ease of Acquisition: This type of financing is easier than commercial lenders, but challenging, since for loans, a company must still undergo the scrutiny of traditional credit analysis. The difficulty of securing CDFI financing is sometimes compounded by the relatively conservative focus and agenda that Community Development Financial Institutions may maintain. Range of Funds Typically Available: The range of funds can be anywhere from $2,000 and much higher. In fact, the National Community Capital Association reported an average member loan of $11.4 million.

Microloans

The Microloan Program was developed by the Small Business Administration (SBA) in 1992 to increase the availability of very small loans to small-business borrowers. It achieved permanent status in 1997. The program uses non-profit intermediaries to make loans to new and existing businesses. The average loan size is about $13,000. Applications for Microloans are submitted to the local intermediary and all credit decisions are made on the local level. Since 1992, this program has accounted for more than 12,500 loans totaling more than $112 million. Appropriate For: Microloan funds may be used for working capital, inventory, supplies, furniture, fixtures, machinery and equipment for small businesses. Supply: Microloans are available from private, non-profit intermediaries. Currently, the program is administered by 170 non-profit organizations serving their communities in nearly every state, plus Washington, DC. According to the SBA, there is a sufficient supply of funds due in part to a self-sustaining revolving fund. Best Use: The loans are best used for startup businesses with lower capital requirements and limited operating history. Microloan borrowers may benefit from the intermediary's expertise in business. Cost: The cost of microloans is negotiable with the intermediary, but rates tend to be higher than standard business loans. Most loans are collateralized by equipment, contracts, inventory or other property and require personal guarantees from the small business. Ease of Acquisition: Microloans are extremely good source of funds for small businesses that have never borrowed from a conventional bank. Microloans provide a source of smaller loans that many banks are reluctant to service, especially as a business loan. However, one of the difficulties in obtaining microloan funding lies in the non-profit intermediary distribution system. These intermediaries distribute funds in their own communities and/or regions, so if one does not exist in the small business area, SBA microloan financing may be difficult to get. If this is the case, there are other microloan programs that are often backed by state and local governments. Range of Funds Typically Available: Microloans can be less than $100 to a maximum of $35,000. The average loan size is about $13,000, with an average loan maturity of 42 months. The maximum term for this type of loan is six years.



Asset-Based Loans

Asset-based loans are usually from commercial finance companies, as opposed to banks, that are offered on a revolving basis and collateralized by a business’s assets, specifically accounts receivable and inventory. In asset-based lending, the quality of the collateral becomes pre-eminent in determining the creditworthiness of the customer. Appropriate for: Asset-Based loans are for businesses that may be rapidly growing, highly leveraged, in the midst of a turnaround or undercapitalized. In addition, asset-based financing works only for businesses with proven accounts receivable, and a demonstrated track record of turning over their inventory several times each year. Supply: Overall, the supply of asset-based financing is vast. A large number of commercial finance companies, as well as many conventional banks, have massive pools of capital to lend to businesses. However, for asset-based loans of $500,000 or less, the market is considerably smaller. The reason for this is most asset-based lenders would prefer to make larger loans because the cost to monitor an asset-based loan is generally the same whether it's large or small. Best Use: The best use for asset-based loans is for financing rapid growth in the absence of sufficient equity capital to fund receivables and inventory. Asset-based loans are well suited for manufacturers, distributors and service companies with a leveraged balance sheet whose seasonal needs and industry cycles often hamper their cash flow. Asset-based loans can also be used to finance business acquisitions. Cost: Asset-based loans are more expensive than conventional bank financing, since asset-based lenders generally have higher expenses than bankers. Still, pricing is competitive among asset-based lenders. Small asset-based loans typically run from 12 percent to 28 percent, which can be rather pricey. Ease of Acquisition: Small businesses can obtain asset-based loans comparatively easy if they have good financial statements, good reporting systems, inventory that is not exotic, and customers who have a track record of paying their bills on-time. If the business does not have any of these attributes, then the path to an asset-based loan will be challenging. Range of Funds Typically Available: Asset-based loans range anywhere from $250,000 to $1 million from small finance companies and financial institutions. Larger lenders tend to specialize in financing amounts of $1 million and greater.

Bank-Term Loans

Bank-term loans are the basic business commercial loan. They typically carry fixed interest-rates, monthly or quarterly repayment schedules, and include a set maturity date. Bank-term loans tend to be classified into two categories:



Intermediate-term Loans Usually running less than three years, these loans are generally repaid in monthly installments from a business's cash flow. According to the American Bankers Association, repayment is often tied directly to the useful life of the asset being financed. Long-term Loans These loans are commonly set for more than three years. Most long-term loans are between three and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow. These loans usually carry wording that limits the amount of additional financial commitments the business may take on (including other debts, dividends, or principals' salaries), and they sometimes require that a certain amount of profit be set-aside to repay the loan.

Appropriate For: Bank-term loans are for established small businesses that can leverage sound financial statements and substantial down payments to minimize monthly payments and total loan costs. Loan repayments are typically linked in some way to the item(s) financed. Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, the business should be sure they can make full use of ownership-related benefits, such as depreciation, and should compare the cost with that type of leasing. Supply: The supply of bank-term loans is extremely abundant but highly individualized. The degree of financial strength required to receive a loan approval can vary considerably from bank to bank, depending on the level of risk the bank is willing to take on. Best Use: The best use for bank-term loans are for construction; major capital improvements; large capital investments, such as machinery; working capital; and purchases of existing businesses. Cost: The cost of this type of financing is inexpensive if the borrower can pass the financial litmus tests given by the bank. Rates vary from bank to bank, making it worthwhile to shop, but the rates generally run around 2.5 points over prime for loans of less than seven years and 3.0 points over prime for longer term loans. Bank-term loan fees totaling up to 1 percent are common, with higher fees on construction loans. Ease of Acquisition: Bank-term loans are challenging but sometimes a moderate challenge when smaller amounts are involved with the financial request. However, for loans more than $100,000, a small business would need a complete set of financial statements and must undergo a complete financial analysis by the lending institution. Range of Funds Typically Available: Bank-term loans usually start at $25,000 and go from that amount.



Conclusion

In a small business, financial resources are often viewed as the major factor that limits its start-up or growth potential. It is up to the individual business which financing option is best for their success and growth. There are two methods of improving the small businesses financial base: (1) grow gradually and let the net income fund additional growth and (2) seek external funds, such as debt and equity funding. Either approach will consume time and energy for small business entrepreneurs. However, every small business will experience rejections and hardship on their way to success. There are several recommendations that many small businesses should follow to be successful. First, a successful business should always think through business decisions by producing a complete and effective business plan. Some of the most important things that a start-up business should do are to create a business plan, feasibility study, and do their homework. Second, small businesses should find sufficient working capital and financing before starting the venture and ensure that it manages the finances efficiently. The small business should establish tight financial controls; good budgeting practices; and accurate bookkeeping and accounting methods that are backed by an attitude of frugality. Third, owners and managers of small businesses should possess the professional skills and knowledge on how to run a competitive business. If they do not, the business managers should enroll in educational business courses or seminars at a local college or university. Fourth, the founders and managers of the business should be determined and committed to the business throughout the development and growth cycle. Fifth, the business should conduct a complete market analysis before producing or offering the product or service. Finally, the small business should always be on the lookout for great opportunities because much of the success of a small business is being at the right place at the right time.



References Jeffery A. Timmons and Stephen Spinelli. New Venture Creation: Entrepreneurship for the 21st Century. McGraw-Hill Irwin, 2007. “White Paper – Managing Working Capital.” Date Accessed: July 14, 2006. www.planware.org/workcap.htm “Working Capital Analysis.” Date Accessed: July 14, 2006. www.entrepreneur.com/article/0,4261,265235,00.html “How to Raise Money for Your Business.” Date Accessed: July 18, 2006. www.entrepreneur.com/howto/raisemoney/1,5964,,00.html “Finding the Right Resources to Run Your Business.” 2005 Arkansas Small Business Resource. Pages 15-16. “U.S. Small Business Administration Performance and Accountability Report.” Date Accessed: July 21, 2006. “SBA Loan Programs.” Date Accessed: July 21, 2006. http://www.sba.gov/financing/sbaloan/snapshot.html “Frequently Asked Questions about the Small Business Administration.” Date Accessed: July 21, 2006. http://www.sba.gov/advo/stats/sbfaq.pdf “Arkansas Financing Resource Guide.” Date Accessed: July 21, 2006 www.1800arkansas.com “Financial Services Used by Small Businesses: Evidence from the 1998 Survey of Small Business Finances.” United States Federal Reserve. April 2001. Various Websites Used www.sba.gov www.1800arkansas.com/small_business http://downtownlr.com www.entrepreneur.com Interviews Conducted Linda Nelson, District Director of the SBA Arkansas District Office, July 21, 2006. Sharon Priest, Executive Director of the Downtown Partnership, July 24, 2006.



A CROSS-CULTURAL EXAMINATION OF PAY SATISFACTION AND PAY FAIRNESS AMONG EMPLOYEES AND SELF-EMPLOYED FAMILY BUSINESS

OWNERS WORKING IN TOURIST AREAS

Vida Scarpello, University of Florida Shawn M. Carraher, Cameron University

Sarah C. Carraher, Consolidation Enterprises

Abstract

The purpose of this research was to test the extent to which pay satisfaction is equivalent to perceptions of pay fairness. Results indicate that pay satisfaction share the same construct space for the majority of 340 salaried and wage earners and 1403 self-employed family business owners working in tourist areas. However, a large minority is less satisfied with their pay than would be indicated by their perceptions of the fairness of their pay. The results suggest that researchers studying the antecedents of pay satisfaction and pay fairness should not confound their measurement instruments with items that differ in frames of reference (satisfaction or fairness). Future research is needed to further examine the situations that influence whether or not the constructs are perceived to be equivalent.

For nearly 40 years, job satisfaction researchers have included the measurement of pay satisfaction in assessments of job satisfaction (e.g., Weiss, Dawis, England & Lofquist, 1967; Warr & Routledge, 1969; Smith, Kendall, Hulin, 1969). Since the 1970's, however, considerable research has focused on assessing pay satisfaction independently of job satisfaction (for reviews see: Lawler, 1971; Heneman, 1985; Miceli & Lane, 1991; Carraher & Buckley, 1996; Kinicki, McKee-Ryan, Schriesheim, & Carson, 2002; Currall, Towler, Judge, & Kohn, 2005). Pay satisfaction researchers suggest that because labor costs comprise a major portion of business expenses, the determinants of pay satisfaction require independent research attention (Currall et al. 2005). Job satisfaction researchers (Clark, Oswald, & Warr, 1996; Nagy, 2002; Patterson, Warr, & West, 2004), pay satisfaction researchers (Lawler, 1971; Shaw & Gupta, 2001; Gardner, Van Dyne, & Pierce 2004; Sweeney & McFarlin, 2005), and employers often are interested in the equivalence of pay satisfaction and perceptions of pay fairness (i.e., equity). Among job and pay satisfaction researchers, it is often assumed that pay satisfaction and pay fairness are equivalent as an examination of pay satisfaction scales reveals that the scales include the measurement of pay fairness (e.g., Smith, et al., 1969; Motowidlo, 1982), or base the scale's items on the component parts of the compensation administration process (e.g., Heneman & Schwab, 1985). Although employers design and implement pay systems to provide fair pay rather than to satisfy employee desires for pay (e.g., Jones, Scarpello, & Bergmann, 1999) employers also seem to equate pay satisfaction to pay fairness (Deckop, Merriman, & Blau, 2004). One way that employers assess employee acceptance of pay and benefit practices is through surveys measuring pay and benefit satisfaction. Despite the widely accepted assumption that pay satisfaction is equivalent to perceptions of pay fairness, the accuracy of this assumption has not been



empirically verified. The purpose of the present study is to test the extent to which pay satisfaction is equivalent to perceptions of pay fairness. Investigating the equivalence of pay satisfaction to pay fairness has implications for guiding future research and practice. Knowledge of the relationship between pay satisfaction and perceptions of pay fairness can aid in developing and testing theoretical models that include the major antecedents of pay satisfaction without confounding satisfaction and fairness. As with antecedents of job satisfaction (e.g., Scarpello & Campbell, 1983b), when examining pay satisfaction models it may be necessary to include factors that are not under the organization's direct control (e.g., desires for pay to satisfy life style wants). The equivalence of pay satisfaction to pay fairness perceptions has implications for the employing organization as well. If pay satisfaction is not equivalent to perceptions of pay fairness, then the organization must decide which type of information it wishes to obtain. For example, if the intent is to assess whether or not the organization is providing the intended "fair pay" then the criterion of interest is pay fairness (Carraher & Carraher, 2005). On the other hand, if the intent is to find out if employees are satisfied with the pay received, irrespective of whether or not they believe the pay to be fair, then the criterion of interest is pay satisfaction.

Pay Satisfaction and/or Pay Fairness

The examination of the equivalence of pay satisfaction to pay fairness requires the consideration of the presumed views of the individual recipient of pay, the employer allocating the pay and the interaction between individual and employer views. Individual Views about Pay

It is generally agreed that individuals view pay as a valued commodity. Pay satisfaction should result from "more" pay rather than just "fair" pay. Field research on pay satisfaction consistently finds that the most important determinant of satisfaction is the individual's pay level (Lawler & Porter, 1966; Judge & Thoresen, 1996; Williams, McDaniel, & Nguyen, 2006). These findings are supported by social psychological and sociological experiments on pay satisfaction and pay fairness (e.g., Austin, McGinn & Susmilch, 1980; Messe & Watts, 1983; Shepelak & Alwin, 1986). Laboratory experiments indicate that the more the amount of pay exceeds the perceived market pay rate, the greater the satisfaction with pay (Austin et al., 1980; Messe & Watts, 1983; Shepelak & Alwin, 1986). Employer Views of Pay

Employers view compensation as a major cost factor of production and as a necessary inducement (Sturman, Trevor, Boudreau, & Gerhart, 2003) for attracting suitable job applicants, retaining valued employees, and motivating performance and other desirable behaviors. Within budget constraints, employers attempt to provide fair pay with respect to the external labor market, the relative value of the job, and the "added-value" individuals produce for the organization. Within an industry, employers tend to experience similar business costs and require the services of similarly skilled individuals. To maintain competitive positions within product markets, employers typically control their compensation outlays by assessing the



compensation practices of other employers within

Research has found that individuals whose income comes from salaries or wages focus on the same pay determination processes to evaluate their pay satisfaction as used by employers to design fair pay systems (Scarpello & Jones, 1996). Furthermore, Heneman and Schwab's (1985)

their industry. Pay outlays are generally controlled to industry labor market pay rates of "benchmark" jobs (i.e., jobs commonly found across organizations that are stable in terms of content and include a large number of incumbents). Some slack in the industry "benchmark" factor exists, however, for jobs that are priced in local labor markets (i.e., salaried non-exempt and hourly-paid jobs). The pay of jobs in local labor markets is controlled by comparing pay practices of employers across industries that are likely to be perceived as attractive employers to the organization's current employees. Although employers may also attempt to maintain competitiveness with respect to benefit offerings (Carraher, Hart, & Carraher, 2003), in the U.S., benefit offerings are more influenced by U.S. tax policy than they are by employer competition (e.g., Miller, 2005). Employer pay practices are intended to provide "fair" pay. The term "fair," however, is defined by the pay system's ability to balance competitive business interests through the cost control of compensation outlays with the compensation goals of attracting, retaining, motivating, and developing a competent workforce. Because employer business costs vary across industries, "fair" pay is a relative term. The pay level and pay treatment for employees with similar skills, performance, and valued behaviors is similar within an industry but may differ considerably across industries (e.g., Mahoney, 1979; Krueger & Summers, 1988; Haisken-DeNew & Schmidt, 1997; Laing & Weir, 1999; Lucas & Langlois, 2003). Individual-Employer Interaction

Individuals trade their occupational skills and other work behaviors for compensation. As previously noted, pay level appears to be the major determinant of pay satisfaction. There is laboratory evidence, however, that individuals equate pay satisfaction and pay fairness when the amount of pay received meets or slightly exceeds perceived market pay rates (Austin, et al., 1980; Messe & Watts, 1983; Ordonoz, Connolly, & Coughlan, 2000; Carr, Hodgson, Vent, & Purcell, 2005; van den Bos, Peters, Bobocel, & Ybema, in press). This suggests that individuals use external standards for assessing their pay situation. Within the world of work those standards can be expected to be bounded by occupational and career expectations. Specifically, pay satisfaction and pay fairness perceptions may be equivalent for most people whose income comes from salary or wage work rather than from entrepreneurial activities as the socialization processes within their occupations and organizations serve to focus their attentions and expectations as to the levels and types of pay to be received (e.g., Jaques, 1961; Mahoney, 1979; Solberg, 1999; Dupuy & Borghans, 2005; Wolaver & White, 2006).

Pay Satisfaction Questionnaire (PSQ), is based on components of the pay administration process. The PSQ measures five aspects of compensation: pay level, raises, pay structure, pay administration, and benefits. The PSQ has been found to explain more variance in compensation satisfaction (Heneman & Schwab, 1985; Scarpello, Huber, & Vandenberg, 1988; Williams et al. 2006) than explained by more restrictive instruments such as the pay scales of the Job Descriptive Index (JDI) (Smith, et al., 1969) and the Minnesota Satisfaction Questionnaire (MSQ) (Weiss et al., 1967). Finally, indirect evidence also suggests that employees may limit their desires for pay to the possibilities inherent in their employment situations. For example,



pay satisfaction instruments that measure non-job related pay facets (e.g., JDI) correlate highly with pay satisfaction instruments (e.g., MSQ) which only measure job related pay facets (e.g., Dunham, Smith & Blackburn, 1977; Gillett & Schwab, 1975). If personal desires for pay were relatively independent of employment situations, then pay scales which measure non-job related facets should not correlate highly with pay scales that measure only job related pay facets. Allowing for the presence of random individual differences, even if pay satisfaction and pay fairness are not equivalent, considerable overlap between the two constructs appears to exist (e.g., Berkowitz, Fraser, Treasure & Cochran, 1987; Dornstein, 1989; Jones et al. 1999; Shaw & Gupta, 2001; Shore, 2004). In summary, there is reason to expect that for most salary and wage earners, pay satisfaction and pay fairness may be equivalent. The equivalence of the two constructs, however, has not been empirically verified. Although evidence for overlap between pay satisfaction and pay fairness perceptions exists, the extent of the overlap is the critical factor in determining the equivalence of the two constructs. It is unclear as to how these two constructs would be perceived among the self-employed (Jaques, 1961).

Testing the Equivalence of the Two Constructs

Statistical assessments of construct equivalence are the norm in the social sciences. Such assessments are indirect assessments of equivalence and thus, the resulting evidence for equivalence is really evidence for "essential" rather than "actual" equivalence. The strongest test for inferring equivalence of pay satisfaction and pay fairness perceptions requires that measures of each construct be identical with respect to item wording and rating format. If this condition holds, then the difference between constructs can be assessed by comparing responses to identical items anchored with either "fairness" or "satisfaction" referents (e.g., Cronbach & Meehl, 1955; Campbell, 1982; Cooper & Richardson, 1986; Edgar & Geare, 2005). In this research, construct equivalence is assessed indirectly and directly. Indirect assessments serve three purposes. First, they provide evidence typically used to infer construct equivalence and thus, are useful means for relating the results of known procedures for inferring construct equivalence to results obtained from a direct assessment of equivalence. Second, indirect assessments provide a means of inferring the extent to which common method variance may explain the findings. Third, if equivalence between the two constructs is indicated by the direct test for equivalence, then evidence against common method variance increases the strength of the equivalence inference. Four questions were asked to assess construct equivalence: Question 1: Does a common construct underlie responses to pay fairness and pay satisfaction questions? If pay fairness and pay satisfaction are essentially equivalent, then the results of principal components analysis should result in one general dimension. This expectation is based on research on the dimensionality of pay satisfaction (e.g., Heneman & Schwab, 1985; Scarpello, et al., 1988; Judge, 1993; Carraher & Buckley, 1996; Carraher, Mulvey, Scarpello, & Ash, 2004). Due to potential common method variance, the factor analytic findings for equivalence should be interpreted in view of other evidence.



Question 2: If it is found that a common construct underlies responses to pay fairness and pay satisfaction questions, how likely is it that this finding is due to common method variance? This can be assessed through the use of Harman's one-factor test (1967). Question 3: To what extent do responses to pay satisfaction questions result in the same means and standard deviations as obtained from responses to identical pay fairness questions? If pay satisfaction and pay fairness are essentially equivalent, then responses to pay satisfaction questions and identical pay fairness questions should result in obtaining "essentially" identical sample means and standard deviations. Although common method variance may produce "similar" results, it should not produce identical results. This will be assessed through the use of t-tests. Question 4: Do respondents give the same numerical rating to items anchored with the fairness referent as they do to identical items anchored with the satisfaction referent? The answer to this question provides a direct test for equivalence of pay satisfaction to pay fairness because it allows direct observation of response distributions. If pay fairness and pay satisfaction are equivalent then the majority of respondents should provide the same numerical rating for the item anchored with the fairness referent as they do for the identical item anchored with the satisfaction referent. Conceptual equivalence can also be inferred if the numerical rating given one referent does not differ from the numerical rating given the other referent by more than one rating value. For example, using a 1-5 Likert-like rating format, conceptual equivalence can be inferred if, for each identical item, the respondents who rate satisfaction a "3" also rate fairness either a "2" or "4". The difference between the responses is one rating value. The "one" rating value difference allows for response variability that may be caused by the presence of perceived unequal distances between the rating scale anchors. It also allows for random response variability due to individual differences in base line responses. In summary, the extent of equivalence between pay satisfaction and pay fairness perceptions can be directly determined from examining (a) the proportion of subjects with identical ratings for the two referents, (b) the proportion of subjects with only one numerical rating difference for the two referents, and (c) the proportion of subjects with more than one numerical rating difference for the two referents.

Method

Research Sites and Subjects

Four samples were used for the current study. One sample was of employees from three locations in North America and three samples were of self-employed family business owners in the United States, the United Kingdom, and Germany. For the first sample the total populations of three geographically dispersed North American manufacturing plants (California, West Virginia, Central Canada) of a subsidiary corporation of a multinational firm were sampled. The plant personnel were not unionized and were employed in one of nine functional departments within each plant. The total sample (n = 340) consisted of salaried-exempt (n = 10) salaried non-exempt (n=17) and hourly paid (n=310) employees and 3 employees whose job classification was not known. The majority (80.3%) of the subjects were male with median age between 31 and 35 years; median education was having completed high school and having received some college or technical training after high school; and median organizational tenure was between five and ten years. Subjects did not differ significantly in their responses by their salary/wage classification status or by their other demographic characteristics. The three



samples of self-employed family business owners included 589 from San Diego, USA; 380 from London, UK, and 434 from Frankfurt, Germany working in tourist areas within their respective cities. Once again the entire populations in the area were sampled with proportionate stratified sampling with a target of 20% females in order to match the gender proportions from the employee sample as previous research has found that gender may be related to satisfaction and fairness perceptions (Clark et al., 1996; Solberg, 1999; Carraher, Gibson, & Buckley, 2006). The samples of self-employed individuals ranged from 79.8 (Germany) to 81.0 (U.K.) males and had similar median ages (between 31 to 35 years of age), median educational levels (some college or technical training after high school), and median organizational tenures (between 5 to 10 years) as for the employee samples.

Procedure

Questionnaire data were collected as part of two larger projects seeking to develop an employee opinion survey capable of measuring a variety of job-related factors for the employees and seeking to understand the customer service behaviors of business owners for the self-employed. The survey consisted of over 100 randomly distributed questions. This study uses a subset of the data from the questionnaires. For the employee sample the subsidiary's human resource staff administered the questionnaires to groups of employees at each location during working hours. Employees were assured of confidentiality and were told that each group's survey responses would be placed in a sealed envelope immediately after completion of the survey and sent to the lead author to score. Employees were also told that if they had concerns about being identified that they need not complete all demographic information requested. For the samples of self-employed the surveys were completed at the individuals’ places of business. Confidentiality was assured and the data was collected for research purposes only.

Measures

Six pay items were used to assess the equivalence of pay satisfaction and pay fairness. Two items (a) "my current wage or salary" and (b) "how my raises are determined" are items contained in the PSQ. The third and fourth items, "differences in pay levels or rates among jobs in the company" and "my overall pay level or rate" were also adapted from the PSQ. The difference between the PSQ items and the present items is the added words "or rate." This addition was required to be consistent with the terminology used by hourly-paid employees to refer to their pay level. The fifth item "my pay for the effort I have to exert" is similar to the MSQ item "amount of pay for the work I do" and the sixth item "my pay compared to similar jobs in other companies" is similar to MSQ item "how my pay compares with that for similar jobs in other companies." Following Gorsuch (l983: 332), who has noted that it is "generally difficult to replicate factors with fewer than five or six salient variables per factor" we used six items for each construct (fairness and satisfaction referents). Including six items per construct greatly decreases the likelihood that any one-dimensional solution would occur by chance (Carraher, Buckley, & Carraher, 2002). Benefit satisfaction was also measured. The PSQ's four-item benefit satisfaction scale was used to help determine whether common method variance is a



problem in the current sample. The benefit items have been shown to be relatively independent of the pay items with this and other samples (e.g., Scarpello, et al., 1988; Carraher, 1991a, 1991b; Judge, 1993; Carraher & Buckley, 1996; Carraher et al. 2004; 2006). All items used a 5-point Likert-like rating format.

Results

In answer to Question 1, we used limited information confirmatory factor analysis (Sethi & Carraher, 1993) as suggested by Schoenfeldt and Mendoza (1994). Limited information factor analysis is a confirmatory factor analysis method used in estimating the parameters of a structural equation model one equation at a time. It is also called “piecemeal fitting” by Bollen (1989). Limited information factor analysis allows directly testing for unidimensionality with an unrotated factor pattern for the six items with both frames of reference (shown in Table 1), indicates that one general factor does underlie pay satisfaction and perceptions of pay fairness for all four samples.

TABLE 1

Limited Information Factor Analytic Results ________________________________________________________________________________________ Item North American USA UK Germany Employees Self Employed Sat1 - My current wage or salary .90 .87 .89 .89 Sat2 - How my raises are determined .77 .68 .74 .72 Sat3 - Differences in pay levels or rates among jobs in the company .70 .60 .66 .64 Sat4 - My overall pay level or rate .90 .88 .90 .90 Sat5 - My pay for the effort I have to exert .85 .79 .81 .81 Sat6 - My pay compared to similar jobs in other companies .82 .79 .77 .80 Fair1 - My current wage or salary .90 .88 .87 .88 Fair2 - How my raises are determined .77 .73 .74 .72 Fair3 - Differences in pay levels or rates among jobs in the company .71 .64 .66 .66 Fair4 - My overall pay level or rate .89 .86 .88 .86 Fair5 - My pay for the effort I have to exert .85 .81 .84 .82 Fair6 - My pay compared to similar jobs .83 .77 .82 .79 in other companies ________________________________________________________________________________________ given values 8.21 7.31 7.73 7.57 .049 (RMSR)



The first dimension accounts for 60.9% (USA self-employed) to 68.5% (North America employees) of the total variance while the second dimension accounts for only 6.7% (North America employees) to 7.8 % (USA and UK self-employed) of the variance. The given value greater than one criterion, screen test, and Horn's parallel analysis criterion (1965) all agreed as to the number of dimensions appropriate for these items for all four samples. To assess whether this finding may be due to common method variance (Question 2), we used a modified version of Harman's one-factor test (l967). In this test, all variables under examination are typically entered into a factor analysis. If only one factor emerges in the unrotated factor solution then it is assumed that common method variance may be the primary source of variance observed in the data. Conversely, the greater number of factors extracted the less likely common method variance is a systematic source of any variability (Podsakoff & Organ, 1986; Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). In the current situation, the question is whether or not a single factor is appropriate for the two constructs examined. To answer that question, we used a modified version of Harman's one-factor test. Specifically, pairs of items from hypothetically independent scales were entered into a factor analysis until a one-factor solution was not optimal. Theoretically, the number of pairs of items (one from one hypothetically independent scale and one from the other hypothetically independent scale) could range from two to an infinite number. In this study, we used a hierarchical search procedure to enter the dyads of pay satisfaction (or pay fairness) and benefit satisfaction items into a factor analysis. This was done to determine the minimum number of dyads necessary for a one-factor solution to be non-optimal. The first dyad consisted of the items "my current wage or salary" and "my benefit package." The second dyad consisted of the items "how my raises are determined" and "amount the company pays toward my benefits." We found that only the first two dyads (see above) were necessary to have a two-factor solution be preferable to a one-factor solution. These results were invariant regardless of which of the pay items were used in the dyads. As discussed by Velicer (1976), the minimum number of items that may define an independent factor in data with correlations other than .00 is two. Thus, as two is the minimum number of item pairs possible for two separate factors to exist, it is unlikely that common method variance is causing the results shown in Table 1. Question 3 asked to what extent responses to pay satisfaction questions result in the same means and standard deviations as obtained from responses to identical pay fairness questions. Table 2 shows that the means of the identical items using different frames of reference (fairness or satisfaction) are not significantly different for one-half of the items (items 3, 5, 6). However, they are significantly different for the other half of the items (items 1, 2, 4). Given the mixed results, more importance should be placed on the direct tests of equivalence.



TABLE 2

t-tests for items using different frames of reference ______________________________________________________________________________

____________

Fairness Satisfaction

Direct matching of responses to identical satisfaction and fairness items revealed that the majority of subjects gave the same numerical rating to five of the six "fairness" anchored items as they did to the "satisfaction" anchored items. Data in Table 3 show that the mean percentage of subjects who gave identical ratings to the 6 "fairness" and 6 "satisfaction" items ranged from 48.8% to 74.4%. However, excluding the item "differences in pay levels or rates among jobs in the company" [the item with the lowest level of equivalence within all four of the samples] from the mean percent calculation shows that between 58.3% and 74.4% of the subjects gave

Items n Mean (SD) Mean (SD) t

(means) Sig. t

North America Employees 1. My current wage or salary 330 3.3192 .868 3.1977 .892 4.51 .001 2. How my raises are determined 326 3.0399 1.071 2.8098 1.142 5.92 .001 3. Differences in pay levels . . . 325 3.1077 1.041 3.0338 1.031 1.40 .162 4. My overall pay level or rate 329 3.4863 1.054 3.3435 1.054 4.21 .001 5. My pay for the effort I have to exert 331 3.3897 .986 3.3535 .990 1.02 .308 6. My pay compared to similar jobs . . .327 3.4128 1.014 3.3547 1.084 1.34 .181 USA Self-employed 1. My current wage or salary 579 3.7478 .814 3.6684 .857 3.48 .001 2. How my raises are determined 575 3.2678 .987 3.0626 1.026 7.07 .001 3. Differences in pay levels . . . 574 3.3031 .932 3.2561 .886 1.17 .242 4. My overall pay level or rate 572 3.7622 .889 3.6364 .864 5.07 .001 5. My pay for the effort I have to exert 576 3.6094 .856 3.5903 .821 0.73 .468 6. My pay compared to similar jobs . . .573 3.6091 .901 3.6056 .919 0.11 .912 U.K. Self-employed 1. My current wage or salary 375 3.7120 .851 3.6160 .891 3.36 .001 2. How my raises are determined 373 3.2145 1.059 3.0402 1.066 4.76 .001 3. Differences in pay levels . . . 367 3.3025 .957 3.2289 .942 1.51 .131 4. My overall pay level or rate 373 3.7051 .912 3.6113 .920 3.40 .001 5. My pay for the effort I have to exert 374 3.6043 .872 3.5936 .870 0.33 .741 6. My pay compared to similar jobs . . .370 3.6189 .927 3.6135 .954 0.14 .887 Germany Self-employed 1. My current wage or salary 429 3.7459 .836 3.6643 .862 3.24 .001 2. How my raises are determined 425 3.2471 1.011 3.1106 1.028 3.98 .001 3. Differences in pay levels . . . 422 3.3081 .957 3.3152 .908 .15 .879 4. My overall pay level or rate 425 3.7459 .909 3.6376 .874 3.84 .001 5. My pay for the effort I have to exert 424 3.6108 .882 3.6226 .816 0.38 .706 6. My pay compared to similar jobs . . .426 3.6455 .908 3.6455 .930 0.80 .425



equivalent ratings to the 5 "fairness" and "satisfaction" anchored items. Fewer than 9.9% of the self-employed and 5.8% of the employees deviated in their ratings by more than one numerical value for any one item. Across the six items, the mean percentage of subjects whose satisfaction and fairness ratings differed by more than one value ranged from 0.7% to 9.9%.

TABLE 3 Mean Percentage of Direct Matches of Satisfaction and Fairness Responses

__________________________________________________________________________________________ Satisfaction Satisfaction Satisfaction Fairness & Satisfaction equals 1 point 1 point differ by higher than lower than more than

______________________________________________________________________________

Items n Fairness Fairness Fairness 1

point

North America - Employees 1. My current wage or salary 330 69.4 8.5 19.7 2.4 2. How my raises are determined 326 58.3 9.8 28.2 3.7 3. Differences in pay levels . . . 325 48.9 16.9 24.6 5.2 4. My overall pay level or rate 329 68.1 8.8 21.0 2.1 5. My pay for the effort I have to exert 331 63.7 14.8 19.6 1.8 6. My pay compared to similar jobs . . .327 59.0 15.6 19.6 5.8 USA – Self-employed 1. My current wage or salary 579 72.9 9.8 16.1 1.2 2. How my raises are determined 575 59.7 9.7 27.1 3.4 3. Differences in pay levels . . . 574 49.5 16.4 24.2 9.9 4. My overall pay level or rate 572 70.5 8.2 19.2 2.1 5. My pay for the effort I have to exert 576 64.9 14.6 18.9 1.6 6. My pay compared to similar jobs . . .373 61.3 15.7 17.5 5.7 UK – Self-employed 1. My current wage or salary 375 72.5 9.1 17.1 1.4 2. How my raises are determined 373 60.9 9.4 26.5 3.2 3. Differences in pay levels . . . 367 49.9 18.3 23.6 8.2 4. My overall pay level or rate 373 74.0 7.8 17.2 1.0 5. My pay for the effort I have to exert 374 65.8 15.2 17.4 1.6 6. My pay compared to similar jobs . . .370 64.3 15.1 15.7 5.0 Germany – Self-employed 1. My current wage or salary 429 74.4 9.1 15.9 0.7 2. How my raises are determined 425 60.9 11.5 24.5 3.1 3. Differences in pay levels . . . 422 48.8 18.2 23.2 9.8 4. My overall pay level or rate 425 71.5 8.5 17.9 2.1 5. My pay for the effort I have to exert 424 65.8 14.6 17.2 2.4 6. My pay compared to similar jobs . . .426 62.9 17.9 14.3 4.9



Discussion & Conclusions

The results of this study indicate that for many salary and wage earners - and for those who are self-employed - that pay satisfaction may be relatively equivalent to perceptions of pay fairness. Results also showed that a large minority of the sample provided different rating values for the satisfaction referent than they did for the fairness referent. The response tendency was to provide a lower rating for satisfaction than for fairness. This pattern was observed across job classification, job tenure, department, sex, age, and education level groupings – whether an employee or self-employed. The composition of the samples suggests that the results may be generalizable to other organizations. Although the employee sample was comprised of employees of one corporation, it was heterogeneous in two respects. First, the employees were dispersed geographically (California, West Virginia, and Canada). The inclusion of Canadian subjects adds support for the findings because their compensation is partly a function of Canadian, as opposed to U.S., law. Thus, there is no actual equivalence of the pay treatment received by Canadian as opposed to U.S.-based employees. Second, the employee sample consisted of hourly paid, salaried non-exempt, and salaried-exempt employees. Although pay outlays are controlled within industry groupings, the pay treatment of salaried non-exempt and hourly-paid employees is also influenced by local labor market conditions to a greater extent than is the pay treatment of salaried-exempt personnel. Thus, there is no actual equivalence between salaries and wages that "like employees" within the same corporation received. Nevertheless, the majority of subjects (between 58.3% and 74.4%) responded identically to five pay fairness and pay satisfaction items, suggesting that the underlying standards used for responding to those items were the same or similar as used by the corporation in the pay administration process. The equivalence of ratings was weakest for the item "differences in pay levels or rates among jobs in the company." Here, only 48.8% to 49.9% gave equivalent ratings for pay satisfaction and pay fairness. The results of this work suggest that additional basic research should be performed in order to facilitate the development of new theories about pay fairness and satisfaction. The discrepancy theory of Heneman and Schwab (1985) recognizes 4 (or 5) static dimensions of pay satisfaction. In their review of prior research, Williams and Brower (1996) have found solid support for only two of the dimensions - satisfaction with pay levels and benefits. They further suggested that the poor results for the other dimensions may occur due to problems with the items used to measure them. They suggested that the items may inadequately sample the content domain for the constructs of satisfaction with raises, pay structures, and pay administration. This hypothesis has led some (Ash & Bendapudi, 1996) to seek to alter a few of the items on the PSQ - and to add other items to the PSQ - - and this is just in the area of pay satisfaction. The development of theories to explain optimal dimensionalities will require the sampling of large numbers of diverse populations in order to determine how individuals actually conceive of pay fairness and satisfaction and the development of items and questionnaires which clearly measure the construct of interest.

Another vein for research would focus on examining how similar or different the results found here might be across other cultures and regions of the world (Carraher, 2003; Carraher, Carraher, & Whitely, 2003). It might also be useful, for example, to examine whether individuals from different countries perceive of performance and reward problems in the same manner (Carraher



& Buckley, 1996) and whether cultural differences influence the effectiveness of socialization processes, and subsequent performance, of new employees (Buckley, Fedor, Veres, Weise, & Carraher, 1998; Buckley, Mobbs, Mendoza, Novicevic, Carraher, & Beu, 2002). For instance how might the results differ - if Chinese, Ukrainian, Nigerian, Bulgarian, or French samples were added (Carraher, 2005; Huang, Carraher, & Parnell, 2006)? It could also prove to be interesting to examine the influence that levels of pay fairness and satisfaction can have in terms of the identification, recruitment, selection, reward, and retention of high performing professionals and managers (Sturman, 2003) or on individuals’ intentions and behaviors such as intentions to search for a new job, be absent, or quit - and actual turnover, absenteeism, tardiness, and job performance (Weiner, 1980). The influence that each of the dimensions of pay satisfaction and pay fairness has on overall job satisfaction and life satisfaction could also be examined. Finally, the influence and changes in the importance of the dimensions of pay fairness and satisfaction could be examined across time and across stages in life in order to examine whether their influence on important organizational and life variables varied across life and career stages. Given the demonstrated equivalence of pay satisfaction and pay fairness, the question that requires answering is: Should we measure pay satisfaction or pay fairness? Both constructs deserve research attention. However, researchers interested in measuring pay satisfaction may be cautioned to use measures that do not confound pay satisfaction with pay fairness as they are not true surrogates for one another (Dalton, Johnson, & Daily, 1999). The patterning of responses for individuals who provided one numerical rating value higher or lower for satisfaction than provided for the fairness referent suggests that the responses may be due to some unknown cause(s) rather than to unequal distances between the numerical scale anchors or to random individual differences in base line responses. One possible explanation for the lower satisfaction ratings is that personal goals for career progress rather than occupational expectations for progress moderate pay satisfaction. Such a possibility is suggested by research findings that individuals use pay as the major criterion for judging their career progress (e.g., Scarpello & Campbell, 1983a & 1983b; Scarpello & Vandenberg, 1992). The present data also suggests that organizational interests may be better served by measuring pay fairness rather than pay satisfaction. The pay fairness scale used in this research was developed to measure perceptions of fairness with respect to the three equity concerns compensation administrators assess in designing a pay system (external equity, internal job equity, and employee equity; Scarpello et al. 1988). Measuring pay fairness instead of pay satisfaction may not decrease the explanatory power obtained from measuring pay satisfaction. Moreover, since a large minority of employees tend to provide lower satisfaction ratings than fairness ratings, assessments of pay fairness would probably result in higher "scores" for the organization and be more in line with the process criterion of interest, i.e., does our pay system provide the intended "fair pay" (Carraher & Carraher, 2005). In summary, the present study suggests that researchers continue to study both pay satisfaction and pay fairness issues but distinguish the two constructs in their studies. The organization's interests may, however, be better served by measurement of pay fairness perceptions than measurement of pay satisfaction.



Assuming that pay fairness and pay satisfaction are distinct concepts, the possibility exists that the equivalence found with the present sample may not be found with subjects whose earnings are more variable. It is possible that those who work primarily for commission or other forms of incentive pay may distinguish between pay fairness and pay satisfaction (Sturman & Short, 2000). Due to the increasing variability of work options (e.g., self-employment, short term, long term employment) and increasing organizational use of incentive pay programs, future research may find it fruitful to examine the equivalence of the pay fairness and pay satisfaction constructs with subjects whose incomes are variable. In the meantime, organizations may infer that with the exception of internal pay comparisons, the majority of their employees may not distinguish between pay fairness and pay satisfaction in a meaningful manner. Employees who may distinguish between the two concepts are likely to give higher ratings for pay fairness than for pay satisfaction. Consequently, the use of pay satisfaction as the criterion for assessing whether or not the pay system is providing the intended "fair pay" would likely underestimate the criterion of interest.



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TIM FERLAND’S GPS KINNISVARAHOOLDUS (GPS REAL ESTATE SERVICES)

Shaw-Foong Chan

Shawn M. Carraher

Executive Summary In order to strengthen GPS Real Estate Services (GPS Kinnisvarahooldus)’ s strengths at headquarter country, Estonia and seek for the complete range of services related to real estate and property businesses opportunities operating in Latvia, this report presents a comprehensive look at the strengths and weaknesses, and opportunities and threats for the firm. I. This report contains analysis of the firm’s businesses, management and organization,

financial performance, the markets (in Estonia and in Latvia), the strategy, and Latvia’s country data.

II. The analysis has been done via the record of GPS Real Estate Services and online research.

1. The record of GPS Real Estate Services is provided by Professor ******************. 2. Investment Guide, INVESTinESTONIA.COM; Latvia Country Commercial Guide

2004, which provided by the U.S. & Foreign Commercial Service, U.S. Embassy Warsaw; and others related websites.

3. The World Fact book (2005). 4. American Chamber of Commerce in Latvia. 5. www.gtlaw.com 6. free.investopedia.com 7. ryanair4.ryanair.esat.net

III. Estonia and Latvia’s economic growths provide opportunities and problems to the firm: 1. Opportunities: High quality with highly differentiation and flexibility cleaning and real

estates services. 2. Major problem: Short of financial capitals. 3. Highly supervisor-manager-level of employee turnover. 4. High material consumption and costs due to the firm’s expansion in Estonia.

IV. Conclusions reached: 1. Maintain its unique service strengths and quality as described on (III 1). 2. Gather financial capitals supports from the banks (local and foreign) and any possible

supporters such as Small Business Administration (SBA) and private offerings. 3. Preserve valuable supervisor-manager-level employees. 4. Lower down material consumption and costs.

V. Recommendations 1 1. Carry on perform its unique and quality services as described on (III 1) for its long-term

competition.

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2. Make loan from bank(s) and/ or from any possible investors. 3. Seek financial assistance from the owner’s home country (U.S.A.) and/ or other

international supporters such as European banks. 4. Increases 40.44 percent sales revenue of first 3 quarter of 2004’s in the last quarter to

construct a well budget for the firm.

Background of the Firm GPS (Global Property Services) Real Estate Services, “GPS Kinnisvarahooldus”, was formed by four investors (an American and three Estonians) as a limited liability company headquartered at Tallinn, the capital city of Estonia in late 2000. About six months later since the operation began in 2001, one of the investors, Mr. Tim Ferland, bought out the entire GPS Kinnisvarahooldus with his personal savings. He owned 100 percent ownership of the company, which was registered as a limited liability company under the Estonian law. The total revenue grew by well over 100 percent in the second year (2002) reaching over 2 million Estonian Kroons (EEK) and 300 percent at the end of 2003, while the number of employees had increased to 30 by the end of 2003. GPS won a very large government contract on December 2003. Mr. Tim Ferland is American, grew up in the Washington state in the United States. He majored international business while he was studying in the Central Washington University. After the completion of the management-training program for JELD-WEN, a door and window-manufacturing firm based in Oregon State, he accepted the position of Sales and Marketing Manager at the facility in Aizkraukle, Latvia (90 km to the East of Latvia’s capital city, Riga). After the successful completion of assignment in Latvia, he was appointed to handle another project operational assignment for all of their European subsidiaries in France, England, Spain, Latvia, and Poland. Tim was indicated as a reliable person who could handle work from anywhere in Europe. Tim married with Kaia Joost, an Estonia from Tallinn, during his years in Latvia, and he moved to Tallinn and became one of the founders of GPS in 2000 as described above. GPS is a small company that involves a complete range of service such as building management, maintenance repair and cleaning services, and buying and selling of real properties. Initially, this company had about 30 employees and all the businesses were only from around Tallinn. The situation was changed, the company required 170 people more who can perform cleaning and maintenance services from 35 buildings spread across the country in 15 cities, since GPS was successfully won bid for a contract that was worth 670,000 EEK per month from the Estonian Government. This contract will have GPS’s revenues quadrupled. Meanwhile, due to the complexity that was caused by the growth in the headquarters at the country, Estonia, this brought GPS to the difficult situation in management and operations, GPS adopted a regional structure as GPS’s organizational structure with regional offices in Tartu (south), Narva (east), and Pärnu (west), while the Tallinn office of the company doubled as the northern regional office and handled all the jobs in the Tallinn region. Please see Appendix A for countries analysis. There would be a regional manager assigned to handle each of the four regions, which reported to the General Manager. The Tallinn office had also had one manager



who was responsible for all of the special cleaning services (carpet cleaning, window cleaning, floor polishing, etc.) that was required by all contracted and non-contracted clients. Each job site and/ or contract had an object or special works manager who reported to the respective regional managers. The GPS’s organizational structure had been provided (Figure 1). Additionally, GPS’s personnel such as accounting, finance, and marketing were outsourced to a private accounting firm, Simar OÜ. But Tim personally, with help of Sylvia, managed budgeting and financial planning. Purchases and material control were the responsibility of Valentina with supervision by Tim. GPS has more than 200 employees across Estonia, mostly contract part-time workers. Approximately 100 of those employees are located in Tallinn and the others were spread over the 14 other cities serviced by GPS. Tim needed some reliable managers, especially a southern regional manager, material and cost controls. Tim tried to introduce ad-hocracy into GPS, hoping to transform the company to adapt this drastically changing of its business environment. He had also thought about to expand his business to Estonia’s western neighbor, Latvia when GPS’s strengths have been strengthened. Objectives of the Firm are:

• Improve sales revenue to 40.44 percent of its first 3 quarter of 2004’s during the last quarter performance.

• Seek financial supporters from Estonian local bank, European bank, or the bank from owner’s home country (U.S.A.). If not, then from Small Business Administration (SBA) and private offerings.

• Hire and maintain supervisor-manager-level employees to full up the vacancies due to the high turnover.

• Carry on performs its unique and quality services as described on (III 1) for its long-term competition.

• Reduce material consumption and cost. Analysis (by area) 1. Marketing: Currently GPS targets its businesses across Estonia, and is planning to involve business in Latvia. A.

• Target market: GPS targets a complete range of building management, maintenance repair, cleaning services, and retailing buildings such as buying and selling residential homes, and industrial sites of real property markets in Baltic countries of Estonia and Latvia. GPS competes directly against some of the largest services companies in Estonia in both private and public contract tenders.

Opportunities/Problem(s)

• Market research: (a). Estonia, and (b). Latvia:



• (a). In the Estonia, the cleaning service market has been growing due to the increase in building of new commercial and retail facilities, which received further boost from the foreign direct investment driven by Estonia’s accession to the European Union. The real increases in the market would come from the increased awareness of the professional service required in the industrial sector and more potential for out-sourcing by many industrial and commercial firms, which uses in-house cleaning and service personnel. The estimation of the market size at the end of 2003 was about 200 million Estonian Kroons (12.78 million Euros).

The key players in the market Market shares (in %)

SOL Estonia (Finnish owned) 32

Minu Vara ESS group ESS cleaning services (Estonian owned) 22

Krausberg (Estonian Owned) 11

GPS 5

Smaller players 30

Market Share in Estonia

SOL Estonia,

32%

Minu Vara ESS group

ESS cleaning services,

22%

Krausberg, 11%

GPS, 5%

Smaller Players,

30%12345

(b). In Latvia, currently the market relates to the key players remain unknown.

• Products and services differentiations: The GPS practices its customer-oriented approach, which reflects GPS’s efficiency and flexibility executing the contract, which



is supervised by a GPS’s object managers who are responsible for the conduct of the jobs.

Their contracts consist of two parts: (i). A long section of all the legal details, and (ii). A one-page “specifics” part, which includes the essential details of each job including price for the job, the type and frequency of services provided. The GPS will always willingly to renegotiate the specifics part as the need arose and any changes in the contracts often require simply modifying the one-page specifics part. GPS pursues this approach, which differentiates itself from the competition with customer focus and dedication to exceed the clients’ expectations. Because Tim believes that GPS draws strength from combination of the American style senior management oriented to customer satisfaction with dedicated and hard working Estonian managers; thus, build up long-term relationships between both the company and customers and clients, preserve a network of stable, loyal, and supportive customers who help the company grow rapidly in future growth.

• Consumer service: GPS operates from daily office cleaning to weekly maid service for

a customer’s home. The company’s jobs operate in diplomatic buildings (Embassies and Ambassadorial residences), commercial, and retail buildings, residential homes, and industrial sites.

Besides regular services, GPS also provides special job services -- oiled wood floor maintenance, window cleaning, floor waxing and polishing, furniture cleaning, carpet cleaning, and etc.

The company focuses on quality not quantity.

• Location:

o Estonia: Tallinn (Headquarter, the capital city, north branch), Tartu (south branch),

Narva (east branch), and Pärnu (west branch). o Latvia: Riga (the capital city).

• Purchasing: Purchases and material control are supervised by Valentina (General

Manager) and Tim (Chairman). GPS requires cleaning materials, tools and machines for cleaning jobs.

• Image of the firm: Image of the firm is built upon “A good word goes a long way to

bringing in new business”, and the strategy restricts its client’s list to those clients that fit the strategic client profile. Companies that are “high profile” (receive extensive public and media attention), companies with a prestigious image, governmental agencies (embassies) and ministries which have special needs, four-star



or better hotels, and diplomatic or prestigious residences are examples of GPS’s customers.

B. Discussion

Meanwhile, in a smaller country as Estonia and Latvia, the quantity of lands and real estates should be limited, plus enter of the foreign investors would push up the prices of real estate property.

: GPS’s opportunities, when the foreign firms enter these two Baltic countries, their physical locations and their houses in those countries provide business opportunities for GPS. The problem, GPS could not swallow all the opportunities due to the small size of the firm. Although the Baltic countries have a friendly investment environment, the further market information such as pricings of the competitors for both countries, remain unknown. Further information has to be addressed.

C. (1) Recommendations I

:

• In Estonian market, additional collection of the business intelligence for both countries, Estonia and Latvia is required. Due to the business growth in Estonian cities, the information for the four cities is necessary. GPS should send its employees to collect business information from the competitors. Tim and one of his employees should visit the four Estonian cities, observing the business opportunities and current situation.

• For the future in Latvia, if GPS has additional capital, it might need to consider

keeping properties such as land and building at the golden (commercial) area in Latvia for its future business physical location, or selling out if GPS gains 15% from the price it bought.

(2) Recommendations II

• Due to the future expansion at Riga of Latvia, further data related to the development and evolution of Latvian market is required for further analyzing, pay attention to the market environmental variation, market development and market evolution, and the economic trend.

:

• The business plan has to be changed due to the environmental changes in Latvia.

• Keep the eye onto the trend of the real estate, and observe in what area/ city does

the Latvian government plan to develop as a new industrial, commercial area, or residents living area.

• At the same time, pay attention to Latvian markets.



• GPS should make moves in order:

Firstly, strengthens its powers in the base country, Estonia within five years.

Secondly, sets up an office at Riga for its cleaning services in Latvia. Then, expands to the retail business of buying and selling buildings

services. Lastly, after strengthening the businesses at Riga, spread the businesses

across Latvia like the cancer. 2. Accounting:

GPS Real Estate Services

Income Statement 1000s of Kroons

2002 2003 2004* Total sales 2,387 2,331 7,418 Labor costs 604 324 4,738 Materials 856 1,411 1,150 Others 326 340 547 Depreciation 68 123 98 Total operating Expenses 1,854 2,198 6,533 Operating profit 533 133 885 Interest Expenses 9 26 62 Taxes 0 0 0 Net Profit 524 107 823

(*Income statement for the first 3 quarters of 2004)



BALANCE SHEET AS OF MARCH 30, 2004

1000s of Kroons, EEK

Assets Current assets Cash, deposits and prepaid 760.2 Accounts receivable 1,047.12 Total current assets 1,807.32 Fixed assets Plant and equipment 314.94 Total assets 2,122.26 Liabilities and Owners' Equity Current Liabilities Accrued expenses 1,060.76 Long-term Liabilities Notes Payable* 678.38 Total liabilities 1,739.14 Owners' Equity 383.12 Total liabilities and owners' equity 2,122.26

(* The Notes Payable has been separated from the current assets) Notes:

1. The deposit of 670, 000 Kroons is for the government contract. Since March 30, 2004, the deposit was returned in exchange for a bank guarantee from Hansapank (Hansa Bank). The amount was used to pay-off the notes payable.

2. The higher expenses for 2003 reflected extra equipment purchases, which were expensed.

Analysis

The accounting data is not sufficient enough to analyze the firm’s financial performance. With the data the owner, Mr. Tim Ferland, provides, GPS’s financial performance such as liquidity ratios, leverage ratios, and profitability ratios are analyzed below.

For GPS’s liquidity ratios, GPS has a very low, 1.70 times, current ratio which indicates that for every Estonian Kroons (EEK) of current debt, the GPS has EEK1.70 to cover it. It averagely takes 152.45 days to convert accounts receivable into cash either to gauge the liquidity of accounts receivable or the ability to collect from customers.



For leverage ratios, the firm has financed 81.95 percent of its assets with debts (debts ratio), which should gain Tim’s attention. The investment of Tim in equity base is 4.54 times (debt to equity), which is about one-forth (0.22) of what he has owed. Due to the short-term cash position for Tim, it could be a serious problem. Because the higher the percentage of debts, the greater the degree of risk to any of the creditors, but since he does not make loan for his business except for the deposit made from Hansapank (Hansa Bank), Tim has to bear the higher risk himself.

For profitability ratios, GPS’s net profit margin in 2002 was 21.95%, 4.59% in 2003, and 11.09% for the first three quarters of 2004. This means Tim’s ability to translate sales into profits for each year (or in the first three quarters) are mentioned on above. Tim’s ability to manage his total investment in assets for GPS (ROI) in the first quarter of 2004 was 12.93%, in the second quarter of 25.85%, and due to the big contract in the third quarter it was 349.53%.

Furthermore, a high debt/ equity ratio generally means a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest) then the shareholders benefit as more earnings are being spread around to the same amount of shareholders (if GPS has any other shareholders ). However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle, which may result in bankruptcy and leave shareholders with nothing, so it is a delicate balance. This is what the leverage effect is about and what the debt/ equity ratio measures. The debt/ equity ratio will also be dependent on the industry the company operates in. For example, capital-intensive industries such as auto manufacturing tend to have a debt-to-equity ratio above 2, while personal computer companies have a debt to equity of under 0.5. While the numbers for a competitor cannot be found, GPS debt to equity ratio was very high. That needs to be a balance so GPS needs to pay down some of their debts. Tim should have adopted managerial accounting for the firm’s internal record, while the financial accounting is for the outsiders review. With the managerial accounting, Tim might have more clear about the firm’s costs of every job the firm is engaging such as direct materials, direct and indirect labors, and overhead costs for each jobs. Without sufficient accounting provided here, tracking down every single costs and/ or allocation of costs is impossible.



3. Financing:

For the bank financing, Tim does not have much choice. Bank loans that is made from the local Estonian bank, other banks from the European continental, bank from his home country, the U.S.; the special loan programs from Small Business Administration (SBA) in the U.S.; private placements in the U.S.; or goes Initial Public Offering (IPO) can be selected. Bank Financing

Bank loans are a method of asset base for loans. It is can be very difficult to obtain for the start-up companies, because banks usually require hard assets as collateral. The risks associated with using personal property such as accounts receivable, inventory, equipment, or real estate of the borrowers. Despite this, bank financing should not be dismissed as an option, and it could be Tim’s final option due to its very small size of the firm.

Local banks in Estonia: Eesti Pank (Bank of Estonia), Eesti Krediidipank, Eesti Ühispank (Union Bank of Estonia), Hansapank (Hansa Bank), Merita Bank, Optiva Pank (Optiva Bank).

Estonia's banking system has consolidated rapidly. Nine banks operate in Estonia, including three branches of foreign banks. Six representative offices of foreign banks were established by December 2004. The Estonian, Scandinavian-connected banking system is modern and efficient encompassing the strongest and best-regulated banks in the region. These provide both domestic and international services (including Internet and telephone banking) at very competitive rates. Both local and international firms provide a full range of financial, insurance, accounting, and legal services. Estonia has a highly advanced Internet banking system: 68 per cent of inhabitants make their everyday transactions via Internet banking.

Small Business Administration (SBA) The SBA offers a 7(a) Loan Guaranty and a 7(m) Microloan programs to assist small businesses. The 7(a) Loan Guaranty program is the SBA’s primary business loan program helps qualified small businesses obtain funding when they cannot obtain business loans through regular lending channels. This program can be used to finance working capital, machinery and equipment, furniture and fixtures, land and building, leasehold improvement, and debt refinancing. Tim’s 20 percent or more are required to personally guarantee SBA loans. The interest rate on loan is negotiated between Tim and the lender. Under this program, the 504 Loan Program provides fixed-rate financing to small businesses to acquire machinery, equipment, or real estate in order to expand or modernize. The maximum amount of loan for the program is $1 million. The 7(m) is a short-term loans program that up to $35,000 is provided to small business for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery, or equipment. The loan cannot be used to payoff existing debts.



Tim is a citizen of the U.S. but is engaging small business in Europe. If Tim is qualified to this program, it would be significantly helpful because the amount provided from SBA could be larger than what he could borrow from the local banks.

Private Placements

In private placement financing, a company’s securities are purchased by private investors (so-called "angels" or "accredited investors"). These individuals usually possess a substantial net worth and are willing to take a chance on an early stage company with the hopes of a big payout down the road. Entrepreneurs usually maintain operational control since private placement investors typically individually acquire less than 10% of the company and often do not wish to participate significantly in management. While passive investment can be a source of much-needed capital, it could be disadvantageous in that it does not strengthen the company’s management or provide industry contacts.

In general, private investors are solicited through a private placement memorandum, which describes the company, its prospects and the investment. After the decision to invest has been made, a subscription agreement formalizes the transaction. One of counsel’s tasks is to ensure that the private placement offering is exempt from the Federal Securities Act of 1933. This is typically done by structuring the deal so as to fall within one of the exemptions provided under Regulation D. In addition, the offering must comply with any applicable state securities laws, including the company’s state of incorporation and any states in which prospective investors reside.

There are three rules for the private placements: Rule 504, 505, and 506. Under Rule 504, a firm can sell up to $500,000 of securities to any number of investors, regardless of their sophistication, in any 12-month period. Under 505, changes both the investors and dollar amount of the offering. This rule permits the sale of $5 million of unregistered securities in the private offering in any 12-month period. These securities can be sold to any 35 investors and to an unlimited number of accredited investors. Under Rule 506, allows an issuing company to sell unlimited number of securities to 35 investors and an unlimited number of accredited investors and relatives of issuers. No advertising or solicitation through public media can be involved for these three rules.

Private placements is also helpful, Tim does not advertise his business. But it is hard to get private investors for the business engage in an unknown country in Central Europe (the investors might not know where Estonia is).

Initial Public Offering (IPO)

By the time a company is ready to sell equity to the public, it has probably completed one or more of the other forms of financing. While an IPO can provide a myriad of opportunities, there are significant complexities and challenges that should not be undertaken lightly.



Advantages of "going public" include: access to large amounts of capital, an exit opportunity for investors and employee shareholders, legitimacy in the business world, estate planning advantages, and an objective valuation for future mergers, acquisitions or sales.

Challenges of going public include: Securities and Exchange Commission reporting requirements, loss of majority control, exposure to market forces that may affect the company’s valuation, restrictions on purchase/sale of securities by insiders, increased insider trading risk, and a requirement that operations be more formalized.

GPS is not ready to IPO, especially if Tim wants to deal with private placements.

For firm’s financing issue, SBA, bank loans, and private placements are considerable options. Personally, I would recommend SBA if it works, if no, then bank loans. Tim has made a deal with Hansapank (Hansa Bank) for the government contract, Tim should have an outstanding history in the bank record, perhaps, Tim can try bank loans from Hansapank if he wants to make a loans.

4. Production/ Operations: Currently GPS operates its business in Estonia. GPS has no operation in Latvia.

A.

Opportunities/ Problem(s)

• Production Process: Each client contract is placed under a specific “object manager” to handle the contract’s job. The workers and supervisors as needed are made available to the object manager from the human resources that are hired by GPS. The workers are assigned same jobs, and rest of the cleaning and other services are provided according to the client’s desires.

• Administrative Structure: The Office Manager (Sylvia Olesk) is in charge in

administrative activities, management of payroll, and personnel programs, and reports to the board. Please see Figure 1: GPS’s Organizational Structure.

• Control and use of raw material and manpower: The General Manager (Valentina

Sokolova) is in charge and in the control and use of raw material and supervised by the Chairman (Tim). While the Office Manager (Sylvia Olesk) is in charge the manpower.

• Plan layout, quality control, and inventory control system: Through the plan layout,

the company will provide whatever resources the contract job needs such as workers, supervisors and materials to fulfill the contract. Through the quality control, the employees such as Ninel Gerastsenko, has extensive knowledge of cleaning techniques, and will lead GPS to perform its services in quality not quantity, which exceed customer’s expectation. Through the inventory control system, the firm does not have an elegant inventory control system, although the inventory it is the responsibility of the General Manager (Valentina Sokolova) and supervised by Tim.



Meanwhile, GPS’s inventories in Tallinn are materials for their cleaning services, and the real estate properties for being bought and sold.

• Suppliers: UNKNOWN. (GPS does not provide its supplier(s) information.

Considering the high performed quality services provided by his small company, it is logically to believe that the materials supplies will be the combination of local and the foreign products).

B. Discussion

: GPS can still handle its production and operation while the business is limited in Tallinn. When the business is spread over the country and operates internationally, it will not be easy without its own information system and database storage. At the mean time, due to the expansion around Estonia, GPS experiences high material and consumption costs.

C. (1) Recommendations I

:

• In Estonia, a database system is strongly recommended for customer information, records relate with the contract, and inventory. It does not necessary to waste $N million for data warehousing. GPS can outsource the information system design, and its website to a computer programmer.

• Also GPS pays attention on customer’s habits such as how long does a particular

customer require another round of cleaning services, and what kind of services does the customer prefer.

• By maintaining cost, GPS can realize greater profits.

(2) Recommendation II

• For the future engagement in Latvia, start preparing solutions to the problems that the firm would face when it operates in Latvia in the future. These problems of production and operations cover the areas of production process, administrative structure, control and use of raw material and manpower, plan layout, quality control, inventory control system, and suppliers, which the firm would face in Latvia.

:



5. Human Resources: Currently the hiring is in Estonia. GPS does not hire employees in Latvia. A.

• Organizational chart with job descriptions: So far, GPS contains a Management Board, an Accountant, a General Manager, an Office Manager, four Regional Managers, and four Object Managers (Figure 1).

Opportunities/Problem(s)

There are four regional offices in Tallinn (north, headquarter), Tartu (south), Narva (east), and Pärnu (west). The regional managers handle the job at one of the four regional offices where they are assigned. All of the regional managers supervised by the regional manager in Tallinn (north) region. So the Tallinn office has doubled as the northern regional office and handles all the jobs in the Tallinn area.

An Object manager handles a specific contract job, and reports to the related regional manager.

Tim Ferland serves as the Chairman of the Management Board, which also includes Kaia Ferland, and Mihkel Kõrgma, an accountant. Valentina Sokolova serves as General Manager and report to the Board. She is regional manager for Tallinn (north) region and supervises the other three regional managers; she responsible for all the operations, and the purchase and material control, which supervised by Tim. Sylvia Olesk serves as Office Manager handles almost all of the administrative activities and management of payroll and other personnel programs, and report to the Board. Sylvia has also helped Tim to manage budgeting and financial planning.

• Tim, Valentina, and Sylvia are responsible for interviewing and hiring employees. Tim has the right to make the final decision.

• GPS has hired more than 200 employees across Estonia. Most of them are contract

part-timers. There are about 100 of them in Tallinn, the rest of them are spread over the other 14 cities. There are no employees being hired in Latvia.

• Under Estonian labor laws, at least 4-month pay compensation is required for the

discharged employee. In anytime, an employee is discharged “unfairly” as determined by the Labor Board, a stiff penalty will be imposed. To avoid this penalty, Tim has put in place a “non-compensation” requirement for termination of any employee. No compensation is required if the employee quit the job in his/ her own free will, or was terminated for a valid cause such as theft, drinking on the job,



ongoing neglect of duties, and etc. The managers are required to be vigilant in their documentation of employee behavior. The Tallinn office will monitor to ensure that all terminations were done for valid causes.

• According to the Foreign Property, Estonian wages is only 20% of the EU

average, while an EU average is currently €2,335 per month. Meaning: An Estonian wages per month is about €467/ month, EEK 7308.49, or US $548.92 (Foreign Property).

• Under a new Latvia’s Labor Laws, the minimum wages is LVL 60 (and has been

fixed at LVL 80 in 2004), which is EURO €86.18, or US $100. A full time employee in Latvia works 40 hours a week. Five working days per week (National Economy of Latvia in 2004).

• About the information regarding to training, fringe benefits, health programs, and

life insurance for Estonian and Latvian employees are unavailable.

B. Discussion

C. (1

: It is hard to find suitable human resources in both countries. The people there are generally hard working, reliable, and fast learning. But it is still lack of mid- and senior-level managers with western-style management skills. Especially in the services sector, experienced staff is not easy to fine. And also an adoption of Toyota’s “lean production” method can be considered.

) Recommendation I• GPS might need to train its employees regardless where its businesses are. Train

the employee to take risks and be independent for doing their jobs.

:

(2) Recommendation II• Tim needs to prepare funding and design a training program for employee’s,

having the employee’s train the newcomers.

:

• Tim has introduced an ad-hocracy for each region. The ad-hoc team is a “task

force” teamed with different specialists to respond rapidly changing environment.

• Tim might need to try further: a “lean production” method of Toyota

Production System (TPS), which is an idea from the Japanese auto industry, which refers to a smaller group of workers, each performs several tasks, can perform jobs with fewer inventories, less investment, and fewer mistakes. Workers have multiple job responsibilities and encouraged to stop production in order to correct a problem. So the workers can learn from their mistakes and experiences they made (Toyota Motor Corporation, 2003).



FIGURE 1 (GPS’s Organizational Structure)

6. Insurance, Taxes, and Zoning:

A.

• Insurance coverage needed:

Opportunities/ Problem(s)

In Estonia, there are five types of insurance to cover old age, disability, and survivors: (a). Social insurance and mandatory individual account system benefits for all persons currently residing in Estonia who are old age, disability (loss 40% of capability), and survivors who must be incapable of gainful activity; (b). Social insurance system for sickness and maternity benefits to insured employees, insured employers, and insured

Chairman

Tim Ferland

Management Board

Tim Ferland

Kaia Ferland

Mihkel Kõrgma

Accountant

Mihkel Kõrgma

Office Manager

Sylvia Olesk

General Manager

Valentina Solokova

Regional Manager (Tallinn)

Valentina Sokolova

Regional Manager (Tartu)

N/A

Regional Manager (Narva)

N/A

Regional Manager (Pärnu)

N/A

Object Manager (Tallinn)

Ninel Gerastsenko Object Manager (Tartu)

N/A

Object Manager (Narva)

N/A

Object Manager (Pärnu)

N/A



self-employed persons, the spouse of an insured person, persons under age 19, schoolchildren or full-time students, disabled persons, nonworking persons raising a child up to age 3, pregnant women from the twelfth week of pregnancy, social insurance pensioners, persons registered as unemployed, and military personnel; (c). Social insurance system for work injury benefits to insured employees and insured self-employed persons; (d). Social assistance system for unemployment covers permanent residents aged 16 to retirement age who are capable of gainful activity; and (e) Social assistance system for family allowances benefits to permanent residents, non-citizens with temporary residence permits, and refugees (Social Security Programs Throughout the World: Europe, 2004 – Estonia).

In Latvia, there are five types insurance to cover old age, disability, and survivors: (a). Notional defined contribution (NDC) social insurance and mandatory individual accounts system benefits to Employed persons, self-employed persons, active military personnel, individuals caring for children less than 18 months old, unemployed persons, diplomatic staff spouses, and sickness and maternity benefit recipients; (b). Social insurance system for sickness and maternity covers all permanent residents of employed and self-employed persons; (c). Social insurance system for work injury covers employed persons who are either permanent or temporary disability; (d). Social insurance system for unemployment covers employed and self-employed persons, active military personnel, and individuals taking care of children under age 18 months; and (e). Universal system for family allowances covers Permanent residents with a child of prescribed age (Social Security Programs Throughout the World: Europe, 2004 - Latvia).

• Taxes (federal, state, & local): According to the Estonian laws, foreign investors have equal rights and obligations as local entrepreneurs. All foreign investors may establish a company in Estonia in the same way as local investors, no special restrictions are made. Principal of taxation is described in the Law on Taxation.

• The existing state taxes are: o Income tax: 24%; o Value-added tax (VAT): 18%; o Social tax (social security contributions - state pension and health

insurance): 33%; o Unemployment insurance tax: 0.5% employer + 1% employee; o excise taxes (tobacco, alcoholic beverages, motor fuel, motor vehicles,

packages); o Gambling tax is implied on companies that offer gambling services; o Land tax based on the market value of land and ranges between 0.1 to

2.5 percent of market value of land annually from 0.1 to 2.0 for arable land and natural grassland (VISITinESTONIA.COM).



The Latvian tax system neither favors nor discriminates against inward foreign investment. Companies are taxed at 15% and individuals at 25%. However it is government policy to ensure all income generated in transacting business is taxed within the country. There are Special Economic Zones at Liepaja and Rezekne, and the ports of Ventspils and Riga operate as Free Ports. All four zones have substantial tax advantages.

Timeliness of reporting: Its fiscal year is calendar year. In Estonia, a business entity can choose a fiscal year ending on 31 March, 30 June, 30 September or 31 December. In Latvia, the tax year either is the calendar year or may differ from the calendar year if so stipulated by the charter of the company. The fiscal year should be 12 months; however, a company being incorporated part way through the year may have a tax period, which is shorter or longer than 12 months (lowtax.net).

Zoning restrictions/ limitations: According to the investment guide of the

INVESTinESTONIA.COM, Estonia has no exchange controls or restrictions on foreign investment. The amount of foreign capital invested in Estonian business enterprise is unlimited and companies can be in full foreign ownership. Foreign companies enjoy equal rights with local ones, including unrestricted repatriation of profits and the right to own a land. To encourage companies to expand their business all corporate investments are exempted of corporate income tax from Jan 1, 2000. However, any distributed profits, for example dividends, are taxed at 24% (INVESTinESTONIA.COM).

Licensing requirements:

In Estonia, according to the investment guide of INVESTinESTONIA.COM , the registration requirements of a company, requires the Management Board to submit a petition application for the registration in the Commercial Register within six months of concluding the Foundation Agreement. The application must be signed by all members of the board and include the following information to be entered to the Commercial Register:

• The business name of the public limited company; • The area of activity, location and address of the public limited company; • The amount of share capital; • The date of approval of the Articles of Association; • The names, personal identification codes and residences of the management

board; • The members of the management board entitled to represent the public limited

company differently than provided for in subsection 307(1) of the Commercial Code;



• The beginning and end of the financial year; • The other information provided by law.

The following documents should be enclosed with the application:

• The Memorandum of Association; • The Articles of Association; • A bank notice concerning the payment of share capital; • Upon payment by a non-monetary contribution, the agreement concerning the

transfer of the contribution to the public limited company, documents certifying the value of the contribution and an opinion on the valuation of the non-monetary contribution signed by the auditor;

• The names, personal identification codes and residences of the members of the management board, the supervisory board, and the auditors;

• Specimen signatures of the members of the management board; • Telecommunication numbers (telephone, fax, etc.); • A notice from the registrar of the Estonian Central register of Securities

concerning registration of the shares; • Other documents provided by law (INVESTinESTONIA.COM).

In Latvia, according to the Lowtax.net, foreigners are allowed to carry out business activities in Latvia in the form of: a limited liability company (SIA); stock company (A/s - public or closed); or as a branch of a company. That depends what type of company does Tim what to register. The Registration fees payable to the Government upon registration are:

• LVL 250 for a stock company; • LVL 100 for a limited liability company; • LVL 20 for a branch; • LVL 20 for a representative office.

Regardless which form of business entity, according to the new Commercial Code effective 1 January 2002, documents have to be filed with the Registry in Latvian. Documents in other languages have to be translated and notarized. All company documents filed with the Registrar are open to public inspection at a nominal charge.

Latvian company law calls for the creation of a three-tier governing structure: (i). The shareholders' meeting; (ii). The management board; and (iii). The supervisory board (optional for limited liability companies). At least half of the members of the management board must be domiciled in Latvia.



Both limited liabilities and stock companies have legal personality, distinct from that of their shareholders. Shares in a company represent a portion of corporate capital and entitle the holder to a proportional right to corporate assets on dissolution. There is no minimum or maximum amount of shares that a company is allowed to issue, unless otherwise specified in the incorporating documents. "One shareholder" companies are also permissible under Latvian law (lowtax.net).

B. Discussion

• Business strategy: As a green-field company as GPS, a mixture of low-cost and highly differentiation business strategy is a wise move. This “transnational product-market strategy” for low-cost but best value services as the firm’s business strategy will bring profit to GPS while operates in Latvia.

: According the civil laws of Estonia and Latvia are influenced by German, they might have something different in details that require foreign investors to be aware of the differences. C. (1) Recommendation I: Pay attention on both countries’ laws and others regulations. (2) Recommendation II: Be aware of the differences. 7. Other Areas to Concern

• ISO: Since GPS’s work contains quality, perhaps, the firm might try to achieve ISO

9000:2000 quality standard and ISO 14001 environmental standard, that might help. Because some European corporations would like to trade with a firm that has achieved such a quality standard.

• Real estates investment risk: Tim has to make sure that the real estates that bought are value

added not a kind of waste land. Therefore, Tim needs to understand what the Latvian government is preparing to do with the area. Beside the golden area, Tim can try to purchase buildings around the educational area, because students and faculty wants to stay close to the educational institutions.

• Bureaucratic red-tape and corruptions: These might slowdown the process of what GPS

wants from the authorities. 8. The Other Way Round to Analyze GPS’s Capabilities: Although the Estonia and Latvia provides opportunities for GPS’s growth, Tim has to practices “transnational product-market strategy” for low-cost but best value services as the firm’s business Strategy. Compare with the cleaning materials, the real estates business contains certain risks. GPS is a professional property servicing company, but it does not guarantee GPS would buy a valuable real estate.



Through the management effectiveness, GPS is experiencing management and operating problems since it took the Estonian government contract. Currently, GPS targets the differentiated quality jobs to different groups, with mostly part-time workers that sufficient to perform jobs around only Tallinn area. The e-commerce in Estonia had been doing well to the four-year old company. From the view of SWOT, GPS had low on internal strengths in manpower, cash and capital because of it’s newly expansion from a local small firm to nationwide company. But it has high on external opportunities because its jobs contain quality. GPS should be under the Question Marks of the SWOT Analysis. It should keep on doing its most promising business that is the complete range of cleaning and maintenance services related to the real estate and property.

Through the key issues and problems, GPS is experiencing (1). High supervisory-management-level employee turnover; (2). High material consumption and cost; (4). Financial capital shortage; and (4). Its critical situation of the firm’s positioning.

GPS assigns its regional managers to a job of one person doing two to three people’s jobs that had caused the supervisory-management level high turnover. GPS needs to maintain the northern region at Tallinn as the companies headquarter, hires a southern regional manager and at least one object manager in four other regions. The regional managers are to in charge the four regional (northern, southern, eastern, and western) businesses, while the two object managers are to manage more than one contracts jobs at the same time. GPS needs 50 percent of workers in full-time as a basic labor force, and 50 percent of workers in part-time for cost saving. Maintaining the full-time workers, is just in case the company has to deal with a big contract that suddenly requires a larger labor force. Maintaining the part-time works, is the company does not need too much labor force while it does not get a big contract all the time. The more languages the managers and employees could speak, the more beneficial to the company (for the business expansion to the Baltic countries and EU members), Estonian, Russian, English, and German are the key tools for communication.

High material consumption and cost are happening all the time while a firm is expanding from smaller business to the bigger business. GPS needs some cash and capital for its nationwide business. According to its historical record and the government contract, it is persuasive for Tim to make loan from the bank or else where. Once it has successfully expanded its nationwide business, its capital and cash will be growing up to repay the notes payables.

Through Porter’s 5-forces, GPS is facing tough competition. GPS currently shares only 5 percent of the market shares, the Estonian market is still containing potential of growth, and its quality business strategy (broad differentiated position) could make GPS stands out. Due to the 69 percent (1999 estimation, the World Fact book, 2005) of the population is in servicing fields, the power of new entrants is strong, it could be anywhere (from local Estonia, local Latvia, Finland, Germany, Sweden). The power of buyers is strong because customers could get service everywhere (other Estonian owned firm, Russian owned, Swedish owned, and especially Finnish owned). The power of suppliers is weak because GPS can get materials everywhere (even form Tim’s home country, the United States). The power of substitution is medium, because the



customers of business sectors can order their owned employees to clean their facilities themselves, and household can clean their owned house themselves.

Through the macro-environment, GPS needs to be aware of the governmental regulations (taxation and labor laws), the national economy stabilizing, and does more networking by donating scholarships to poor students, medical and health care the local communities, and so on to construct GPS’s positive image. GPS has to be aware the left-wing rural party, People’s Union, because left-wing political party contains strong leftist tendencies that might be going extreme if it runs the office, and to be hostile to the foreign firm. Nonetheless, both macro-environments in Estonia and Latvia have a promising investment environment for the foreign investors.

Introducing ad-hocracy for each region is a wonderful ideal. An ad-hoc team is a “task force” teamed with different specialists to respond rapidly changing environment. On the other hand, perhaps, Tim might need to try further: a “lean manufacturing” method of the Toyota Production System (TPS) from the Japan’s Toyota Motor Corporation.

TPS refers to use highly trained employees at every early stage in production process. These highly trained are a pain-taker to detail and problem solving group to cut waste and improve performance quality. TPS is a combination of techniques includes just-in-time inventory, continuous-flow production, rapid changeover of assembly lines, continuous improvement, and preventive maintenance with management system that encourages employee involvement and problem solving. The heart of TPS idea is the highly involvement of employees, who are trained to “think lean,” which means attacking waste and striving for continuous improvement in all area. They are encouraged to stop production in order to fix a problem. So the workers can learn from their mistakes and experiences they made. Although the TPS is for the manufacturing area, the idea of “think lean” and correction can be brought through the service field.

Through the efficiency and effectiveness, for the cleaning services, it is better for Tim to practice little bit empowerment to the regional managements. However, the buying and selling real estates business is not suitable for the empowerment practice, due to the lack of middle- and senior-level executives’ knowledge and skills. The reason of this is that these skillful employees are hard working and fast-learning that are reliable enough for the smaller jobs such as cleaning and repairing services, but the retail of real estates involve with large amount of cash flows that, I believe, only at least a middle-level manager has sufficient knowledge and skills to handle the entire process of that business, so Tim has to at least supervise on the process from the beginning until the end of the transaction.

In Conclusion

For the firm’s production and operation, maintains its unique service strengths and quality as described on (III 1). Gather financial capitals supports from the banks (local and foreign) and any possible supporters such as Small Business Administration (SBA) and private offerings Financing the firm with debts either via making bank loans (local, the U.S., or European), from SBA, or



from private placements is considerable, except from venture capitalists. Try to preserve valuable supervisor-manager-level employees. Lower down material consumption and costs.

Meanwhile for financial performance purpose, increases 40.44 percent sales revenue of first 3 quarter of 2004’s in the last quarter to construct a well budget for the firm. The degree of opportunity for a firm goes internationally is depending upon how many resources especially the financial resource that have been input for the business starts-up. In GPS’s case, due to the shortage of financial capital that has deeply impacted and weakened the firm’s time of expansion. It takes Tim a long while for his ambition to operate the firm’s businesses (cleaning and buildings retail services) at Latvia.

In the short-term (maximum of five years), spreads business to the Latvia (and maybe to Lithuania), since they shared the common historical influences background (occupied by U.S.S.R.) and gained independence at the same period of time that leads their country’s developments started at the same time period that will not make too much different between the three Baltic countries.

In the long-term (about 10 years, could be longer), through the EU, since it is low-price than the Western European firms. Due to the rapidly changing from the traditional firm to the digital firm, a mini data mart for business intelligence, customer relationships (CRM) for customer’s information and consumption habit, and a mixture of online- and offline- commerce is powerful. At last, GPS should have its own website.

Appendix A

A Brief Introduction of Estonia and Latvia, and the Cities:

Republic of Estonia

Estonia with a population of 1.37 million (Estonian 68%, Russian 26%, Ukrainian 2%, Byelorussians 1%, and Finns 1%, and others 2% 2004 est.), and GDP per person at purchasing power parity of $14,300 (2004 est.), is a smallest of the Baltic countries, in both population and geographic size (Latvia and Lithuania being the other two). Its total size is 45,226 sq km, slightly smaller than New Hampshire and Vermont combined. The religions in Estonia is mainly Lutheran, other larger active confessions are Greek Orthodox, Russian Orthodox, Baptist, Methodist and Roman Catholic.

Since the last Russian troops left in 1994 (it regained its freedom in 1991), Estonia has been free to promote economic and political ties with Western Europe, and joined the European Union and NATO in 2004. As a member of the World Trade Organization, it has efficiently transitioned to a modern market economy model with strong ties to the West, including the pegging of its currency to the EURO. After overcoming the challenges of the early transition years, the economy grew steadily and registered an annual average growth rate of about 6 percent since 1995. Practically all sectors of the economy were open to foreign investment. This led to a number of multinational companies investing in Estonia. The economy benefits from strong



electronics and telecommunications sectors, and is greatly influenced by the developments in its four major trading partners, Finland, Sweden, Russia, and Germany. The high current account deficit remains concern, but the state budget enjoyed a surplus of $130 million in 2003.

Nonetheless, Estonia has a stable political climate, a steady GDP growth 6.5% (2001), 7.2% (2002), 6.7% (2003), 7.8% (2004), 6.5% (2005est., by Ministry of Finance, Estonia) since the transition of the modern economic model with high labor force of 69 % (1999 est.) in services sector, and is also having 9.6 % of unemployment rate (2004 est.), it is not difficult for hiring.

Tallinn

The capital city of Estonia, Tallinn (population 411,600), is located on the northwestern tip of the country. It has many historical and architectural monuments, particularly in the old town center, which is dominated by the steeple of the medieval Town Hall (14th to 15th centuries), the oldest in northern Europe. The city has a wide range of restaurants, cafes and bars. The cultural activities such as opera, ballet and classical music performances are given regularly. The Old Town is well preserved within its original walls, both the upper town (Toompea) where the Parliament and the Lutheran cathedral are located, and the lower merchant town. The city was an important medieval port and trading center. In 1234 it joined the Hanseatic League, the trading union, which was the dominant commercial and cultural link across northern Europe. It is now a UNESCO world heritage site (American Chamber of Commerce Estonia ACCE, 2003).

Tartu

Tartu is a neo-classic Old Town. It is one of the oldest university towns in Europe. In 1632, Swedish King Gustavus II Adolphus decided, on the earnest request of his teacher Johan Skytte, to open Academia Gustaviana here which was the predecessor of the University of Tartu. The international visitors make up over a quarter of the city’s 100,000 inhabitants in winter and spring. By one estimate, 40% of Tartu residents are either students or young people. They give Tartu an energetic, daring character that’s at times whimsical, at times edgy, but always interesting (In Your Pocket Ltd, 2005).

Narva

Narva is 212km east of Tallinn. It is still primarily an industrial city with a Russian population of about 96%. It is a leading textile center that has machinery plants, sawmills, flax and jute factories, and food-processing industries. It is also an important producer of electric power (infoplease, 2000-2005). Lingering Soviet-era shop signs and monuments might give visitors the impression that they've stepped back in time a decade, but for better or worse, these reminders of the past are slowly disappearing as the city heads into the 21st century (In Your Pocket Ltd, 2005).



Pärnu Pärnu is a little pearl of a town has been known as a health resort ever since the first spa opened here in the 1830s. There are about 100,300 inhabitants in Pärnu (7% of Estonian population). Population density is 21 inhabitants/ km², the Estonian average is 32. Due to abundance of woods, bogs and marshes, the county is unevenly populated, 2/3 of the population live in Pärnu and its vicinity (In Your Pocket Ltd, 2005). The population in this city contains Estonian 83%, Russians 12%, and other nationalities 5%. Estonians account for 64% on average in Estonia. Since the middle of 1980s, more people have settled in the county as compared to those who have left it (Pärnu County Government, Tourist Information Centre, 2001). Estonia: Tables of Key Macroeconomic Indicators and Economy Development Perspectives Key Macroeconomic Indicators 2001 2002 2003 2004 GDP, billion EUR 6.7 7.5 8.1 9.0 GDP real growth, % 6.5 7.2 6.7 7.8 Export, billion EUR 3.696 3.642 4.001 4.746 Import, billion EUR 4.798 5.078 5.714 6.737 Current account balance, (% of GDP) -5.6 -10.2 -13.2 -12.9

Consumer prices, (growth %) 5.8 3.6 1.3 3.0 Unemployment rate (ILO, %) 12.6 10.3 10.0 9.7 Average monthly wage, EUR 352 393 430 466 General government balance (% of GDP) 0.6 1.1 2.4 1.7

Sources: Statistical Office, Ministry of Finance



Economic Development Perspectives

2005 2006 2007 2008 2009

GDP real growth (%) 6.5 6.6 6.3 6.3 6.3

GDP (billion EUR) 10.0 10.9 11.9 13.0 14.3

Consumer price index 3.6 2.6 2.6 2.8 2.8

Employment (thous) 599.1 603.0 608.1 612.1 614.7

Productivity growth (per employee) 5.7 5.9 5.5 5.6 5.8

Unemployment rate 9.3 9.2 8.8 8.5 8.4

Average wage (EUR) 512 555 599 647 699

Wage real growth 6.2 5.5 5.3 5.1 5.0

Current account (% of GDP) -10.4 -8.2 -7.4 -6.3 -5.0

Source: Ministry of Finance (Economy, Investment Guide, INVESTinESTONIA.com) Republic of Latvia

Latvia with a population of 2.5 million (Latvia 57.7 %, Russian 29.6 %, Belarusian 4.1 %, Ukrainian 2.7 %, Polish 2.5 %, Lithuanian 1.4 %, other 2 %, 2002), and GDP per person at purchasing power parity of $11,500 (2004 est.), is a small country bordering the Baltic Sea, between Estonia and Lithuania. It is 64,589 sq km that is slightly larger than West Virginia. Although the last Russian troops left in 2004, it regained its freedom in 1991; however, the about 30 % of Russian minority in Latvia remains of concern to Moscow. Latvia joined European Union and NATO in 2004.

In 1999, the Latvian transitional economy recovered from the Russian economic crisis hit in 1998. As the budget cuts recommended by IMF, and gradually reorientation of exports toward EU countries, lessening its trade dependency on Russia, the economy started to pick up again. According to the National Economy of Latvia in 2004 of Latvian Chamber of Commerce & Industry, the GDP growths were 6.4% (2002), 7.5% (2003), and 8.5% (2004). Latvia joined the World Trade Organization in 1999. Its current account and internal government deficits remain major concerns, but the government’s effort to increase efficiency in revenue collection may reduce the budget deficit. A growing perception that many banks in Latvia, facilitate illicit activity could damage the country’s vibrant financial sector.



Latvia’s commercial environment is basically friendly to foreign companies. There are no controls on import, export, or use and conversion of foreign currencies, which facilitates investment and repatriation of profits. The modern laws established to protect copyrights, patents and trademarks and the means for enforcing their protection. Telecommunication services have been modernized and the real estate market looks promising, with both modern housing and reasonably priced business venues available. English is the West European language of choice in governmental and business sectors. American products face strong competition in the Latvian market from the EU and CIS, especially from the historical trade relations, companies from Norway, Sweden, Germany, and Finland.

Nonetheless, Latvia is a potential attractive market for American IT equipment and services, capital machinery and equipment, and consumer products, since its economy is based on service industries. Latvia is also located in the center of the Baltic countries that has provided a strategic location as commercial, financial and transportation hub for the Nordic / Baltic region. And most of the American companies doing business in Latvia rate the business environment among the best in Eastern Europe.

Riga

Riga is the capital of Latvia was found in 1201 with a population of 815,000. It is the geographical centre of the Baltic countries, where cross-roads location between Western Europe and huge Eastern markets has always, been and still is, one of Riga's attractions for business activities. When in the 14th and 15th centuries Riga became one of the most important trade centers of the Hanseatic League, the city was granted special rights to transport goods along the Daugava further to the East.

Nowadays, Riga is also an important transport junction. The main elements that make the city as a transit center are the harbor of Riga, the Riga international airport and developed railway and road networks. The historically developed transportation infrastructure has facilitated Riga's evolution as the major industrial and business center in the Baltic region. The city is well known for its architectural and cultural values, skilful labor and developed infrastructure. Riga is not only the backbone of Latvia's economy but also the largest center of education and science. This is confirmed by a large number of cultural events, international exhibitions, scientific conferences and seminars that every year takes place in Riga (VirtualRiga.com).



Latvia: Economy Development

(By National Economy of Latvia in 2004, Latvian Chamber of Commerce & Industry) Latvia: Graph of Growth

(By National Economy of Latvia in 2004, Latvian Chamber of Commerce & Industry)



Appendix B The Balance Sheet before separated from the current assets

Balance Sheet as of March 30, 2004 Assets 1000s of

Kroons Liabilities and Equity 1000s of

Kroons Cash, deposits and prepaid 760.20 Notes Payable* 678.38 Accounts Receivable 1,047.12 Accrued expenses 1,060.76 Total current assets 1807.32 Total Current liabilities 1,739.14 Plant and equipment 314.94 Owner’s Equity 383.12 Total 2,122.26 Total 2,122.26

(*Notes Payable before separated from the current assets)



References GPS Real Estate Services, prepared by ***************. American Chamber of Commerce in Estonia http://www.acce.ee/index.php?millen=lehed&id=25 Investment Guide, INVESTinESTONIA.COM*: Taxes - http://www.investinestonia.com/index.php?option=displaypage&Itemid=73&op=page&SubMenu=

Foreign Direct Investment – http://www.investinestonia.com/index.php?option=displaypage&Itemid=112&op=page&SubMenu=

Establishing A Company – http://www.investinestonia.com/index.php?option=displaypage&Itemid=71&op=page&SubMenu=

www.gtlaw.com

http://www.foreignproperty.com/feature/143.php, Goodson, Darren. Twelve Reasons Why Estonian Property Prices Have To Boom, Foreign Property, 2005

inyourpocket.com, In Your Pocket Ltd: Narva - http://www.inyourpocket.com/estonia/narva/en/ Pärnu - http://www.inyourpocket.com/estonia/parnu/en/ Tartu- http://www.inyourpocket.com/estonia/tartu/en/ infoplease.com: Narva - http://www.infoplease.com/ce6/world/A0834873.html Pärnu County Government, Tourist Information Centre http://www.parnumaa.ee/eng/general.html Latvia Country Commercial Guide 2004, U.S.& Foreign Commercial Service, U.S. Embassy Warsaw, 2004 http://www.buyusa.gov/baltics/en/doing_business_in_latvia.html#_section2 lowtax.net: Latvia: Type of Company - http://lowtax.net/lowtax/html/latvia/jlvcos.html

Executive Summary – http://lowtax.net/lowtax/html/latvia/jlvnews.html

Corporate Income tax – http://lowtax.net/lowtax/html/latvia/jlvdctx.html

http://www.acce.ee/index.php?millen=lehed&id=25�

http://www.investinestonia.com/index.php?option=displaypage&Itemid=73&op=page&SubMenu�






http://www.foreignproperty.com/feature/143.php�

http://www.inyourpocket.com/estonia/narva/en/�

http://www.inyourpocket.com/estonia/parnu/en/�

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http://lowtax.net/lowtax/html/latvia/jlvcos.html�

http://lowtax.net/lowtax/html/latvia/jlvnews.html�

http://lowtax.net/lowtax/html/latvia/jlvdctx.html�



Latvian Chamber of Commerce & Industry Directory 2005/ 2006, National Economy of Latvia in 2004

http://www.latvijas-talrunis.lv/lcci-new/lcci_economy-2004.htm VirtualRiga.com http://www.virtualriga.com/about.asp CIA The World Factbook: Estonia - http://www.odci.gov/cia/publications/factbook/geos/en.html Latvia - http://www.cia.gov/cia/publications/factbook/geos/lg.html

Social Security Programs Throughout the World: Europe, 2004:

Estonia - http://www.ssa.gov/policy/docs/progdesc/ssptw/2004-2005/europe/estonia.html

Latvia - http://www.ssa.gov/policy/docs/progdesc/ssptw/2004-2005/europe/latvia.html http://www.toyota.co.jp/en/special/tps/tps.html, Public Affairs Division, Toyota Motor Corporation, 2003. Map of Central and Eastern Europe, The Regional Environmental Center http://www.rec.org/REC/Maps/eur_map.html Hisrich, Robert. Peters, Michael P. Shepherd, Dean A. Entrepreneurship, 6th Edition, McGraw-Hill Irwin, 2006. p328-331 and p336-339. free.investopedia.com ryanair4.ryanair.esat.net . www.oldenborg.pomona.edu *(Please key in “investinestonia” or “investinestonia.com” in Google.com, if the three links of source 3 unavailable)

http://www.latvijas-talrunis.lv/lcci-new/lcci_economy-2004.htm�

http://www.virtualriga.com/about.asp�

http://www.odci.gov/cia/publications/factbook/geos/en.html�

http://www.cia.gov/cia/publications/factbook/geos/lg.html�

http://www.ssa.gov/policy/docs/progdesc/ssptw/2004-2005/europe/estonia.html�

http://www.ssa.gov/policy/docs/progdesc/ssptw/2004-2005/europe/latvia.html�

http://www.toyota.co.jp/en/special/tps/tps.html�

http://www.rec.org/REC/Maps/eur_map.html�



ARTAC, Inc. Advanced Research, Technology and Agriculture Company Incorporated

“Making a difference one seed at a time”

Maria Liberty Bevers Melissa Howe

Andrew Svilokos Merita Tyrell

Shawn M. Carraher

Executive Summary

ARTAC, Inc. is a research company whose asset includes a seed germination technology that uses various natural plant growth hormones to increase food production. Artac, Inc. was incorporated in Oklahoma in 2005; it will use available chemical technology to increase seed generation in developing countries that lack the technology to do so, and will manufacture and market seed germination products; it is also looking at the potential of licensing the rights to pharmaceutical companies. Artac, Inc technology is based on extensive researcher done by the founder Dr. Charles E. Carraher Jr; the technology will use natural germination and biodegradable ingredients in seeds to reduce toxicity and side effects. Also, the founder wishes to use a binding agent that will not only fertilize and germinate seeds, but one that will help them to retain their moisture. There are also concerns about the amount of insecticides and possible connections to air and water pollutant. In addition there is the fear of developing countries not having the technological capacities to sustain and maintain the resources and infrastructure needed for seed germination. In light of this, Artac Inc expects to sell their product globally; they believe their products will help third world and under-developed countries that lack the resources for high seed germination due to severe heat, water, insect infestation, cold as well as other factors. Due to this, the United States is the launching market of choice, particularly in the state of Oklahoma. Objectives

• To increase food production by developing the resources and infrastructure needed generate high seed germination.

• To hire staff both currently identified and unidentified to implement our business concepts and strategies.

• To reduce the use of chemical insecticides • To make environmentally friendly products • To aid U.S. farmers and food manufacturers to become global mechanism that will help

to provide humanitarian – aid to third world and under-developed countries. • To have a positive net income within five years.



Mission Through the combination of natural plant growth hormones and future research ensure our food production is safe from dangerous and harmful environmental factors. Keys to Success

• To manufacture and market our products through licensing rights to as many pharmaceutical companies.

• Provide a stimulating and nurturing environment for research. • Produce large increases in food production. • Strategically market licensure to pharmaceutical companies. • Employees are committed to research • FDA approval.

Company Background

Company Summary Artac, Inc. is a research company incorporated in Oklahoma in 2005. The company goals are to introduce seed germination technology that will help developing countries to obtain their necessary resources and infrastructure for high seed germination. Artac, Inc. will be highly aware of the negative effects of insecticides and pollution on the environment through their development, and hope to license the rights to pharmaceutical companies. Company Ownership ARTAC, Inc. is owned and governed by its founder Dr. Charles Carraher and his partners. Company location and facilities The initial administrative offices will be established in the Center for Emerging Technology and Entrepreneurial Studies. The facility includes access to Internet and free professional assistance. From planning outcomes, our central headquarter will be located in Lawton, Oklahoma. Through growth and sustainable development, we will look to rent or buy existing building for our administrative and management team, as well as a warehouse to satisfy our growing needs and give us a strategic advantage in the fertilization industry. Start-up Summary Dr. Charles Carraher and an equity partner will fund our operating expenses. Additional funding may be provided by grants and donations. Sales will be available in August 2006, and another version of the product in chemical testing will be available in March 2007.

Products and Services



Products and Service Description

Fertilizers are compounds given to plants with the intention of promoting growth; they are usually applied either via the soil, for uptake by plant roots, or by foliar spraying, for uptake through leaves. Fertilizers can be organic (composed of organic matter, i.e. carbon based), or inorganic (containing simple, inorganic chemicals). They can be naturally-occurring compounds such as peat or mineral deposits, or manufactured through natural processes (such as composting) or chemical processes (such as the Haber process). They typically provide, in varying proportions, the three major plant nutrients (nitrogen, phosphorus, and potassium), the secondary plant nutrients (calcium, sulfur, magnesium), and sometimes trace elements (or micronutrients) with a role in plant nutrition: boron, manganese, iron, zinc, copper and molybdenum. Fertilizer is a necessity when you are in the plant-growing business. As a result, fertilizer is big business. According to the United States Department of Agriculture (USDA), in 1999, 53.5 million tons of fertilizers were applied in the United States alone. It comes as no surprise, then, that plant professionals are subject to a near constant bombardment of fertilizer images and advertising; thus leading plenty of people ask if one fertilizer is really any different from the rest. The answer is a definitive yes and there are in fact, myriad factors to look at when choosing the fertilizer that best addresses the needs of your product. Factors include raw ingredients, cost, time/labor implications, efficacy, plant health, media type, regulations and production. It’s also important to remember that there are various forms of fertilizers, including (but not necessarily exclusive to) granular, coated granular, water soluble, true liquids and liquid suspensions. Each of these has unique characteristics that should be considered.

At ARTAC, Inc., our main interest is the use of additives in the development of our seed germination technology that uses natural plant growth hormones: giberlic acid, kinetin and the condensation polymers derived from them. Additives will be used to coat seeds, as an addition to fertilizing, and will also to help plants retain their moisture. Our product could benefit third-world and underdeveloped countries; however, there is growing concern about the amount of insecticides and possible connections to air and water pollution. Additionally, developing countries lack the resources for high seed germination; excessive heat, water, cold, insect infestation and time have severely limited crop production; therefore we feel that these countries would embrace our product and ensure positive growth through out our company’s life.

Our first product of interest is an additive called chitosan. Chitosan (poly-D-glucosamine) is one of the most common polymers found in nature. Structurally, it is related to cellulose, which consists of long chains of glucose molecules linked to each other. It is a linear polysaccharide composed of randomly distributed ß- (1-4)-linked D-glucosamine (deacetylated unit) and N-acetyl-D-glucosamine (acetylated unit). Chitosan is produced commercially by deacetylation of chitin which is the structural element in the exoskeleton of crustaceans (crabs, shrimp, etc.). The

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degree of deacetylation (%DA) can be determined by NMR spectroscopy, and the %DA in commercial chitosans is in the range 60-100 %. The amino group in chitosan has a pKa value of ~6.5, thus, chitosan is positively charged and soluble in acidic to neutral solution with a charge density dependent on pH and the %DA-value. In other words, chitosan is bioadhesive and readily binds to negatively charged surfaces such as mucosal membranes. Chitosan is used primarily as a plant growth enhancer, and as a substance that boosts the ability of plants to defend against fungal infections. It is approved for use outdoors and indoors on many plants grown commercially and by consumers. The active ingredient is found in the shells of crustaceans, such as lobsters, crabs, and shrimp, and in certain other organisms. Given its low potential for toxicity and its abundance in the natural environment, chitosan is not expected to harm people, pets, wildlife, or the environment. The use of Chitosan are many; below is an outline:

• Use Sites: Many field crops, ornamentals, and turf grown in fields, home gardens, nurseries, and other sites.

• Uses: Plant defense booster; plant growth regulator (enhancer). • Target Pests: Helps plant defend against certain fungal diseases, including early and late

blight, downy and powdery mildew, and gray mold. Risks to the environment are not expected because chitosan has not shown toxicity in mammals, and it is abundant in nature, and it is used in tiny amounts. Another product of interest is potassium sulfate, which we will use as by-product for fertilizing. A fertilizer is a substance intended to improve the quality or quantity of a plants growth. When it is properly applied, fertilizer can improve a plant’s vigor, make leaves grow larger, reverse a decline and lessen the chance of insects and disease. Fertilizer does this by providing elements that are essential to the plant's metabolic processes. Plants are unique in that they derive their energy for growth from the basic elements of soil minerals, light, water and air. In evaluating the nutrient needs of a crop/plant we must consider factors such as nutrient levels, nutrient availability and interactions between nutrients and most of all we must consider environmental conditions that determine the availability of the nutrients to the crop/plant. Potassium sulfate (K2SO4) (also known as potash of sulfur) is a non-flammable white crystalline salt which is soluble in water. Potassium sulfate (SOP, sulfate of potash) is a source of highly soluble potassium, and has the additional benefit of supplying sulfur. It is used in agricultural production systems where potassium is a limiting nutrient and also as a substitute for potassium chloride on chloride-sensitive crops. Potassium Sulphate (K2SO4) or Sulphate of Potash (SOP) is the world’s most popular low-chloride fertilizer. Combining Potassium (50% K2O) and Sulphur (18%) SOP offers a high concentration of nutrients readily available to plants. Sulphate of Potash has a very low salinity index making it the preferred potash fertilizer in areas at risk from soil salinity. SOP improves crop yield and quality. It makes plants more resistant to drought, frost, insects and disease. Not only does Potassium Sulphate improve crop’s nutritional value, taste and appearance but also its

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resistance to deterioration during transport and storage, and its suitability for industrial processing. Another product of interest is as an additive called gypsum (calcium sulfate). Gypsum (0-0-24) has been widely used for many years as a sulfur- and calcium-bearing material for fertilization and soil reclamation. It provides calcium, which is needed to flocculate clays in soil. It is the process in which many individual small clay particles are bound together to give much fewer but larger particles. Such flocculation is needed to give favorable soil structure for root growth and air and water movement. Gypsum is also used in the reclamation of sodic soils; where the exchangeable sodium percentage (ESP) of sodic soils is too high, it must be decreased for soil improvement and better crop growth. Soils that have been treated with gypsum have wider range of soil moisture levels where it is safe to till without danger of compaction or deflocculating. This is accompanied with greater ease of tillage and more effective seedbed preparation and weed control. Gypsum also improves water infiltration rates into soils and also the hydraulic conductivity of the soil. Also, it protects against excess water runoff from especially large storms that are accompanied with erosion. It decreases the pH of sodic soils or near sodic soils from value often over 9 but usually over 8 to values of from 7.5 to 7.8. These values are in the range of acceptability for growth of most crop plants. Also, the level of exchangeable sodium is decreased which lessens the hydrolysis of clay to form hydroxides. These reactions can decrease the incidence of lime and bicarbonate-induced iron deficiency. Also, gypsum increases water-use efficiency of crops in areas and in times of drought, which is extremely important. It improves water infiltration rates, improves hydraulic conductivity of soil, provides better water storage in the soil which leads to deeper rooting and better water-use efficiency; usually from 25 to 100 percent more water is available in gypsum-treated soils. Also, in the United States, Oklahoma is one of the states that produce the most gypsum, so it should be easily obtain. Another additive we at ARTAC, Inc. are looking to use is hydrogel. Hydrogel is a network of polymer chains that are water-soluble, sometimes found as a colloidal gel in which water is the dispersion medium. Hydrogels are superabsorbent (they can contain over 99% water) natural or synthetic polymers. It can be used as a granules for holding soil moisture in arid areas, reduce irrigation, increases shelf life of plants and promotes faster growth. As an addition, we will use it to help to retain the moisture in our plants. Also, in addition to all the other additives, we will use mulches. Mulches provide many benefits to plants. Benefits vary with the material used, the type of soil, the kind of plant and the cultural practices used. Mulches also may be used to make landscapes more attractive and usable and to reduce the amount of maintenance work. At ARTAC, Inc. we will use used wood chips as our mulch to provide us with the following

• Surface insulation

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- to conserve moisture - to moderate extremes in temperature - to control weeds

• Soil amendment - to improve soil aggregation and granulation - to increase water absorption and retention - to prevent soil compaction and improve aeration

Competitive Comparison ARTAC’s competition includes all companies and research facilities in Oklahoma or neighboring Texas seeking to heighten levels of seed germination. We will be fighting for space on the CO-OP’s shelves with other established fertilizers. Our strategic advantage will be our unique formula that enables better growth with lesser amounts of fertilizer. Our fertilizer will provide faster germination time and will be more reliable and successful, even during bad environmental conditions, than our competitors.

Sourcing and Fulfillment The existing facilities at ARTAC are sufficient for launching the product. We have excellent logistics and inventory control as well as competent employees who will ensure our product is successfully distributed. We will be investing in a warehouse that will be our production facility as well as our distribution plant, which will allow us to have a quality control environment. We will have a “Just-in-Time” production process that will allow immediate shipment and drive down our inventory costs.

Technology ARTAC is an advocate for investing in research and development, which ensures a dominant and innovative technological advancement. ARTAC has been active in the field of controlled releases of various agents. ARTAC offers formulation flexibility, which ensures appropriate amounts of the product are available for different types of conditions. ARTAC uses natural and biodegradable ingredients that reduce product toxicity levels and side effects. Technology is a staple for this company, and will provide a means of constant growth and improvement in the fertilizer industry.

Future Products and Services



Future products of ARTAC will be coordinated around plant growth and seed germination research and development. We plan to incorporate all facets of the farming and gardening segment. We will target the small individual domestic gardener with 1 oz packets of fertilizer, larger commercial farmers with bags of 2 to 5 pounds of fertilizer, and the large CO-OP’s with 50 pound bags of fertilizer.

Market Analysis Summary

Description of the market

ARTAC is a research company that will market its first product known as Endo-Grow along with other alternative fertilizer products. ARTAC will compete with other manufacturers in the fertilizer industry. Our target markets will be large farmers in southern Oklahoma and most of Texas. We will reach these farmers mainly through CO-OP’s and commercial distributors in the local areas. Once revenues and profits begin to outweigh are costs, we will look to expand both domestically and globally. Domestically, we will attempt to place our products on the shelves of home improvement stores such as Home Depot and Lowes. The purpose of this is to capture the homeowner market, which will enable ARTAC to grow at a faster rate. Furthermore, ARTAC will attempt to capture the local gardener market by providing its products through landscape retail stores. Alternatively, our initial global target market will include large farmers in developing countries where limited crop production has been a result of the harsh environment. Exporting our products to developing and third world countries will enable us to reach commercial crop growers there. Finally, the Internet will serve as a channel for ARTAC to reach customers globally. Technological advances make it imperative that ARTAC creates a web page promoting the marketing mix and other important company characteristics. Marketing Plan

Marketing objectives: The marketing objectives of ARTAC are to capture the fertilizer market in both Oklahoma and Texas, and become the predominant fertilizer manufacturer in these areas. Furthermore, ARTAC intends to re-establish the position of the United States as a leading fertilizer exporter. Over the past 15 years, the United States has lost ground as an exporter due to increasing energy costs. Conversely, the United States has become more and more dependent on foreign importers because of their lower energy costs. ARTAC will be able to reduce this dependence and compete effectively, both domestically and globally, through low costs, differentiation, and innovation. ARTAC will produce environmentally friendly products without the use of chemicals found in other types of fertilizers. Product availability, customization, communication, and information will be important customer service elements that ARTAC will provide. ARTAC’s goal is to sell 2,500 tons of Endo-Grow through local CO-OP’s and commercial distributors in the 1st quarter of year 1, and 39,800 tons by the end of year 1. Globally, ARTAC will export 5,000 tons of fertilizer in year 1. Overseas supply and logistics channels will take time to properly establish. Similarly, it will take approximately 5 years to develop an identifiable customer base, build strong customer relationships, and cater to their needs appropriately. ARTAC expects to have a well-defined global market at end of this period.



Target customer segments: ARTAC will focus mainly on getting the product into the hands of the large farmer. ARTAC will accomplish this by selling its products to local CO-OP’s and commercial distributors. Individual domestic gardeners, small commercial farmers, and landscaping companies are alternate potential end users of our product. ARTAC will meet their needs through landscape retail stores and home improvement stores. Lastly, we will meet the needs of our global customers through sales agents, the Internet, and the company interactive website. Product offering description: Initially, ARTAC will offer a natural fertilizer, called Endo-Grow. It is our intention to offer an environmentally friendly fertilizer that will aid in the improvement of crop growth. The ingredients of Endo-Grow include Kinetin (plant growth hormone), Giberellic Acid (GA3), and condensation polymers. ARTAC will offer Endo-Grow to the consumers in 50lb bags and 1oz packages. Alternatively, customers will have the opportunity to purchase Endo-Grow II, which is effective in temperature changes (due to season changes) and arid climates. Endo-Grow II contains chitosan, mulches, potassium sulfate, gypsum, and hydrogel. These ingredients enable the fertilizer to better retain moisture and maintain a stable ground temperature. Market research and strategy: ARTAC intends to collect data through the use of focus groups. A sample of farmers from CO-OP’s in different areas will partake in a discussion concerning our products. This will enable us to gain more insight into our customer’s needs and desires. Since our initial consumers will be large farmers, we will target our focus groups towards them. As we progress, we will continue performing market research on large farmers but will expand our research to include others inclined to use our products. Key questions that we will address include the following: Do customers desire our products more than that of competitors; what are our customer’s growth needs and what type of environment are they located in; and how will we reach our global customer’s with the products and relative information concerning the products?

ARTAC will identify its competition and gather information on how customers view our products as compared with our competitors. We understand that many of our competitors use chemicals such as nitrogen, phosphorus, and potash in their fertilizers. ARTAC believes its products are superior to these fertilizers, and thus, will clearly relate and define its products to the consumers. We will clearly state our unique selling proposition so that customers understand our purpose. Our unique selling proposition is the following: “We provide an all environmental, natural fertilizer for all your growth needs”.

retention capabilities for the crop growers in extremely dry environments. Our expectation isthat this product will become a big seller in many developing countries. ARTAC is also researching

Marketing mix Product: ARTAC will differentiate itself from the competition through product quality. Similarly, our unique, enhanced fertilizer will be the element of the marketing mix that stands out in the consumer’s mind. A natural fertilizer that promotes and assists in crop growth without the use of chemicals sets a new standard for the fertilizer market. In addition to Endo-Grow, ARTAC will offer other quality products such as a natural fertilizer with moisture



products that will assist the growth of crops in other harsh climates. A fertilizer that retains heat will be able to preserve crops throughout the four seasons for farmers in colder climates. Smaller packages of Endo-Grow will aid individual gardeners in their efforts to grow plants or gardens. Additionally, ARTAC will provide seeds that are able to produce grass for new homeowners, schools, and other businesses. Lastly, ARTAC will provide a lawn supplement that enables lawns to maintain their color and ensure survival throughout the year. Price: Endo-Grow’s cost of production is $100 per ton. ARTAC will sell Endo-Grow to CO-OP’s and commercial distributors for $225 per ton. The retail price to CO-OP members is $250 per ton, which is $110 per ton less than our primary competition. Many of our primary competitors have raised prices because of increased energy costs. For instance, urea fertilizers currently sell through several of our competitors at nearly $400 per ton. Similarly, according to the Southwest Farm Press, nitrogen fertilizers have increased from $.35 cents per lb to $.40 cents per lb last year alone. ARTAC will sell Endo-Grow II to CO-OP’s and commercial distributors for $240 per ton. Retail for this product will cap at $275 per ton. The raw materials that make up Endo-Grow II are relatively inexpensive. For example, Chitosan is a very abundant, natural polymer that has a low cost. Similarly, the active ingredient is only $1.60 per ton. Raw materials in addition to the entire mixing process come to a cost of approximately $120 per ton. Promotion: ARTAC will mainly provide its product through word of mouth. Local CO-OP’s are excellent channels for ARTAC to meet customer needs. Farmers residing in the same locale normally organize or run the CO-OP’s; therefore, they are excellent establishments for building word of mouth. Furthermore, the establishment of CO-OP’s was for the farmer’s mutual benefit; therefore, word of mouth will be effective as long as they find our product to be high quality. Alternatively, constant technological advancements deem it necessary that ARTAC promote its products over the Internet. We realize that growth is directly related to exposure, and the Internet provides us an excellent means to meet the needs of customers all over the world. Place: ARTAC will initially be located in the Center for Emerging Technology and Entrepreneurial Studies; however, soon thereafter our central headquarters will be located in Lawton, OK. ARTAC will sell its products through CO-OP’s and other commercial distributors, home improvement stores, landscaping retail stores, the Internet, and its own interactive website.

Customer Relationship Management ARTAC will provide customers with information or assistance through the customer service page on our website and a toll free number. There will be two separate toll free numbers: One number will be for the organizations that purchase our products directly and the other will be for the actual end users. Additionally, ARTAC will maintain a customer database at its central headquarters in Lawton, OK. This database will contain information about all the CO-OP’s, commercial distributors, and other retailers whom we sell to directly. Information contained on this database will include general information (name, address, phone number, etc); history of



purchases made (dates, quantity, amount paid, types of products purchased, etc); customer issues, concerns, and/or feedback; and secondary information concerning end users (buying habits, customer comments, and general information). The Intranet, along with an added program will be the gateway to all this important information. Expanding the Product Line ARTAC intends to expand its fertilizer line to include environmental friendly products more focused towards individual customer needs. For instance, crop growers in dry climates would be more interested in a fertilizer that could retain moisture over longer periods of time. On the other hand, crop growers in colder environments would be interested in a fertilizer that could retain heat so that the crops could continue to grow even in the colder seasons. Although, Endo-Grow and Endo-Grow II meet such customer needs, research will be ongoing and product improvements will continue in an effort to satisfy supplementary, global customer needs. For instance, in addition to selling fertilizers, ARTAC may consider marketing lawn care products such as seeds that grow quality grass and supplements that would protect the grass throughout the four seasons. New product development will correlate with changing customer needs, technological advances, and product enhancements. Market research, customer feedback, and international sales representatives provide ARTAC the tools to achieve global success. Expanding domestically and internationally

As profits generate, ARTAC will look to grow domestically throughout the Midwestern and Southwestern states. ARTAC intends to expand domestically through CO-OP’s, feed distribution stores, and home improvement stores such as Home Depot, Atwoods, and Lowes. We will extend our products through CO-OP’s and commercial distributors in those areas. Furthermore, ARTAC plans to grow globally by exporting its products to large farmers and distributors in developing countries. Sales agents will represent and personally interact with these customers. Additional requirements of sales agents include the following: Act in accordance with the guidelines and standards set forth by ARTAC; that they are bilingual (fluent in English and the country they represent); and that they perform as intermediaries with respect to transactions. Sales agents will represent territories or regions in their assigned nation. Upon receiving customer inquiries from other territories, sales agents will forward or direct them to their corresponding representative. The Internet will be an additional channel for ARTAC and its customers to develop relationships and execute transactions. The interactive website further allows for the flow of information and communication between both parties.



Strategy and Implementation

ARTAC will assign an analyst to interested customers and targeted market segments such as CO-OP’s, farmers, crop growers and garden owners in both Oklahoma and Texas to evaluate the market need for our product. We will focus on marketing our product before we begin sales in order to create demand.

Strategy Pyramid

Our main strategy is to successfully sell our product to a global market. Endo-Grow will also be important in producing crops in Third World or developing countries. After all tests are completed, we must provide information to our customers concerning the proper use of our product. An interactive website will be created giving all the necessary information about End-Grow and all other related products in crop-growing and lawn care.

Value Proposition ARTAC will provide a product to the agricultural industry that will allow primarily an increase in food production. We want to provide a value that the crop industry cannot do without and, therefore leave them with the need to have and use our product. ARTAC wants to provide solutions to the future decline in food production caused by the decreased use of pesticides and insecticides through a product that will be delivered at a fair price in the most efficient and effective way domestically and globally.

Competitive Edge Our competitive advantage is that our product is unique and not easily substituted due to research and development and high production costs. No other company provides this type of product. As demand increases, ARTAC will gradually reach economies of scale, which will generate more profit than when first initialized.

ARTAC is a radical innovation business which offers a highly differentiated product that companies will find hard to imitate as a result of extensive research and development. SWOT Analysis

Strengths:

• Scientific capacity to develop and manufacture a fertilizer that is made of natural

plant growth hormones • ARTAC has a top notch management team and a highly capable, productive staff

who are dedicated to delivering high quality, unique product at a fair price



• High benefit-to-price ratio. Endo-Grow is composed of natural plant growth hormones which contains polymers for faster seed germination which can bring about an increase in food and crop production. Since it utilizes natural plant growth hormones, it is very safe and environment friendly

• Access to resources. These include financial, human, physical and organizational resources and includes brand know-how, facility, plant and equipment

Weaknesses:

• As a new venture, it has to bear full cost for developing and marketing the product • Limited ability to build a large product line on its own. In its initial stage, it has to

rely on alliances which can complement its product. • As a novelty product, it still has to build customer trust and demand which require

full blast advertising (through its website) and potential consumers’ education regarding the use of the product (through dissemination of brochures and catalogs, demos, CO-OP meetings, etc)

Opportunities:

• ARTAC has a huge potential market, mainly Oklahoma and Texas domestically and Third World countries, internationally or globally

• Endo-Grow is one of a kind in the fertilizer industry. As such, demand will be high after the introductory period and competition low. This creates the potential to generate above average returns or profit

• With its unique competency and competitive advantage, ARTAC has the potential to expand beyond Oklahoma and Texas, and globally. If patent is sold to a large pharmaceutical firm, it will have proprietary rights and protection and cannot be easily imitated and substituted. Pharmaceutical firm can provide the financial capital needed for the establishment of distribution centers in each target market

• ARTAC has the capability to expand its product line through alliances with other companies that produce related products such as seeds, lawn care, farming, home and garden supplies and materials

Threats:

• Competition from different well-established fertilizer companies domestically and

globally which offer substitute products for a low cost • Consumer acceptance is critical. There is a long road to take invention to

commercialization. Introductory or emergent stage may take a few years before product gets established and create value among consumers and success depend on market effect and acceptance



Industry and Competitor Analysis Using the Six Forces Model

• Firm Rivalry – among industry competitors is modest to intense. There are about 308 leading fertilizer industries worldwide such as BASF in Germany, BP Canada Energy Company, British Sulphur, Con Agra International Fertilizer Company, Honeywell International, Oakley International, Great Salt Lake Minerals Corporation to name a few. These companies carry leading brands of organic, chemical, nitrogen and liquid fertilizers.

• Threat of Entry by New Competitors – It is low due to the high cost of research

and development and the uniqueness of the product.

• Threat of Substitute Products – Low. Most of the fertilizers produced in the market use sulfur, nitrogen, boron and other minerals and chemicals. Endo-Grow is highly differentiated in the sense that it is the only product that uses natural plant growth hormones as well as other natural ingredients such as Chitosan, a natural polymer that acts as a preservative coating and bio-fungicide, mulches and hydrogel which help retain moisture and are environmentally safe.

• Bargaining Power of Customers – Modest. Product awareness will contribute to increased demand. As the only product with this characteristic of germinating seeds seven fold, demand might exceed supply and thus customers cannot dictate market price if demand is high and supply low.

• Bargaining Power of Complementors – High. Big companies that sell

complements to ARTAC’s own product offering might demand low price especially if it is a retail store such as Wal-Mart, Atwoods, Lowe’s and Home Depot since they employ price strategy to attract customers.

• Bargaining Power of Suppliers – High. A unique product such as Endo-Grow

requires access to resources and suppliers. As ARTAC still has to be established, volume production will be low during its initial phase therefore suppliers dictate the price of equipment and materials needed. However, as soon as production reaches economies of scale, bargaining power of suppliers will decrease as more suppliers will try to take advantage of volume or high quantity of orders associated with increased production and company activity.

Marketing Strategy

ARTAC’s marketing strategy involves:

• Direct selling to producers and suppliers in the agricultural field for customers in Texas and Oklahoma



• Selling the product via Internet or through the ARTAC interactive website which can also target the international or global market

• Providing demos and seminars to CO-OP’s, farmers, crop growers and home gardeners as regard the efficacy and effective use of Endo-Grow

• Distributing samples and brochures to stores such as Wal-Mart, Atwoods,

Lowe’s, Home Depot, Sutherland as well as other agricultural and lawn care companies so promotions and advertising can be intensified thus creating demand

• Establishing contacts in different target geographic locations to evaluate demand

• Building alliances with ARTAC’s product complementors to expand its product line. Alliances can also help promote and market Endo-Grow. Royalties will be given out as incentive to these alliances

• Establishing good relationship with its customers and target segments with fast and efficient delivery of high quality products

Positioning Statement To establish ARTAC as a company that has the safest and most effective product on the market in the agricultural industry.

As radical innovation, ARTAC has a highly differentiated product that is hard to imitate and be substituted. It is the only kind of fertilizer that uses all natural ingredients such as natural plant growth hormones which are biodegradable and environmentally safe.

Pricing Strategy ARTAC can give price incentives to customers, dealers and sales agents. Royalties on most agricultural products, like ours, is about 5 percent of sales. Promotion Strategy

This will lie in our reviews and in the success that we achieve in increasing food supply. This will be published in journals and articles depicting our work. Our primary promotion strategy for this product will be word of mouth or viral marketing. The creation of its own website on the Internet, which can also provide helpful tips in lawn care, gardening, agriculture and crop production, will help promote public awareness of product. This website will cater to both domestic and global markets. Ordering can also be expedited using the Internet.

Distribution Patterns The distribution strategy for the Endo-Grow product will be mainly to target the larger farmers through the local CO-OP’s. Research has shown that these farmers, who are primarily farmers with five hundred acres or less, are a little more open minded about new products for agriculture. The competition between these farmers and the other incorporated farms is very intense. Since



our product might be able to give those farmers a better competitive advantage, they will be our focus group. The farmers that will be targeted by our company will be located in the southern part of Oklahoma, the panhandle of Texas to the mid and southern parts of Texas. We feel very strongly that this would be a good starting base. As soon as base gets started, it can eventually expand and add more distribution centers in other agricultural parts of the country. Main office and distribution center will be based in Lawton, Oklahoma. Marketing Programs

Our marketing program will be centered on a sound understanding of our product to the consumer. Endo-Grow can be very effective in the cultivation of the soil and in the production of healthier crops but only if used properly. This will come from a combination of advertising and educating the targeted customer. We want to make sure that our message is put in a positive and enlightening way.

Sales Strategy Our main sales strategy will be one of going after the community CO-OP’s and the feed distribution stores since these are the primary people who are in touch with the small “Mom and Pop” farmers. Internationally, contacts or sales agents will be hired for developing countries. Sales Forecast

Due to the fact that our product is a new product and the larger farmers are more apt to try something new, we feel that they will be our main focus. Farmers typically acquire loans at the beginning of planting season and this will give us our greatest chance for a high volume of sales. Due to this situation, time will be of the essence in terms of getting our product out and in use.

Sales Programs Our sales program will be developed after a set plan and strategy is decided on by members of the board. This will include specific time frame for each activity which intend to launch sales and distribution to all targeted market segments. Strategic Alliances Our strategic alliances will be mainly with the CO-OP’s and feed distribution centers here in the United States and in some developing countries. The people in these establishments have their hand on the pulse of the small farmers and will be in a better situation to gage our product and they will be able to tell us about any feedback on Endo-Grow’s efficacy and effectiveness.



Recommendations

• A website must be created to help launch product and promote awareness nationwide and worldwide. Orders can also be received through the website

• It is recommended that top management collaborate and get approval and

endorsement of the Department of Agriculture in both the United States market and developing nations

• Alliances must not be limited to CO-OP’s and feed distribution centers. It must also include lawn care and garden supplies stores and retail centers

• Endo-Grow can be enhanced to not just only target crops but also fruit trees and ornamental plants to expand its market

• Grants can be written (for agricultural researches which intend to aid in food production and fight hunger) to finance research and development of more product lines for ARTAC. In this way, its objective of providing Humanitarian aid to Third World and underdeveloped countries will be realized.

• Management Summary

Organizational Structure

Wesley Learned, president, is responsible for overall business management. Our chief Executive Officer and Chief Financial Officer report directly to Dr. Charles Carraher, Vice President of Research and Development. Legal Counsel will be Sylvia Burgess, JD, LLM. Management Team Wesley Learned, President, has a Master of Science degree in Agricultural Communications from Oklahoma State University. He has over 50 years experience in operating the Flying Circle L Ranch in Billings, Oklahoma. Howard Van Auken, Vice President of Finance, has over 15 years of experience with the financing of new business ventures and is a native Oklahoman. Dr. Charles Carraher, Vice President of Research and Development, holds a PHD in Chemistry from the University of Missouri, Kansas City. He has 30 plus years of experience with cancer research, more than 800 publications, and more than two dozen patents. He was one of sixteen original Fellows of the American Chemical Society. He received an official nomination for the Nobel Prize for his work in this area. Sylvia Burgess, JD, LLM has 25 years’ experience as a lawyer and Oklahoma judge. She specializes in corporate law, taxation, and employee benefits.



Melissa Howe has over a decade of experience dealing with various Oklahoma State agencies. Ms. Howe has overseen numerous projects that required bringing a group of diverse parties together that resulted in success to all parties. She will serve as Marketing Director. Ms. Howe is also an MBA graduate of Cameron University. Merita Tyrell has degrees in Master of Psychology and Master of Business Administration from Cameron University. With her academic background, she will be the Human Resources Director who will oversee the personnel and staffing function. Maria Bevers has 6 years’ experience working as a math and science coordinator. Ms. Bevers has an additional 4 years in the finance industry. Ms. Bever’s experience working in a math and science department as well as in financial management will enhance her abilities to assist in implementing the financial aspects of the business. Ms. Bevers is a MBA graduate from Cameron University. Mr. Andrew Svilokos has several years of financial services experience and education. Mr. Svilokos has participated in many projects utilizing his financial management skills. Mr. Svilokos is a MBA graduate of Cameron University. The other members of our management team are skilled and ambitious college graduates with certification in various areas that are required for the efficient and effective functioning of the administrative end of the company. Management Team Gaps We currently lack a full-time professional who can deal with the changing legal and financial aspects of the farming and agricultural industry. We have a strong background in finance, business management, and biochemical research. As we continue to grow, we must hire personnel to fill these vital positions in the farming and agricultural positions within the company. To maintain the lowest start-up budget possible, only the administrative employees will be salaried until such time that the business experiences positive cash flows and net earning in excess of operating expenses. Personnel Plan The personnel plan requires an increase in employees within the next three years. Future employees must be college graduates and have at least two to four years’ experience in the field they are being considered for. Additional employees will also be added to increase administrative and accounting support



Financial Assumption

The enclosed financials are based on several assumptions. They assume the owners will invest additional funds and ARTAC will be able to align an equity partner for any additional capital. Depending upon performance, distributions will be made when appropriate.

Company Milestones

Milestones: This is the tentative time table of our milestones for our first year of business.

1. Have all of our start up capital no later than August 2006. 2. A complete review of our business plan will be done by June 2006. 3. All product testing done by August of 2006. 4. Annual report reviewed and approved by August 2007.



Appendix

Balance Sheet

Our projected balance sheet shows a dramatic increase in net worth to over one million by the end of 5 years, at which point, we expect to positively increase this net worth over the coming years.

Balance Sheet (In Thousands)

End of year

1 End of year

2 End of year

3 End of year

4 Assets

End of year 5

Current Assets Cash and equivalents 882.4 1,458.40 17,188.70 78,244 233,678 Receivables 1,427.20 7,152.30 32,612 88,754 648,192 Inventories 4,468.20 7,268.10 37,166 112,147 827,962 Other current assets 377.8 522.60 894.8 1,437 7,842 Total current assets 7155.6 16,401.40 87,861.90 280,582 1,717,674 Non-current assets Property, plant & equipment, gross 8,322.40 17,268.20 17,966.20 34,566.20 47,212.60 Accumulated depreciation 832.24 1,726.82 2,155.94 4,147.94 7,081.89 Property, plant & equipment, net 7,490.16 15,541.38 15,810.26 30,418.23 40,130.71 Intangibles 964.2 1,328.60 2,677.40 6,244.10 7,583.90 Other non-current assets 277.60 379.40 412.70 722.80 996.40 Total non-current assets 8,731.96 17,249.38 18,900.36 37,385.13 48,711.01 Total assets 15,887.56 33,650.78 106,762.26 317,967.13 1,766,385.01 Liabilities Current Liabilities Royalties payable 448 1,227 4,389.20 37,244.10 46,577.60 Accounts payable 1,833.40 9,179.20 44,726 82,579.30 310,424 Short-term debt 5,796.10 6,887.40 11,422.40 21,638.40 278,641 Total current liabilities 8077.5 17,294 60,537.60 141,461.80 635,642.60 Non-current liabilities Long-term debt 3,647.30 6,652.10 20,144.90 68,944.30 433,763.40 Total non-current liabilities 3,647.30 6,652.10 20,144.90 68,944.30 433,763.40 Owners' equity Owners' contributions 320.00 350 350.00 350.00 350.00 Retained earnings 3,842.76 9,354.68 25,729.76 107,211.03 696,629.01 Total owners' equity



Total liabilities and owner's equity 15,887.56 33,650.78 106,762.26 317,967.13 1,766,385.01

Income Statement (In Thousands)

End of year 1

End of year 2

End of year 3

End of year 4

Sales

End of year 5

10,206.00 41,812.00 130,845.00 597,360 4,560,814 Cost of Goods Sold 5,092.00 20,619.00 64,540.00 295,620 2,257,679 Gross Operating Profit 5114 21,193.00 66,305.00 301,740 2,303,135 Selling, Genera l& Admin. Expenses 512 1,379.00 2,657.00 8,569.00 57,695.00 Other Taxes 0 0 0 0 0 EBITDA 4602 19,814.00 63,648.00 293,171.00 2,245,440.00 Depreciation & Amortization 100 100 100 100 100 EBIT 4502 19,714.00 63,548.00 293,071.00 2,245,340.00 Other Income, Net -3.8 -6.8 -2.7 2.1 6.2 Total Income Avail for Interest Exp. 250 250 250 250 250 Interest expense 250 250 250 250 250 Minority Interest 0 0 0 0 0 Pre-tax Income 4248.2 19,457.20 63,295.30 292,823.10 2,245,096.20 Income Taxes 1274.46 5,837.16 18,988.59 87,846.93 673,528.86 Special Income/Charges 0 0 0 0 0 Net Income from Cont. Operations 2,973.74 13,620.04 44,306.71 204,976.17 1,571,567.34 Net Income from Discont. Operations 0 0 0 0 0 Net Income from Total Operations 2,973.74 13,620.04 44,306.71 204,976.17 1,571,567.34 Total Net Income 2,973.74 13,620.04 44,306.71 204,976.17 1,571,567.34

Cash Flow The table presents our cash flow balances. Our cash flow follows a yearly pattern. The critical first year reflects positive cash flow. Yearly cash flow is positive and more important the balances are positive, which indicates adequate financial reserves and correct planning of the required working capital. The estimated results permit a margin of error and still appear strong, even though the numbers remain conservative. Through cash flow we will like to finance growth and purchase a larger facility and equipment. Additional technology will be primarily financed with cash-flow. We have had no problems with accounts receivable and we expect to maintain prompt collection. The financial projection picture is quite encouraging.



Cash Flow Statement

End of year 1

End of year 2

End of year 3 End of year 4

Operating activities

End of year 5

Net Income (Loss) 2,973.74 13,620.04 44,306.71 204,976.17 1,571,567.34 Depreciation and amortization 100 100 100 100 100 Deffered Income Taxes 522.4 1,622.50 7,564.80 33,759.41 277,845.28 Operating (Gains) Losses 52.8 122.6 598.8 7,230.40 8,845.20 Extraordinary (Gains) Losses 0 0 0 0 0 Increase (Decr) In Receivables 1,427.20 5,725.10 25,459.70 56,142 559,438 Increase (Decr) In Inventories 4,468.20 2,799.90 29,897.90 74,981.00 715,815.00 Increase (Decr) In Other CA 377.8 144.8 372.2 542.2 6,405.00 Decrease (Incr) in Payables 2,281.40 8,124.80 38,709.00 70,708.20 237,178.20 Decrease (Incr) in Other CL 5,796.10 1,091.30 4,535.00 10,216.00 257,002.60 Net cash from continued operations 17,999.64 33,351.04 151,544.11 458,655.38 3,634,196.62 Net cash from discontinued operations 0 0 0 0 0 Net cash from operating activities 17,999.64 33,351.04 151,544.11 458,655.38 3,634,196.62 Investing Activities Cash Flow Provided by: Sale of Property, Plant, Equipment 0 4.7 9.2 0 33.2 Sale of Short Term Investments 0 1.2 2.4 7.6 18.24 Cash Used by: Purchase of Property, Plant, Equipment -32.4 -162.8 -64.3 -79.3 -189.4 Purchase of Short Term Investments 0 -22.8 0 0 -41.6 Other Investing Changes Net 0 -2.1 0 -4.9 -10.7 Net cash from investing activities -32.4 -181.8 -52.7 -76.6 -190.26 Financing Activities Bank loan 38.4 168.4 192.8 244.7 228.6 Owners' cash contributions 320 350 350 350 350 Net cash from financing activities 358.4 518.4 542.8 594.7 578.6 Beginning cash balance 0 18,325.64 52,013.28 204,047.49 663,220.97 Ending cash balance 18,325.64 52,013.28 204,047.49 663,220.97 4,297,805.93



TABLE 1 ARTAC, Inc. Sales Projections for the Expected Growth Rate, 10% at Year 1 (In

Thousands)

Month 2 3 4 5 6 7 8 9 10 11 12 Year 1 Total

Units (In Thousands, Tons) 0.0

1. Endo-Grow 0.0 0.0 2.5 2.8 3.0 3.3 3.7 4.0 4.4 4.9 5.4 5.9 39.8

2. Exports

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.5 1.7 1.8 5.0 Price Per Unit $225

1. Endo-Grow $225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225

($225 Wholesale & Distributors'

Price and $250 Retail Price Per

Ton) Note: $225 will be

used as Standard Price.

$250

2. Exports (with handling fee) $0

$250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250

Sales In Dollars (Endo-Grow) $0 $0 $563 $619 $681 $749 $824 $906 $997

$1,096

$1,206

$1,326 $8,965

Sales in Dollars (Exports) $0 $0 $0 $0 $0 $0 $0 $0 $0 $375 $413 $454 $1,241

TOTAL SALES ($ In

Thousands)




Thousands) Month 1 2 3 4 5 6 7 8 9 10 11 12 Year 2

Total

Units (In Thousands, Tons)

1. Endo-Grow 6.5 7.1 7.9 8.6 9.5 10.5 11.5 12.6 13.9 15.3 16.8 18.5 138.8

2. Exports

2.0 2.2 2.4 2.6 2.9 3.2 3.5 3.9 4.2 4.7 5.1 5.6 42.3 Price Per Unit

1. Endo-Grow $225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225

($225 Wholesale & Distributors' Price

and $250 Retail Price Per Ton) Note: $225 will be used as

Standard Price.

2. Exports (with handling fee)

$250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250

Sales In Dollars (Endo-Grow)

$1,460

$1,606

$1,767

$1,944

$2,138

$2,352

$2,587

$2,846

$3,130

$3,443

$3,788

$4,166

$31,226

Sales in Dollars (Exports)

$495 $545 $599 $659 $725 $797 $877 $965 $1,061

$1,167

$1,284

$1,412

$10,585

TOTAL SALES ($ In Thousands)

$1,955

$2,151

$2,366

$2,602

$2,863

$3,149

$3,464

$3,810

$4,191

$4,610

$5,071

$5,579

$41,812




Thousands) Month 1 2 3 4 5 6 7 8 9 10 11 12 Year 3

Total


1. Endo-Grow

20.4 22.4 24.6 27.1 29.8 32.8 36.1 39.7 43.6 48.0 52.8 58.1 435.2

2. Exports 6.2 6.8 7.5 8.2 9.0 9.9 10.9 12.0 13.2 14.5 16.0 17.6 131.7

Price Per Unit

1. Endo-Grow

$225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225

$225


Price and $250 Retail

Price Per Ton) Note:

$225 will be used as

Standard Price.

2. Exports (with

handling fee)

$250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250

$250

Sales In Dollars

(Endo-Grow)

$4,579

$5,037

$5,540

$6,094 $6,704

$7,374

$8,112 $8,923 $9,815 $10,796 $11,876

$13,064

$97,913

Sales in Dollars

(Exports)

$1,540

$1,694

$1,863

$2,050 $2,255

$2,480

$2,728 $3,001 $3,301 $3,631 $3,994

$4,394

$32,932

TOTAL SALES ($ In

Thousands)

$6,119

$6,731

$7,404

$8,144 $8,958

$9,854

$10,840 $11,924

$13,116 $14,428 $15,870

$17,458

$130,845



TABLE4

E 4ARTAC, Inc. Sales Projections for the Expected Growth Rate, 15% at Year 4 (In Thousands)

Month 1 2 3 4 5 6 7 8 9 10 11 12 Year 4 Total


1. Endo-Grow

66.8 76.8 88.4 101.6 116.9 134.4 154.5 177.7 204.4 235.0

270.3

310.8

1,937.7

2. Endo-Grow II

0.0 0.0 3.0 3.5 4.0 4.6 5.2 6.0 6.9 8.0 9.2 10.6 60.9

3. Exports 20.2 23.3 26.8 30.8 35.4 40.7 46.8 53.8 61.9 71.2 81.9 94.2 587.0

Price Per Unit

1. Endo-Grow

$225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225

($225 Wholesale

& Distributors

' Price and $250 Retail



Standard Price.

2. Endo-Grow II

$240 $240 $240 $240 $240 $240 $240 $240 $240 $240 $240 $240

3. Exports $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250

Sales In Dollars (Endo-Grow)

$15,033 $17,288 $19,882 $22,864 $26,293 $30,237 $34,773 $39,989 $45,987 $52,886

$60,818

$69,941

$435,993

Sales ($) Endo-Grow

II

$0 $0 $720 $828 $952 $1,095 $1,259 $1,448 $1,665 $1,915

$2,202

$2,533

$14,619

Sales in Dollars

(Exports)

$5,060 $5,819 $6,692 $7,696 $8,850 $10,177 $11,704 $13,460 $15,479 $17,800

$20,471

$23,541

$146,748

TOTAL SALES ($

In Thousands)

$20,093 $23,107 $27,293 $31,388 $36,096 $41,510 $47,736 $54,897 $63,131 $72,601

$83,491

$96,015

$597,360



TABLE 5

ARTAC, Inc. Sales Projections for the Expected Growth Rate, 20% at Year 5 (In Thousands)

Month 1 2 3 4 5 6 7 8 9 10 11 12 Year 5 Total


1. Endo-Grow 373.0 447.6 537.1 644.5 773.4 928.0 1,113.7

1,336.4

1,603.7

1,924.4 2,309.3 2,771.1 14,761.9

2. Endo-Grow II

12.7 15.3 18.3 22.0 26.4 31.7 38.0 45.6 54.7 65.6 78.8 94.5 503.5

3. Exports 113.0 135.6 162.8 195.3 234.4 281.3 337.5 405.0 486.1 583.3 699.9 839.9 4,474.2

Price Per Unit

1. Endo-Grow $225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225 $225


Price and $250 Retail



Standard Price.

2. Endo-Grow II

$240 $240 $240 $240 $240 $240 $240 $240 $240 $240 $240 $240

3. Exports $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250

Sales In Dollars

(Endo-Grow)

$83,916

$100,699

$120,839

$145,007

$174,008

$208,810

$250,572

$300,686

$360,823

$432,988 $519,586 $623,503 $3,321,437

Sales ($) Endo-Grow II

$3,053

$3,663

$4,396

$5,275

$6,330

$7,596

$9,116

$10,939

$13,126

$15,752 $18,902 $22,683 $120,831

Sales in Dollars

(Exports)

$28,260

$33,912

$40,694

$48,833

$58,600

$70,320

$84,384

$101,261

$121,513

$145,815 $174,978 $209,974 $1,118,545

TOTAL SALES ($ In

Thousands)

$115,229

$138,275

$165,929

$199,115

$238,938

$286,726

$344,071

$412,886

$495,463

$594,555 $713,466 $856,160 $4,560,814



TABLE 6

ARTAC, Inc. Cost Projection for Year 1 to Year 5 (In Thousands) Expenses Year 1 Year 2 Year 3 Year 4 Year 5

Raw Materials ($100 per Ton for Endo-Grow &Exports and $120 per Ton for Endo-Grow II)

1. Endo-Grow $3,980 $13,880 $43,520 $193,770 $1,476,190

2. Endo-Grow II $0 $0 $0 $7,308 $60,420

3. Exports $500 $4,230 $13,170 $58,700 $447,420

Total Cost Raw Materials: $4,480 $18,110 $56,690 $259,778 $1,984,030

Distributor Royalties (5% of Sales) $510 $2,091 $6,542 $29,868 $228,041

Credit Card Charges (1% of Sales) $50 $350 $400 $500 $750

Marketing/Advertising $250 $300 $360 $432 $518

Depreciation on $0.5 M Lab Equipment 5 year life straight-line

$100 $100 $100 $100 $100

Interest ($1 M bank loan @ 8% per annum for 5 years)

$250 $250 $250 $250 $250

Salaries and Benefits (10% Pay Raise Every Year depending on

Sales and Performance)

President ($6,000 per month) $72 $79 $87 $96 $105

Vice-Presidents (3 @ $5,000per month)

$180 $198 $218 $240 $264

Legal Counsel ($4,500 per month) $54 $59 $65 $72 $79

Directors/Managers (4 @ $3,500 per month)

$168 $185 $203 $224 $246

Staff/Sales Agents (10 @ $2,000) $240 $264 $290 $319 $351



Social Security Taxes and other benefits (15% of Total Salaries)

$107 $118 $130 $143 $157

Bonuses and Commissions 1% of Actual Sales

$102 $418 $1,308 $5,974 $45,608

Miscellaneous Expenses: Exportation Fees (5% of Export

Sales) $62 $529 $1,647 $7,337 $55,927

Utilities, Supplies, Travel and Communication

$150 $200 $250 $300 $500

Income Taxes (30% of Income Before Tax)

TOTAL COSTS PER YEAR (IN THOUSANDS)

$6,776 $23,252 $68,541 $305,632 $2,316,927



References

www.black-science.com Daly, W. H . Chitin and Chitosan, Under-utilized Resources. Macromolecular Studies Group, Department of Chemistry Louisiana State University, Baton Rouge, LA, USA

www.greensmiths.com Growthproducts.com Gypsum.http://www.mines.state.ok.us/id71.htm Mulch. http://en.wikipedia.org/wiki/Mulch

Potassium Sulphate. http://en.wikipedia.org/wiki/Potassium Sulphate

www.soilenhance.com

SuperCal SO4. Gypsum. A pH Neutral Product. http://www.calciumproducts. com/supercal_so4.htm

http://www.black-science.com/�

http://www.greensmiths.com/�

http://en.wikipedia.org/wiki/Mulch�

http://en.wikipedia.org/wiki/Potassium�

http://www.calcium/�



CHANIAN CHOCOLATE

Shaw-Foong Chan, Cameron University Shawn M. Carraher, Cameron University

Executive Summary Term of Report: Summer 2006

The entrepreneur, Shaw, is going to introduce his artistic Flagships products (chocolates & chocolate related products) and Chanian’s reinforcement of Flankers products (Chinese Deserts, Chocolates Drinks, Coffees, Asian Drinks, and Aeco Series bottle low alcoholic drinks) businesses into Estonian. “Chanian”, comes from Chan (last name of the owner). It will be the company’s and brand’s name. The term, “Chanian”, stands for the commercial kingdom of Chania that is belonged to Shaw-Foong Chan. For Shaw’s start up business, Shaw will push out more creative idea which will be manipulated in artistic way through Chanian’s chocolates and chocolates related products in Estonian temporarily as well as to the Western European region as its capitals growing larger and stronger. Shaw and his company will listen what customer really wants from Chanian’s products in terms of feedbacks and will develop complete solutions for consumers in terms of maximizing of customers satisfactions. Chanian is an unborn chocolate sole-proprietorship, this report presents comprehensive perspectives at the strengths and weaknesses, and opportunities and threats of this small unborn business. II. This report contains analysis of the Chanian’s chocolates and its related products businesses,

expected management and organization situations, financial situation, the market opportunity in Estonia, the corporate strategy, business strategy, marketing strategy, and pricing strategy.

II. The analysis has been done via online research. 1. INVESTinESTONIA.COM; 2. The World Fact book (2006).

III. Estonia’s economy growth provides opportunities and problems to the firm: 5. Lack of financial capitals (problem); 6. Dealing with European competitors in the same industry (problem); 7. Must be very creative through the products and services (opportunity); 8. Take advantage in low production costs (opportunity).

IV. Conclusions reached: 5. Be much more creative in products and services via reading much more recipes; 6. Gather financial capitals supports from the banks (EEK 600,000) and any possible

investors; 7. Gather reinvestment funds from customers via quality, flexible and warm-heart of

products and services to customers without hurting their feelings; 8. Develops as bigger the size of market share in Estonia (more than 5 percent is great) as

possible via top quality products and services at competitive prices; 9. Control spending.

V. Recommendations: Recommendation for a Chanian as mentioned above at III.



Background of the Firm and Idea of Chanian Mr. Shaw-Foong Chan has a dream to open up a small chocolate store, Chanian (company’s name and brand name), at Tallinn, the capital city of Estonia. A chocolate store is chosen to locate at Tallinn because of the capital city contains a large population of 411,600 people include foreigners (consumers) in the capital city, and easier to collect regional business intelligence.

The reasons he opens this business in Estonia instead of in Asia, because (1) Shaw is a romantic person who wish to open a chocolate business that is closer to those romantic chocolates lovers, the Europeans; (2), taking advantage in terms of low-cost production with top quality at reasonable prices; (3) taking advantage in closer to observe the differences of European chocolates and related products; (4) collecting information in terms of trends and marketing opportunities and threats of cosmetics and fashions designs and marketing industries in Europe (4) seeking to cultivate Western Europe market shares and then head toward the US and back to Asia, especially to Japan, to China and Taiwan after this brand has gained fame in Europe.

“Chanian” means the Kingdom of Chania. It is the commercial kingdom of Mr. Shaw-Foong Chan – “Chan” is the last name of the owner. Shaw is an ambitious entrepreneur as he wants his people of Chania, the Chanians, using and consuming products and services that made of Chania. These products and services are chocolates and its related products, bakery and real estates in Estonia.

As Chanian has successful in its chocolate business and grows stronger, the coffee, low-alcoholic drinks (4% alcoholic sodas and fruit juice sodas), and particularly, the Chanian Cosmetics & Fashions and Asian real estate products and services that are made of Chanian will be committed. In addition, the Chanian’s Cosmetics & Fashions and Asian real estate businesses will be handed over to his beloved sisters).

The “Chanian” is the philosophy of Shaw-Foong Chan’s people of Kingdom of Chania. Objectives of Chanian are:

• Seek investors • Acquires at least 5,350.80 customers or 1.3 percent of population at Tallinn, and 8,500

university students out of 18500 in the University of Tartu at the city of Tartu, or 3.2 percent of market share in the 14.1 percent “bakery and other products” industry in 1.37 million population of Estonian total population

• Chanian’s net profit has to be at least EEK 900,000.00 per year to offset its materials and others unknown costs

• Develop customers in terms of market share • Maintain customers through quality products and services • Create brand name that represents quality and company’s name that represents fame



Analysis (by area) 1. Marketing:

Currently Chanian has not started its operation in Estonia yet. This business is still in the planning stage. A. Opportunities/ Problem(s)

• Location: Tallinn (Headquarter, the capital city, the only store). Shaw wishes to open the store at the commercial area but avoid any restaurant and bars.

Tartu will be the first branch to be opened close to the university soon since it is an old university town with 100,000 residents in the city. The University of Tartu contains 18,500 students (Wikipedia.org, 2006).

Target market: Tallinn and Tartu. Chanian targets its unique products and services to the local people (students, price sensitive & less price sensitive working classes and households) and foreigners. The customers can be any demographic (ages, genders, and income level) but mainly for the younger couples, students, and for those prefer a low-budget with top quality chocolates.

Chanian is expected to operate at Tallinn, which contains 411,600 people in the national capital city. Regardless what kind of them, some of these people would have tried chocolates once in a while, some of them would frequently purchase chocolates or related products, and even some of them are chocolate lovers. Chanian is also targeting to the students at the University of Tartu with the young-people’s desserts and drinks due to their high consumption habits, low price sensitive, and night-lives social able habits. The mysterious seldom-seen Asian desserts & sweet cold Asian drinks, and the unique cold but low alcoholic drinks are the main force and very suitable to occupy the students’ hearts. The prices for this will remain low for preserve student retentions.

According to the data of Statistical Office of Estonia the food industry formed in 2004, the bakery and other products is counted 14.1 percent of the food industry. Chanian needs to acquire at least 3.2 percent market share from there. The figure shows the structure below:



Structure of Estonian food industry in 2004

(Source: Statistical Office of Estonia)

• Profit: From the offline market, if Chanian possess about 1.3 percent of the total population (411,600 people) of Tallinn which is 5,350.8 people, each shopper is expected to purchase about EEK 5.4 chocolate products for 2.5 times a month, the profits would be EEK 866,829.60 per year = [(5,350.8 consumers) x (EEK 5.4 per consumer) x (2.5 times per month) x (12 months)].

If Chanian possess about 8,500 students of University of Tartu (totally 18,500 students) in the Estonia’s city of Tartu, each student is expected to purchase about EEK 7 products for 4 times a month with friends, the profits would be EEK 2,856,000.00 per year = [(8,500 consumers) x (EEK 7 per consumer) x (4 times per month) x (12 months)].

Or if Chanian possess about 3.2 percent market share in the 14.1 percent bakery industry within 1.37 million of Estonian total population, the profit would be EEK 1,001,393.28 per year = [(6,181.44 people) x (EEK 5.4 spent per customer) x (2.5 times per month) x (12 months)].

Online market will be considered if the orders placed from Eastern and Western Europe. The delivery could be done via DHL or UPS services.

• Purchasing: Purchases and material control are supervised by the owner and his student worker. The materials, for example, are milk, skim milk, soy milk, cocoa powder, cocoa butter, sugar, caramel, nuts (almonds, hazelnuts and others nuts), cherry, raisin, coffee powders, coconut cream, natural and artificial flavors (orange, raspberry, blueberry, strawberry, mints, peanuts butter), tapiocas, wines such as Bordeaux, Burgundy, O.X., Hennessy Cognac, Napoleon, white wines, red wines.



So far, the materials costs are unknown, but it is not less than EEK 3,000 per 1.5 month.

• Products and Services Differentiations: Chanian will practice its customer-oriented approach, which reflects its friendliness, efficiency and flexibility executing customer requests.

Chanian will differentiate itself from the competition with customer focus and dedication to exceed the customers’ expectations. Because Shaw believes that Chanian draws strength from combination of the American style managerial model to customer satisfaction with friendly and warm-heart that manipulated via the chocolate products and services; hence, build up long-term relationships between both the company and chocolate lovers.

Chanian will provide its chocolate and chocolate products, Chinese desserts, and drinks at the store, and will provide services as preparing chocolate cakes to the wedding couple or birthday, student couples, other parties as long as they place an order to the store. But they need to come and pick the items up themselves. Flagship (chocolate) products: A chocolate bar (Cadbury bar size, 127 gram); chocolate ball/ heart/ stones (about strawberry size); hand-made chocolate assortment in a box with various types of multi-shaped chocolates with different fillings are used (18.9 oz/ 540 g); chocolate truffles (6.25 oz/ 175g); and other creative and artistic works. Small chocolate toy building, small chocolate toy bus, small chocolate toy animals, small chocolate toy trees, small chocolate fruits, cakes and others are available according to customer’s wants. Flankers (Chinese Deserts): Chinese Buns (Apple, Blueberry, Carrots, Creamy Coconuts, Pineapple, Strawberry, Peanuts Butter, Green Bean Paste, Red Bean Paste, and Egg Yolk), Tart (Apple, Blueberry, Cheery, Carrots, Creamy Coconuts, Pineapple, pumpkins, Strawberry, Peanuts Butter, Green Bean Paste, Red Bean Paste, and Egg), Egg Roll, Pot Sticker, Xiu Mai and other items that are to be created. The desserts prices are from EEK 1.80 to EEK 2.25 (usually it comes for 2 to 3 pieces per order). Flankers (Chocolates Drinks): Cold/ Hot Chocolate milk with/ without flavor of (Cinnamon, Coffee, Dark Chocolate, Hazelnuts, Coconuts Cream, Orange, Raspberry, Strawberry, and Mints). EEK 2.25 per cup. Flankers Coffees: Cold/ Hot Coffee with flavor of (Arabica, Cinnamon, Columbian, Coconuts Cream, Dark Chocolate, Double Chocolate, French Vanilla, Hazelnuts, Java, Morca, Orange, Raspberry, Strawberry, Mints). EEK 2.25 per cup. Flankers Asian Drinks: Ice cold drink of Red/ Black/ Green Tea with/ without fruit flavor of (Apple, Banana, Blueberry, Cat-Melon, Coconuts, Carrots, Grape,



Grapefruits, Lemon, Lime, Mango, Passion Fruits, Pineapple, Raspberry, Strawberry, Watermelon, or Yam) with/ without Milk with/ without Tapiocas. EEK 2.15 per glass. *Note: These Chinese desserts and Asian drinks will definitely be altered for local people tastes, since the Westerner’s preference of sweetness instead of Asian’s preference of salty flavor. These items are to serve the Westerners who like to try the have-not-seen mysterious Eastern culture as they might have enough for Western desserts -- chocolates and cakes. *Note: The Asian drinks are the main force to occupy students’ and younger couples’ hearts as the mood of these drinks is “young”, “sweet” and “passionate”. These drinks are the saviors of Chanian businesses. Flankers, Aeco Series: Low alcoholic drinks, 4 percent alcoholic drinks (12 Fl Oz per bottle). EEK 1.08 per bottle. Buy 6 gets one free.

AecoKoffee: Cold coffee with flavor of (Arabica, Cinnamon, Columbian, Coconuts Cream, Dark Chocolate, Double Chocolate, French Vanilla, Ginseng, Hazelnuts, Java, Morca, Orange, Raspberry, Strawberry, Mints).

AecoCova: Carbonate fruit juice with flavor (Apple, Banana, Blueberry,

Cat-Melon, Coconuts, Carrots, Grape, Grapefruits, Lemon, Lime, Mango, Passion Fruits, Pineapple, Raspberry, Strawberry, Watermelon, Yam, or Sodas). Low alcoholic mix drink, lower than the “Cova” in American bars.

AecoTea: An alcoholic Black/ Green/ Red Tea with/ without Ginseng

flavor.

AecoTeco: A cold Black/ Green/ Red Tea with fruit flavor (Apple, Banana, Blueberry, Cat-Melon, Coconuts, Carrots, Grape, Grapefruits, Lemon, Lime, Mango, Passion Fruits, Pineapple, Raspberry, Strawberry, Watermelon, or Yam).

* Note: The Aeco series are Shaw’s most recent creation for being the flankers of Chanian’s businesses. Because the Aeco series is suitable for students and younger couples and for those who like alcohol and love exotic drinks but afraid to get drunk. So the series will not create any social problem for the students and young people.

• Consumer Services: Chanian will prepare chocolate cakes or other products for

wedding, birthday, or other parties when the order is placed by customers at least three hours in advance.



Delivery of cakes for parties purposes will not be available due to the cakes is a vulnerable product. Customers will have to pick their items up at Chanian. Chanian will offer gift such as a small pack of chocolates that is in promotion. Online orders for chocolate products (exclude cakes) will be considered as the firm can afford to engage in such marketing activities in the short coming future. The company will focuses on quality for future business opportunities inside and outsider Estonia.

• Company’s Name: The company’s name, Chanian, is built upon brand image, and

paper and online advertisings.

• Brand Image: The brand image, Chanian, is built upon the unique products and quality friendly services. Because the brand, Chanian, will not only be limited in chocolate and its related products and services in the future, but will involve with the owner’s, Shaw’s, visual art exhibition, and (maybe) will engage in other industries such as cosmetics and fashions, and real estates in Europe, the US and the Asia in the future.

In this case, Shaw will also design the logo of the package paper himself. Each of the Chanian’s chocolate will be given a name that is from the mines, stones, and stars.

• Pricing Strategy:

Flagships: Chocolates prices will be from EEK 0.98 per pound (EUR 0.06275, USD 0.08013) to EEK 65.95 (EUR 4.22326, USD 5.39268) per box or per package. Cakes will be from EEK 7.09 (EUR 0.45395, USD 0.57974) to EEK 55.95 (EUR 3.58274, USD 4.57498); and other products are dependant on ingredients costs and/ or product’s weight which is greater. If customer’s preference, Chanian can offer a really finest quality with elegant expensive chocolates of petit desserts with 14 to 64 types of small chocolate pieces with the prices from EEK 29.95 up to EEK 205 which depends on what the particular customer wants.

Flankers: Chinese Desserts prices are from EEK 1.80 to EEK 2.25 (usually it comes for 2 to 4 pieces) per order. Chinese Drinks are all EEK 2.15 per glass. Chocolate Drinks are all EEK 2.25 per cup. Coffees are all EEK 2.25 per cup. Low alcoholic drinks are all 2.50 per glass. Aeco series low alcoholic drinks are EEK 1.08 per bottle -- Buy 6 gets one free.

* Note: Shaw will definitely adjust the prices at least 10 to 15 percent lower than any competitor in Estonia, which also includes the foreign competitors in Estonia without altering too much quality of any of the products for Chanian’s competition with. Shaw



believe that by absorbing the losses for a while will increase customers’ and potential customers’ confidences of Chanian’s products and services.

• Marketing Strategies: Implementation of offensive marketing strategy through (1)

reasonable good deal and reasonable high quality to the price sensitive customers; (2) top quality with competitive premium prices to less price sensitive chocolate lovers; (3) coordination of Flagships and Flankers products and services; (4) acquisition of broad demographics customers groups, especially for students and low-budget group.

Marketing Efforts Contain: (1) delivery of advertising papers to households, companies, people on the streets, and customers in the stores, this way, Chanian can acquire customers and lays low; (2) tagging along sample(s) with the products and services that customers have ordered; (3) asking employees to delivery ads to their college, university, and friends; (4) offering discounts to the employees and for those who have been introduced by the employees within a time period; and (5) “Buy more get cheaper” and / or “buy more gets one free” are considered depend on the products and the relationships between the owner and customers.

Trialability: Small size sample of products will be provided to have customers try before purchase.

• Distribution Channels: Offline channel – in store shopping. Online channel through the DHL or UPS delivery services.

B. Discussion:

Chanian’s opportunities and strengths: Shaw expects that the growth of Estonia’s economy increases households’ buying powers. Therefore, Chanian: (1) Will have opportunities and will love to provide its reasonable good deal and reasonably high quality chocolates and chocolate related products; and (2) Will enjoys comparatively low-cost of raw materials supplies in this European country as a headquarter for the investment toward the other European countries. Chanian’s threats and weaknesses: The Westerners (European – exclude Russian) are romantic in nature. This natural character enables them to create very delicate and passionate products as you can find these factors from their classical music, paintings and the beautiful traditional buildings with various art-styles during periods of Medieval ages, Renaissance, Baroque, Classical, and Romantic. The foreign European chocolate, candy and foods companies are threats as they have large resources to Judo-strike Chanian out of the industry through low-cost competitions as Chanian might not be capable to adjust prices that are low than these competitors.



C. Recommendations:

• The efforts of the business intelligence gathering regarding to other industries for

the rest of the European countries is required, especially this attractive bakery products, because keeping an eye on the changes for Chanian’s survival in a foreign country is very important.

• Chanian has to put a lot more efforts in delicate and passionate chocolate in

design and flavors, because Chanian’s artistic chocolate products can be left behind.

• Chanian has to lay low before its business is right on track within 5 years,

because the local competitors, American Hershey, British Cadbury, and German Milka Alpenmilch Milk Chocolate Confection, these are Chainan’s threats as they can mass production in low-cost competitions; and other sole proprietorships in Belgium, France and Latvian chocolates, and e-commerce of zChocolat.com, these are in somehow threatening Chanian’s expansion in the Central and Western Europe as they produce very good classy chocolates.

• Shaw will enforce the tactics of what he stated in terms of brand image,

company’s name, marketing efforts, marketing strategy, and pricing strategies for the survival during the beginning period of the business operation.

• A little Estonian language for local communication is required, since the

owner is a friendly and warm-heart person; thus, a fluent Estonian speaking will help for communication.

2. Accounting:

The accounting is unavailable due to the only online research is being engaged. But Shaw believes that the wages for two employees will be EUR 400 per person, utilities fees (water, wastewater, electricity, and gas) will be around EUR 660. Shaw will rent an office (about 250 to 270 m2, EUR 10 per m2) will be EUR 2,700. Shaw prefers Tele2 for telephone line service (EUR) and will switch to its any competitor for lowing production cost purpose. All these bills are estimated on monthly based:



Expenditures/ Currencies EEK EUR USD

Materials and Ingredients Supplies 4,000.00 255.658 325.223

Wages (2 employees) 12,500.546 800.000 1,022.159

Utilities: Elec, Water, WasteWater, & Gas

10,326.274 660.000 839.585

Rent (about 270 m2, EUR 10/ m2) 42,243.850 2,700.000 3,434.668

Communications (Telephone line) 39.000 2.492 3.170

Total 69,109.670 4,418.150 5,624.806

(Source: Chan, 2006) * (EUR 1 = EEK 15.635, USD 1 = EEK 12.230, USD 1 = EURO 0.7825) From the above accounting, the yearly budget of production costs and expenses is estimated as EEK 829,316.00 per year. Due to other unknown expenditures and potential mis-calculating, these might be just enough for paying off its bills. The costs information is listed below.

Operating Costs Such As:

• Wage - The minimum wage in Estonia is EUR 192 per month. In 2004 the average monthly wage (gross) was EUR 515. The highest gross wage is in financial intermediation and the lowest in agriculture and hunting sector.

• Payment for overtime - additional remuneration of per hour of overtime paid to an employee shall not be less than 50 percent of the rate of hourly wage. Work during holidays could be compensated either by offering time off or by extra remuneration of at least 50 percent of wage rate. Work on public holidays has to be compensated at a double rate.

Average Monthly Gross Salary by Job Families, 2005 (EUR)

Tallinn Other Regions

Engineering (management) 1 358 - 1 979 ca 1 188

Engineering (technology and processes) 555 - 1 080 520 - 879

Engineering (design and product development) 743 - 1 112 628 - 750

Engineering (equipment) 662 - 971 500 - 777

Craftsman 467 - 660 316 - 559

Blue collar workers 355 - 544 296 - 364



(Source: Fontes, Estonian Salary Survey 2005)

* (EUR 1 = EEK 15.635, USD 1 = EEK 12.230, USD 1 = EURO 0.7825) • Tariffs of Electricity, Gas, Water and Sewage

The price of electricity depends on the time of consumption (there are day-time tariffs and night-time tariffs) and on the chosen price package. Detailed information is available on the web site of Estonian National Energy Company Eesti Energia.

The share of natural gas has gradually increased in the Estonian energy structure. AS Eesti Gaas, a joint stock company owned by the Finnish Fortum Oil and Gas OY, Russian RAO Gazprom and German Ruhrgas AG performs the purchase and sale of natural gas and organizes the construction of gas pipeline systems.

Electricity and Gas Tariffs in Estonia

For private consumer For industrial consumer

Electricity 0,056 – 0,096 EUR/kWh 0.035-0.066 EUR/kWh + ampere based fee EUR 0.2/A/month

Gas 0.19 – 0.3 EUR/m3 ~0.14 EUR/m3

(Source: Eesti Energia, Eesti Gaas)

The increase in water and sewage rates has indicated a continuous slowdown, while certain safety margins granted for providers of these services have been abandoned. Tariffs on water and gas depend on municipality.

Water and Sewage Tariffs in Estonia (EUR/ m3)

Narva Pärnu Tallinn

Private consumer

Industrial consumer

Private consumer

Industrial consumer

Private consumer

Industrial consumer

Water 0.31 0.58 0.67 0.67 0.8 1.98

Wastewater 0.42 0.77 0.98 0.98 0.66 1.45-3.1

(Source: Narva and Tallinn water companies; VAT included)

http://www.energia.ee/en/first/�

http://www.gaas.ee/?lang=eng�





• Telecommunication Costs - Fixed Line Communications As of 1 January 2001 the Estonian telecommunications market is completely open to competition. The dominant company in the fixed telephone services market is AS Elion Ettevõtted which belongs to AS Eesti Telekom. In 2001 several new service providers have entered the market for fixed telephone services. Of the largest operators, Tele2 and Elisa have begun offering international and domestic long-distance calls.

Telephone Tariffs (EUR/ min):

Elion Ettevõtted Tele2 Elisa

Call starting fee 0.03 (EUR) 0.03 (EUR) 0.03 (EUR)

Ordinary call 0.02 0.02 0.02 *Special tariff 0.018 0.016 0.016

Night tariff (01.00-07.00) 0.009 0.008 0.008

Calls to mobile 0.21 - 0.25 0.16 - 0.21 0.19 - 0.25 Long-distance call

abroad 0.09 - 1.6 0.08 - 1.09 0.09 - 1.41

* 19.00 - 7.00 or 20.00 - 8.00; Saturday, Sunday, holidays; VAT included * (EUR 1 = EEK 15.635, USD 1 = EEK 12.230, USD 1 = EURO 0.7825)

• Mobile Phone Communications There are three operators in the Estonian mobile communications market: AS EMT which began operations in 1991 and belongs to AS Eesti Telekom, Elisa, which began operations in 1995 and belongs to Elisa Communications, Tele2, owned by Tele2 AB, which has operated since 1997 and 100 percent Estonian-owned Bravocom since November 2004. The services are offered at rather different rates and every company concentrates on different market segments. Further information can be found from the companies web sites.

• Data Communications The data communications market has always been open for competition in Estonia and different companies offer the service. The most well known are Elion Ettevõtted, Tele 2 and Microlink.

• A wide range of services as dial-up, ISDN, ADSL or permanent and cable connections are offered. Rapid changes and tight competition on data communication market influence the price policies. Prices on data communication are very variable, depending on market situation and concrete needs of clients. For specific information on data communication companies, visit: http://www.ee/index.php?Ari/Side/Arvuti-_ja_andmeside&l=2

http://www.ee/index.php?Ari/Side/Arvuti-_ja_andmeside&l=2�



• Note: Shaw prefer to try telephone and the Internet services provide by Tele2. Tele2 offers its telephone service package as follows:

Tele2.free package call minute rate

Weekends and public holidays 0 cents Working days (7.00pm-7.00am) 0 cents Working days (7.00am-7.00pm) 31 cents

(Source: Tele2, 2006)

* Calls are subject to a call start fee of 48 cents.

* The monthly fee for the package is 39 kroons.

*Note: Shaw will negotiate with Tele2 for lowering fees if he applies

telephone, mobile phone, and the Internet services together from Tele2.

• Land : Depending on the exact location and the improvement opportunities plots of land suitable for construction of warehousing and production buildings cost in Tallinn between 16-32 EUR/ m2.

• Office, Retail and Industrial Premises: There are neither restrictions for the lease of buildings and rooms nor are there any procedural peculiarities. Rents are usually fixed and not indexed; therefore the term of lease is relatively short. Costs for electricity, heating and others are customarily excluded from rent and have to be paid separately. Rents in major towns of Estonia, class A and B premises (EUR/ m2 per month) are shown below:

Type of Space Tallinn Tartu Pärnu Narva

Office 10 - 15 4.5 - 12 5.1 - 10 3.2 – 8.3 Retail 8 - 45 5 - 32 5 - 16 6.3 – 19

Industrial 2 - 6.5 0.6 - 3 0.6 - 3.8 1 – 4.5 (Source: Arco Vara, Tallinn 2006)

* (EUR 1 = EEK 15.635, USD 1 = EEK 12.230, USD 1 = EURO 0.7825)

Indicative cost for construction of new storage or industrial facility ranges between EUR 300 to 600 per m2 (excluding land cost).



• Principal Taxes: The system of taxation is described in the Law on Taxation. The existing state taxes are:

• Income tax: 23%; • Value-added tax (VAT): 18%; • Social tax (social security contributions - state pension and health insurance):

33%; • Unemployment insurance tax: 0.3% employer + 0,6% employee; • Excise taxes (tobacco, alcoholic beverages, motor fuel, motor vehicles, packages); • Gambling tax; • Land tax.

• Property Taxes, Fees, Charges Property taxes are relatively low, and are likely to remain so. In Estonia the land tax is the only real property tax; buildings and forests are not taxed separately.

• Land Tax is based on the market value of land and ranges between 0.1 to 2.5 percent of market value of land annually (0.1 to 2.0 for arable land and natural grassland). Factors that affect the market value are location, land use and environmental characteristics. Landowners or in some cases land users (Local Government or state property) must pay Land tax. (Source: Kinnisvaraekspert AS).

In addition, in registering into Land Register, the state duty is applicable. The following state duty rates apply:

Declared Price EEK * (EUR) Full Fee EEK* (EUR) 50,000 (3,195) 260 (17) 100,000 (6,390) 390 (25) 500,000 (31,949) 860 (55) 1,000,000 (63,897) 1,430 (91) 5,000,000 (319,489) 14,500 (926,5) 10,000, 000 (638,977) 40,000 (2,556)

* Exclusive of VAT, ** In case of sums over 10 million, additional fee equaling 0.4 percent from transaction value is applied.



3. Financing:

For business financing, personal saving is absolutely. For the bank financing, Shaw does not have much choice. Bank loans that is made from the local Estonian bank, other banks from the European continental, Hong Kong, or Singapore.

Bank Financing Bank loans are a method of asset base for loans. It is can be very difficult to obtain for the start-up companies, because banks usually require hard assets as collateral. The risks associated with using personal property such as accounts receivable, inventory, equipment, or real estate of the borrowers. Despite this, bank financing should not be dismissed as an option, and it is Shaw’s final option due to its very small size of the firm. Local banks in Estonia: Eesti Pank (Bank of Estonia), Eesti Krediidipank, Eesti Ühispank (Union Bank of Estonia), Hansapank (Hansa Bank), Merita Bank, and Optiva Pank (Optiva Bank).

Estonia's banking system has consolidated rapidly. Nine banks operate in Estonia, including three branches of foreign banks. Six representative offices of foreign banks were established by December 2004. The Estonian, Scandinavian-connected banking system is modern and efficient encompassing the strongest and best-regulated banks in the region. These provide both domestic and international services (including Internet and telephone banking) at very competitive rates. Both local and international firms provide a full range of financial, insurance, accounting, and legal services. Estonia has a highly advanced Internet banking system: 68 per cent of inhabitants make their everyday transactions via Internet banking.

The Private Placements can be tried through the local investors, but I do not expect this way works.

The Small Business Administration (SBA) supports stuffs can be forgotten as Shaw is not the citizen of the United States.

Initial Public Offering (IPO) can also be ignored no matter it is in American form or the Estonian form due to the business is just Shaw’s dream land. However, Shaw might need to go IPO for 25 years later when Chanian became a very large chocolate corporation and also engaged in other industries such as bakery, candy, coffee, recipes, and Asian desserts*. By that time, this firm is ready to sell equity to the public and going for IPO.

For firm’s financing issue, bank loan is the only way if Shaw leaves out the private placements. Personally, I will try Hansapank (Hansa Bank) for the business establishment.

*Note: Shaw hopes to make an amount of EEK 600,000 loan from bank for chocolate machinery, tools, and equipments for the business starts-up.



4. Production/ Operations: Currently Chanian doest not exist in Estonia.

D. Opportunities/ Problem(s)

• Company type: a Sole Proprietorship (Füüsilisest Isikust Ettevõtja or FIE). Under Estonian laws, a sole proprietor may be entered in the Commercial Register at his/ her request. A sole proprietor will be entered into the Commercial Register if he or she is registered with the Tax Board as a taxpayer under the Value Added Tax Act. The law may provide other cases in which a sole proprietor will be entered in the Commercial Register.

Shaw has only preferred sole proprietorship so far no matter he will be one of the winners or losers in this industry.

• Production Process: The chocolates and chocolate related products are either hand

made or machine made.

The chocolates are baked, designed, packaged and logo designed by Shaw himself. Wedding or birthday cakes are baked by Shaw or the employees.

• For the wedding party, birthday party, or other parties, Shaw and his employees will start baking the cakes and other items according to the customer’s order that placed.

• Administrative Structure: The owner, Shaw, himself handle the small store. Shaw

will consider hiring at least two students as part-timers.

• Control and Use of Raw Material and Manpower: Shaw will be the only one who deals with these.

• Suppliers: Local suppliers are considered. Shaw is still doing research regarding to

reliable suppliers.

E. Discussion: Shaw will handle producing products while the student employees will service

customers and being casher. Shaw and his employees will clean the store.

F. Recommendations:

• The reliable suppliers of ingredients are very important. Reliable means the ingredients are supplied on time.



• The prices of ingredients should not be increased in anytime the suppliers want.

• Watch out the costs of production.

• Knowing how the competitors operate the store. 5. Human Resources: Currently Chanian does not hire employees in Estonia. A. Opportunities/ Problem(s)

• Organizational chart with job positions are shown on Figure 1. The structure is very primitive, and will be extended while Chanian expands its business along Estonia’s cities, crossing borders toward the neighbor countries, or expand involvement of various industries.

Figure 1: (Chanian’s Organizational Structure)

(Source: Chan, 2006)

• So far, 2 student part-timers are enough for a small single store.

• According to Figure 1, the employees A and B are to report to the Owner, Shaw.

• Under Estonian labor laws, at least 4-month pay compensation is required for the discharged employee. In anytime, an employee is discharged “unfairly” as determined by the Labor Board, a stiff penalty will be imposed. To avoid this penalty, Tim has put in place a “non-compensation” requirement for termination of

Owner

Shaw-Foong Chan

Management

Administration

Accountant

Part-timer A

Service customers

Casher

Cleaning windows

Part-timer B

Service customers

Casher

Cleaning windows



any employee. No compensation is required if the employee quit the job in his/ her own free will, or was terminated for a valid cause such as theft, drinking on the job, ongoing neglect of duties, and etc. The managers are required to be vigilant in their documentation of employee behavior. The Tallinn office will monitor to ensure that all terminations were done for valid causes.

• According to the Foreign Property, Estonian wages is only 20% of the EU

average, while an EU average is currently €2,335 per month. Meaning: An Estonian wages per month is about €467/ month, EEK 7308.49, or US $548.92 (Foreign Property).

• Shaw will train them to service customer, package the chocolate products, being

casher, and management skill and knowledge.

• Shaw will teach them to make chocolates without releasing any secret formula. This is to attract the part-timers to love their job. Shaw will encourage these employees return to Chanian no matter when would they be quitting this job, because Chanian will need them as the expansion takes place in the future.

C. Discussion: Paying benefits and insurance for each of the employees will be increasing

the cost of production. But there will be a drawback for hiring part-timer as they will take a week of for studying exam or vacation or for parties.

C. Recommendations:

• Shaw needs to train the employees to practice American-style management and marketing knowledge and skills to handle customer services, to learn product packaging and for being a casher. Also train the employee to take risks and be independent for doing their jobs on the basis of not hurting customers’ feelings.

• Hiring part-timers would be cheaper than hiring full-timers as the full-timers

need to be paid for the benefits and insurances.

• Most importantly, treat the employees warmly as they are human-beings regardless they would treating the owner back in the same way or not.



6. Insurance, Taxes, and Zoning:

A. Opportunities/ Problem(s)

• Insurance coverage needed: In Estonia, there are five types of insurance to cover old age, disability, and survivors: (a). Social insurance and mandatory individual account system benefits for all persons currently residing in Estonia who are old age, disability (loss 40% of capability), and survivors who must be incapable of gainful activity; (b). Social insurance system for sickness and maternity benefits to insured employees, insured employers, and insured self-employed persons, the spouse of an insured person, persons under age 19, schoolchildren or full-time students, disabled persons, nonworking persons raising a child up to age 3, pregnant women from the twelfth week of pregnancy, social insurance pensioners, persons registered as unemployed, and military personnel; (c). Social insurance system for work injury benefits to insured employees and insured self-employed persons; (d). Social assistance system for unemployment covers permanent residents aged 16 to retirement age who are capable of gainful activity; and (e) Social assistance system for family allowances benefits to permanent residents, non-citizens with temporary residence permits, and refugees (Social Security Programs Throughout the World: Europe, 2004 – Estonia).

• Taxes (federal, state, & local): According to the Estonian laws, foreign investors have equal rights and obligations as local entrepreneurs. All foreign investors may establish a company in Estonia in the same way as local investors, no special restrictions are made. Principal of taxation is described in the Law on Taxation.

• The existing state taxes are: o Income tax: 24%; o Value-added tax (VAT): 18%; o Social tax (social security contributions - state pension and health

insurance): 33%; o Unemployment insurance tax: 0.5% employer + 1% employee; o excise taxes (tobacco, alcoholic beverages, motor fuel, motor vehicles,

packages); o Gambling tax is implied on companies that offer gambling services; o Land tax based on the market value of land and ranges between 0.1 to

2.5 percent of market value of land annually from 0.1 to 2.0 for arable land and natural grassland (VISITinESTONIA.COM).

Timeliness of reporting: Its fiscal year is calendar year. In Estonia, a business entity

can choose a fiscal year ending on 31 March, 30 June, 30 September or 31 December.



Zoning restrictions/ limitations: According to the investment guide of the INVESTinESTONIA.COM, Estonia has no exchange controls or restrictions on foreign investment. The amount of foreign capital invested in Estonian business enterprise is unlimited and companies can be in full foreign ownership. Foreign companies enjoy equal rights with local ones, including unrestricted repatriation of profits and the right to own a land. To encourage companies to expand their business all corporate investments are exempted of corporate income tax from Jan 1, 2000. However, any distributed profits, for example dividends, are taxed at 24% (INVESTinESTONIA.COM).

Licensing requirements:

In Estonia, according to the investment guide of INVESTinESTONIA.COM, the registration requirements of a company, requires the Management Board to submit a petition application for the registration in the Commercial Register within six months of concluding the Foundation Agreement. The application must be signed by all members of the board and include the following information to be entered to the Commercial Register:

• The business name of the public limited company; • The area of activity, location and address of the public limited company; • The amount of share capital; • The date of approval of the Articles of Association; • The names, personal identification codes and residences of the management

board; • The members of the management board entitled to represent the public limited

company differently than provided for in subsection 307(1) of the Commercial Code;

• The beginning and end of the financial year; • The other information provided by law.

The following documents should be enclosed with the application:

• The Memorandum of Association; • The Articles of Association; • A bank notice concerning the payment of share capital; • Upon payment by a non-monetary contribution, the agreement concerning the

transfer of the contribution to the public limited company, documents certifying the value of the contribution and an opinion on the valuation of the non-monetary contribution signed by the auditor;

• The names, personal identification codes and residences of the members of the management board, the supervisory board, and the auditors;

• Specimen signatures of the members of the management board;



• Telecommunication numbers (telephone, fax, etc.); • A notice from the registrar of the Estonian Central register of Securities

concerning registration of the shares; • Other documents provided by law (INVESTinESTONIA.COM).

B. Discussion: According the civil laws of Estonia is influenced by German, they might have something different in details that require foreign investors to be aware of the differences. C. (1) Recommendation I: Pay attention on both countries’ laws and others regulations. (2) Recommendation II: Be aware of the differences. 7. Other Areas to Concern: Strategies: The strategies are:

• Corporate Strategy: (1). A green-field company, Chanian;

(2). ISO Series: European corporations prefer to trade with a firm that has achieved such a quality standard. Chanian should achieve ISO 9000:2000 quality standard and ISO 14001 environmental standard as a part of its corporate strategies in order to launch the Western and Asian beaches some days in the future.

• Business Strategies: (1) A mixture of low-cost and highly differentiation products and

services business strategy is a wise move. This “transnational product-market strategy” for low-cost but best value services as the firm’s business strategy will bring profit as well as customer retention to Chanian. (2) Targets to less price sensitive group with premium products and prices. (3). Targets to low-budget working class and price sensitive groups with top quality at competitive prices. (4) Targets consumers in the commercial districts. (4) Also targets students who are high consumption with active night-life around the university, and Chanian’s Tartu branch can open the branch until 2:00 AM.

• Marketing Strategies: implementation an offensive marketing strategy through (1)

reasonable good deal and reasonably high quality to the price sensitive customers; whereas, top quality with top prices to less price sensitive chocolate lovers. Try to (3) acquire broad demographics customers groups, (4) be more flexible and friendly to customers and potential customers. (5) A coordination powers of Flagship and Flankers to obtain profits and market shares. Must construct high revenue, market share, quality and fame.



Conclusion After analyzing the unborn business, Shaw has to be much more creative in products and services via reading much more recipes, in order to survival from the fights against with the larger competitors due to many larger corporate have plenty resources for research & development activities. While Shaw has come out of hiring a chemistry expertise to analyze his competitors’ products, which means his competitors can even have much more resources to break down Shaw’s formulas and Judo-strike Shaw out from the business field, so Shaw has to lay low first just like what the American retail store, Wal-Mart, did before getting stronger. Gather financial capitals supports from the banks and any possible investor if he could. Also try to gather reinvestment funds from sales revenue via quality, flexible management and warm-heart of products and services to me. Shaw has to control spending before its profits increasing. In short-run, Shaw has to open one more store in other city, location – unknown, and also engage in other low-alcoholic drinks and Asian desserts. Shaw should consider buying some real estates around college and university for rental to students at Tartu, and for rental to working class at Tallinn and Narva.

In middle-run, go to Latvia (Riga), and time is unknown.

In long-run, engage in fashion & perfume (will extent to full cosmetic market) markets, and then strike back to Asia to challenge Japanese, Taiwanese, and Hong-Kong brands in fashion & cosmetic markets. Also invest in Asia’s real estates since it is a region of high population and limited of land, it could be profitable.

After this, Shaw will hand over Chanian’s fashion & cosmetic business to his two sisters as a gift. Time, it depends how fast and strong Chanian could growth.

Appendix A A Brief Introduction of Estonia and three of its Cities:

Republic of Estonia

Estonia with a population of 1.37 million (Estonian 68%, Russian 26%, Ukrainian 2%, Byelorussians 1%, and Finns 1%, and others 2% 2004 est.), and GDP per person at purchasing power parity of $14,300 (2004 est.), is a smallest of the Baltic countries, in both population and geographic size (Latvia and Lithuania being the other two). Its total size is 45,226 sq km, slightly smaller than New Hampshire and Vermont combined. The religions in Estonia is mainly Lutheran, other larger active confessions are Greek Orthodox, Russian Orthodox, Baptist, Methodist and Roman Catholic.

Since the last Russian troops left in 1994 (it regained its freedom in 1991), Estonia has been free to promote economic and political ties with Western Europe, and joined the European Union and NATO in 2004. As a member of the World Trade Organization, it has efficiently transitioned to



a modern market economy model with strong ties to the West, including the pegging of its currency to the EURO. After overcoming the challenges of the early transition years, the economy grew steadily and registered an annual average growth rate of about 6 percent since 1995. Practically all sectors of the economy were open to foreign investment. This led to a number of multinational companies investing in Estonia. The economy benefits from strong electronics and telecommunications sectors, and is greatly influenced by the developments in its four major trading partners, Finland, Sweden, Russia, and Germany. The high current account deficit remains concern, but the state budget enjoyed a surplus of $130 million in 2003.

Nonetheless, Estonia has a stable political climate, a steady GDP growth 6.5% (2001), 7.2% (2002), 6.7% (2003), 7.8% (2004), 6.5% (2005est., by Ministry of Finance, Estonia) since the transition of the modern economic model with high labor force of 69 % (1999 est.) in services sector, and is also having 9.6 % of unemployment rate (2004 est.), it is not difficult for hiring.

These are the cities Shaw has thought about for his business expansion:

Tallinn

The capital city of Estonia, Tallinn (population 411,600), is located on the northwestern tip of the country. It has many historical and architectural monuments, particularly in the old town center, which is dominated by the steeple of the medieval Town Hall (14th to 15th centuries), the oldest in northern Europe. The city has a wide range of restaurants, cafes and bars. The cultural activities such as opera, ballet and classical music performances are given regularly.

The Old Town is well preserved within its original walls, both the upper town (Toompea) where the Parliament and the Lutheran cathedral are located, and the lower merchant town. The city was an important medieval port and trading center. In 1234 it joined the Hanseatic League, the trading union, which was the dominant commercial and cultural link across northern Europe. It is now a UNESCO world heritage site (American Chamber of Commerce Estonia ACCE, 2003).

Tartu

Tartu is a neo-classic Old Town. It is one of the oldest university towns in Europe. In 1632, Swedish King Gustavus II Adolphus decided, on the earnest request of his teacher Johan Skytte, to open Academia Gustaviana here which was the predecessor of the University of Tartu. The international visitors make up over a quarter of the city’s 100,000 inhabitants in winter and spring. By one estimate, 40% of Tartu residents are either students or young people. They give Tartu an energetic, daring character that’s at times whimsical, at times edgy, but always interesting (In Your Pocket Ltd, 2005). Narva

Narva is 212km east of Tallinn. It is still primarily an industrial city with a Russian population of about 96%. It is a leading textile center that has machinery plants, sawmills, flax and jute factories, and food-processing industries. It is also an important producer of electric power



(infoplease, 2000-2005). Lingering Soviet-era shop signs and monuments might give visitors the impression that they've stepped back in time a decade, but for better or worse, these reminders of the past are slowly disappearing as the city heads into the 21st century (In Your Pocket Ltd, 2005).

Appendix B Tables of Key Macroeconomic Indicators and Economy Development Perspectives

Key Macroeconomic Indicators 2001 2002 2003 2004 GDP, billion EUR 6.7 7.5 8.1 9.0 GDP real growth, % 6.5 7.2 6.7 7.8 Export, billion EUR 3.696 3.642 4.001 4.746 Import, billion EUR 4.798 5.078 5.714 6.737 Current account balance, (% of GDP) -5.6 -10.2 -13.2 -12.9

Consumer prices, (growth %) 5.8 3.6 1.3 3.0 Unemployment rate (ILO, %) 12.6 10.3 10.0 9.7 Average monthly wage, EUR 352 393 430 466 General government balance (% of GDP) 0.6 1.1 2.4 1.7

(Sources: Statistical Office, Ministry of Finance)



Economic Development Perspectives

2005 2006 2007 2008 2009

GDP real growth (%) 6.5 6.6 6.3 6.3 6.3

GDP (billion EUR) 10.0 10.9 11.9 13.0 14.3

Consumer price index 3.6 2.6 2.6 2.8 2.8

Employment (thous) 599.1 603.0 608.1 612.1 614.7

Productivity growth (per employee) 5.7 5.9 5.5 5.6 5.8

Unemployment rate 9.3 9.2 8.8 8.5 8.4

Average wage (EUR) 512 555 599 647 699

Wage real growth 6.2 5.5 5.3 5.1 5.0

Current account (% of GDP) -10.4 -8.2 -7.4 -6.3 -5.0

(Source: Ministry of Finance) (Economy, Investment Guide, INVESTinESTONIA.com



References

American Chamber of Commerce in Estonia http://www.acce.ee/index.php?millen=lehed&id=25 CIA The World Factbook: (Was updated on 20 July, 2006) Estonia - http://www.odci.gov/cia/publications/factbook/geos/en.html Estonia – Official State Web Center, eriik), http://www.riik.ee/en/

Goodson, Darren. Twelve Reasons Why Estonian Property Prices Have To Boom, Foreign Property, 2005. http://www.foreignproperty.com/feature/143.php.

Investment Guide, INVESTinESTONIA.COM*:

Labor Market - http://www.investinestonia.com/index.php?option=displaypage&Itemid=109&op=page&SubMenu=

Operating Costs - http://www.investinestonia.com/index.php?option=displaypage&Itemid=110&op=page&SubMenu=

Real Estate Market - http://www.investinestonia.com/index.php?option=displaypage&Itemid=70&op=page&SubMenu=

Taxes - http://www.investinestonia.com/index.php?option=displaypage&Itemid=73&op=page&SubMenu=

*(Please key in “investinestonia.com” in Google.com, if the links does not work). inyourpocket.com, In Your Pocket Ltd: Narva - http://www.inyourpocket.com/estonia/narva/en/ Pärnu - http://www.inyourpocket.com/estonia/parnu/en/ Tartu- http://www.inyourpocket.com/estonia/tartu/en/ infoplease.com: Narva - http://www.infoplease.com/ce6/world/A0834873.html Map of Central and Eastern Europe, The Regional Environmental Center http://www.rec.org/REC/Maps/eur_map.html

http://www.acce.ee/index.php?millen=lehed&id=25�

http://www.odci.gov/cia/publications/factbook/geos/en.html�

http://www.riik.ee/en/�

http://www.foreignproperty.com/feature/143.php�









http://www.inyourpocket.com/estonia/narva/en/�

http://www.inyourpocket.com/estonia/parnu/en/�

http://www.inyourpocket.com/estonia/tartu/en/�

http://www.infoplease.com/ce6/world/A0834873.html�

http://www.rec.org/REC/Maps/eur_map.html�



Social Security Programs Throughout the World: Europe, 2004: Estonia - http://www.ssa.gov/policy/docs/progdesc/ssptw/2004-2005/europe/estonia.html

Tele2.fee package, Fixed, Tele2.ee, 2006* http://www.editorial.ee-en.tele2.ee/?page=t2i_telefon_tele2free&t2page=telefon_free *(Please key in “tele2.ee” and select “ENG”, go to “FIXED”, then “Tele2.free Package”, if the link is unavailable). University of Tartu, Wikipedia.org, 6 August 2006. http://en.wikipedia.org/wiki/University_of_Tartu#Notable_Students

http://www.ssa.gov/policy/docs/progdesc/ssptw/2004-2005/europe/estonia.html�

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http://en.wikipedia.org/wiki/University_of_Tartu#Notable_Students�



GBB LLC

Good Better Best Baseball Academy Limited Liability Corporation

David Smigiel, Cameron University (student) Shawn M. Carraher, Cameron University

“Combining Science, Technology and Domain Expertise to assist the young athlete in

optimizing their competitive skills and athletic potential”

Executive Summary

Executive Summary GBB LLC (the firm) is a service company specializing in working with young athletes to optimize their abilities in the pursuit of their chosen sport.

The firm will leverage state of the art video and computer technology combined with the science of bio-mechanics and specific training protocols to provide young athletes with the proper training regimen to allow them to develop skills in the most optimal manner.

Objectives

• To establish GBB LLC as the preferred provider of training for young athletes in the Genesee, Saginaw, and North Oakland Counties of Michigan

• Obtain 6 clients during the first 6 months • Achieve $5000 in revenue during the first 12 months of operation • Obtain certification from the National Pitching Association for key personnel • Within the first 12 months present the firm’s value proposition to 6 youth

baseball coaches • Promote confidence in the young athlete to participate competitively in

athletics • Within 3 years position the firm to be structured as a franchise opportunity for

other coaches that have a passion for supporting young athletes in their dreams to be able to compete with their peers

Mission Good Better Best (GBB) LLC provides young baseball & softball athletes with training that leverages the synergy of science, technology, and domain knowledge to allow them to develop their physical and mental abilities to their optimum level. The young athlete will realize their potential in a very safe and supportive environment. In addition to providing specific training to the athlete we will also provide services targeted at the parents providing them with the knowledge to support their young athlete during time away from structured training sessions.



Keys to Success • Develop awareness in the local community • Successfully articulate the firm’s value proposition • Strive for customer intimacy for each and every client • Obtain nationally respected credentials that will differentiate GBB in the

marketplace • Leverage cost effective technology to develop a sustainable competitive

advantage • Establish a reputation for developing skills in young athletes who are not yet

proficient at their sport or elite players Business Opportunity GBB’s value proposition is that any athlete can optimize their development by following a training protocol that combines the appropriate technology and training regimens. GBB also believes that this type of training can be obtained for a fair price and is appropriate for not only the elite athlete but for the athlete that has yet to develop their skills. It is this developing athlete that GBB will target as we believe this segment will benefit most from GBB’s offerings as the athlete will develop a solid base of bio-mechanical movement from which their level of skill will develop. Unfortunately, most youth coaches and parents are not cognizant of the proper mechanics for sports activities such as throwing and hitting a baseball. Even many high school coaches are not adequately trained on current techniques and approaches to developing these skills. Consequently, many young participants in sports never reach their full potential or worse develop improper mechanics which many times lead to injuries. GBB’s business opportunity is a result of the existence and convergence of several social and market dynamics:

• our society’s continuing emphasis on competitive youth sports leagues • emphasis of the teams that participate in these competitive leagues is on winning

and not on ensuring that every athlete plays • parent’s of young athletes want to help their child pursue their athletic dream

almost at any cost • participation in youth sports is seen by most stakeholders (e.g. parents,

researchers, heath care experts) as a way to combat issues such as childhood obesity, juvenile delinquency and school drop-out rates

• in GBB’s initial target market there is very little to no competition • in GBB’s initial target market there are several vibrant and well supported youth

leagues • the communities that these leagues are in are relatively affluent • many parent’s continue to look for ways to develop strong rapport with their

children • Single parent families continue to grow in number in society



Company Summary

Company Ownership GBB will be owned by the founder, Mrs. Kelly Smigiel and partners. Start-up Summary Start-up operating expenses will be provided by the owners. At this time it is not anticipated that the firm will require any additional investments from outside parties through year 1 of operation. During year 2 it is anticipated that additional facility space may be needed and at that time the firm plans on applying for a SBA loan. Company Location In the short-term GBB will be a home based business located at 10344 Field Stone Ct. Goodrich, Mi. As the firm is starting up during the summer months, initial training and evaluation sessions will be held on local baseball fields and at the home office which sits on 5 acres of land. Video analysis will be conducted at the home office which has a large TV viewing area equipped with a 60 inch High definition TV. The firm is also in negotiations with a local weight lifting gym owner who has facility space available which will allow training sessions to be held inside during the winter months and inclement weather. In the mid to long term (years 2 & 3) the firm will be looking to open a commercial space once revenue targets and client recruiting targets are achieved.



GBB’s market offering will focus on services that combine video capture and analysis of the athlete performing sports specific drills. The firm’s go to market strategy is based on two specific services:

1. Providing video capture of athletes participating in baseball throwing, catching

and hitting drills. These supervised activities will be analyzed for proper bio-mechanical movement using commercially available motion analysis software. The analysis will be performed by consultants skilled in body movement sciences such as kinesiology and trained and certified baseball practitioners. The consultant will utilize the feedback provided by the video to educate the young athlete on proper mechanics for producing the optimum movement sequence given the specific activity (e.g. throwing and hitting a baseball). In addition to these feedback sessions the consultant will work with the young athlete utilizing best practices skills necessary for the body and mind to develop the required muscle memory such that the young athlete can reach their optimum skill level.



2. Structured awareness and educational sessions targeted at the parents of young

athletes. These sessions will focus on educating the parent(s) with respect to sports specific terminology and body movements. The goals of these sessions are to provide the parent with a common ground upon which they can continue to reinforce the instruction and feedback from the structured analysis sessions and a common thread through which they can develop a rapport with their young athlete.

Competitive Comparison

GBB’s competition includes:

• profit seeking health clubs, • ex-competitive athletes offering training services, • commercially available training videos, • the athlete’s sports coach, • and structured clinics and camps offered by nationally based organizations.

GBB’s differentiation in the marketplace will be realized through a strategy of product uniqueness and targeted segmentation. GBB will strive to develop brand awareness through product innovation and customer intimacy.

Technology GBB’s leveraging of commercially available video capture hardware, video analysis software and the science of bio-mechanical analysis is central to its value proposition. It is anticipated that the firm will continue to research the most applicable of these tools available in the market and will incorporate new technologies as appropriate to maintain a sufficient differentiation perspective from its targeted customer base. In preparation for the launching of the firm, GBB will procure Sports CAD Motion Analysis software from Seaside Software. The following screen shot represents a key analysis feature of the software.



Utilizing this software the skilled coaches and trained analysts of GBB will be able to provide state of the art analysis along with the proper instruction to the young athlete as they progress from basic levels of skill to increased levels of capability. GBB will realize a significant competitive advantage in the local market as a result of offering instruction and analysis based on the computer generated models of proper bio-mechanics when performing a baseball specific skill such as throwing, catching and hitting a baseball. The price point that GBB services will be offered coupled with the capability of this software along with the expertise in performing the analysis, will facilitate GBB’s value-proposition to be evident to the value conscious consumer of athletic training services. This software will also allow GBB to minimize start-up costs as it requires very little in the way of additional computer and video camcorder hardware beyond what GBB personnel already have.

Future Products and Services The base premise of GBB’s service offering of “leveraging technology, science, and domain expertise to improve specific athletic skills for both non-elite and elite young athletes” can be carried over to sports specific skills such as shooting a basketball or kicking a soccer ball. We envision evaluating and adding additional skill analysis services once the initial business strategy is proven in the market. We also envision incorporating additional offerings structured around complementary specialties such as sports psychology, injury prevention and nutrition. Although, these additional services will be considered they are secondary to our initial focus of optimizing our offerings on the specific skills of throwing, catching and hitting a ball. In the pursuit of developing a unique service offering that allows GBB to obtain brand equity we will not be distracted.

Market Analysis Summary

Market Analysis Summary Nationally the trend is for continuing an explosive growth of competitive athletic programs. Along with this trend is an increasing emphasis on training for young athletes with the hope that this training will provide the young athlete with the edge that they need to succeed at the competitive and elite level and obtain an athletic scholarship to college.

An April, 2005 article in the San Jose Mercury News underlines the growth of competitive leagues and teams. This article estimates that 10 years ago there were approximately 50 competitive baseball teams in Northern California with the number approaching 2000 today. The article also discusses how the goal for these teams is to attract the best youth players by placing the emphasis on winning and skill development than on making sure every kid plays. Interestingly, the article discusses how these team numbers have boomed because they are seen



by parents as the best path to playing in college. We view what is happening in California as a precursor to what will occur across America.

Additionally, Baseball America’s website (Oct.,2005) states that there are approximately 35,000 baseball teams nationwide for competitive players. This number represents an increase of 300% since 1990 when the number was estimated at 9,000. Market Segmentation We segment the market into two main categories;

• Youth athletes that have superior skills when compared to their peers • Youth athletes that have yet to develop their skills due to lack of proper

instruction, poor results due to working on their own and inadequate number of repetitions of the skill they are trying to develop

Target Market Our target market is focused on the segment of youth athletes that have yet to develop their skills. We perceive the age demographic for our services to be between 5 – 14 years of age. Additionally, we are targeting households that earn between $50K and $75K. We believe our targeted age group and skill level of athletes will benefit the most from our synergistic training approach. This group can realize significant improvement in their skills in a short timeframe providing motivation to keep returning to GBB for continued instruction and analysis. Very importantly this group will provide good promotion for GBB with their teammates and parents of their peers as they exhibit their improved skills during practices and athletic contests. The following table highlights the age and economic demographics for the three Michigan counties that we will focus our marketing efforts in during GBB’s first year of business. The source of these statistics is the 2004 American Community Survey dataset.

County Youths 5 – 14

yrs. Number of Families Earning $50K – $75K

Genesee 66,000 23,226 North Oakland, Brandon Township

3,000 1,000

Saginaw 32,000 11,000 Totals 101,000 35,226 Market Trends The sports training market is experiencing significant growth in all segments. The pressure and costs to participate on competitive athletic teams continues to increase. Georgia-based Velocity Sports Performance estimates that youth sports training is a $4 billion-a-year industry (Rocky Mountain News February 2006).



Product Pricing The firm’s services will be priced based on an instructional and analysis session rate. From actual experience and market analysis of professional service rates in the geographical area that GBB will offer services, an average rate of $50 per hour is a good reference. Most sports and training academies package a number of lessons for a reduced price over single sessions. GBB does not want to be viewed as a low cost provider for the fear of equating low cost with inferior training or knowledge relative to the competition. Given that GBB does want to develop a clientele that crosses multiple levels of the socio-economic strata we will structure our prices at $35 per 45 minute sessions. Our sessions will be packaged in 3 tiers, the Good Package, the Better Package, and the Best Package. The pricing for these packages are listed below.

Package Pricing Number of Sessions

Package Components

Good $266 8 Sessions are 45 minutes with groups of up to 4 athletes. One video analysis done at the 1st. session and one done at the last session.

Better $315 10 Sessions are 45 minutes with groups of no more than 2 athletes. A video analysis done at the 1st. session, 6th. session and last session.

Best $700 24 Sessions are 60 minutes with individual instruction. A video analysis is done at every session. All video and commentary analysis provided to the athlete on a VHS Tape or DVD.

Strategy and Implementation Summary

GBB will contact local baseball representatives to make them aware of the launching of the firm. We will also contact the local newspapers, several of which are small independent community ventures to announce our entering the market. Several of these papers provide a section that focuses on new businesses servicing the community at no charge to the business owner.

Strategy Pyramid Our strategy is to introduce to the local community a differentiated product service aimed at improving the skills of young athletes resulting in an improved opinion of themselves, increased self-confidence and the skills and tools to compete with their peers in competitive athletics if they so choose. We aim to build brand equity by being perceived as the premier provider of quality instruction and guidance in youth athletics offered at a fair price and in an environment that is non-threatening and supportive of the developing athlete.



Value Proposition The young athlete that trains at GBB will develop their skills to the most optimum level allowing them to compete athletically with their peers as they progress from youths into young adults. Competitive Edge Our competitive advantage is that our service offerings incorporate leading edge techniques and tools focused on improving the skills of the young athlete who has yet to develop their skills. Our nationally credentialed coaches understand the dynamics that the young athlete is facing at they compete with their peers for athletic recognition. It is our belief that every youth has the capability to develop core sports specific skills that allow them to compete competitively if they so choose. Marketing Strategy Our marketing strategy is to make the organized baseball & softball associations aware of our presence in the community by contacting the coordinators and directors of these associations. Additionally, we anticipate issuing a press release in the local newspapers announcing the opening of GBB and its service offerings.

Positioning Statement GBB offers services to youth baseball and softball athletes who are looking for state of the art instruction to assist them in their pursuit of developing the necessary skills to participate in sport at a competitive level.

Pricing Strategy Our pricing strategy will be one of value with a pricing strategy that is aggressive and structured by packages containing services of increasing value. Promotion Strategy Our promotion strategy approach will leverage several types of marketing media. Our message is one of “every youth athlete that so desires can develop skills necessary to compete with their peers, skilled youth baseball and softball athletes are not born but are a result of proper instruction and repetition.” We will leverage local newspapers and get our message out to local youth coaches and parents through press releases and print advertisements. We are also considering developing relationships with local pizza and sub shops where we would have a strategy to co-promote each others products. Even though we will utilize the promotion strategies discussed above we believe our most important promotion will come through viral marketing as satisfied youth athletes and parents tell others about are value-based service offerings.



Distribution Patterns The initial distribution strategy is to target the parents of youth athletes participating in the three organized baseball associations within a 10 mile radius of GBB’s home office. These three leagues have approximately 3,000 youth athletes participants in their summer softball and baseball leagues..

Marketing Programs Our marketing program will be focused on youth athletes, parents and youth coaches. We will target presenting our unique service offering to a minimum of 6 coaches during the first 6 months. We will also look to buy adds in the local churches bulletins and local community newspapers . Sales Strategy Our sales strategy will be to leverage word of mouth buzz about our successful and innovative techniques and target selling to the parents of youth athletes. We will sell our pragmatic approach and not compete on price or gimmicks. We will provide quality instruction at a fair price that will deliver results for the youth athlete. We believe word of mouth and skill development shown during competitive competition will further reinforce this strategy and grow sales significantly beginning in year two of operations. Sales Forecast The following table highlights our projected sales based on a product mix of projected individual lessons at $35 per hours and a number of Good, Better, Best packages being sold to clients. Our terms for the packages will be 50% of the package price upfront with the remaining amount due at the end of lesson number 4. The package pricing is shown in the table as an average package price with the assumption that we will sell one every other month. Additionally, it is anticipated that sales will be somewhat seasonal with peaks occurring in the months right after summer league play and the months immediately preceding school league play. This seasonality will be a motivation to bring on skills development and analysis for other sports such as basketball and soccer which have seasons that are complimentary to each other from a calendar perspective.



The following graphic highlights the product sales mix between individual lessons and packaged

programs for GBB’s first year.

Sales Programs Our sales program will be further developed once we decide to move forward with the venture.

Strategic Alliances At this time we do not anticipate entering into any strategic alliances.

Management Summary

Organizational Structure Kelly Smigiel, President and Chief Executive Officer, is responsible for overall business management. Our Chief Operating Office and Business Director is David Smigiel. Zachary Smigiel is the Sports Performance Director and will report to the Business Director.



Management Team Kelly Smigiel, President, has a Bachelor of Science degree in Special Education and is a certified therapeutic massage practitioner. In addition to being a senior instructor at a local therapeutic massage school for 6 years she also operates a thriving private practice in Goodrich, Michigan. Amongst the many massage modalities that she is competent in she specializes in massage for the treatment and prevention of athletic injuries. David Smigiel, Chief Operating Officer and Business Director, has a Masters in Business Administration and Master of Science in Entrepreneurial Sciences from Cameron University in Lawton, Oklahoma. He has worked in management consulting roles for over 20 years and has been quite successful both as an independent consultant and employee in developing new clients and business opportunities. Zachary Smigiel, Sports Performance Director, is pursuing Bachelor Degrees in Political Science and Business. He had a very successful high school baseball career in Genesee County and played on a perennial top ten Division III baseball program. He has trained under a number of nationally recognized baseball and skills coaches and has several years experience training youth athletes in the baseball skills that GBB will specialize in. Mr. Smigiel will be responsible for designing and implementing all of the training and analysis protocols that GBB develops.

Management Team Gaps At this time the team does not anticipate any gaps in management skill during the first year of operation. As GBB’s gains traction in the marketplace additional gap analysis will be performed to determine additional skills required to support the firm’s growth. Personnel Plan The personnel plan does not anticipate any hirings in the first year of operation. Due to anticipated growth and offering additional services we do believe that it is reasonable to project hiring one sports performance employee sometime during the second year of operation.

Financial Assumptions

Our start-up costs total $4,550.00 which will provide for establishing the LLC, obtaining software and hardware to allow video to be taken and analyzed, providing initial marketing materials and developing and hosting GBB’s website. The start-up costs also provide for travel to San Diego and participation in the National Pitching Association certification process. The start-up costs are to be financed by direct owner investment. The following table highlights GBB’s projected startup costs.



Startup Expense Item Cost Legal $200.00 Promotional Advertisement $300.00 Brochures $100.00 Website Development & Hosting $250.00 Insurance $500.00 National Certification $1200.00 Expensed Equipment $2000.00 Total Startup Costs $4,550.00

Based on these projected start-up costs and the conservative sales projections break-even will occur sometime in the mid fiscal year 2007 -2008.

Company Milestones

Milestones: This is the tentative time table of our milestones for our first year of business.

1. GBB LLC established - May 15, 2006 2. National Certification class slot acquired - May 15, 2006 3. Website Developed and running on hosted site - May 30, 2006 4. Promotional Material & Press Release Campaign Complete - May 30, 2006

5. Sports Cad software procured - May 30, 2006 6. Local baseball associations contacted for GBB presentation - June 7, 2006 7. GBB has signed their 6th. new client - Dec 1, 2006 8. Spring marketing campaign is launched - January 15, 2006

Appendix

This section contains GBB’s pro-forma financial statements. These projections assume that GBB will not have a dedicated facility in the near term (2 – 3 years). If sales grow significantly grow greater than the conservative figures in this plan a facility will be needed which will result in the capacity for GBB to service a greater number of clients which will result in significant sales growth. Thus this plan and financial forecasts is based on a very conservative projection.



FROM THE ARTIST’S HAND

Karrie Karsteter Natascha Brown Shawn Carraher

Executive Summary

Term of Report: Summer 2006

I. Areas of Analysis Five areas were analyzed. These included marketing, accounting, finance, production/operations, and personnel for the company From the Artists Hands. II. Methodologies used: 1. For marketing surveys and word of mouth were used. 2. For accounting a professional accountant was used. 3. For finance a small investment broker was used. 4. For production/operations word of mouth, flyers, and surveys were used. 5. For personnel surveys and interviews were conducted. III. Opportunities/Problems Analysis: 1. The owners of From the Artists Hands would like to expand the floor space of their shop, lower prices in order to increase sales, and advertise and promote more. 2. The owners would like to increase profits through a reduction in costs, an increase in sales, and an increase in overall profitability. 3. The owners would like to extend their current investments into more risky endeavors. They would also like to develop a new budget that is centered toward the needs of the business. 4. The owners were having slower periods with lower sales when the artists were not delivering new pieces of jewelry during peak selling periods. Also, the owners were not as accommodative to the artists as they would be by allowing them to discuss and unveil their new pieces to the customers at the best times available. 5. The owners were experiencing conflicting hours for their employees, the artists and for themselves. Also, the owners wanted to create an award/incentive program for bringing in new artists. IV. Conclusions Reached 1. The owners need to advertise in more publications that cover the majority of the local population’s small businesses, as well as advertise in the monthly calendar event posting. They also should start acquiring more information to purchase another building for expansion, possibly the one that is right next door to their shop. 2. The owners need to analyze the current financial situation of the business in order to determine which costs can be reduced and which expenses can be completely eliminated. 3. The owners need to determine how much risk they are willing to assume in order to meet their financial investment goals. They also need to determine what components their budget should consist of (including their recurring bills and average revenue stream).



4. The owners need to shift their operating hours in order to gain more potential customers. They also need to accommodate and help organize better timelines for the artists in order to get their jewelry to the shop for sale during peek selling periods. 5. The owners need to shift their operating hours in order to gain more potential artists and better accommodate both the owners and their current employees. They also need to derive a program to reward those employees who bring in more artists to sell more pieces of jewelry. V. Recommendation(s) (for current implementation): 1. The owners are starting their marketing strategy to advertise in more papers, especially the ones that we suggested. 2. A cost benefit analysis should be conducted in order to determine the best route towards higher profitability. 3. Different investment brokers should be researched in order to find the one who best meets the investment needs of the owners. They also need to determine the guidelines for each area of the budget, in order to determine the structure of the budget. 4. The owners plan to shift their operating hours to open their store later, in the early afternoon instead of the morning hours and to remain open until the night hours, instead of the early evening. This way the artists whose creations are on display in the shop can actually discuss with potential customers their own work created by them. 5. We recommend the owners shift their hours so their employees have the opportunity to work more hours since it will not conflict with their classes or other jobs. The same goes for the shops’ artists and their customers. The reward/incentive program for employees who bring in more artists will be by public recognition and employee involvement incentive pay for that particular month. VI. Recommendation(s) (for implementation at a later time as dictated by the changing business situation and resources available): 1. The owners are looking at their financial situation to purchase the building next to them for expansion of their store. 2. This strategy is to take effect immediately. 3. More investments should be made as the profitability and free cash flow increase. 4. This strategy is to take effective immediately. 5. This strategy is to take effective immediately. VII. Implementation: 1. The owners plan to start running new ads in the various papers starting the month of July. The building purchase is in the planning stage and is set to be complete in October. 2. The owners plan on analyzing their current situation with a professional accountant in order to make the best financial decisions. Once their analysis is complete, they hope to implement the results immediately in order to increase profits as soon as possible.

3. The owners plan on meeting with several professional brokers to determine which financial plans best meet their investment goals. Once the chosen strategy is in place, the owners will continue to monitor their investments to ensure that they are continuously meeting their investment goals.



4. Instead of being open from 9 AM to 6 PM on Monday through Friday and 10 AM to 5 PM on Saturdays, the owners are shifting their hours to 12 PM to 9 PM, Monday through Friday and retaining the same hours on Saturday, in order to accommodate the artists, their employees, and themselves. The new hours of operation are effective on July 1st.

5. Instead of being open from 9 AM to 6 PM, the owners are shifting their hours to 12 PM to 9 PM in order to accommodate the artists, their employees, and themselves. This will in turn, better accommodate all parties involved, since they are the ones who benefit from the shop the most. The new hours of operation and incentive pay are effective on July 1st.

Company Background From the Artists Hands has been in operation since 2003 and specializes in selling one-of-a-kind hand made jewelry made from the very heart of what makes up Austin, the local artists. Their mission is to provide authentic hand-made one of a kind jewelry pieces to clients made by their own artists. Their ethos is “Creativity Becomes Art”. They are co-owned by Ms. Karsteter and Ms. Brown who came together with the same passion- the love of jewelry, especially when hand-crafted by local artists. They service many locals, the many visitors Austin attracts, and the various college students that attend the University of Texas at Austin. They provide a huge range of hand-made jewelry from brooches to rings, necklaces, earrings, watches and bracelets. They supply the stores in which artists thrive to have their “creations” sold and noticed. For many this is a stepping stone for their own careers in the future. There are currently 4 employees working for the company. The qualities sought for in employees are a knack for artistic design and trustworthy ethics. They create a work culture that thrives in passion for new designs and is always open and willing to try new ventures that support the ethos. The pieces are solely sold in the local store, for they are all one of a kind with no manufacturing and thus cannot be sold on the internet or from a catalog. What sets From the Artists Hand apart from all of its competition is where and how their jewelry is made and their commitment to give the community high-quality, customized, hand-made jewelry right from its very own local artists.

Objectives of the Firm • To increase sales by 30% in 12 months.

• To expand the store for more jewelry by more artists.

• To increase awareness of the store and what it represents.

• To continuously attract more and more artists to make jewelry for sale.

• To host “Artist Night” where the artists who create the jewelry come and talk about their

pieces and what they represent. • To add two more locations within the next three years.

• To earn $50,000 in three years from investments in order to meet all of the capital

requiring goals.



Opportunities/Problem Analysis 1. Marketing A. Analysis: From the Artists Hands has definite and ample opportunity for more clientele and artists to sell and advertise their creations within the shop. Their location is in a wonderful area that has access to the large majority but their store could stand room for expansion to meet the diverse demands of customers. One problem is the jewelry costs are somewhat pricy when compared to other non-specialty jewelry stores. This often results in fewer and more sporadic sales. Another area they could expand is in their advertising and promotions area. They could do so by featuring new artists along with new promotions. B. Discussion: When we went out to visit and discuss opportunities/problems with the owners, we conducted a survey and asked their customers how they become aware of From the Artists Hands. The majority surveyed said they either read about it in the local newspaper or heard about it by word of mouth from a customer who had made a previous purchase. Others heard about them from one of the artists who made the jewelry, a friend of the artists, and some just so happened walked by the store and was attracted by the window displays. We consistently found word of mouth to be the most widely spread source of marketing for the store. C. Recommendations

Another area they wanted see expanded was more floor space. Their location is wonderful (since it is right in the middle of the large mass of people who shop and are out for the day), but they want a more “quaint” area to display more artists’ creations in order to attract and meet a more diverse population of buyers. There is a store right next door to their current location that can be purchased and transformed into their current store to accommodate their expansion desires. Since they are a specialty jewelry shop their prices are a bit higher when compared to non-specialty jewelry shops. This causes their sales to be more sporadic than the traditional stores. They would like to drive the prices down at times and we think they could do this by having an artists’ special sale This special sale would be for the jewelry that may have been in the shop with little to no turnover. They can reduce their prices, thus making room for newer work, which would help to meet the ever changing demands of customers. Another way to promote more business would be to invite the artist to come into the shop and be on hand to discuss their

: One of the opportunities/problems From the Artists Hands wanted to see was an increase in clientele. In order for the owners to achieve this, they have to be able to reach more potential customers. How so? We suggested advertising more in local areas. For example, they already advertise in the local paper that is distributed on the University campus. Now they need to explore the local small business forum that is produced quarterly, which solely advertises locally owned shops and promotes local buying. There are ample opportunities to advertise in the upcoming events calendar that is produced monthly and it contains free advertising for local businesses in the area. For example, there is a live music festival that attracts thousands of people from various locations and is known to draw quite a few famous names along with it. Once they get their name out there and if the products are considered high quality, this method may be the only advertising needed to attract more and more potential customers.



creations with the clientele. They can discuss how they were inspired, what created their inspiration and what it means to them, especially when they see customers wear their art. The store can also extend their hours to meet the demand of their customers since the majorities of their customers (and some of their artists) are university students. In addition to inviting artists in, they also could set up their website to inform customers of new artist’s upcoming creations and what they can expect to see. This would help to reduce the risk of customers coming into the store and realizing the store had nothing new. The thoughts of the products not being updated might frustrate customers, thus increase the risk of them not coming back. The hardest part is getting customers into the store. Once customers come in, sales can happen. D. Action taken By Client: The clients are taking our advice on all the issues. They are looking into acquiring the building next to them for expansion based on their financial situation. On our marketing advice they are looking into running their ads in the papers, flyers, and advertising in all the sources that are available both free and paid. 2. Accounting A. Analysis

B.

: From the Artists Hands has a great accounting system in place. Based upon an analysis conducted by a professional accountant, it has been determined that certain costs are excessive and could be reduced in order to maximize profits. The client currently has several unnecessary costs that may even need to be eliminated. Some of the excessive costs include: the extra materials used in the creation of the jewelry, the commissions paid to jewelry artists (even if the jewelry does not sell), and the high cost of advertisement. Several of the jewelry pieces are created with extra materials in order to create a special touch. These materials are very costly to implement with the creation of jewelry. Although, several customers may prefer the jewelry due to these added features, the cost may actually outweigh the benefit of having the extras. Also, the removal of the added features is not likely to cause a high turnover. Some people may be disappointed, but it was our experience that most customers preferred the simpler pieces anyway. By eliminating these extras, the cost of producing the bracelets may actually be cut in half. This could tremendously increase profits to the desired high level. The commission expense is also an extremely high cost. The main reason behind this is the fact that the artists are paid for every design produced, not dependent on if the design sells. It may be a good idea to encourage a commission for the artists only upon the sale of their product. This would greatly reduce any unnecessary expenses. Lastly, the advertising has increased dramatically in order to increase the customer base. This may contradict what we had as a goal, but it must be known that the increase in advertising may actually cost more than the benefit of obtaining new customers. It may actually appear to be more profitable to sustain the current customer relationships rather than to build completely new ones. This, however, depends on several factors.

Discussion: When we went to discuss the possibilities with the client, we also used the advice of a professional accountant. This helped to determine the appropriate measures,



based upon a professional opinion. The accountant helped us determine which costs, could in fact be cut, without having a detrimental effect on the customer retention level. We then used these measures provided by the accountant to develop our cost reduction plan. We found this to be very helpful, because without her guidance, we would not have obtained the knowledge that we did. C. Recommendations: Based upon the accountant’s analysis, we determined that we were correct in our original assumptions. The client would definitely need to cut back on some of the more costly materials. These materials could still be used, but only on a select assortment of the jewelry. If the materials were used, the client would need to increase the price accordingly, to make up for the additional cost of the materials. It was also determined that the commissions should only be paid once the actual items were sold. This was clear by the excessive commission costs paid to the artists. Commissions were being paid, even when the items were not selling. This was causing a burden on the shop owners, when it should be a burden on the artists. If the artists’ designs were not selling, then they should not be paid a commission. However, if the artists’ creations are selling well, they should be receiving a nice commission. This way the commission would entice them to create high quality jewelry, that would be easy to sell. By cutting back on just paying commissions to anyone who designs the jewelry, the constraints of actually selling the jewelry would create a strong urge to work harder in some of the artists. Lastly, the accountant determined that a good mix of advertising and customer retention should take place. This means that some money should be poured into attracting new customers, but that some money can be saved by simply retaining existing customers. It is proven that it costs much more to attract a new customer when compared to keeping an existing one happy. Because of this, we urged the client to find a happy medium between the two. D. Action taken By Client: The clients strongly adhered to our suggestions. They have since found alternative materials to use, which appear to be of higher quality, but cheaper than the original excess material. Also, the material is only used on select pieces of the jewelry. This allows the cost to remain low on most of the jewelry. The commission system has switched to only being paid upon the actual sale of the jewelry. Surprisingly, this urged several of the artists to try harder. The product appears to be moving much more quickly now due to the higher effort placed into the product by the artists. A customer retention plan has also been established since our discussion. They now create special savings and offers for their most loyal customers. They do attract new customers through advertising, but also build on their customer base by using existing customer referrals.



3. Finance A. Analysis: Before our assessment, the client only had one real investment/ savings tool. They had invested about $10,000 into a money market account. This account was chosen because of its flexibility and ease of withdrawing money. The client was able to open the account with little effort and had the comfort of withdrawing money at the nearest ATM if needed. This account seemed to suit them well until they began considering a newer location. They knew that with the newer location, meant more required capital. The only way they were going to obtain this capital was through either store profits or through investments. Being that the business was fairly new, the profits were not quite at the level required in order to finance the new location. However, if planned carefully, it appeared that the potential earnings from investments just might work. The concept of budgeting was a difficult one for this business. They currently had no budgeting plan in place. This created havoc for the business plans because no financial guidelines were set into place. It was difficult to make any type of financial decisions without having some sort of structure to follow. The way the current system worked was - money was deposited and any necessary expenses were taken care of with that money. This created financial duress during certain times when the cash flow was low. If it were better planned, the cash flow during the stronger times could be set aside for the not so strong times. This would help to tide the business over during the rough times. After all, the business must go on even during the slow times. B. Discussion: The investment decisions were aided with the help of a certified financial planner. The specialist helped us to analyze the client’s current patterns with their desired goals. Since obviously these goals would not work if the financial planning stayed on its current track (little to nothing), the planner set up some investing guidelines for the client. The plan was to set aside a certain percentage of income every month into the money market account. This would give quick access to funds for any type of short term emergency. Next, a certain percentage should be set aside into a mutual fund/stock index in order to derive the growth needed to finance the new location. The remainder of the money could then be used for the everyday needs of the business in the checking account. By doing this, the client could determine a budget and an investment plan all at once. C. Recommendations

By setting the specified amounts aside into the other two accounts, they would have enough to fund the business during difficult times and enough to consider larger business plans. This also helped them to create a budget. By setting aside certain funds, they were able to begin the

: Our recommendation to the client was to set aside at least 10-20% percent into the money market account for any type of short term emergencies. This money would be needed during the slower months, sometimes just to keep the store running. About 30% of the profits would need to be placed into their investment fund (mutual funds/stock) in order to generate enough profit for their future goals, including the move into a new location. The remaining 50-60% could then be used for the everyday management of the business. This would allow them enough capital to run their business, but would teach them to set enough aside to reach their short term and long term financial goals.



budgeting process. The remainder of the budgeting process included looking into all costs and revenues on a monthly basis. All extra costs which were not necessary to the flow of the business were encouraged to be reduced or eliminated. This would increase their working capital, which would help the cash flow needed to run the business effectively. Certain guidelines were set for the costs. This created an ideal barrier for the limits of the costs. The goal was to remain within the range for costs in order to meet the budgeting goal. As long as the costs remained in that range, the business would be able to continue to save money and invest in the future of the business. D. Action taken By Client: The client readily accepted the budgeting idea. It really helped them to see where there money was going every month. By using the budgeting tools, they were able to move closer to setting aside the recommended investment amounts. The more often they met the investment goals, meant the more often they would meet their business goals. The budgeting also eased the bill paying process because it showed them how much capital they had to work with every month. 4. Productions/Operations

A. Analysis: The hours of operation for From the Artists Hands was in conflict with the

artists and customers schedules. The majority of customers were either in school, at other jobs, or were too busy doing necessary errands during those hours to shop or browse for jewelry. We also looked into the artists’ creation timeline and how long it was before the store actually received the jewelry pieces for sale.

B. Discussion

This increased the awareness for more artists in the future to display and sell their jewelry in the store which catered to the masses of artists in the area (who were also university students). Another concern the owners expressed was the timeline for new pieces of jewelry to make it to the shop for sale. Sometimes the turnaround time was quick for new pieces to arrive from the artists and other times it was very slow. Either way, it always remained inconsistent. This was a factor during the “peak” buying times, for example Christmas, Valentine’s Day, and the wedding season. If the owners could not find artists who would deliver the new pieces “on-time” for these peak times their sales would drop and thus cause a ripple effect on the future. Customers

: We had customers take a survey for us to find out about how they felt the store was performing. Were they satisfied with the products they were receiving? Were the hours of operation good for them or did it make it hard for them to come and shop at the store due to other obligations? We found that the majority of the clientele were either in school or had jobs that coincided with the operating hours of From the Artists Hands. We asked customers how a shift in the operating hours would benefit them and their schedules. We noticed an increase of customers wandering around on the streets which increased the customer’s awareness of where the store was located and what it had to offer the artists and customers. These hours also attracted customers who were university students. They could come straight from class when they were either waiting to catch the bus home or were out and about in the early evening for dinner.



would not come back for a while to ensure they will see new pieces on their next trip and not waste a trip to the store. C. Recommendation: We recommend that the owners predict as much as possible for the upcoming big shopping seasons. They could hold some of the artists’ new pieces to present when the big shopping seasons hit. This could cause the customers to feel that the pieces were created right for that moment. We suggest creating and building up a persona of certain artists jewelry pieces to be displayed in order to create more sales for the soon to be big shopping season. Also, we suggest shifting the operating hours to accommodate the majority of customers and the owners. Everyone will benefit from the shifted operating hours for From the Artists Hands. The owners could potentially increase their sales, have more artists commit to the delivery of their creations, and it would benefit them, the owners, to have the flexibility in the morning hours. D. Action taken By Client: They are shifting their operating hours and hoping to gain more potential jewelry creations, artists, and customers. 5. Personnel

A. Analysis: From the Artists Hands currently has 4 other employees working for them plus the 2 owners (who take turns being in the store during normal operating hours). After interviewing the employees, we found them to be great for they come in when scheduled and are ready and able to work. We also found out that the hours are not conducive for them as a whole. The owners expressed the same concern. They felt that sometimes, particularly in the morning hours, coverage and sales were lower because the employees were either university students or artists who might have other jobs. B. Discussion

C.

: The owners recognized they would have a problem attracting employees during their normal operating hours. This might happen because the majority of their employees and artists could be university students whose classes took place during normal business hours. They might have a hard time getting employees to cover the morning shifts. If this was the case, one or both of the owners would have to cover the store at these times. Conflicts arise when the owners have to physically be at the store when they have prior plans. The employees had either school to attend or had other jobs besides working for From the Artists Hands. They are aware of this issue and have decided not to hire more employees for the short duration of the morning shift when they cannot be promised any more hours. Most employees are seeking more hours then just a few here and there because it will not be justified for them to come to work at all. It turns out to be more of a hassle than it is worth.

Recommendation: We recommend having the owners extend their normal business hours or shift their operating hours. By continuing to keep the same hours nothing is gained. With no change also comes the possibility of a loss of sales due to the time inconvenience. By shifting their hours we noticed they had more motivated employees and artists willing to put in more effort. This would ultimately free up the owners time during the slow morning hours in order for them to meet other obligations. This also might allow for the employees and artists to



work more hours. They could come to work without it conflicting with their other schedules. After the interview, we found that the majority of the artists either know each other or know someone who knows of an artist. We thought that by providing some type of incentive for those employees who continuously brought new artists to the store, we could encourage them to continue. On the other hand, the very same thing that drives the train can also cause a train wreck. If the local artists are having a difficult time creating new pieces, the task could shift towards university students who are studying to be jewelry artists. This can bring in new creations from other areas of the country (even world-wide) for a fresh new look for the store. This look might ultimately entice more customers. D. Action taken By Client: The owners are trying to shift their operating hours to extend later into the evening. This way they can attract all potential customers. They are also looking into ways to reward those employees who seek out more artists to make and sell their creations in the store.



Index of Participants

Bevers, Maria Liberty ………………….297

Black, Gregory S…………………………80

Box, Thomas M………………………….72

Box, Tom………………………………….5

Boyd, Mike …………………………….4, 5

Bradley, Don B. III …………………….233

Bressler, Martin S…………………4, 5, 108

Brown, Natasha ………………………...367

Byus, Kent………………………………..72

Campbell, Kitty………………………5, 140

Carland, James W………………………200

Carland, JoAnn C……………………….200

Carraher, Sarah C. ……………………...247

Carraher, Shawn M……….4 5, 111, 247,

266, 297, 326, 353, 367

Chan, Shaw-Foong ………………..267, 326

Dunn, Paul……………….43, Workshop III

Gober, Jonathan Keith …………………233

Grider, Doug…………………. Workshop II

Howard, Robert………………………….65

Howe, Melissa ………………………….297

Jackson, Mary Jo ……………………….218

Jackson, William T ………………….…218

Karsteter, Karrie ………………………..367

Kogut, Carl A. ………………………….169

Ladd, Jack ……………………………157

Liang, Chyi-lyi (Kathleen)........................43,

Workshop III

Licata, Jane………………………………65

Lockwood, Frank S. ……………………200

Min, Ren1 ……………………………….23

Mosley, Alisa L…………………………184

Mueller, Jens …………………………...123

Nuruddin, Norela1 ………………………23

Ogechukwu, Ayozie Daniel……………….7

Okhomina, Donatus A. ………………184

Paridon, Terry……………………….. 5, 60

Ruddell, Larry …………………Workshop I

Scarpello, Vida …………………………247

Short, Larry E. ………………………….169

Silver, Lawrence S ……………………..140

Smigiel, David …………………………353

Smith, J. R. …………………………….184

Svilokos, Andrew………………….111, 297

Teasley, Russell..………………….……200

Thornton, John …………………………123

Tiger, Andrew A …………………….…..65

Tinsley, Dillard B. ……………………...158

Toombs, Leslie ….1, 2, 4, 157, Workshop II

Tullous, Raydel…………………………4, 5

Tyrell, Merita …………………………..197

Von Bergen, C. W. ……………………..140

Williams, Densil ………………………...28

Woodworth, Warner …………………….95

West, Vicki …………………………….123