Small Business Management An Entrepreneur's Guidebook Mary Jane Byrd 8e - Test Bank

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There are many ways to identify a market, and all can be generally classified as marketing research. Market research is the systematic gathering, recording, and analyzing of data related to the marketing of goods and services. Formal research programs can be very valuable in giving direction, but they can also be expensive. Computers are helping to increase the amount of information gathered while reducing the cost.
Another means of collecting data is a search of existing literature. The first places to look in a library are the “technical section” and the “government documents section.” One should examine Census Bureau data on subjects such as population, business, and housing.
The U.S. Department of Commerce is another good source of information, as its district offices have well-stocked libraries of census data. The department publishes many useful books on planning and organizing small businesses.

There are three things that a potential entrepreneur needs to do when estimating his or her sales and market share. First, one must determine the size of the industry and market segment one wants to enter. Second, one must estimate the competition and determining how to stack up against it. Finally, estimate one’s own share of the market.
In studying the market area, the number of similar businesses that have gone out of business or merged with a competitor should be determined. A high number of these activities usually signals market weakness. Analysis of competitors’ activities may also indicate how effectively a new company can compete.
While the biggest worry for small businesses is their large national or global competitors, the natural advantage goes to the “excellent” companies—large or small—that strive for low overhead, use no-frills assets, and look for a better real estate deal. Small, growing companies should stay out of the path of focused market leaders and deliver unprecedented value to the chosen customers in their market niche.
In order to estimate one’s share of the market, one must determine the geographic boundaries of the market area and estimate how much of one’s product might be purchased. Finally, one must make an educated guess as to what part of this market one might attract as one’s share.

Some reasons for starting a new business lie in the owner’s freedom to define the nature of the business; create the preferred type of physical facilities; obtain fresh inventory; have a free hand in selecting and developing personnel; take advantage of the latest technology, equipment, materials, and tools to cover a void in acceptable products available; and select a competitive environment.
Some reasons for not starting a new business are problems in finding the right business; problems associated with assembling the resources, including the location, building, equipment, materials, and workforce; lack of an established product line; production problems associated with starting a new business; lack of an established market and channels of distribution; and problems in establishing basic management systems and controls. Also, the risk of failure is higher in small business start-ups than in acquiring a franchise or even buying an existing business.

There are reasons to buy an existing business which include factors like the personnel of the existing business are already working; the facilities are already available; the product is already being produced for an existing market; the location may be desirable; relationships may have been established with banks and trade creditors; and revenues and profits are being generated, and goodwill exists.
There are reasons to not buy an existing business which include factors like the physical facilities may be old and obsolete; the employees may have a poor production record or attitude; the accounts receivable may be past due or uncollectible; the location may be bad; the financial condition and relations with financial institutions may be poor; and the inventory may be obsolete or of poor quality.

Franchise agreements normally spell out what both the franchiser and franchisee are responsible for and must do. Each party usually desires the success of the other. The franchiser brings proven and successful methods of operation and business images to aid the franchisee.
Another reason for buying a franchise is that it probably has many of the requirements for success. The market niche has been identified, and sales activities are in place. Also, the business may already be located, managed, and running. Most potential small business owners do not have the competencies or resources to get started successfully. But the franchiser can provide supplemental help through its experience and concentrated study of the field. These talents come from both successes and failures in the past.
However, buying a successful franchise is probably beyond the means of the ordinary entrepreneur, as the best ones are quite costly. Expenses include initial investments and fees, as well as royalty payments. The costs may outweigh the benefits from its purchase. It may not fit the owner’s desires or direction, or it may not give the franchisee enough independence. Finally, overpriced, poorly run, uninteresting, and “white elephant” franchises are potentially disastrous.

Franchising is a marketing system whereby an individual owner conducts business according to the terms and conditions set by the franchiser. The franchise is the agreement granting the right to do business and specifying the terms and conditions under which the business will be conducted. The franchiser is the company that owns the franchise’s name and distinctive elements (such as signs, symbols, and patents) and that grants others the right to sell its product. The franchisee is usually an independent local businessperson who agrees with the franchise owner to operate the business on a local or regional basis. While the franchisee is given the right to market the franchiser’s designated goods or services, that marketing must be done according to the terms of the licensing agreement. The contract specifies what the franchisee can and cannot do and prescribes certain penalties for noncompliance.

There are two types of franchising systems: product and trademark franchising; and business format franchising.
Product and trademark franchising is an arrangement under which the franchisee is granted the right to sell a widely recognized product or brand. Most such franchisees concentrate on handling one franchiser’s product line and identify their business with that firm. Familiar examples include automobile and truck dealerships, gasoline service stations, and soft-drink bottlers. The franchiser exercises very little control over the franchisee’s operations; what control there is has to do with maintaining the integrity of the product, not with the franchisee’s business operations.
Business format franchising is a relationship in which the franchisee is granted the right to use an entire marketing system, along with ongoing assistance and guidance from the franchiser. The industry groups with the largest volume of sales in this type of franchising are restaurants, retailing (nonfood), hotels and motels, business aids and services, automotive products and services, and convenience stores.

A franchise fee is one-time fee paid by the franchisee to the franchiser for the business concept, rights to use of trademarks, management assistance, and other related services from the franchiser.
A royalty fee is continuous fee paid by the franchisee to the franchiser usually based on a percentage of the franchisee’s gross revenue.

The Federal Trade Commission requires that a franchise give prospective franchisees a formal agreement and a Uniform Franchise Offering Circular (UFOC) at least 10 days before the contract is executed or before any money is paid. This prospectus or disclosure statement should provide background on the franchiser and its financial position; the financial requirements for a franchisee; and the restrictions, protections, and estimated earnings of the franchise. A franchiser’s formal offering circular can be downloaded from the World Wide Web.

The industries that especially lend themselves to franchising are restaurants; motels; convenience stores; electronics; and automotive parts, accessories, and servicing.
The success of restaurants, especially those offering fast foods, is related to many variables, including demographic factors such as the high percentage of young adults and singles in the population and the increasing number of women working outside the home. Other factors that seem to have had a positive influence on franchised restaurant success are product appeal to a growing segment of the market, fast service, a sanitary environment, and buildings and signs that are easily recognizable.
The motel industry has experienced explosive growth since the interstate highway system began in 1956 and the growing affluence and mobility of Americans created a market for quality motels. The industry has grown from mom-and-pop units (with an often questionable image) to one dominated by large corporate empires. These corporations not only sell franchises to independent businesspeople but also operate some of the most profitable units themselves. Best Western is considered to have the largest number of establishments.
With the rapid growth in electronics fields such as music, video, TV, and computers, franchising has naturally followed. Today most businesses in the United States own at least one computer which indicates tremendous opportunities for franchises.