Essentials_of_Entrepreneurship_and_Small_Business_Management,_Global

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 549

OR MT ND VT NH
#12 #7 #2 MN #45 #8 ME

NV WY S 4 #29
#3 #1 #
CA NY
#48 UT N MO #50
#9 CO #3 #16
MA
#19 KS AR #25
#20 RI
AZ #46
#22 NM OK CT
#42
#38 NJ
#49
MS AL DE
#17 #21 FL #13
T #5 MD
# #41

#30

10 best business tax climates
10 worst business tax climates

FIGURE 14.1
State Business Tax Climate Index

Source: Scott Drenkard and Joseph Henchman, 2014 State Business Tax Climate Index, Tax Foundation, October 9, 2013, p. 2.

> 60% 29.1 Mbps
Faster 25.5 Mbps
40–60% 21.8 Mbps
Faster 18.2 Mbps
20–40% 14.6 Mbps
Faster 10.9 Mbps
0–20% 7.3 Mbps
Faster
0–20%
Slower
20–40%
Slower
40–60%
Slower
> 60%
Slower

FIGURE 14.2
Internet Download Speeds Across the United States

Source: Reuben Fischer-Baum, “A Map of Who’s Got the Best (and Worst) Internet Connections in America,” Gizmodo, September 15, 2013,
http://gizmodo.com/americas-internet-inequality-a-map-of-whos-got-the-b-1057686215.

550 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

important factor in many entrepreneurs’ decisions to locate in these cities. Google currently
is  working with other cities, such as Atlanta, Charlotte, Phoenix, Portland, Raleigh-Durham,
San Antonio, and San Jose, to bring Google Fiber to their businesses and residents.21

ENTREPRENEURIAL PROFILE: Brandon Schatz: SportsPhotos.com Brandon Schatz,
founder of SportsPhotos.com, a company that organizes and helps photographers sell pho-
tos of a variety of athletic events, decided to move his business from Springfield, Missouri, to the
Kansas City Startup Village to take advantage of Google Fiber’s speed. SportsPhoto.com uploads
hundreds of photos of each event, which requires a fast Internet connection. In Springfield, the
slow Internet connection always created a bottleneck for the company. However, with Google Fiber,
which costs 83 percent less than his slower connection did, Schatz can download a batch of photos
that would have taken 30 to 40 hours in just 30 minutes. SportsPhoto.com’s increased efficiency not
only has improved its profitability but also has enabled Schatz to grow the company faster.22 ■

TOTAL OPERATING COSTS When scouting a state in which to locate a company, an entrepreneur
must consider the total cost of operating a business. For instance, a state may offer low utility
rates, but its labor costs and tax rates may be among the highest in the nation. To select the
ideal location, entrepreneurs must consider the impact of a state’s total cost of operation on their
business ventures. After Feel Golf, a company that makes golf clubs and grips, acquired Pro Line
Sports, a Sanford, Florida, business that markets the IGOTCHA golf ball retriever, CEO Lee
Miller decided to relocate Feel Golf to Florida from Salinas, California, where the company had
operated for 15 years. Miller made the move because he was concerned about the effect that the
high cost of doing business in California had on his company.23

The state evaluation matrix in Table 14.2 provides a handy tool designed to help entrepreneurs
determine which states best suit the most important location criteria for their companies. This
same matrix can be adapted to analyze individual cities as well. Claremont McKenna College’s
Kosmont-Rose Institute Cost of Doing Business Survey reports that cities in Texas tend to offer

TABLE 14.2 State Evaluation Matrix

State-Weighted Score (Weight × Score)

Location Criterion Weight Score State 1 State 2 State 3
(Low = 1,
Quality of labor force High = 5)
Wage rates
Union activity
Property/building costs
Utility costs
Transportation costs
Tax burden
Educational/training assistance
Start-up incentives
Raw material availability
Quality of life
Other:
Other:

Total Score

Assign to each location criterion a weight that reflects its relative importance to your company. Then
score each state on a scale of 1 (low) to 5 (high). Calculate the weighted score (weight × score) for each
state. Finally, add up the total weighted score for each state. The state with the highest total score is the
best location for your business.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 551

TABLE 14.3 Best and Worst States for Doing Business

Top 10 States for Doing Business

Rank* State Taxes and Regulations Workforce Quality Living Environment

1 Texas **** **** ****
2 Florida **** *** ****
3 Tennessee **** **** ****
4 North Carolina **** **** ****
5 South Carolina **** **** ****
6 Indiana **** **** ***
7 Arizona *** *** ***
8 Nevada **** *** ***
9 Louisiana **** **** ****
10 Georgia *** *** ****

Bottom 10 States for Doing Business

Rank* State Taxes and Regulations Workforce Quality Living Environment

41 Maryland * *** ***
42 Pennsylvania ** *** ***
43 Hawaii * ** ****
44 Connecticut * *** ***
45 Michigan ** ** **
46 Massachusetts * *** ***
47 New Jersey * *** **
48 Illinois * *** **
49 New York * *** **
50 California * *** ***

*Rank is the result of a survey by Chief Executive magazine that asked 650 business leaders to rank the states on factors such as taxes, regulatory
burden, quality of workforce, and quality of life. Five stars is best; one star is worst.

Source: “2014 Best and Worst States for Business,” Chief Executive, May 4, 2014, http://chiefexecutive.net/best-worst-states-for-business-2014.

the lowest cost of operation (6 cities among the 20 least expensive), while cities in California are
among the most expensive (12 cities among the 20 most expensive).24 Austin, Abilene, and Fort
Worth, Texas; Cheyenne, Wyoming; Eugene, Oregon; and Yakima, Washington, are among the
cities that offer the lowest cost of doing business, and New York City, New York; Los Angeles and
San Francisco, California; Philadelphia, Pennsylvania; and Newark, New Jersey, are those with
the highest costs of doing business.25

Table 14.3 shows the states that CEOs rank as the 10 best states and the 10 worst states on
factors that include taxes and regulations, quality of workforce, and living environment.

Choosing the City

POPULATION TRENDS Analyzing over time the lists of “best cities for business” compiled
annually by many magazines reveals one consistent trend: Successful small companies in a city
tend to track a city’s population growth. In other words, more potential customers mean that a
small business has a better chance of success. The Census Bureau recently named San Antonio,
Texas; Orlando, Florida; Raleigh, North Carolina; Houston, Texas; and Austin, Texas, as the
fastest-growing cities in the United States.26 Austin, a thriving university town that is home to
many technology-related companies, including Dell, Apple, IBM, and Samsung, is a haven for
entrepreneurial start-ups. With its funky culture, progressive music scene, abundant festivals

552 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

(including the quirky South by Southwest Interactive Festival), and temperate climate, the city
has become a magnet for young, creative people. The median age of Austin’s population is 31.1,
well below the national average of 37.2. A highly educated workforce, large concentrations of
angel and venture capital, and an entrepreneurial support system that includes business incubators
and accelerators such as Capital Factory add to the city’s attractiveness for entrepreneurs.

ENTREPRENEURIAL PROFILE: Alan Knitowski: Phunware Serial entrepreneur Alan
Knitowski started Phunware, a fast-growing mobile apps company, in Austin, Texas, in
2009, in the jaws of the Great Recession. Knitowski was drawn to Austin’s highly educated work-
force, entrepreneurial culture and support system, access to start-up capital, and quality of life.
With annual sales approaching $50 million, Phunware’s software facilitates more than 1 trillion
transactions on mobile devices worldwide each year for many companies, such as NASCAR,
E! Entertainment, ESPN, Adobe, TCM, Discovery Channel, Disney, and many others, helping them
engage and market to their mobile customers in creative ways. The company has grown to more
than 150 employees and has raised $43 million in capital in five rounds of financing. From com-
pany headquarters in Austin, Knitowski has a vision to make Phunware the industry leader in
branded mobile applications and a plan to set up offices across the United States, expand its
operations in Europe and Asia, and perhaps make an initial public offering.27 ■

By analyzing population and other demographic data, entrepreneurs can examine a city in
detail, and the location decision becomes more than just an educated guess or, worse, a shot in
the dark. Studying the trends and the demographics of a city, including population size and den-
sity, growth trends, family size, age breakdowns, education, income levels, job categories, gender,
religion, race, and nationality, gives entrepreneurs the facts they need to make an informed location
decision. Useful information is available from the U.S. Census Bureau for cities of all sizes, includ-
ing metropolitan and micropolitan areas (those with an urban core of between 10,000 and 50,000
people) and small towns. There are 536 micropolitan areas in the United States, and Table 14.4
shows the states that have the greatest number of micropolitan areas listed in the top 100.

In fact, using only basic census data, entrepreneurs can determine what home values are
in an area, how many rooms they contain, how many bedrooms they contain, what percentage
of the population own their homes, and how much residents’ monthly rental or mortgage pay-
ments are. Imagine how useful that information would be to someone about to launch a bed-
and-bath shop!

A company’s location should match the market for its products or services, and assembling
a demographic profile tells an entrepreneur how well a particular site measures up to his or her
target market’s profile. For instance, an entrepreneur planning to open a fine art shop would likely
want information on a city’s household income, size, age, and education level. To succeed, this
art shop should be located in an area where people appreciate its products and have the discre-
tionary income to purchase them.

TABLE 14.4 States with the Most Top Micropolitan Areas

State Number of Top 100 Micropolitan Areas

Ohio 15
Georgia 9
Michigan 9
North Carolina 8
Tennessee 8
Iowa 7
Kentucky 7
Nebraska 7
Minnesota 6

Source: Ron Starner, “The Ladder Effect,” Site Selection, March 2014, pp. 116–127.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 553

ENTREPRENEURIAL PROFILE: Texas Roadhouse, Anchorage, Alaska Courtesy of Texas Roadhouse
Texas Roadhouse, a 410-unit casual dining chain, recently opened its
first restaurant in Anchorage, Alaska, the state’s largest and wealthiest city.
With a per capita income of nearly $55,000 and a population of nearly 300,000
people, Anchorage is capturing the attention of several restaurant chains in
the Lower 48 states. Texas Roadhouse executives say that although somewhat
remote, the market is underserved and represents a huge growth opportu-
nity. The chain’s theme, a steak-oriented menu and country music, fits well
with Alaska’s culture. The Anchorage restaurant incorporates several modifi-
cations that reflect the region’s unique characteristics. The restaurant is big-
ger than those located in the Lower 48; it needs more storage space because
supply deliveries are less frequent in remote locations. The lights also are
brighter to offset the long periods of darkness (an average of nearly
18½ hours per day in January) the region experiences in the winter months.
The menu features the chain’s signature steaks and ice cold beer but also
includes several local items, including salmon and crab legs.28 ■

The amount of available data on the population of any city or town is staggering. These sta-
tistics allow entrepreneurs to compare a wide variety of cities or towns and to narrow the choices
to those few that warrant further investigation. Analyzing all of this data makes it possible to
screen out undesirable locations and to narrow the list of suitable locations to a few, but it does
not make the final location decision for an entrepreneur. Entrepreneurs must see the potential
locations on their “short list” firsthand. Only by seeing a potential location can an entrepre-
neur add the intangible factor of intuition into the decision-making process. Spending time at a
potential location tells an entrepreneur not only how many people frequent it but also what they
are like, how long they stay, and what they buy. Walking or driving around the area will give an
entrepreneur clues about the people who live and work there. What are their houses like? What
kinds of cars do they drive? What stage of life are they in? Do they have children? Is the area on
the rise, or is it past its prime?

Following are other factors that entrepreneurs should consider when evaluating cities as pos-
sible business locations.

COMPETITION For some retailers, locating near competitors makes sense because similar
businesses located near one another may serve to increase traffic flow to both. This location
strategy works well for products for which customers are most likely to comparison shop. For
instance, in many cities, auto dealers locate next to one another in a “motor mile,” trying to create
a shopping magnet for customers. The convenience of being able to shop for dozens of brands of
cars all within a few hundred yards of one another draws customers from a sizable trading area.
Locating near competitors is a common strategy for restaurants as well.

ENTREPRENEURIAL PROFILE: George Stathakis: Stax Omega When George Stathakis
opened his sixth restaurant, Stax Omega, in Greenville, South Carolina, he chose a site at
the intersection of an interstate highway and a busy road where several other popular restaurants
were already operating. With years of experience in the restaurant business, Stathakis knows that
a cluster of restaurants create business for one another. “I always liked the idea of locating my
restaurants near competitors,” he says.29 ■

Of course, this strategy has limits. Overcrowding of businesses of the same type in an area can
create an undesirable impact on the profitability of all competing firms.

Studying the size of the market for a product or service and the number of existing competi-
tors helps an entrepreneur determine whether he or she can capture a sufficiently large market
share to earn a profit. Again, census reports can be a valuable source of information. County Busi-
ness Patterns gives a breakdown of businesses in manufacturing, wholesale, retail, and service
categories and estimates companies’ annual payrolls and number of employees broken down by
county. ZIP Code Business Patterns provides the same data as County Business Patterns except
it organizes the data by ZIP code. The Economic Census, which is produced for years that end in
2 and 7, gives an overview of the businesses in an area—their sales (or other measure of output),
employment, payroll, and form of organization. It covers eight industry categories, including

554 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

clusters retail, wholesale, service, manufacturing, construction, and others, and gives statistics not only at
geographic concentrations the national level but also by state, Metropolitan Statistical Area, county, places with 2,500 or more
of interconnected compa- inhabitants, and Zip code. The Economic Census is a useful tool for helping entrepreneurs deter-
nies, specialized suppliers, mine whether the areas they are considering as a location are already saturated with competitors.
and service providers that
are present in a region. CLUSTERS Some cities have characteristics that attract certain industries, and, as a result,
companies tend to cluster there. Clusters are geographic concentrations of interconnected
companies that share specialized supply chains, resources, labor force, distribution networks,
and service providers that are present in a region.30 Businesses in a cluster build on the same
pool of resources and strengthen the entire business ecosystem in the area. According to Harvard
professor Michael Porter, clusters allow companies in them to increase their productivity, gain a
competitive edge, and increase their likelihood of survival. “Specialization in a region increases
the number of patents and business formations and leads to higher wages,”* adds Harvard’s Rich
Bryden, who has helped develop a map of business clusters in the United States. Northeastern
Ohio is home to dozens of companies, most of them small businesses, in the flexible electronic
components (those that can be bent, folded, and stretched) field, many of them inspired by the
world-renowned work of Kent State University’s Liquid Crystal Institute and the pioneering work
in polymer science at the University of Akron and Case Western Reserve University.31 California’s
Napa Valley boasts more than 300 wineries, many of them small, family-owned operations that
are among the best in the United States. The region’s climate and soil, both of which are ideal
for growing grapes, led entrepreneurs to establish wineries as early as 1861. As in most clusters,
over time these vintners shared both knowledge and best practices, leading to the formation of
more wineries, increased productivity and innovation, and the resulting competitive advantages.32

Once a concentration of companies takes root in a city, other businesses in those industries
tend to spring up there as well. Ogden, Utah, hosted some events for the 2002 Olympics in Salt
Lake City. With its bountiful mountains, canyons, and rivers and a population devoted to outdoor
activities ranging from hiking and biking to mountain climbing and skiing, Ogden has become
the hub of a cluster of outdoor sports companies. It offers the ideal location for testing new prod-
ucts, and a nearby airport provides direct international flights for entrepreneurs who are engaged
in international business.

ENTREPRENEURIAL PROFILE: Steve Flagg: Quality Bicycle Products Steve Flagg,
founder of Quality Bicycle Products, a small wholesale bicycle distributor based in Bloomington,
Minnesota, chose Ogden for his company’s second location. Flagg, whose company serves 5,000
independent bicycle shops, was drawn to Ogden by its cluster of companies that make outdoor gear,
its strong pool of labor, its growing retail base, and its easy access to the West Coast market.33 ■

COMPATIBILITY WITH THE COMMUNITY One of the intangibles that can be determined only by
a visit to an area is the degree of compatibility a business has with the surrounding community.
In other words, a small company’s image must fit in with the character of a town and the needs
and wants of its residents. For example, Beverly Hills’s ritzy Rodeo Drive or Palm Beach’s
Worth Avenue are home to shops that match the characteristics of the area’s wealthy residents.
Exclusive shops such as Cartier, Jimmy Choo, Versace, Louis Vuitton, and Tiffany & Company
abound, catering to the area’s rich and famous residents.

LOCAL LAWS AND REGULATIONS Before settling on a city, entrepreneurs must consider the
regulatory burden local government will impose. Government regulations affect many aspects
of small business’s operation, from acquiring business licenses and building permits to erecting
business signs and dumping trash. Some cities are regulatory activists, creating so many rules
that they discourage business creation; others take a more laissez-faire approach, imposing
few restrictions on businesses. Andy Puzder, CEO of CKE Restaurants, owner of the Carl’s Jr.
and Hardee’s quick-service restaurant chains, says getting a building permit in Texas requires
60 days; in Shanghai, China, the permitting process takes 63 days, and in Novosibirsk, Russia, the
process takes 125 days. In Los Angeles, however, Puzder says getting a building permit requires

*Emily Maltby, Where the Action is, The Wall Street Journal, August 23, 2011.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 555

285 days, pointing out the irony of being able to open a restaurant on Karl Marx Prospekt in
Russia faster than the company can open one on Karl Archer Boulevard in California.34

ENTREPRENEURIAL PROFILE: Damien Graf and Robyn Semien: Bibber and Bell
Wine and Spirits Copreneurs Damien Graf and Robyn Semien found the ideal location
for their wine and spirits shop, Bibber & Bell Wine and Spirits, in the Williamsburg neighborhood
in Brooklyn, New York. Negotiating a lease for the building, which is located in a high-traffic area
just one block away from a busy subway station, took time and patience but was nothing com-
pared to the gyrations the couple had to go through to get a retail liquor license from the State
Liquor Authority. The paperwork they were required to submit took the Authority took three
months to process while Graf and Semien continued to pay rent (about $14,000) and other ex-
penses (about $6,000) so that they would not lose their desired location. The couple persisted and
ultimately opened their shop, which they continue to operate successfully.35 ■

Zoning laws can have a major impact on an entrepreneur’s location decision. New York zoning laws
City passed the first comprehensive zoning laws in 1916, and most cities now have zoning laws laws that divide a city or
that divide a city or county into cells or districts to control the use of land, buildings, and sites.36 county into small cells or
Their purpose is to contain similar activities in suitable locations. For instance, one section of a districts to control the use
city may be zoned residential, whereas the primary retail district may be zoned commercial and of land, buildings, and sites.
another zoned industrial to house manufacturing operations. Before selecting a particular site
within a city, entrepreneurs must explore local zoning laws to determine whether there are any variance
ordinances that would place restrictions on business activity or that would prohibit establishing a a special exemption to a
business altogether. Zoning regulations may make a particular location out of bounds. zoning ordinance.

In some cases, an entrepreneur may appeal to the local zoning commission to rezone a site
or to grant a variance (a special exception to a zoning ordinance), but this is risky and could be
devastating if the board disallows the variance. Stan Freemon, opened his first Eggs Up Grill, a
franchise that serves an extensive breakfast menu as well as sandwiches and salads, on a busy
road with a high concentration of retail shops in Greenville, South Carolina, in 2014. Several
months later, Freemon opened his second franchise in Greenville’s vibrant downtown district,
drawn by its youthful population, art galleries, live theaters, and eclectic mix of retail shops.
Because zoning laws restricted downtown businesses’ operating hours, Freemon had to secure a
variance from the city’s Board of Zoning Appeals to open his restaurant between midnight and
5 a.m.37 As the number of home-based businesses has increased in the last several years, more
entrepreneurs have found themselves at odds with city zoning regulations.

APPROPRIATE INFRASTRUCTURE AND UTILITIES Business owners must consider the quality of the
infrastructure and availability of utilities in a potential location. Is an airport located nearby? Are
flights available to the necessary cities, and are the schedules convenient? If a company needs
access to a railroad spur, is one available in the city? How convenient is the area’s access to major
highways? What about travel distances to major customers? How long will it take to deliver
shipments to them? Are transportation rates reasonable? In some situations, double or triple
handling of merchandise and inventory causes transportation costs to skyrocket. Are sufficient
supplies of necessary inputs such as water and natural gas available? Are utility rates reasonable?
What impact will utilities costs have on the company’s operation?

ENTREPRENEURIAL PROFILE: Providencia USA Providencia USA recently built a
$70 million factory that makes nonwoven fabric in Statesville, North Carolina, because the
location offered all of the necessary infrastructure that is important to the factory’s success. An
international airport is just 45 minutes away, and two major interstate highways make transport-
ing finished goods to customers along the East Coast fast and efficient. Railway access was also an
important factor because railroad delivery is the least expensive way to deliver the pelletized
polypropylene raw material that Providencia uses in its production process. Finally, the availability
of low-cost electricity was the “tipping factor” in the company’s location decision.38 ■

INCENTIVES Many states, counties, and cities offer financial and other incentives to encourage
businesses that will create jobs to locate within their borders. These incentives range from job
training for workers and reduced tax rates to financial grants and loans. To gear up its economic
development effort, Minnesota recently included more than $86 million in business incentives in

556 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Ethics and Entrepreneurship

“Wait, You Can’t Take Our Location . . . Can You?”

As children, Jo-Ann Morlando and Dominica Clementi, both resi- in their new location, they were powerless to save it because the
dents of Charlotte, North Carolina, learned how to bake from their city could invoke the power of eminent domain, which allows a
beloved Italian grandmothers, affectionately known as Nonas. As government entity to expropriate private property for public use
adults, both women chose professional careers but retained their as long as the government pays “just compensation.” Because the
love for baking, often creating delectable sweets for their chil- entrepreneurs were renting the building, they were not entitled to
dren’s school events or for church gatherings. Before long, their any compensation. As word spread throughout the community
reputation as stellar bakers led to a constant barrage of requests that the building that housed the bakery was being torn down,
for goodies from family members and friends. Sometimes the sales began to decline.
women would work a full day at the office and stay up all night
baking. In 2004, after one marathon baking session, Morlando Morlando and Clementi wanted to stay in the University City
turned to Clementi and said, “Let’s start a bakery.” area and began searching for a new location, but many sites,
particularly those in shopping centers, were off limits because
They did and named their bakery Nona’s Sweets as a tribute their tenants included grocery stores, which typically have their
to their grandmothers, whose recipes they used to create the vari- own bakeries, that had negotiated lease provisions that prevent
ety of sweet treats they offered. Although their original shop was landlords from leasing space to other bakeries. They finally found
small, it was in a good location that drew plenty of customers. another suitable building in University City in The Shoppes at
The bakery thrived, and in the midst of the Great Recession, the Worthington, a shopping center with no grocery store. The city
family decided to expand to a new, carefully chosen location in did reimburse Morlando and Clementi for the cost they incurred
Charlotte’s fast-growing University City neighborhood. The build- to move their business to the new location, but they received no
ing they rented was in a prominent location in a high-traffic area. compensation for the additional costs of outfitting their new loca-
In addition, the local university had announced plans to build a tion and advertising it or the sales they lost while the bakery was
football stadium nearby, and the city had announced that it was closed during the transition.
going to build a station for the LYNX Blue Line, the city’s light rail
system (which carries 16,000 people on a typical weekday) that Although the entrepreneurs say they would not want to go
it was expanding. Although the bakery was profitable, no banks through another forced move, the tenacious pair is finding reasons
would lend money for the expansion, so Morlando and Clementi to be excited about their new location, which allowed them to cre-
invested nearly $400,000 in transforming their new location, on ate a space that is warm, welcoming, and relaxing. Shelving allows
which they had signed a 10-year lease, into the quaint bakery they them to boldly display their intricately decorated cakes, tempting
had always dreamed of. They worked 14-hour days, experiment- smells lure passersby, and old photographs of nonas from past
ing with new products, improving their grandmothers’ recipes, generations line the walls and give customers a sense of nostalgia.
and building their clientele. They added a wedding cake service, a
cupcake bar, and a section called Papa’s Eats that serves breakfast 1. Should a government entity have the power to “take” a
and lunch. Within months, their business was booming; sales and business’s location if it better serves the public good? Explain.
profits were higher than ever.
2. Use the resources of the Internet to learn more about the
Then in 2012, Morlando and Clementi received a letter from concept of eminent domain. What benefits does it produce?
the city of Charlotte, telling them that the plans for the light rail What are the risks associated with it?
expansion had changed. In a cost-cutting move, the city was
shortening the expansion by 1.2 miles and was going to build Sources: Caitlin McCabe, “Nona’s Sweets Gets Derailed, Starts Over at a New Site
a five-story parking garage where their building sat. They had in Charlotte,” Charlotte Observer, June 23, 2013, http://www.charlotteobserver
90 days to move their bakery out of the building. Morlando and .com/2013/06/23/4124634/nonas-bakery-gets-derailed-starts.html#.U5DBUnZrTOs;
Clementi were stunned and contacted their lawyer. They soon Lindsay Ruebens, “Lynx Parking Deck to Bump Nona’s Bakery,” Lake Norman
learned that, despite investing hundreds of thousands of dollars News, November 4, 2012, http://www.charlotteobserver.com/2012/11/04/3637266/
lynx-parking-deck-to-bump-nonas.html#.U5DCW3ZrTOs; Coleen Harry, “Blue Line
Extension Forcing Businesses Out,” 14 News, October 4, 2012, http://www.14news
.com/story/19740507/blue-line-extension-forcing-businesses-out.

its budget, but companies have to earn the incentives through capital investments or job creation.
Emerson Process Management, which manufactures pressure, temperature, flow, level, and
wireless measurement instruments, earned more than $2.7 million in incentives by investing
$70 million in a factory in Shakopee, Minnesota, that created 500 new jobs. Shutterfly, a
California-based company that provides personalized digital photo solutions, qualified for a
$1 million loan through the Minnesota Investment Fund by locating a production and distribution
center in Shakopee that created 330 jobs.39 Although incentives are not the primary driver of
companies’ location decisions, they often are the “tie-breaker” between similar sites.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 557

Companies that accept incentives must be aware of “clawback” provisions that require them to
repay the state the value of some or all of the incentives if the company fails to create a minimum
number of jobs or make a minimum capital investment. State and local government entities ap-
proved nearly $270 million in incentives to convince Dell Inc. to build a computer assembly plant
in Winston–Salem, North Carolina, on the condition that the company create at least 900 jobs. Four
years later, however, in a move to improve its efficiency, Dell decided to close the factory, which
required the company to repay $28 million under the contract’s clawback provision.40

QUALITY OF LIFE A final consideration when selecting a city is the quality of life it offers. For many
entrepreneurs, quality of life is one of the key determinants of their choice of locale. Cities that
offer comfortable weather, cultural events, colleges and universities, museums, outdoor activities,
concerts, unique restaurants, and an interesting nightlife have become magnets for entrepreneurs
looking to start companies. Over the last two decades, cities such as Austin, Boston, Seattle, San
Francisco, Washington, Dallas, Minneapolis, and others have become incubators for creativity
and entrepreneurship as educated young people drawn by the cities’ quality of life have moved in.

Not only can a location in a city offering a high quality of life be attractive to an entrepre-
neur, but it can also make recruiting employees much easier. According to a study of the impor-
tance of location on recruiting employees conducted by the Human Capital Institute, the three
most important factors in attracting talent are job opportunities, a clean and safe community, and
an affordable cost of living.41

ENTREPRENEURIAL PROFILE: K.C. Walsh: Simms Fishing Products. A few years ago,
K.C. Walsh, CEO of Simms Fishing Products, a company launched by entrepreneur and fly
fisher John Simms in 1980 that makes fishing waders and accessories, relocated its headquarters
to Bozeman, Montana. The quality of life (and superb fly fishing) in and around Bozeman was the
primary factor in the decision. Walsh, a lifelong fly fisher, said his dream was to live, work, and
play in Montana. Because most of the company’s 120 employees are avid fly fishers and outdoor
enthusiasts, Bozeman’s access to some of the best trout rivers and streams, mountains, and natural
beauty make it an ideal location for Simms. Montana is a business-friendly state, and Simms can
field-test its products under real-world conditions quite easily.42 ■

Choosing the Site

The final step in the location selection process is choosing the actual site for the business. Once again,
entrepreneurs must let the facts guide them to the best location. Every business has its own unique
set of criteria for an ideal location. A manufacturer’s prime consideration may be access to raw ma-
terials, suppliers, labor, transportation, and customers. Service firms require access to customers but
can generally survive in lower-rent properties. A retailer’s prime consideration is sufficient customer
traffic. For example, an entrepreneur who is planning to launch a convenience store should know that
generating a sufficient volume of sales requires a population of at least 500 to 1,000 people who live
within a one-mile radius of the outlet and choose a location accordingly.43 The one element common
to all three types of businesses is the need to locate where customers want to do business.

Some entrepreneurs test the suitability of potential locations by opening “pop-up” stores,
shops that are open for only a few days, weeks, or months before shutting down. These temporary
stores open in available spaces, sell their merchandise quickly, close, and move on to the next
location; they are low-cost, efficient ways for an entrepreneur to test a location as a potential site
for a permanent business.

ENTREPRENEURIAL PROFILE: Stephen Robins: Pelindaba Lavender Stephen Robins,
founder of Pelindaba Lavender, a company that sells more than 250 lavender-based pro-
ducts from its farm store on San Juan Island in northwestern Washington, recently opened a pop-
up store in Pacific Place, a downtown retail center in Seattle, to test the area as a site for a permanent
store location. In addition to serving as a test site, the pop-up store serves as a showcase for the
company’s unique products and introduces them to customers the company normally would not
reach, including tourists. Because of the pop-up store’s success, Robins is looking for a location
with 900 to 1,000 square feet to house a new permanent Pelindaba Lavender store.44 ■

Rental or lease rates are an important factor when choosing a site. Of course, entrepreneurs
must be sure that the rent or lease payments for a particular location fit comfortably into their

558 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

budgets. Although “cheap” rental rates can be indicative of a second-class location (and the re-
sulting poor revenues they generate), entrepreneurs should not agree to exorbitant rental rates that
jeopardize their ability to surpass their break-even points.

ENTREPRENEURIAL PROFILE: Claude Esnault: Au Grande Richelieu Boulangerie
Claude Esnault, owner for the last 43 years of the Au Grand Richelieu Boulangerie, recently
closed the landmark bakery, which opened in 1811, because the annual rent had nearly doubled
from €18,000 ($22,860) to €35,000 ($44,450) per year. The landlord claims the new rent is in line
with that of other locations in the fast-growing neighborhood, which is situated near the Opera
Garnier and the Louvre museum. Unfortunately, Esnault says the bakery, Paris’s oldest, could not
support rent that high, prompting the decision to close the historic bakery’s doors.45 ■

Many businesses are downsizing their outlets to lower their start-up and operating costs and to
allow for a greater number of location options that are not available to full-size stores. Franchises
such as Cinnabon and Burger King are finding success by placing smaller, less expensive outlets
in locations that cannot support a full-size store. Burger King recently opened six Whopper Bars in
the United States and three international locations in Venezuela and Singapore. At just 700 square
feet, a Whopper Bar is one-fifth the size of a traditional Burger King outlet and is ideal for locations
in theme parks, airports, museums, casinos, cruise ships, and shopping malls. A Whopper Bar,
which sells beer and includes a Whopper topper area in which customers customize the company’s
signature sandwich with 22 different toppings, costs between $600,000 and $800,000 to build,
which is 30 percent less than the smallest traditional Burger King restaurant. Despite its size, the
Whopper Bar’s sales per square foot exceed those of its full-size franchise outlets.46

Finally, an entrepreneur must be careful to select a site that creates the right impression for a busi-
ness in the customers’ eyes. A company’s location speaks volumes about a company’s “personality.”

ENTREPRENEURIAL PROFILE: Charlene Dupray and Pascal Siegler: South’n France
When copreneurs Charlene Dupray and Pascal Siegler saw an old diner in downtown Wilm-
ington, North Carolina, with its salmon pink concrete exterior, 13-foot ceilings, and diner stools,
they knew they had found the perfect building to house their chocolate bonbon business, South’n
France. In addition to its unique character, the building came equipped with freezers capable of
holding 20,000 bonbons, provided sufficient space for Dupray and Siegler to manufacture their
chocolate delicacies, and included rooms they could convert into a retail storefront. Even though
their business is on the verge of outgrowing the space, Dupray says, “We love it so much that
we’re considering adding another story or buying nearby residences because this old luncheon-
ette really is a workhorse for us.”47 ■

LO2 Location Criteria for Retail and Service Businesses

Describe the location Few decisions are as important for retailers and service firms as the choice of a location. Be-
criteria for retail and cause their success depends on a steady flow of customers, these businesses must locate their
service businesses. businesses with their target customers’ convenience and preferences in mind. The following are
important considerations:

trading area Trade Area Size
the region from which a
business can expect to draw Every retail and service business should determine the extent of its trading area, the region from
customers over a reason- which a business can expect to draw customers over a reasonable time span. The primary variables
able time span. that influence the scope of the trading area are the type and size of the business. If a retail store
specializes in a particular product line and offers a wide selection and knowledgeable salespeople,
it may draw customers from a great distance. In contrast, a convenience store with a general line of
merchandise has a small trading area because it is unlikely that customers will drive across town to
purchase items that are available within blocks of their homes or businesses. As a rule, the larger the
store, the greater its selection, and the better its service, the broader is its trading area. Cabela’s, the
outdoor outfitter, has nearly 60 stores across the United States and Canada (with more on the way) that
average 127,500 square feet (one store is 247,000 square feet) and carry more than 225,000 SKUs,
ranging from outdoor apparel and hunting and fishing gear to boats and home furnishings. With their
extensive inventories and unique features (museum-quality wildlife displays and huge aquariums),

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 559

You Be the Consultant

“Pop” Goes the Store

Pop-up stores are temporary locations that are open for only a product lines, get ideas for new products, and determine whether
few hours, days, or weeks before shutting down. For entrepre- they are ready to open brick-and-mortar stores. Jon Crawford,
neurs who operate highly seasonal businesses (think Halloween founder of Storenvy Inc., an online platform where small busi-
costume stores and Christmas décor shops), pop-up stores are a nesses can set up e-commerce stores and sell their products, part-
way of life, but other entrepreneurs use them to test new business nered with Storefront Inc. to set up a physical store in which five of
ideas or potential locations, create brand awareness, clear out ex- Storenvy’s more than 50,000 e-commerce business owners would
cess inventory, and promote their full-time locations. Rick Martin operate their own real-world shops for one month. Each month,
used a pop-up store to test Pacific Place, a popular shopping, din- five new businesses move into the retail space, which is located in
ing, and entertainment center in downtown Seattle, Washington, downtown San Francisco. Crawford says the retail space has be-
as a potential location for his gourmet olive oil and balsamic vin- come a type of retail incubator that allows e-commerce merchants
egar business, 11 Olives. Martin’s pop-up store proved to be so to test the viability of a physical store.
successful that he has begun looking for a permanent location in
Pacific Place. When Laura Bruland, who makes unique laser-cut jewelry
from recycled books (she ran a successful Kickstarter campaign
The Academy of Art University in San Francisco periodically to raise the money to purchase her first laser cutter), opened her
opens a pop-up shop to showcase the work of its students and pop-up shop, Yes & Yes Designs, in the retail space, she realized
alumni. The temporary boutique is filled with a wide array of mer- that she needed a much bigger and bolder display for her innova-
chandise, including jewelry, gifts, clothing, and accessories and tive designs. Her one-month experience with the physical store
gives students the opportunity to learn firsthand what is required gave her the confidence to start selling her jewelry successfully
for fashion to go from an idea to actual products that end up in at festivals and craft fairs. Bruland, who operates the online com-
customers’ shopping bags. The pop-up shop has proved to be so pany from her own studio in Oakland, California, with the help
popular that university officials are considering opening a perma- of her partner, Julien Shields, and their wonder dog, Toto, also
nent location in San Francisco. has benefitted from her in-depth conversations with customers,
many of whom have given her ideas for new designs and new
Before hip-hop artist Kanye West’s Yeezus tour opened in products. After one customer asked about a gift for her husband,
New York City, the entertainer used Storefront, a company that Bruland created a line of cufflinks. Several early participants in the
specializes in helping entrepreneurs and businesses find locations program have gone on to create physical stores to supplement
for pop-up stores, to find a suitable spot for a pop-up shop to sell their online sales.
his merchandise. Four days later, when the tour moved on to its
next venue, the shop closed, but not before selling thousands of 1. What advantages and disadvantages do pop-up stores such
T-shirts, tote bags, caps, and hats. as the ones described here offer entrepreneurs?

Claire Winkler, owner of the Greenville, South Carolina, lo- 2. What types of businesses would be successful opening pop-
cation of Ten Thousand Villages, a business that sells handmade up stores temporarily on your campus or on a nearby cam-
gifts and crafts created by artisans in developing countries, op- pus? What advice would you offer entrepreneurs who are
erates her company from a full-time location on busy Augusta considering opening the store? When should it open and
Street. Although only two miles from Greenville’s vibrant down- for how long?
town district, the Augusta Street location rarely draws downtown
residents and tourists. Winkler opened a pop-up Ten Thousand 3. Would a pop-up store such as the ones that 11 Olives and
Villages store in a vacant building that once housed offices in the Ten Thousand Villages used be successful in your commu-
downtown district from October to December to take advantage nity? Explain. Work with a team of your classmates to iden-
of the pedestrian traffic generated by the many fall festivals and tify three products or product lines that would be successful
events the city held downtown, the area’s live performances, and in your community if they were sold from a pop-up store.
the busy holiday shopping season. In addition to generating addi-
tional sales, her goal was to expand the awareness of her Augusta Sources: Based on Jeanne Lang Jones, “Retail Pop-Up Stores in Demand,” Puget
Street location. The first weekend, the store was extremely busy. Sound Business Journal, November 30, 2012, http://www.bizjournals.com/seattle/
Winkler says many of the pop-up shop’s customers were people print-edition/2012/11/30/retail-pop-up-stores-in-demand.html?page=all; Joshua David
who lived in Greenville but had never heard of her Augusta Street Stein, “No Space Too Small, No Lease Too Short,” New York Times, December 20,
store and its interesting collection of inventory. She considers the 2013, http://www.nytimes.com/2013/12/22/fashion/Pop-Up-Stores-Storefront.html;
pop-up to be a huge sales—and brand awareness—success. “Young Designers Debut at Academy of Art University Pop-Up Shop,” 7X7SF,
May 28, 2014, http://www.7x7.com/music-nightlife/young-designers-debut-academy-
Even online merchants are opening pop-up stores, and art-university-pop-shop; Tony Bravo, “Academy of Art University Pop-Up Shop,”
many are finding that the opportunity to spend face-to-face time SF Gate, May 23, 2014, http://blog.sfgate.com/chronstyle/2014/05/23/academy-of-art-
with customers enables them to gain valuable feedback on their university-fashion-pop-up-shop/#23693101=0; Amy Westervelt, “A Shot at the Real
World,” Wall Street Journal, February 3, 2014, p. R5; Anna Lee, “Here Today, Gone
Tomorrow,” Greenville News, October 19, 2013, pp. 1A, 3A.

560 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Cabela’s stores are destination stores, often drawing shoppers from 100 or more miles away.48 Busi-
nesses that offer a narrow selection of products and services tend to have smaller trading areas. For
instance, the majority of a massage therapist’s clients live within 3 to 5 miles of the location, with a
secondary tier of clients who live within 5 to 10 miles. Clients who are willing to travel more than
15 minutes for a session are rare.49

retail compatibility ENTREPRENEURIAL PROFILE: Greg Carafello: Cartridge World When Greg Carafello
the benefits a company became a master franchiser for Cartridge World, an Australia-based company that sells new
receives by locating near and remanufactured printer cartridges, he opened franchises in suburban New Jersey in strip
other businesses that sell malls located near concentrations of small businesses, which make up 95 percent of his customers.
complementary products When Carafello began opening stores in downtown Manhattan, where rental rates are much
and services or that gener- higher, he discovered that the best locations are those on the first floor of high-rise buildings that
ate high volumes of traffic. house at least 60 floors of business space. The high concentration of small business customers in
close proximity generates a high volume of business for his Cartridge World locations.50 ■
index of retail
saturation Retail Compatibility
a measure of the potential
sales per square foot of Shoppers tend to be drawn to clusters of related businesses. That’s one reason shopping malls
store space for a given and outlet shopping centers are popular destinations for shoppers and are attractive locations for
product within a specific retailers. The concentration of businesses pulls customers from a larger trading area than a single
trading area; it is the ratio freestanding business does. Retail compatibility describes the benefits a company receives by
of a trading area’s sales locating near other businesses that sell complementary products and services or that generate
potential for a product or high volumes of foot traffic. Clever business owners choose their locations with an eye on the sur-
service to its sales capacity. rounding mix of businesses. For instance, grocery store operators prefer not to locate in shopping
centers with movie theaters, offices, and fitness centers, all businesses whose customers occupy
parking spaces for extended time periods. Drugstores, nail salons, and ice cream parlors have
proved to be much better shopping center neighbors for grocers.

ENTREPRENEURIAL PROFILE: Carol Buie-Jackson and Jay Jackson: Birdhouse on the
Greenway Carol Buie-Jackson and her husband, Jay Jackson, spent months screening potential loca-
tions for their wild bird product shop, Birdhouse on the Greenway. They chose a 1,600-square-foot
space in The Shops at Piper Glen, a shopping center on the fast-growing south side of Charlotte, North
Carolina, which offers two prime advantages. The store is located in the middle of one of the city’s
most affluent residential areas that contains large numbers of their target customers, people who are
in their 50s and 60s with above-average incomes and are environmentally conscious. It also sits at the
entrance of Four-Mile Creek Greenway, a popular walking trail that winds through natural habitat
and has connectors to local neighborhoods. The other businesses in the shopping center complement
Birdhouse on the Greenway because they draw the same customers the Jacksons target. Trader Joe’s is
just two doors down, and other stores include Starbucks and Great Harvest Bread Company. Because of
their wise choice of a location for their shop, the Jacksons say Birdhouse on the Green is thriving.51 ■

Degree of Competition

The size, location, and activity of competing businesses also influence the size of a company’s trad-
ing area. If a business will be the first of its kind in a location, its trading area might be quite exten-
sive. However, if the area already has 8 or 10 nearby stores that directly compete with a business, its
trading area might be very small because the market is saturated with competitors. Market saturation
is a problem for businesses in many industries, ranging from fast-food restaurants to convenience
stores. Red Mango, an upscale yogurt chain based in Los Angeles, recently saw four of its franchises
in that city close because of poor location choices. The company is continuing with its expansion
plans but will focus on other cities that are less saturated with frozen yogurt shops.52

The Index of Retail Saturation

One of the best measures of the level of saturation in an area is the index of retail saturation
(IRS), which takes into account both the number of customers and the intensity of competition in
a trading area. The index of retail saturation is a measure of the potential sales per square foot
of store space for a given product within a specific trading area. It is the ratio of a trading area’s
sales potential for a particular product or service to its sales capacity:

IRS = C * RE
RF

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 561

where

C = number of customers in the trading area

RE = retail expenditures, or the average expenditure per person ($) for the product in the trading area

RF = retail facilities, or the total square feet of selling space allocated to the product in the trading area

This computation is an important one for every retailer to make. Locating in an area already
saturated with competitors results in dismal sales volume and often leads to failure.

To illustrate the index of retail saturation, suppose an entrepreneur who is looking at two sites
for a shoe store finds that he needs sales of $175 per square foot to be profitable. Site 1 has a trad-
ing area with 25,875 potential customers who spend an average of $42 on shoes annually; the only
competitor in the trading area has 6,000 square feet of selling space. Site 2 has 27,750 potential
customers spending an average of $43.50 on shoes annually; two competitors occupy 8,400 square
feet of space:

Site 1

Index of retail saturation = 25,875 * 42
6,000

= $181.12 sales potential per square foot

Site 2

Index of retail saturation = 27,750 * 43.50
8,400

= $143.71 sales potential per square foot

Although site 2 appears to be more favorable on the surface, the index shows that site 1 is
preferable; site 2 fails to meet the minimum standard of $175 per square foot.

Reilly’s Law of Retail Gravitation

Reilly’s Law of Retail Gravitation, a classic work in market analysis published in 1931 by
William J. Reilly, uses the analogy of gravity to estimate the attractiveness of a particular busi-
ness to potential customers. A business’s ability to draw customers is directly related to the extent
to which customers see it as a “destination” and is inversely related to the distance customers
must travel to reach it. Reilly’s model also provides a way to estimate the trade boundary between
two market areas by calculating the “break point” between them. The break point between two
primary market areas is the boundary between the two where customers become indifferent about
shopping at one or the other. The key factor in determining this point of indifference is the size
of the communities. If two nearby cities have the same population sizes, then the break point lies
halfway between them. The following is the equation for Reilly’s Law:53

BP = d

1 + Pb
A Pa

where
BP = the distance in miles from location A to the break point

d = the distance in miles between locations A and B
Pb = the population surrounding location B
Pa = the population surrounding location A

For example, if city A and city B are 22 miles apart and city A has a population of 25,500
and city B has a population of 42,900, the break point according to Reilly’s law is

BP = 22 = 9.2 miles
42,900
1 + A 25,500

562 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

The outer edge of city A’s trading area lies about nine miles between city A and city B.
Although only a rough estimate, this simple calculation using readily available data can be useful
for screening potential locations.

Transportation Network
For many retail and service businesses, easy customer access from a smoothly flowing network
of highways and roads is essential. If a location is inconvenient for customers to reach, a business
located there will suffer from a diminished trading area and lower sales. Entrepreneurs should
verify that the transportation system works smoothly and is free of barriers that prevent custom-
ers from reaching their shopping destinations. Is it easy for customers traveling in the opposite
direction to cross traffic? Do traffic signs and lights allow traffic to flow smoothly?

E-commerce companies also must consider accessibility to trucking routes, such as in-
terstate highways, and airports so that they can expedite customers’ orders. Zappos, the online
shoe retailer, moved its fulfillment center to Louisville, Kentucky, so that the company can ship
orders almost anywhere in the United States within one day. The Zappos center is located just
12 miles from the UPS Worldport, the world’s largest automated package-sorting facility (it can
sort 416,000 packages per hour) in the Louisville International Airport. From this airport, flights
can reach 75 percent of the population of the United States in just 2.5 hours and 95 percent of the
population in 4 hours. The city also has three interstate highways and two railways. Because of
Zappos’s location, a package that leaves UPS Worldport by 12:45 a.m. can arrive at the home or
business of any customer in the United States that same day, giving the company a competitive
edge in customer service.54

Physical and Psychological Barriers
Trading area shape and size also are influenced by physical and psychological barriers. Physi-
cal barriers may be parks, rivers, lakes, bridges, or any other natural or man-made obstruction
that hinders customers’ access to the area. Locating on one side of a large park may reduce the
number of customers who will drive around it to get to a store. Psychological barriers include
areas that have a reputation for crime and illegal activities. If high crime areas exist near a site,
potential customers will not travel through them to reach a business.

Other factors retailers should consider when evaluating potential sites are discussed next.

Customer Traffic
Perhaps the most important screening criterion for a potential retail (and often for a service)
location is the number of potential customers passing by the site during business hours. To be
successful, a business must be able to generate sufficient sales to surpass its break-even point,
and that requires an ample volume of customer traffic going past its doors. The key success fac-
tor for many retail stores is a high-volume location with easy accessibility. Entrepreneurs should
use traffic counts (pedestrian and/or auto) and traffic pattern studies (usually available from state
highway departments) to confirm that the sites they are considering as potential locations are
capable of generating sufficient sales volume.

ENTREPRENEURIAL PROFILE: IHOP IHOP, the restaurant chain best known for its break-
fast offerings, recently opened an IHOP Express, a downsized version of its restaurants, in
Atlanta’s Hartsfield-Jackson International Airport. Located outside the security checkpoint in the
Main Terminal Food Court, the 3,000-square-foot restaurant is open 24 hours a day, seven days a
week and features both sit-down and “grab-and-go” meals. The IHOP Express benefits from the
high volume of traffic created by the 90 million passengers who pass through the world’s busiest
airport each year and the 60,000 employees who work there. Rental rates are much higher than
those in traditional locations, but average sales per square foot for restaurants and retailers at
Hartsfield-Jackson are an impressive $2,215, seven times the average at a typical mall (and three
times the average at top-performing malls).55 ■

Adequate Parking
If customers cannot find convenient and safe parking, they are not likely to shop in the area.
Many downtown areas lose customers because of inadequate parking. Although shopping

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 563

malls average five parking spaces per 1,000 square feet of shopping space, many central busi-
ness districts get by with 3.5 spaces (or fewer) per 1,000 square feet. In addition, some cen-
tral business districts require visitors to feed meters to pay for parking, another deterrent to
shoppers. Even when free parking is available, some potential customers may not feel safe on
the streets, especially after dark. Some large city downtown business districts become virtual
ghost towns at the end of the business day. A location where traffic vanishes after 6 p.m. may
not be as valuable as mall or shopping center locations that mark the beginning of the prime
sales time at 6 p.m.

ENTREPRENEURIAL PROFILE: Chris Wysocki and Robert Fulbright: Yarnhouse Chris
Wysocki and Robert Fulbright opened Yarnhouse, a specialty knitting, crocheting, and fiber
art shop in 2008 in a building on North Davidson Street located in the heart of Charlotte, North
Carolina’s arts district (known as “NoDa”). The arts district location provided significant exposure
and attracted a large number of the entrepreneurs’ target customers, but customers often com-
plained about the scarcity of available parking. They knew their sales were suffering because
many customers were not willing to walk several blocks to shop at their store. Wysocki and Ful-
bright decided to move their store, but they did not go far—just a half-mile down North Davidson
Street to a building surrounded by ample parking spaces and just three doors away from one of
Charlotte’s most popular restaurants, Amelie’s French Bakery. Their rent actually is 20 percent
lower, customer traffic at Yarnhouse already has increased, and Wysocki says the new location is
proving to be “monumental.”56 ■

Reputation

Like people, a site can have a bad reputation. Sites in which businesses have failed repeatedly
create negative impressions in customers’ minds; many people view the business as just another
one that soon will be gone. Sometimes previous failures are indicative of a fundamental problem
with the location itself; in other cases, the cause of the previous failure was the result not of a
poor location but of a poorly managed business. When entrepreneurs decide to conduct business
in a location that has housed previous failures, it is essential that they make many highly visible
changes to the site to exorcise the “ghosts” of the failed businesses that came before them and to
give customers the perception of a company making a “fresh start.”

ENTREPRENEURIAL PROFILE: James and Julie Petrakis: The Cask and Larder When
copreneurs James and Julie Petrakis, owners of The Ravenous Pig, a restaurant in Winter
Park, Florida, decided to open a second restaurant, The Cask and Larder, they selected a land-
mark building only a half a mile away from their existing restaurant. Although the building was
well known to locals and was in a high-traffic location, the Petrakises had some misgivings
about it because it had been home to five failed restaurants over the previous decade. How-
ever, the couple was able to negotiate a favorable lease and invested in a major renovation to
erase the memory of past failures from customers’ minds. Two years later, the Cask and Larder
is going strong with a diverse menu that includes meats cured in-house, locally sourced fresh
seafood, homemade preserves and jams, and craft beers brewed onsite by an experienced
brewmaster.57 ■

Visibility LO3
A final characteristic of a good location is visibility. Highly visible locations simply make it easy
for customers to find a business and make purchases. A site that lacks visibility puts a company Outline the location options
at a major disadvantage before it ever opens its doors for business. for retail and service
businesses: central business
Location Options for Retail and Service Businesses districts, neighborhoods,
shopping centers and
There are nine basic areas where retail and service business owners can locate: the central busi- malls, near competitors,
ness district, neighborhoods, shopping centers and malls, near competitors, shared spaces, inside shared spaces, inside large
large retail stores, nontraditional locations, at home, and on the road. According to Reis Inc., retail stores, nontraditional
the average cost to lease space in a shopping center is about $19 per square foot, and at malls, locations, at home, and on
lease rates average $39 per square foot. In central business locations, the average cost is between the road.
$22 and $45 per square foot (rental rates vary significantly, depending on the city).58 Of course,
cost is just one factor a business owner must consider when choosing a location.

564 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Central Business District

The central business district (CBD) is the traditional center of town—the downtown concentra-
tion of businesses established early in the development of most towns and cities. Entrepreneurs
derive several advantages from a downtown location. Because the business is centrally located,
it attracts customers from the entire trading area of the city. In addition, a small business usually
benefits from the customer traffic generated by the other stores in the district. Many cities have
undertaken revitalization efforts in their CBDs and have transformed these areas into thriving,
vigorous hubs of economic activity that are proving to be ideal locations for small businesses.
However, locating in some CBDs does have certain disadvantages. Many CBDs are characterized
by intense competition, high rental rates, traffic congestion, and inadequate parking facilities.

ENTREPRENEURIAL PROFILE: David and Margaret Smith: Blowin’ in the Wind
David Smith, a fourth-generation carpenter and artist, and his wife, Margaret, moved to
Las Vegas, New Mexico (not to be confused with its casino-laden namesake in Nevada) in 2006 to
realize David’s dream of opening a business. With a population of 14,000, Las Vegas, which was
settled in the 1830s while still a part of Mexico, is unique in that its central business district fea-
tures an uninterrupted avenue of well-preserved commercial buildings from the late nineteenth
and early twentieth centuries that reflect a variety of styles, including Victorian, Mission Revival,
Queen Anne, and others. More than 900 of the town’s buildings are listed on the National Regis-
ter of Historic Places, and its main street recently was named one of the top 10 Great American
Streets. The unique architecture and intriguing colors of the buildings that line historic Bridge
Street reflect Las Vegas’s frontier history as an important hub of commercial and transportation
activity on the famous Santa Fe Trail. The Smiths considered many different locations in the small
town before choosing a 7,500-square-foot building at the foot of historic Bridge Street, which
connects the “Old Town” with the “New Town,” as the site for their gallery and boutique, Blowin’
in the Wind, because of its large windows that allow them to feature their merchandise. The
copreneurs have filled the space with an eclectic collection of merchandise ranging from wind
sculptures and furniture (all made by David) to jewelry and clothing.59 ■

Beginning in the 1950s, many cities saw their older downtown business districts begin to
decay as residents moved to the suburbs and began shopping at newer, more conveniently located
malls. Today, however, many of these CBDs are experiencing rebirth as cities restore them to
their former splendor and shoppers return. Many customers find irresistible the charming at-
mosphere that traditional downtown districts offer with their rich mix of stores, their unique
architecture and streetscapes, and their historic character. Cities have begun to reverse the urban
decay of their downtown business districts through proactive revitalization programs designed
to attract visitors and residents alike to cultural events by locating major theaters and museums
in the downtown area. In addition, many cities are providing economic incentives to real estate
developers to build apartment and condominium complexes in the heart of the downtown area.
Vitality is returning as residents live and shop in the once nearly abandoned downtown areas. The
“ghost-town” image is being replaced by both younger and older residents who love the conve-
nience, culture, and excitement of life at the city center.

ENTREPRENEURIAL PROFILE: Nello Gioia: Ristorante Bergamo Forbes recently
named Greenville, South Carolina, one of America’s Best Downtowns, but 30 years ago, the
city’s central business district was a far different place. Nello Gioia, owner of Ristorante Bergamo,
an upscale Italian restaurant, took a chance on a downtown location on Main Street in Greenville
in 1985 when the city was just beginning an ambitious revitalization of its central business district.
Unlike the busy, vibrant, highly desirable location Greenville’s downtown is today, what Gioia saw
then was a seedy-looking street spattered with offices, a few longtime resident businesses, and
lots of shuttered and vacant stores. “The month before we opened, I got cold feet,” recalls Gioia.
“But I was up to my neck. I had to do it.” Gioia had considered locating in a nearby regional mall
and a strip mall but decided that those locations were inconsistent with the image he wanted to
create for his restaurant. “The one place that resembled where I came from [Bergamo, Italy] was
downtown,” says Gioia.60 ■

Today, Gioia is glad he took the chance on a downtown location; Greenville’s central busi-
ness district, with its eclectic mix of restaurants, small shops, and cultural events, has become a

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 565

well-known success story, and many other cities across the United States are using it as a model
for reclaiming their own downtowns.

Neighborhood Locations

Small businesses that locate near residential neighborhoods rely heavily on the local trading area
for business. Businesses that provide convenience as a major attraction for customers find that
locating on a street or road just outside major residential areas provides the needed traffic counts
essential for success. Gas stations and convenience stores thrive in these high-traffic areas. One
study of food stores found that the majority of the typical grocer’s customers live within a five-
mile radius. The primary advantages of a neighborhood location include relatively low operating
rent and close contact with customers.

ENTREPRENEURIAL PROFILE: Jodi Hamilton: Dream Dinners Jodi Hamilton, who
owns two Dream Dinners franchises, a chain that allows busy parents to assemble fast
meals for their families using fresh, pre-prepped ingredients, selected the locations for her two
Chicago-area outlets with her target customers in mind. Both of Hamilton’s stores are in neigh-
borhood locations, but each one is unique. Her Roscoe Village store, just north of Chicago, is
near hundreds of single-family homes characterized by the typical suburban lifestyle. Hamilton’s
Ukranian Village store is just four miles away but is in a more densely populated area that is
home to a younger population with smaller families and young professionals who are not inter-
ested in cooking for themselves. The Roscoe Village store is busiest in the mornings, while the
Ukranian Village store begins to buzz in the afternoons and is open on Sundays. Hamilton’s
choice of locations that are convenient for her target customers has played a significant role in
her stores’ success.61 ■

Shopping Centers and Malls

Until the early twentieth century, central business districts were the primary shopping venues
in the United States. As cars and transportation networks became more prevalent in the 1920s,
shopping centers began popping up outside cities’ central business districts. Then in October
1956, the nation’s first shopping mall, Southdale, opened in the Minneapolis, Minnesota, sub-
urb of Edina. Designed by Victor Gruen, the fully enclosed mall featured 72 shops anchored
by two competing department stores (a radical concept at the time), a garden courtyard with
a goldfish pond, an aviary, hanging plants, and artificial trees. With its multilevel layout and
parking garage, Southdale was a huge success and forever changed the way Americans would
shop.62 Today, shopping centers and malls are a mainstay of the American landscape. Approxi-
mately 113,000 shopping centers and 1,513 traditional enclosed malls operate in the United
States.63 Because many different types of stores operate under one roof, shopping centers give
meaning to the term “one-stop shopping.” In a typical month, nearly 187 million adults visit
malls or shopping centers, generating $2.4 trillion in annual sales, an amount that represents
more than half of all retail sales in the United States.64 There are nine types of shopping centers
(see Table 14.5):

● Strip shopping centers. Strip shopping centers are made up of attached rows of retail
stores or service outlets that provide local shoppers a narrow range of goods and services.
Although they tend to be the smallest of all shopping centers with an average size of
13,375 square feet of space, they make up the bulk of the centers in the United States,
with a total count of more than 66,600.65

● Neighborhood shopping centers. The typical neighborhood shopping center is relatively
small, containing from 3 to 12 stores and serving a population of up to 40,000 people
who live within a 10-minute drive with a focus on convenience. The anchor store in these
centers is usually a supermarket or a drugstore. Neighborhood shopping centers serve
primarily the daily shopping needs of customers in the surrounding area. More than
32,200 neighborhood shopping centers operate across the United States.66

● Community shopping centers. A community shopping center contains from 12 to
50 stores and serves a population ranging from 40,000 to 150,000 people. The leading
tenant often is a large department or variety store, a super-drugstore, or a supermarket.

566 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

TABLE 14.5 Types of Shopping Centers

Type of Square Footage Typical Anchor Anchor Primary
Shopping Ratio Trade
(Including (%)a Area
Center (Miles)b
Concept Anchors) Acreage Number Type

Enclosed Malls

Regional General 400,000–800,000 40–100 2 or more Full-line department 50–70 5–15
center and fashion >800,000 60–120 3 or more store; junior department 50–70 5–25
merchandise; store; mass merchant;
mall (typically discount department 1
enclosed) store; fashion apparel 1–3
3–6
Superregional Similar to regional Full-line department
center center but offers store; junior department 8–12
more variety store; mass merchant;
fashion apparel 5–10
25–75
Open-Air Centers 25–75

Strip Shopping Convenience 10,000–25,000 2–12 1 Drugstore 30–50
Center 30,000–150,000 3–15
100,000–350,000 10–40
Neighborhood Convenience 1 or more Supermarket 30–50
center

Community General 2 or more Discount department 40–60
center merchandise; 0–2 store; supermarket; 0–50
convenience 3 or more drug; home 75–90
Unspecified improvement; large N/A
Lifestyle Upscale national 150,000–500,000 10–40 specialty or discount
center chain specialty but can be larger apparel
stores, dining, and or smaller
entertainment in Not usually anchored in
an outdoor setting the traditional sense but
may include bookstore;
Power center Category- 250,000–600,000 25–80 large specialty retailers;
dominant anchors; multiplex cinema; small
few small business department store
tenants
Category killer; home
Theme/festival Leisure; tourist 80,000–250,000 5–20 improvement; discount;
center oriented; retail 50,000–400,000 10–50 department store;
and service warehouse club; off
Outlet center price
Manufacturers’
outlet stores Restaurants;
entertainment

N/A Manufacturers’ outlet N/A
stores

aThe share of a center’s total square footage that is occupied by its anchors.
bThe area from which 60% to 80% of the center’s sales originate.

Source: Table adapted from U.S. Shopping Center Definitions, April 2009. Copyright © 2009 by the International Council of Shopping Centers.
Reprinted with permission.

Community shopping centers sell more clothing and other soft goods than do neighbor-
hood shopping centers. Of the eight types of shopping centers, community shopping cen-
ters take on the greatest variety of shapes, designs, and tenants. Nearly 9,500 community
shopping centers operate across the United States.67

● Power centers. A power center combines the drawing strength of a large regional mall with
the convenience of a neighborhood shopping center. Anchored by several large specialty

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 567

retailers, such as warehouse clubs, discount department stores, or large specialty stores,
these centers target older, wealthier baby boomers who want selection and convenience.
In the United States, there are more than 2,000 power centers, where anchor stores usu-
ally account for 80 percent of power center space, compared with 50 percent in the typical
community shopping center. Just as in a shopping mall, small businesses can benefit from
the traffic generated by anchor stores, but they must choose their locations carefully so
that they are not overshadowed by their larger neighbors. William James recently opened
the Arms Room gun shop, which includes a shooting range, in a former Circuit City store
in a power center in Houston, Texas. James spent $5 million to purchase and renovate the
20,000-square-foot building, a bargain compared to what it would have cost to build.68

● Theme or festival centers. Festival shopping centers employ a unifying theme that individ-
ual stores display in their decor and sometimes in the merchandise they sell. Entertainment
is a common theme for these shopping centers, which often target tourists. Many festival
shopping centers are located in urban areas and are housed in older, sometimes historic
buildings that have been renovated to serve as shopping centers.

● Outlet centers. As their name suggests, outlet centers feature manufacturers’ and retailers’
outlet stores selling name-brand goods at a discount. Unlike most other types of shopping
centers, outlet centers typically have no anchor stores; the discounted merchandise they
offer draws sufficient traffic. Most outlet centers are open air and are laid out in strips or
in clusters, creating small “villages” of shops. Nearly 350 outlet centers operate in the
United States.69

● Lifestyle centers. Typically located near affluent residential neighborhoods where their
target customers live, lifestyle centers are designed to look less like shopping centers and
malls and more like the busy streets in the central business districts that existed in towns
and cities in their heyday. Occupied by many upscale national chain restaurants such as
P. F. Chang and specialty stores such as Talbots, Coach, and many others, the 392 lifestyle
centers in the United States combine shopping convenience and entertainment ranging
from movie theaters and open-air concerts to art galleries and people watching. The typi-
cal lifestyle center generates between $400 and $500 in sales per square foot compared to
$370 in sales per square foot in traditional malls. The first lifestyle center, The Shops of
Saddle Creek, opened in Germantown, Tennessee, in 1987.70

● Regional shopping malls. The regional shopping mall serves a large trading area, usually
from 5 to 15 miles or more in all directions. These enclosed malls contain from 50 to
100 stores and serve a population of 150,000 or more living within a 20- to 40-minute
drive. The anchor is typically one or more major department stores with smaller specialty
stores occupying the spaces between the anchors. In the United States, 828 regional malls
currently are in operation.71 Apparel and accessories are the most popular items sold in
regional shopping malls.

● Superregional shopping malls. A superregional mall is similar to a regional mall but is
bigger, containing more anchor stores and a greater variety of shops selling deeper lines
of merchandise. Its trade area stretches up to 25 or more miles out. Currently, 685 super-
regional malls operate in the United States.72 Canada’s West Edmonton Mall, the largest
mall in North America, with more than 800 stores and 100 restaurants, is one of the most
famous superregional malls in the world. In addition to its abundance of retail shops, the
mall, which draws an average of nearly 31 million visitors a year, contains an ice skating
rink, a water park, an amusement park, an aquarium, a bungee tower, miniature golf
courses, and a 21-screen movie complex.

Major department or mass merchandising stores serve as anchors and attract a significant
volume of customer traffic to malls and shopping centers, allowing small businesses with their
unique, sometimes quirky product offerings, boutique atmospheres, and marketing approaches
to thrive in their shadows. In fact, as mall vacancy rates have climbed, mall owners are eager to
rent space to small businesses, tenants that in the past many of them had shunned in favor of large
brand-name retailers.

568 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

ENTREPRENEURIAL PROFILE: John Myers: Party Palace John Myers had a successful
but highly seasonal business renting inflatable bounce houses and other equipment for
backyard parties. His goal was to secure an indoor location, and in 2010, he rented a space that
had once housed an Old Navy store in Aviation Mall in Queensbury, New York. Myers converted
the 18,000-square-foot space into the ideal home for the Party Palace, which hosts children’s par-
ties and offers a full line of inflatables, miniature golf, playhouses, kids’ rides, and a stuffed ani-
mal center.73 ■

When evaluating a mall or shopping center location, an entrepreneur should consider the
following questions:

● Is there a good fit with other products and brands sold in the mall or center?

● Who are the other tenants? Which stores are the anchors that will bring people into the
mall or center?

● Demographically, is the center a good fit for your products or services? What are its
customer demographics?

● How much foot traffic does the mall or center generate? How much traffic passes the
specific site you are considering?

● What is the mall’s average sales per square foot (a common metric for measuring a mall’s
attractiveness)? The average for all malls is $370 per square foot, but one-third of malls
generate less than $300 per square foot in sales. Only 27 percent of malls generate sales
per square foot of $535 or more.74

● How much vehicle traffic does the mall or center generate? Check its proximity to major
population centers, the volume of tourists it draws, and the volume of drive-by freeway
traffic. A mall or center that scores well on all three is more likely to be a winner.

● What is the mall’s vacancy rate? What is the turnover rate of its tenants?

● How much is the rent, and how is it calculated? Most mall tenants pay a base amount of
rent plus a small percentage of their sales above a specified level.

A mall location is no guarantee of business success, however. Malls have been under pressure
lately, especially from online retailers and fast-growing discount stores, and mall vacancy rates
have been slow to recover from the Great Recession. Many weaker malls (known as “grayfields”)
have closed or have been redeveloped. The basic problem is an oversupply of mall space; there
is 23.5 square feet of mall retail space for every person in the United States!75 The last new en-
closed shopping mall opened in 2011. Another problem is that many malls are showing their age,
requiring mall owners to remodel them, adding more restaurants, upscale movie theaters, and
supermarkets—experiences that shoppers cannot get online.76 In addition, the demographic
makeup of an area’s shoppers often changes over time, creating a new socioeconomic customer
base that may not be compatible with a small company’s target customer profile. As a result, many
malls have undergone extensive renovations to transform themselves into “entertailing” destina-
tions, adding entertainment features to their existing retail space in an attempt to generate more
traffic. For instance, in addition to its 520 retail shops and 60 restaurants, Minneapolis’s Mall of
America, the second-largest mall in the United States (located only a few miles from Southdale,
the nation’s first mall), includes a seven-acre Nickelodeon Universe amusement park at its center,
the Sea Life Minnesota Aquarium, a Star Trek exhibition, a CSI Experience based on the popular
television show, and a 14-screen movie complex in its 4.2 million square feet of space.77

Near Competitors
One of the most important factors in choosing a retail or service location is the compatibility of
nearby stores with the retail or service customer. For example, stores selling cars, antiques, and
other shopping goods find it advantageous to locate near competitors to facilitate comparison
shopping. Locating near competitors can be a key factor for success in those businesses selling
goods that customers shop for and compare on the basis of price, quality, color, and other factors.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 569

Although some business owners avoid locations near direct competitors, others see locating
near rivals as an advantage. For instance, restaurateurs know that successful restaurants attract
other restaurants, which, in turn, attract more customers. Many cities have at least one “restaurant
row,” where restaurants cluster together; each restaurant feeds customers to the others.

Locating near competitors has its limits, however. Clustering too many businesses of a single
type into a small area ultimately erodes their sales once the market reaches the saturation point.
When an area becomes saturated with competitors, the shops cannibalize sales from one another,
making it difficult for any of them to be successful.

Shared Spaces coworking
a situation in which two or
Because outstanding locations can be expensive or hard to find, some small companies are shar- more small companies share
ing spaces with other small businesses, a trend known as coworking. Entrepreneurs can reduce the same space.
their rent and maintenance costs (and, therefore, their financial risk) by operating in a shared
space. Entrepreneurs often find that sharing space with other businesses sparks creativity because
their employees have the opportunity to interact with people outside of their industries. Others
who share space with businesses that sell complementary products often see their sales increase.
Shoe designer Rebecca Anderson, founder of Chaos & Harmony, and fashion designer Teresa
Hodges, founder of BLAK, operated their businesses from their respective homes before team-
ing up to share a single workspace in Mt. Maunganui, New Zealand, that included enough space
for them to open a retail store, BLAKCHAOS. By sharing workspace, Anderson and Hodges not
only lower their operating expenses but also draw inspiration from each other’s designs, enabling
them to offer customers a complete, put-together look.78

Inside Large Retail Stores

Rather than compete against giant retailers, some small business owners are cooperating with
them, locating their businesses inside the larger company’s stores. These small companies offer
products that the large retailers do not and benefit from the large volume of customer traffic the
large stores attract. The world’s largest retailer, Wal-Mart, is a host to several small businesses, in-
cluding franchisees of national chains Subway, McDonald’s, Seattle’s Best Coffee, and others.79

Nontraditional Locations

Rather than select a location and try to draw customers to it, many small businesses are dis-
covering where their customers already are and setting up locations there. These nontraditional
locations include airports, museums, office buildings, churches, casinos, college and university
campuses, athletic arenas, and others that offer high concentrations of potential customers. Mark
Talarico, a successful Domino’s Pizza franchisee, recently set up interactive pizza-ordering
kiosks (not vending machines) in high-traffic areas near residence halls on the campuses of the
University of California Santa Barbara and Santa Barbara City College. Students who order
pizzas through the kiosks receive a $1 discount.80 In many cases, nontraditional locations are
smaller and less expensive to build but generate much more in sales per square foot than tradi-
tional, full-size stores. Daniel Mancini, who left a successful career in the apparel business to
open a restaurant using his Italian grandmother’s meatball recipes, operates Meatball Obsession
in NewYork City’s Union Square neighborhood from a tiny 212-square-foot location that is barely
bigger than a counter. Given his space limitations, Mancini keeps his menu simple, offering just
four types of meatballs with a dozen sauces.81

Dunkin’ Donuts has more than 500 nontraditional locations out of 6,800 outlets in the United
States, including theme parks, military bases, universities, travel centers on interstate highways,
and others. About 8,000 of Subway’s 35,000 restaurants worldwide are in nontraditional loca-
tions, including a high school in Detroit in which students operate the outlet and a church in
Buffalo, New York; these locations account for 20 percent of the chain’s total sales. Subway also
has an outlet on the MS Stolzenfels riverboat that cruises the Rhine River in Germany.82

Home-Based Businesses

For millions of entrepreneurs, home is where the business is, and their numbers are swelling.
One recent study from the Small Business Administration reports that 52 percent of all small

570 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

companies are home based.83 Although a home-based retail business usually is not a good idea,
locating a service business at home is quite common. Many service companies do not have cus-
tomers come to their places of business, so an expensive office location is unnecessary. For
instance, customers typically contact plumbers or exterminators by telephone, and the work is
performed in customers’ homes.

Entrepreneurs locating their businesses at home reap several benefits. Perhaps the biggest
benefit is the low cost of setting up the business. Most often, home-based entrepreneurs set up
shop in a spare bedroom or basement, avoiding the cost of renting, leasing, or buying a building.
With a few basic pieces of office equipment—a computer or tablet, printer, copier, and smart
phone—a lone entrepreneur can perform just like a major corporation.

ENTREPRENEURIAL PROFILE: Jen Joas: UrbanHalo Jen Joas describes herself as an
accidental entrepreneur, saying that she never intended to launch a business. Instead, the
active stay-at-home mom merely wanted a headband stylish enough to wear out but that would
stay in place during a workout without giving her a headache. After searching for the perfect
headband with no success, Joas sat down at her sewing machine and made one. Soon other peo-
ple noticed her stylish headwear and asked her to make headbands for them. Joas realized that
she had discovered a business opportunity, started a home-based business named UrbanHalo, and
began selling her headbands through local boutiques and salons. Joas, who continues to operate
her business from home, relies on her company’s Web site and Facebook page and attending
marathon expositions to market UrbanHalo; she recently expanded her company’s product line to
include headbands for men and studio scarves.84 ■

Choosing a home location has certain disadvantages, however. Interruptions are more
frequent, the refrigerator is all too handy, work is always just a few steps away, and isolation can
be a problem. Another difficulty facing some home-based entrepreneurs involves zoning laws.
As their businesses grow and become more successful, entrepreneurs’ neighbors often begin
to complain about the increased traffic, noise, and disruptions from deliveries, employees, and
customers who drive through their residential neighborhoods to conduct business. Many com-
munities now face the challenge of passing updated zoning laws that reflect the reality of today’s
home-based businesses while protecting the interests of residential home owners.

On the Road

Some entrepreneurs are finding that the best location is not a permanent location but a mobile
business that takes products and services to its customers. Veterinarians, dentists, restaurants,
and others are outfitting mobile units and taking their businesses on the road. Although mobile
entrepreneurs avoid the costs of building or renovating permanent locations, they must incur the
expense of setting up their mobile businesses. They also face other obstacles, such as finding
suitable parking spaces in high-traffic areas, complaints from owners of nearby businesses, and
securing the necessary permits to operate. Some communities welcome mobile businesses, while
others restrict them or even forbid them to operate.

ENTREPRENEURIAL PROFILE: Neil Parish: The Kibitz Room and Reuben on Rye Neil
Parish, owner of the Kibitz Room, a classic Jewish delicatessen in Cherry Hill, New Jersey,
took his operation on the road after he purchased a used truck and spent $50,000 to outfit it,
which he says is a bargain because setting up a food truck usually cost $100,000 or more. Parish
often takes the truck, which he dubbed Reuben on Rye, into neighborhoods from which he does
not typically draw customers to his restaurant. A favorite spot is in nearby Camden, near three
courthouses, a hospital, and a college campus that are served by very few restaurants. Parish uses
social media and his Web site to promote the truck and its daily location. Not only does Parish’s
food truck increase his company’s sales and profits, but it also serves as a rolling advertisement for
the Kibitz Room.85 ■

LO4 The Location Decision for Manufacturers

Explain the site selection The criteria for the location decision for manufacturers are very different from those of retailers
process for manufacturers. and service businesses; however, the decision can have just as much impact on the company’s
success. In some cases, a manufacturer has special needs that influence the choice of a location.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 571

For instance, when one manufacturer of photographic plates and digital cameras was searching
for a location for a new plant, it had to limit its search to those sites with a large supply of avail-
able fresh water, a necessary part of its process. In other cases, the location decision is controlled
by zoning ordinances. If a manufacturer’s process creates offensive odors or excessive noise, it
may be even further restricted in its choices.

The type of transportation network required dictates location of a factory in some cases.
Some manufacturers may need to locate on a railroad siding, whereas others may need only reli-
able trucking service. If raw materials are purchased by the carload for economies of scale, the
location must be convenient to a railroad siding. Bulk materials are sometimes shipped by barge
and consequently require a facility convenient to a navigable river or lake. The added cost of
using multiple shipping methods (e.g., rail to truck or barge to truck) can significantly increase
shipping costs and make a location unfeasible for a manufacturer.

As fuel costs escalate, the cost of shipping finished products to customers also influences
the location decision for many manufacturers, requiring them to open factories or warehouses
in locations that are close to their primary markets to reduce transportation costs. Thermo-Pur
Technologies, a small company that has developed a new stainless-steel heat exchanger core
that makes automotive radiators lighter, more efficient at transferring heat, and less expensive to
manufacture, recently selected the Clemson University International Center for Automotive Re-
search in Greenville, South Carolina, as the location for its headquarters and first North American
factory. Company managers considered other locations but selected Greenville because of its
growing reputation as a knowledge center for automotive products, excellent transportation net-
work, proximity to potential customers (including BMW, Mercedes Benz, Kia, and others), cost
of operation, and overall quality of life.86

Foreign Trade Zones foreign trade zone
a specially designated area
Foreign trade zones can be an attractive location for small manufacturers that engage in global in or near a U.S. customs
trade and are looking to reduce or eliminate the tariffs, duties, and excise taxes they pay on port of entry that allows
the materials and the parts they import and the goods they export. A foreign trade zone (see resident companies to
Figure 14.3) is a specially designated area in or near a U.S. customs port of entry that allows resi- import materials and
dent companies to import materials and components from foreign countries; assemble, process, components from foreign
manufacture, or package them; and then ship the finished product back out while either reducing countries; assemble, pro-
or eliminating completely tariffs and duties. As far as tariffs and duties are concerned, a company cess, manufacture, or pack-
located in a foreign trade zone is treated as if it is located outside the United States. For instance, age them; and then ship
a maker of speakers can import components from around the world and assemble them at its the finished product while
plant located in a foreign trade zone. The company pays no duties on the components it imports either reducing or eliminat-
or on the speakers it exports to other foreign markets. The only duties the manufacturer pays are ing tariffs and duties.
on the speakers it sells in the United States; the duty the company pays is either on the finished
speakers or the imported component parts, whichever is less. There are 258 foreign trade zones
and 498 subzones, which are special foreign trade zones that are established for limited purposes,
operating in the United States. More than $730 billion worth of goods are shipped into FTZs in
the United States annually.87

Small Company FIGURE 14.3

Duty No duty paid U.S. sales How a Foreign
paid Duty paid Trade Zone Works
Exports
Without FTZ Store Duty paid U.S. sales
No duty paid Exports
Imported Parts Assemble
and Materials
Package
With FTZ
Manufacture

No Process
duty
paid Mix

572 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

business incubator Business Incubators
an organization that
combines low-cost, flexible For many start-up companies, a business incubator may make the ideal initial location. A
rental space with a multi- business incubator is an organization that combines low-cost, flexible rental space with a mul-
tude of support services for titude of support services for its small business residents. The primary reason for establishing an
its small business residents. incubator is to enhance economic development by growing new businesses that create jobs and
diversify the local economy. An incubator’s goal is to nurture young companies during the vola-
tile start-up period and to help them survive until they are strong enough to go out on their own.
Common sponsors of incubators include colleges or universities (32 percent), economic develop-
ment organizations (25 percent), government entities (16 percent), and others. Most incubators
(54 percent) are “mixed use,” hosting a variety of start-up companies, followed by incubators
that focus on technology companies (37 percent).88 Some incubators operate virtually with no
physical presence much like a social network, providing entrepreneurs with mentoring and the
opportunity to collaborate with other entrepreneurs.

In addition to discounted lease rates, incubators also offer tenants valuable resources, such
as telephone systems, computers and software, high-speed Internet service, meeting and confer-
ence rooms, and sometimes management consulting services and financing contacts. Not only
do these services save young companies money (reducing a small company’s start-up costs in
some cases by 40 to 50 percent), but they also save them valuable time. Entrepreneurs can focus
on getting their products and services to market faster than competitors rather than searching for
the resources they need to build their companies. The typical incubator has entry requirements
that prospective residents must meet. Incubators also have criteria that establish the conditions a
business must maintain to remain in the facility as well as the expectations for “graduation” into
the business community (usually within three to five years).

More than 1,250 incubators operate across the United States (and 7,000 incubators world-
wide), up from just 12 in 1980; they house an estimated 49,000 start-up companies.89 Perhaps the
greatest advantage of choosing to locate a start-up company in an incubator is a greater chance
for success; according to the National Business Incubation Association, graduates from incuba-
tors have a success rate of 87 percent, and 84 percent of the companies that graduate stay in the
local community.90

ENTREPRENEURIAL PROFILE: Jonni Lynch: Pie Bird Sweet and Savory Jonni Lynch, a
mother with a full-time job at a law firm in Covington, Kentucky, started a business making
pies from her home simply because she loved baking pies. Less than a year after starting Pie Bird
Sweet and Savory, Lynch moved into the Northern Kentucky Kitchen Incubator where she shares
space with other food-related small businesses, including companies that make marshmallows,
granola, and vegan zucchini bread. Not only do the incubator tenants have access to professional
kitchen equipment, but they also benefit from lower overhead costs and combine their purchases
whenever possible to negotiate better discounts from vendors.91 ■

LO5 Layout and Design Considerations

Describe the criteria used to Once an entrepreneur chooses the best location for his or her business, the next issue to address
analyze the layout and design is designing the proper layout for the space to maximize sales (retail) or productivity (manufac-
considerations of a building, turing or service). Layout is the logical arrangement of the physical facilities in a business that
including the Americans with contributes to efficient operations, increased productivity, and higher sales. Planning for the most
Disabilities Act. effective and efficient layout in a business environment can produce dramatic improvements in
a company’s operating effectiveness, efficiency, and overall performance. An attractive, effec-
layout tive layout can help a company’s recruiting efforts, reduce absenteeism, and improve employee
the logical arrangement of productivity and satisfaction. The comprehensive U.S. Workplace Survey by global design firm
the physical facilities in a Gensler reports that employees believe that the quality and the quantity of their work would
business that contributes increase by an average of 25 percent with better workplace design.92 The changing nature of
to efficient operations, in- work demands that work space design also changes. Although many jobs require the ability to
creased productivity, focus on “heads-down” individual tasks, collaboration with coworkers is becoming a more sig-
and higher sales. nificant component of work. An effective work space must be flexible enough to accommodate
and encourage both types of work. Increasingly, work is becoming more complex, team based,

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 573

technology dependent, and mobile; work spaces must adapt to accommodate these character-
istics. The study by Gensler concludes that top-performing companies have work spaces that
are more effective than those of average companies, particularly for collaboration. Gensler also
reports that employees at top-performing companies spend 23 percent more time collaborating
with their coworkers than do employees at average companies.93

The design of a company’s work space should reflect its character and culture, which is es-
pecially important for start-ups that are trying to recruit employees or attract investors. The “cube
farms,” rows of impersonal cubicles in expansive open spaces, dominated office designs for de-
cades but are disappearing in favor of smaller work spaces that are more informal and contain
workstations and furniture that employees can rearrange quickly and easily. Research shows that
open offices, with their distractions and lack of privacy, actually impede employees’ productivity,
reduce their creativity, and increase their stress levels.94 Modern, flexible work spaces encourage
collaboration among employees, look less like a traditional office and more like a comfortable
living room, and can be rearranged easily to accommodate different tasks, technology, and types
of work.

ENTREPRENEURIAL PROFILE: Mark Zuckerberg: Facebook Facebook recently moved
into its new headquarters on a 57-acre tract in Menlo Park, California, whose design en-
courages creativity, productivity, interaction, and collaboration among its more than 4,000 work-
ers. The goal is to create a headquarters that more closely resembles a college campus than a
corporate office. Designers took out interior walls, cubicles, and private offices in the existing
building to create an open space, covered the walls with whiteboard paint, and sprinkled com-
fortable sofas and hundreds of small breakout rooms throughout the space where workers can
conduct informal meetings and brainstorming sessions. In a tribute to Facebook’s “hacker cul-
ture,” the design features exposed beams and ductwork and plywood-covered corridors to re-
mind employees that their work is never done. Free-style artwork throughout the space signals
the value of creativity and self-expression. The renovated building features a glass roof that pro-
vides plenty of natural light and a central courtyard with cafés, dry cleaners, a fitness center, a
medical clinic, and other services to maximize employee convenience—even a giant, outdoor
screen on which employees can watch movies after hours. Facebook recently announced the ad-
dition of a 494-unit housing community, Anton Menlo, that is within walking distance of its head-
quarters. Like company headquarters, the community’s layout encourages people to interact and
share ideas.95 ■

When creating a layout, managers must consider its impact on the space itself (comfort,
flexibility, size, and ergonomics), the people who occupy it (type of work, special requirements,
need for interaction, and tasks performed), and the technology they use (communication, Internet
access, and equipment).96 The following factors have a significant impact on a space’s layout and
design.

Scot Richie/Cartoon Stock

574 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Size and Adaptability

A building must offer adequate space and be adaptable enough to accommodate a business’s daily
operations. If it is too small at the outset of operations, efficiency will suffer. A space must have
enough room for customers’ movement, inventory, displays, storage, work areas, offices, and re-
strooms. Haphazard layouts undermine employee productivity and create organizational chaos.
Businesses that launch in locations that are too small at the outset must make premature and costly
moves to larger spaces, interfering with their ability to maintain a loyal customer base. Although
entrepreneurs want spaces capable of accommodating their companies’ growth, they should avoid
spaces that are too big because they waste valuable resources. Many businesses are reducing the
space they allocate to office workers because technology allows some people to work from almost
anywhere rather than from a traditional office. In the 1970s, the average amount of office space
per worker was 600 square feet; today, it is 200 square feet, and experts predict that by 2021, the
typical employee will work in just 150 square feet of space.97 Companies are moving away from
private offices and even cubicles to unassigned works spaces, such as communal tables or desks
that workers share and can rearrange easily to suit the task at hand. Research shows that employ-
ees’ cubicles are unused more than 60 percent of the time and that private offices sit empty about
80 percent of the time.98 Some entrepreneurs have done away with the concept of “the office” entirely.

ENTREPRENEURIAL PROFILE: Jill Bluming: The Creative Type Although Jill Bluming’s
graphic design company, The Creative Type, is based in New York City, her eight employees
have no office space. Instead, her creative team, which is made up of copywriters, designers,
illustrators, and others, work together “virtually” from their homes or wherever they are. When
Bluming needs a conference room for a client meeting, she uses a Web-based service to rent one
by the hour. Bluming says The Creative Type is driven by flexibility rather than a particular struc-
ture, pointing out that her company’s low overhead costs give it a competitive advantage.99 ■

Construction and Appearance

Is the construction of the building sound? Having an expert look it over before buying and leasing
the property can pay big dividends. Beyond the soundness of construction, does the building have
attractive external and internal appearances? The physical appearance of the building provides
customers with their first impression of a business. Retailers and service providers, in particular,
must recognize the importance of creating the proper image for their stores and how their shops’
layouts and physical facilities influence this image. A store’s external appearance contributes
significantly to establishing its identity among its target customers. Does the building convey the
appropriate signals to potential customers about the type of company it houses? Physical facili-
ties send important messages to customers. Should the building project an upscale image or an
economical one? Is the atmosphere informal and relaxed or formal and businesslike?

Communicating the right signals through layout and physical facilities is an important step
in attracting a steady stream of customers. Retail consultant Paco Underhill advises merchants
to “seduce” passersby with their storefronts. “The seduction process should start a minimum of
10 paces away,” he says.100

A store’s window display and in-store displays can be powerful selling tools if used properly.
Often, a store’s displays are an afterthought, and many business owners neglect to change their
displays often enough. The following tips help entrepreneurs create window displays that sell:

● Keep displays simple. Simple, uncluttered, and creative arrangements of merchandise draw
the most attention and have the greatest impact on potential customers.

● Keep displays clean and current. Dusty, dingy displays or designs that are outdated send a
negative message to passersby.

● Change displays frequently. Customers do not want to see the same merchandise on
display every time they enter a store. Experts recommend changing displays at least quar-
terly, but stores selling trendy items should change their displays twice a month.

● Get expert help if necessary. Not every business owner has a knack for designing displays.
Their best bet is to hire a professional or to work with the design department at a local
college or university.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 575

Entrances

Entrances to a business should invite customers into a store. Wide entryways and attractive mer-
chandise displays that are set back from the doorway draw customers into a business. A store’s
entrance should catch passing customers’ attention and draw them inside. “That’s where you
want somebody to slam on the brakes and realize they’re going someplace new,” says retail con-
sultant Paco Underhill.101 Retailers with heavy traffic flows, such as supermarkets or drugstores,
often install automatic doors to ensure a smooth traffic flow into and out of their stores. Retailers
must remove any barriers that interfere with customers’ easy access to the storefront. Broken
sidewalks, sagging steps, mud puddles, and sticking or heavy doors create not only obstacles that
might discourage potential customers but also legal hazards for a business if they cause custom-
ers to be injured. The goal is to eliminate anything that creates what one expert calls “threshold
resistance.”102

The Americans with Disabilities Act Americans with
Approximately 12.3 percent of people in the United States are disabled.103 The Americans with Disabilities Act (ADA)
Disabilities Act (ADA), passed in 1990, requires practically all businesses, regardless of their a law that requires practi-
size, to make their facilities available to physically challenged customers and employees. Most cally all businesses to make
states have similar laws, many of them more stringent than the ADA, that apply to small compa- their facilities available to
nies as well. The rules of these state laws and the ADA’s Title III are designed to ensure that men- physically challenged cus-
tally and physically challenged customers have equal access to a firm’s goods or services. For tomers and employees.
instance, the act requires business owners to remove architectural and communication barriers
when “readily achievable” (accomplished without much difficulty or expense). The ADA allows
flexibility in how a business achieves this equal access, however. For example, a restaurant could
either provide menus in Braille or offer to have a staff member read the menu to blind customers.
A small dry cleaner might not be able to add a wheelchair ramp to its storefront without incurring
significant expense, but the owner could comply with the ADA by offering curbside pickup and
delivery services at no extra charge for disabled customers.

The Department of Justice revised the ADA in 2010, and all newly constructed or renovated
buildings that are open to the public and were occupied after March 15, 2012, must comply with the
2010 requirements. For example, in retail stores, checkout aisles must be wide enough—at least
36 inches—to accommodate wheelchairs. Restaurants must have at least 5 percent of their tables
accessible to wheelchair-bound patrons. Miniature golf courses must make at least 50 percent
of the holes on the course accessible to disabled customers.

Complying with the ADA does not necessarily require businesses to spend large amounts
of money. The Department of Justice estimates that more than 20 percent of the cases customers
have filed under Title III involved changes the business owners could have made at no cost, and
another 60 percent would have cost less than $1,000.104 In addition, companies with $1 million
or less in annual sales or with 30 or fewer full-time employees that invest in making their loca-
tions more accessible qualify for a tax credit. The credit is 50 percent of their expenses between
$250 and $10,250. Businesses that remove physical, structural, and transportation barriers for
disabled employees and customers also qualify for a tax deduction of up to $15,000.

Signs Echo/Getty Images

One of the lowest-cost and most effective methods of communicating with customers is a busi-
ness sign. Signs serve as guideposts for a business, telling potential customers what it does,
where it is, and what it is selling. Ideally, a sign conveys a positive image of the company’s
brand. In a highly mobile society, a well-designed, well-placed sign can be a powerful tool for
reaching potential customers. The Viva McDonald’s restaurant on Las Vegas Boulevard (or
“the Strip”) includes an oversized sign and four jumbo display screens—all with video play-
back ability—mounted on the front of the store. Designers recognized that a restaurant located
in a city known for gaudy neon light displays required a sign that would stand out to attract
customers.105

A sign should be large enough for passersby to read from a distance, taking into consider-
ation the location and speed of surrounding traffic arteries. To be most effective, the message
should be short, simple, and clear. Including the company’s Web site URL on the sign promotes

576 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

ergonomics its e-commerce business. A sign should be legible both in daylight and at night; proper illumina-
the science of adapting tion is a must. Contrasting colors and simple typefaces are best. The most common problems with
work and the work envi- business signs are that they are illegible, poorly designed (including unattractive color schemes
ronment to complement and type that is hard to read), improperly located, and/or poorly maintained.
employees’ strengths and
to suit customers’ needs. Before investing in a sign, an entrepreneur should investigate the local community’s sign
ordinance. In some cities and towns, local regulations impose restrictions on the size, location,
height, and construction materials used in business signs.

Building Interiors

Designing a functional, efficient interior layout demands research, planning, and attention to
detail. Retailers in particular have known for a long time that their stores’ layouts influence their
customers’ buying behavior. Retailers such as Cabela’s, Barnes & Noble, and Starbucks use
layouts that encourage customers to linger and spend time (and money). Others, such as Lowe’s,
Aldi, and Wal-Mart, reinforce their discount images with layouts that communicate a warehouse
environment, often complete with pallets, to shoppers. Luxury retailers, such as Tiffany and
Company, Coach, and Nordstrom, create opulent layouts in which their upscale customers feel
comfortable.

Building interiors send important signals to shoppers about a business’s image, and cleanli-
ness and order are essential. In restaurants, for example, dining areas or bathrooms that are dirty
send customers scurrying. Studies consistently show that the most common reason that custom-
ers refuse to return to a restaurant has nothing to do with food or service; it is dirty bathrooms!106
(“If the bathrooms are this bad, the kitchen must be worse.”) Because entrepreneurs are in their
buildings every day and are focused on the “big picture,” overlooking details in the physical
space can happen easily but can be deadly for sales. Is the carpet in need of cleaning or replace-
ment? Are displays and decorations dusty and disheveled? Would a coat of fresh paint brighten
the space? Does clutter detract from a good first impression?

Coordinating an effective layout is not a haphazard process. Ergonomics, the science of
adapting work and the work environment to complement employees’ strengths and to suit cus-
tomers’ needs, is an integral part of a successful design. For example, chairs, desks, and table
heights that allow people to work comfortably can help employees perform their job faster and
more easily. Design experts claim that improved lighting, better acoustics, and proper climate
control benefit the company as well as employees. An ergonomically designed workplace can
improve workers’ productivity significantly and reduce days lost due to injuries and accidents.
A study for the Commission of Architecture and the Built Environment and the British Council
for Offices reports that simple features, such as proper lighting, reduce absenteeism by 15 percent
and increase productivity between 2.8 and 20 percent.107

Unfortunately, many businesses fail to incorporate ergonomic design principles into their
layouts, and the result is costly worker’s compensation claims, absences from work, and lost pro-
ductivity. The good news for employers, however, is that preventing injuries, accidents, and lost
days does not require spending thousands of dollars on ergonomically correct solutions. Most of
the solutions actually are quite simple and inexpensive, ranging from installing equipment that
eliminates workers’ repetitive motions to introducing breaks during which workers engage in
exercises designed by occupational therapists to combat injuries.

Drive-Through Windows

For many businesses, a drive-through window adds another dimension to the concept of customer
convenience and is a relatively inexpensive way to increase sales. In the quick-service restaurant
business, drive-through windows are an essential design component, accounting for 70 percent
of sales, an increase from 60 percent in 2002.108 Although drive-through windows are staples at
quick-service restaurants, other businesses, including fast-casual restaurants, drugstores, con-
venience stores, hardware stores, and even wedding chapels benefit from them. Managers at
fast-casual restaurant chain Panera Bread studied and tested drive-through windows for 10 years
before introducing them throughout the chain because they did not want to diminish the dining
experience for drive-through customers or in-store customers, who might be distracted by the
noise of a drive-through window. Panera’s strategy includes drive-throughs that are isolated from
the dining room, sufficient staff dedicated solely to serving drive-through customers, technology

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 577

to support fast, accurate orders, and special packaging designed to ensure the integrity of custom-
ers’ food. Panera says sales at outlets with drive-through windows have experienced double-digit
sales, and all new outlets include drive-through windows.109

Sight, Sound, Scent, and Lighting

Retailers can increase sales by sending important subconscious signals to customers using what
design experts call “symbolics.” For instance, when shoppers enter a Whole Foods supermarket,
the first items they see are displays of fresh flowers. Not only are the flowers’ colors and the
smells pleasing, but they also send a clear message to customers: “You are embarking on an
adventure in freshness in our store—flowers, produce, meats, seafood, everything.”110 Layouts
that engage all of customers’ senses also increase sales. Retail behavioral expert Paco Underhill,
founder of Envirosell, a market research company, says most of customers’ unplanned purchases
come after they touch, taste, smell, or hear something in a store. For example, stores that sell
fresh food see sales increase if they offer free samples to customers. One study reports that of-
fering shoppers free samples increases not only sales of the item offered but also sales of other
products.111 Research also shows that customers are willing to pay more for products they can
see, touch, taste, or try.112 “If somebody doesn’t try ‘em, they’re not going to buy ‘em,” quips
Underhill.113 Sight, sound, scent, and lighting are particularly important aspects of retail layout.

SIGHT A business can use colors and visual cues in its interior designs to support its brand
and image in subtle yet effective ways. At the Vermont Country Deli in Brattleboro, Vermont,
wooden bookshelves and odd tables filled with colorful displays of jams, jellies, and desserts
greet customers as they enter the store. The mismatched tables and shelves give the store an
authentic, down-home look, and signs such as “Life is short. Eat cookies.” entice customers
to make purchases. At Whole Foods, prices for fresh fruits and vegetables appear to be hand
scrawled on fragments of black slate, a tradition in outdoor markets in Europe—as if a farmer
had pulled up that morning, unloaded the produce, and posted the price before heading back
to the farm. Some of the produce also is sprinkled with water droplets. When customers at the
restaurant Tallulah on the Thames in Newport, Rhode Island, are seated, waiters hand them a
rustic clipboard with a handwritten list of the daily “farm-to-table menu.”114 The subtle message
these symbolics send to customers is freshness.115

SOUND In an attempt to engage all of their customers’ senses, companies are realizing the impact
that sound has on shoppers and are incorporating it into their layouts. Research shows that a
business’s “soundscape” can have an impact on the length of time customers shop and the amount
of money they spend. Background music that appeals to a company’s target customers can be an
effective marketing tool, subtly communicating important messages about its brand to customers.
Playlists differ depending on the company’s target customers and the mood the business wants to
create. Quaker State & Lube, a chain of 45 casual dining restaurants that feature an automotive
theme, hired experts at Ambiance Radio to create playlists for its outlets for different parts of the
day (lunch, dinner, and late night). At peak times, Quaker State & Lube plays upbeat, fast-tempo
music to encourage faster dining and to speed up the number of table turns.116 To reinforce its
image with its target audience, 18- to 30-year-olds who appreciate its funky, often edgy styles,
retail clothing company Urban Outfitters uses playlists that feature
obscure, independent artists whose work is available on online
platforms such as SoundCloud and Spotify.117 Thomas Pink, an
upscale London-based retailer known for its branded shirts and
ties with stores in major cities in Europe, Asia, the United States,
and the Middle East, plays an eclectic list of songs that is designed
to be part of customers’ interaction with the brand. The company
worked with soundscape specialty company Mood Media to create
a customized playlist that is far-reaching, ranging from The Beatles
and David Bowie to The Jam and the Mystery Jets, but is decidedly
British. The company also launched a Web radio channel that
streams its in-store playlists.118 For most retail soundscapes, one
rule is clear: Slow is good. People’s biorhythms reflect the sounds
around them, and soothing classical music encourages shoppers to David Lyons/Alamy

578 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

relax and slow down, meaning that they will shop longer and spend more. Classical music also
makes shoppers feel more affluent and increases sales more than any other type of music.119

SCENT Research shows that scents can have a powerful effect in retail stores. The Sense of
Smell Institute reports that the average human being can recognize 10,000 different odors and
can recall scents with 65 percent accuracy after one year, a much higher recall rate than visual
stimuli produce.120 In one experiment, when Eric Spangenberg of Washington State University
diffused a subtle scent of vanilla into the women’s department of a store and rose maroc into the
men’s department, he discovered that sales nearly doubled. He also discovered that if he switched
the scents, sales in both departments fell well below their normal average.121 Vanilla connotes
warmth and comfort, and citrus scents tend to be energizing and invigorating.

Many companies—from casinos to convenience stores—are beginning to understand the
power of using scent as a sales tool. Bakeries use fans to push the smell of fresh-baked breads
and sweets into pedestrian traffic lanes, tempting them to sample some of their delectable good-
ies. Panera Bread, a chain of 1,800 restaurants in 45 states, recently switched bread-baking in its
stores from the night shift to the day shift so that customers could smell the enticing aroma of
freshly baked bread (and watch the bakers at work). Cinnabon, a chain of franchised restaurants
located mainly in shopping malls that specialize in fresh cinnamon buns, locates its ovens in the
front of its stores so that the delectable smell of baking cinnamon buns can draw in customers.122
Select Comfort, the company that markets the Sleep Number mattress in 400 stores across the
United States, worked with ScentAir, a company that designs scents for retailers, to infuse its
retail outlets with a blend of cashmere wool, amber, cardamom, cinnamon, and bergamot that
conveys a sense of “quiet repose.”123

LIGHTING Good lighting allows employees to work at maximum efficiency. Proper lighting
is measured by the amount of light required to do a job properly with the greatest lighting
efficiency. Efficiency is essential because lighting consumes 21 percent of the total energy
used in the typical commercial building.124 Traditional incandescent lighting, which Congress
banned on January 1, 2014, is least efficient. Only 10 percent of the energy it generates is light;
the remaining 90 percent is heat. Compact fluorescent lights (CFLs) generate far less heat, use
75 percent less energy, and last 10 times longer than traditional incandescent lights. Technology
advances are increasing the popularity of light-emitting-diode (LED) lighting. Although still
more expensive to purchase, LEDs use just 20 percent of the electricity of incandescent lights
and 50 percent of CFLs. They also last six times longer than CFLs and 25 times longer than
incandescent lights. LEDs generate the least amount of heat, reducing business’s cooling
costs.125 Joseph Banker, owner of Creative Dental Care, a boutique dental practice in Westfield,
New Jersey, invested $700 to switch his entire lighting system to LEDs. Because LEDs are
more efficient and burn much cooler than incandescent and CFL bulbs, Banker’s cooling bill
decreased, saving him $1,800 in the first year.126

Lighting provides a good return on investment given its overall impact on a business.
Few people seek out businesses that are dimly lit because they convey an image of untrust-
worthiness. Layouts that use natural light not only are less expensive to operate but also give
businesses an open and cheerful look and actually can boost sales. A series of studies by energy
research firm Heschong Mahone Group found that stores using natural light experience sales
that are 40 percent higher than those of similar stores using fluorescent lighting.127 In a retail
environment, proper lighting should highlight featured products and encourage customers to
stop and look at them.

Sustainability and Environmentally Friendly Design

Businesses are designing their buildings in more environmentally friendly ways not only be-
cause it is the right thing to do but also because it saves money. Companies are using recycled
materials; installing high-efficiency lighting, fixtures, and appliances; and using Leadership in
Energy and Environmental Design (LEED) principles in construction and renovation. LEED
principles cover every phase of construction and include concepts ranging from installing self-
contained, solar-powered energy sources and water-conserving plumbing fixtures to collecting
rainwater for use in landscape irrigation to using renewable and recycled construction materials.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 579

Starbucks, the popular chain of coffee shops, built its lat- Richard Ellis/Alamy
est roasting plant in Sandy Run, South Carolina, to LEED
standards and has built several LEED-certified outlets out of
old shipping containers that otherwise would have gone to a
landfill. Some of these outlets are micro drive-throughs. At
just 380 square feet, they are the smallest Starbucks stores in
existence, but they allow the company to access high-traffic
locations that otherwise would be out of reach and can be
operating in just one week. Other outlets are larger, made of
several shipping containers connected to or stacked on top of
one another. Each “recycled” outlet contains all of amenities
of a “regular” Starbucks store and is decorated to reflect the
local character of each location. The company plans to build
more “green” outlets in the future.128

Layout: Maximizing Revenues, LO6
Increasing Efficiency, or Reducing Costs
Explain the principles
The ideal layout for a building depends on the type of business it houses and on the entrepre- of effective layouts for
neur’s strategy for gaining a competitive edge. An effective layout can reinforce a brand and retailers, service businesses,
contribute to a company’s desired image. and manufacturers.

ENTREPRENEURIAL PROFILE: John Kunkel: Lime Fresh Mexican Grill John Kunkel,
founder of Lime Fresh Mexican Grill, a small chain of casual burrito restaurants that Ruby
Tuesday recently purchased, was repulsed by the hard plastic interiors of other quick-service
Mexican restaurants. He contends that the design sends a clear signal to customers: “Finish your
food quickly and make room for the next customer.” Instead, Kunkel wanted to create a comfort-
able, welcoming environment that supported his company’s image. He says he took cues from
Starbucks and tried to make a Lime Fresh Mexican Grill a social place where people can come to
hang out. A large tub filled with ice and bottled beverages sits on a countertop, reminding cus-
tomers of a friendly backyard cookout. Large windows that diffuse natural light, golden-toned
walls, warm hammered-copper and brick accents, and comfortable chairs invite customers to lin-
ger inside, and umbrella-covered sidewalk tables beckon hungry customers to sit and relax. Dining
room attendants called “fronters” greet customers and provide café-style service, delivering bev-
erage refills, chips, salsas, and desserts.129 ■

Retailers design their layouts with the goal of maximizing sales revenue and reinforcing the
brand; manufacturers see layout as an opportunity to increase efficiency and productivity and to
lower costs.

Layout for Retailers

Retail layout is the arrangement of merchandise and displays in a store. For retailers, layout is all
about understanding a company’s target customers and crafting every element of a store’s design
to appeal to those customers. Retail expert Paco Underhill says “a store’s interior architecture is
fundamental to the customers’ experience—the stage upon which a retail company functions.”130
A retail layout should pull customers into the store and make it easy for them to locate merchan-
dise; compare price, quality, and features; and ultimately make a purchase. This is another area in
which small stores may have an advantage over their larger rivals. Small stores allow customers
to find the products that they want to purchase quickly and easily. (One study reports that the
average shopper in a cavernous Wal-Mart Supercenter spends 21 minutes in the store but finds
only 7 out of 10 items on his or her shopping list!131)

In addition, a floor plan should take customers past displays of other items they may buy
on impulse. Customers make a significant percentage of their buying decisions once they enter a
store, meaning that the right layout can boost sales significantly. One of the most comprehensive
studies of impulse purchases found that one-third of shoppers made impulse purchases. The me-
dian impulse purchase amount was $30 but varied by product category, ranging from $6 for food

580 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

items to $60 for jewelry and sporting goods. Although the urge to take advantage of discounts
was the most common driver of unplanned buying decisions, the location and attractiveness of
the display also were important factors.132

Retailers have always recognized that some locations within a store are superior to others.
Customer traffic patterns give the owner a clue to the best location for the highest gross margin
items. Generally, prime selling space should be reserved for products that carry the highest mark-
ups. If customers come into the store for specific products and have a tendency to walk directly
to those items, placing complementary products in their path boosts sales. Diane Holtz, CEO of
Pet Supermarket, a retailer of pet supplies founded in 1962 with 124 locations in the Southeast,
redesigned the layout of the company’s stores, placing essential items such as pet food and kitty
litter at the rear of the store to draw customers past attractive displays of pet toys, treats, and
supplies. The new design features a clean, colorful look with space to feature new products each
week and to encourage interaction with pets and their owners. One year after the redesign, the
company’s sales had increased almost 16 percent.133

Hands On . . . How To

Create the Ideal Layout

As the world shifts to a knowledge-based economy, more work- At Big Spaceship, a creative agency in Brooklyn, New York,
ers are engaging in office work, in which measuring productivity the design includes open spaces to which employees are natu-
sometimes proves difficult. Research shows that a well-designed rally drawn and that encourage collaboration. Walls are covered
office is one of the simplest and most cost-effective ways to in whiteboard paint and markers are everywhere so that employ-
increase workers’ productivity and satisfaction. For instance, if a ees can sketch their ideas while working together. It also includes
company builds and operates an office building, the cost of initial private and semi-private rooms with couches and beanbag chairs
construction accounts for just 2 percent of the building’s total cost to which people can escape when they need a quiet space in
over 30 years. Operating expenses account for 6 percent. The re- which to work. Cross-disciplinary teams sit along with their backs
maining 92 percent of the total cost of operating the building over to aisles so that they can concentrate on a project or simply spin
30 years goes to paying the salaries and benefits of the people their chairs around to collaborate with colleagues. The goal of Big
who occupy the space! The implication of this research is that top- Spaceship’s layout is to encourage collaboration, stimulate creativ-
performing companies recognize that their employees account for ity, and capture as many ideas as possible.
the largest portion of the total cost of a work environment and
make adequate investments to ensure that the work space maxi- What principles make for a good office design and allow a
mizes their efficiency, satisfaction, and productivity. Unfortunately, company to get the most out of its investment in designing a
many other companies remain stuck in the antiquated cubicle cul- work space?
ture that provides the fodder for so many Dilbert cartoon strips
and that squelches individual expression, collaboration with col- Observe How Employees Use the Existing Space
leagues, and creativity.
The nature of employees’ work changes over time, and so do their
In the early to mid-twentieth century, companies used of- work space needs. A design that was suitable a few years ago
fice layouts that resembled factory layouts with workers sitting may be inappropriate today. Entrepreneurs should take the time to
in long rows performing repetitive tasks. The layout reflected observe employees at work. When do workers use office space?
management’s attitude that workers were simply parts in the Which spaces are at maximum capacity, and which ones are un-
company machinery. In the 1960s and 1970s, the landscape derutilized? Why? Does the existing design support employees’
office emerged, featuring a design in which managers and their ability to do their jobs or hinder it? Red flags include the following:
staffs sat together so that they could accomplish related tasks
efficiently. In the 1980s, as real estate prices escalated, compa- • People whose work requires collaboration do not naturally
nies used cubicles as an efficient way to pack lots of workers into interact with their colleagues during the course of a day.
a limited amount of space, giving cubicles the reputation of hous-
ing employees in the same way that a hive houses bees. Today, • Employees waste a lot of time in transit to meeting rooms,
office designs reflect the changing nature of work: small teams printers, copiers, and other office equipment.
of employees collaborate on projects, and creativity improves
when employees from different parts of the company exchange • Workers are competing for the use of certain pieces of
ideas as a result of impromptu encounters. Modern offices office equipment.
employ furniture, features, and designs that are more flexible,
allowing employees to shift them according to the tasks they • An area is either typically overcrowded or empty.
need to perform.
• Employees schedule meetings at nearby coffee shops or
restaurants because these places provide better common
space for collaboration.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 581

Hands On . . . How To (continued)

Involve Employees in the Redesign At OpenTable, the restaurant reservation site based in San
Francisco, the design reflects the company’s food-centric cul-
One of the worst mistakes designers make is creating a new layout ture. The lobby doubles as a large break room and includes a
without the input of the people who will be working in the space. wall filled with employees’ quotations about their favorite res-
Asking employees up front for ideas and suggestions is essential taurant experiences. A “menu of the day” chalkboard invites
to producing an effective layout. What barriers to their work does employees to share creative ideas. Conference rooms, which
the existing design create? How can you eliminate them? One carry names such as “Food Truck” and “Buffet,” feature flex-
surefire way to alienate employees is to fail to involve them in the ible designs that employees adjust to suit their needs. Compar-
redesign of their work space. ing the company’s new space to its previous headquarters, one
manager says the new space reflects OpenTable’s culture and
Plan the New Design encourages employee interaction, which has enhanced creativity
in the company.
Redesigning a work space can be a major undertaking. The pro-
cess goes much more smoothly, and the end result is superior for Create a Design That Helps People
companies that invest in significant planning than for those com- Get Their Work Done
panies that do not. Successful designs usually result when entre-
preneurs and their employees define two to five priorities, such as A work space should never impede employees’ productivity—
increased collaboration, enhanced productivity, reduced absentee- although many designs do. A proper layout should enhance
ism and turnover, or improved energy efficiency, for design profes- employees’ ability to do their jobs. At animated film company
sionals to achieve. Pixar, the work space, which includes large open areas with large
couches and high-top tables that encourage impromptu meet-
Creating an effective design does not have to be expensive, ings, is designed to encourage collaboration among employees.
but it does demand a good plan. An extensive report, Innovative Even the company’s volleyball and basketball courts encourage
Workplace Strategies, from the General Services Administration, employee interaction, making Pixar headquarters a haven of cre-
lists the following hallmarks of the productive workplace: ativity. However, recognizing that sometimes employees must
work “heads down” without interruption, Pixar also created more
• Spatial equity. Do workers have adequate space to accom- private, quiet spaces.
plish their tasks and have access to privacy, natural light,
and aesthetics? Rely on Continuous Improvement

• Healthfulness. Is the work space a healthy environment A redesign project is not finished just because the work is com-
with access to air, light, and water? Is it free of harmful plete. Smart entrepreneurs resist the temptation to sit back and
contaminants and excess noise? admire the finished product and think about how happy they are
to be “done.” Instead, they recognize that no redesign, however
• Flexibility. Can workers adjust their work environment to well planned, is perfect. They are willing to tweak the project
respond to important functional changes? and to make necessary adjustments to meet employees’ chang-
ing needs.
• Comfort. Can workers adjust light, temperature, acoustic
levels, and furnishings to their individual preferences? Sources: Based on Stephanie Orma, “Branding at Work,” Entrepreneur, February
2014, p. 20; Lisa Ward, “Design for Working,” Wall Street Journal, April 28, 2014,
• Technological connectivity. Can on-site and off-site work- p. R6; Ben Kesling and James R. Hagerty, “Say Goodbye to the Office Cubicle,” Wall
ers stay connected with one another and gain access to the Street Journal, April 3, 2013, pp., B1, B6; “How to Design an Office That Makes
information they need? Does technology enhance their Everyone Happy,” Inc., November 2013, p. 60; Aaron Herrington, “Pixar Is Inspi-
ability to collaborate on projects? ration for Modea’s New Headquarters,” Modea, September 19, 2011, http://www
.modea.com/blog/pixar-is inspiration-for-modeas-new-headquarters; Jane Hodges,
• Reliability. Does the workplace have dependable mechani- “How to Build a Better Office,” BNET, 2007, http://www.bnet.com/2403-13056_23-
cal and technological systems that receive proper support? 190221.html; Julie Schlosser, “The Great Escape,” Fortune, March 20, 2006,
pp. 107–110; Michael Lev-Ram, “How to MakeYour Workspace Better,” Business 2.0,
• Sense of place. Does the workplace decor and atmosphere November 2006, pp. 58–60; Jeffrey Pfeffer, “Thinking Outside the Cube,” Business 2.0,
reflect the company’s mission and brand? Does the space April 2007, p. 60; and Innovative Workplace Strategies, General Services Adminis-
create a culture that is appropriate for accomplishing the tration, Office of Governmentwide Policy, Office of Real Property, Washington, DC,
tasks at hand? 2003, p. 70.

Layout in a retail store evolves from a clear understanding of customers’ buying habits.
Observing customer behavior helps entrepreneurs identify “hot spots” where merchan-
dise sells briskly and “cold spots” where it may languish indefinitely. Winn-Dixie stores, a
supermarket chain, recently remodeled its stores to capitalize on its primary hot spot, the
front section of the store to the right of the front door. Because market research shows that
produce is the most important factor in choosing a grocery store and winning customer loyalty,
Winn-Dixie located its produce section there and expanded it by 30 percent. Bananas, one of

582 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

the most commonly purchased produce items, are located at the back of the section to draw cus-
tomers through it. Produce displays also use wood shelves, carts, and display tables as symbolics
to send a message of freshness.134

Business owners should display merchandise as neatly and attractively as possible. Custom-
ers’ eyes focus on displays, which tell them the type of merchandise the business sells. It is easier
for customers to relate to one display than to a rack or shelf of merchandise. Open displays of
merchandise can surround a focal display, creating an attractive selling area. Spacious aisles pro-
vide shoppers an open view of merchandise and reduce the likelihood of shoplifting. One study
found that shoppers, especially women, are reluctant to enter narrow aisles in a store. Narrow
aisles force customers to jostle past one another (experts call this the “butt-brush factor”), mak-
ing them extremely nervous. The same study also found that placing shopping baskets in several
areas around a store can increase sales. Seventy-five percent of shoppers who pick up a basket
buy something, compared to just 34 percent of customers who do not pick up a basket.135

Retailers can also boost sales by displaying together items that complement each other. For
example, displaying ties near dress shirts or handbags next to shoes often leads to multiple sales.
Placement of items on store shelves is important, too, and store owners must keep their target
customers in mind when stocking shelves. For example, putting hearing aid batteries on bottom
shelves where the elderly have trouble getting to them or placing popular children’s toys on top
shelves where little ones cannot reach them hurts sales. Retailers also must avoid wasting prime
selling space on nonselling functions (e.g., storage, office, fitting rooms, and others). For a typi-
cal retailer, the ratio of selling to nonselling space is 80/20. Although nonselling activities are
necessary for a successful retail operation, they should not occupy a store’s most valuable selling
space. Shoppers who use fitting rooms to try on garments make purchases 67 percent of the time,
compared to a 10 percent purchase rate for shoppers who do not use a fitting room. Clothing
retailer Ann Taylor recently revamped its fitting rooms, enhancing their lighting to be more flat-
tering, enlarging them to accommodate shoppers’ and their friends, and making them more like
a shopper’s walk-in closet. The company also added displays of complementary merchandise,
such as camisoles, underwear, and shapewear, to its fitting room areas. Many retailers place their
nonselling departments in the rear of the building, recognizing the value of each foot of space in
a retail store and locating their most profitable items in the best-selling areas.136

The checkout process is a particularly important ingredient in customer satisfaction and often
ranks as a sore spot with shoppers. Research shows that shoppers tend to be impatient, willing to
wait only about four minutes in a checkout line before becoming exasperated. One study reports
that 43 percent of customers say long checkout lines make them less likely to shop at a store.137
Retailers are discovering that simplifying and speeding up the checkout process increases cus-
tomer convenience, lowers shoppers’ stress levels, and makes them more likely to come back.
Some retailers, including Apple, use roving clerks equipped with handheld credit card–swiping
devices, especially during peak hours, to hasten the checkout process. Studies conclude that hav-
ing shoppers form a single line that leads to multiple cashiers results in faster checkout times than
having shoppers form multiple lines in front of multiple cashiers.138

The value of a store’s space for generating sales depends on floor location in a multistory
building, location with respect to aisles and walkways, and proximity to entrances. Space values
decrease as the distance from the main entry-level floor increases. Selling areas on the main level
contribute a greater portion to sales than those on other floors in the building because they offer
greater exposure to customers than either basement or higher-level locations. Therefore, main-
level locations carry a greater share of rent than other levels.

Space values also depend on their position relative to the store entrance. Typically, the farther
away an area is from the entrance, the lower is its value. Another consideration is that in North
America, most shoppers turn to the right entering a store and move around it counterclockwise.
(This apparently is culturally determined; studies of shoppers in Australia and Great Britain find
that they turn left on entering a store.) Finally, only about one-fourth of a store’s customers will
go more than halfway into the store. Based on these characteristics, Figure 14.4 illustrates space
values for a typical small store.

Retail layout is a never-ending experiment in which entrepreneurs learn what works and
what doesn’t.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 583

Window Entrance Window FIGURE 14.4
18% 18% 12%
14% Space Values
5% for a Small Store

Source: From Retailing,
6th edition, by Dale M.
Lewison. Copyright © 1997
by Dale M. Lewison.
Reprinted with permission.

12% 10%

6% 5%

Layout for Manufacturers
Manufacturing layout decisions take into consideration the arrangement of departments, work
stations, machines, and stock-holding points within a production facility. The objective is to ar-
range these elements to ensure a smoothly flowing, efficient, and highly productive work flow.
Manufacturing facilities have come under increased scrutiny as companies attempt to improve
quality, reduce inventory, and increase productivity through layouts that are integrated, flexible,
and efficient. Facility layout has a dramatic effect on product processing, material handling, stor-
age, production volume, and quality.

FACTORS IN MANUFACTURING LAYOUT The ideal layout for a manufacturing operation depends
on several factors, including the following:

● Type of product. Product design and quality standards, whether the product is produced
for inventory or for order, and the physical properties, such as the size of materials and
products, special handling requirements, susceptibility to damage, and perishability.

● Type of production process. Technology used, types of materials handled, means of
providing a service, and processing requirements in terms of number of operations
involved and amount of interaction between departments and work centers.

● Ergonomic considerations. Ensure worker safety, avoid injuries and accidents, and
increase productivity.

● Economic considerations. Volume of production; costs of materials, machines, work
stations, and labor; pattern and variability of demand; and minimizing cycle time, the
amount of time between receiving a customer’s order and delivering the finished product.

● Space availability within the facility itself. Ensure that the space will adequately meet
current and future manufacturing needs.

TYPES OF MANUFACTURING LAYOUTS Manufacturing layouts are categorized either by the work
flow in a plant or by the production system’s function. There are three basic types of layouts that
manufacturers can use separately or in combination—product, process, and fixed position—and
they are differentiated by their applicability to different conditions of manufacturing volume.

584 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

product (line) layout Product Layouts In a product (line) layout, a manufacturer arranges workers and equipment
an arrangement of workers according to the sequence of operations performed on the product. Conceptually, the flow is
and equipment accord- an unbroken line from raw material input or customer arrival to finished goods or customer
ing to the sequence of departure. This type of layout is applicable to rigid-flow, high-volume, continuous-process or a
operations performed on a mass-production operation or when the service or product is highly standardized. Automobile
product. assembly plants, paper mills, and oil refineries are examples of product layouts. Product layouts
offer the advantages of low material handling costs; simplified tasks that can be done with low-
cost, lower-skilled labor; small amounts of work-in-process inventory; and relatively simplified
production control activities. All units are routed along the same fixed path, and scheduling
consists primarily of setting a production rate.

Disadvantages of product layouts are their inflexibility, monotony of job tasks, high fixed
investment in specialized equipment, and heavy interdependence of all operations. A breakdown
in one machine or at one work station can idle the entire line. This layout also requires business
owners to duplicate many pieces of equipment in the manufacturing facility, which for a small
firm can be cost prohibitive.

process layout Process Layouts In a process layout, a manufacturer groups workers and equipment according
an arrangement of workers to the general functions they perform, without regard to any particular product or customer.
and equipment according Process layouts are appropriate when production runs are short, when demand shows considerable
to the general function they variation and the costs of holding finished goods inventory are high, or when the service or
perform, without regard to product is customized. Process layouts offer the advantages of being flexible for doing custom
any particular product or work and promoting job satisfaction by offering employees diverse and challenging tasks. Its
customer. disadvantages are the higher costs of materials handling, requirement of more skilled labor, lower
productivity, and more complex production control.

ENTREPRENEURIAL PROFILE: C.C. Filson C.C. Filson, a company that began supplying
gold miners with outdoor gear in 1897, recently moved into a new 57,400-square-foot
factory in which the company manufactures its line of durable luggage and bags. The new
factory uses an efficient process layout that is divided into three departments, each of which
focuses on making 10 similar types of products. Workstations are arranged so that products
flow smoothly from one to the next without having to double-back (as they did in the old,
cramped factory). Quality manager Teresa Whittaker says making this change alone saved the
company huge amounts of time and money. In the new factory, workers use rolling carts to
move bundles of fabric and leather to their workstations, which are equipped with special
chairs designed for a sewing operation, rather than hauling them by hand in the old factory.
Managers say that since moving into the new factory, employee productivity has increased by
more than 50 percent. ■

fixed position layout FIXED POSITION LAYOUTS In a fixed position layout, materials do not move down a line as
an arrangement in which in a production layout but rather, because of the weight, size, or bulk of the final product, are
materials do not move assembled in one spot. In other words, workers and equipment go to the material rather than
down a production line having the material flow down a line to them. Aircraft assembly plants and shipyards typify this
but rather, because of their kind of layout.
weight, size, or bulk, are
assembled on the spot. DESIGNING PRODUCTION LAYOUTS Two important criteria for selecting and designing a layout
are workers’ productivity and material handling costs. An effective layout allows workers to
maximize their productivity by providing them the tools and a system for doing their jobs
properly. For example, a layout that requires a production worker to step away from the work
area in search of the proper tool is inefficient. An effective manufacturing layout avoids what lean
manufacturing principles identify as the seven forms of waste:

● Transportation. Unnecessary movement of inventory, materials, and information

● Inventory. Carrying unnecessary inventory

● Motion. Engaging in motion that does not add value to the product or process

● Waiting. Periods of inactivity when people, materials, or information are idle

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 585

● Overproduction. Producing more than customer demand dictates

● Processing. Using tools and procedures that are inappropriate for the job

● Defects. Producing poor-quality products, which requires scrapping or reworking
material

In its newest factory in Miyagi, Japan, Toyota positioned cars on the assembly line
side by side rather than tip to tail, reducing the required length of the production line by
35 percent and increasing worker productivity by allowing employees to walk shorter dis-
tances between cars.139

Manufacturers can lower materials handling costs by using the following principles that are
hallmarks of a lean, efficient manufacturing layout:

● Planned materials flow pattern

● Straight-line layout where possible

● Straight, clearly marked aisles

● “Backtracking” of products kept to a minimum

● Related operations located close together

● Minimum amount of in-process inventory on hand

● Easy adjustment to changing conditions

● Minimum materials handling distances

● Minimum of manual handling of materials and products

● Ergonomically designed work centers

● Minimum distances between work stations and processes

● No unnecessary rehandling of material

● Minimum handling between operations

● Minimum storage

● Materials delivered to production employees just in time

● Materials efficiently removed from the work area

● Maximum visibility; maintain clear lines of site to spot problems and improve safety

● Orderly materials handling and storage

● Good housekeeping; minimize clutter

● Maximum flexibility

● Maximum communication

Using the principles of lean manufacturing can improve efficiency, quality, and productivity and
lower costs.

ENTREPRENEURIAL PROFILE: Bensonwood Homes Bensonwood Homes, a premier
designer and builder of energy-efficient timber frame homes based in Walpole, New
Hampshire, applies “5S” principles (sort, shine, simplify, standardize, and sustain) that world-class
automaker Toyota uses in its lean manufacturing process. (Bensonwood also added a sixth “S”
principle, safety.) As the company’s 65 employees began to buy into the process, improvements
quickly became apparent. Employees applied lean and 5S principles to processes for both standard
and custom products; productivity increased by 40 percent, setup time for several machining pro-
cess decreased by 90 percent, and the company experienced dramatic reductions in costs associ-
ated with the seven forms of waste.140 ■

586 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Chapter Summary by Learning Objective

1. Explain the stages in the location decision: raw materials and the quality and quantity of avail-
choosing the region, the state, the city, and able labor.
the final site.
● A foreign trade zone is a specially designated area
● The location decision is one of the most impor- in or near a U.S. customs port of entry that allows
tant decisions an entrepreneur will make given its resident companies to import materials and com-
long-term effects on the company. An entrepreneur ponents from foreign countries; assemble, process,
should look at the choice as a series of increasingly manufacture, or package them; and then ship the
narrow decisions: Which region of the country? finished product while either reducing or eliminat-
Which state? Which city? Which site? Choosing the ing tariffs and duties.
right location requires an entrepreneur to evaluate
potential sites with his or her target customers in ● Business incubators are locations that offer flex-
mind. Demographic statistics are available from a ible, low-cost rental space to their tenants as well
wide variety of sources, but government agencies as business and consulting services. Their goal is
such as the Census Bureau have a wealth of detailed to nurture small companies until they are ready
data that can guide an entrepreneur in his or her to “graduate” into the business community. Many
location decision. government agencies and universities sponsor incu-
bator locations.
2. Describe the location criteria for retail
and service businesses. 5. Describe the criteria used to analyze the
layout and design considerations of a building,
● For retailers, the location decision is especially including the Americans with Disabilities Act.
crucial. Retailers must consider the size of the trade
area, the compatibility of surrounding businesses, ● When evaluating the suitability of a particular build-
the degree of competition, the suitability of the ing, an entrepreneur should consider several factors:
surrounding transportation network, physical and size (Is it large enough to accommodate the busi-
psychological barriers, volume of customer traffic, ness with some room for growth?), construction
adequacy of parking spots, a site’s reputation, and and external appearance (Is the building structurally
the site’s visibility. sound, and does it create the right impression for the
business?), entrances (Are they inviting?), legal is-
3. Outline the location options for retail and sues (Does the building comply with the Americans
service businesses: central business districts, with Disabilities Act? If not, how much will it cost to
neighborhoods, shopping centers and malls, bring it up to standard?), signs (Are they legible, well
near competitors, shared spaces, inside large located, and easy to see?), interior (Does the interior
retail stores, nontraditional locations, at home, design contribute to our ability to make sales? Is it
and on the road. ergonomically designed?), and lights and fixtures (Is
the lighting adequate for the tasks workers will be
● Retail and service businesses have nine basic performing? What is the estimated cost of lighting?).
location options: central business districts; neigh-
borhoods; shopping centers and malls; near com- 6. Explain the principles of effective layouts
petitors; shared spaces; inside large retail stores; for retailers, service businesses, and
nontraditional locations, such as museums, sports manufacturers.
arenas, and college campuses; at home; and on the
road. ● Layout for retail stores and service businesses
depends on the owner’s understanding of his or her
4. Explain the site selection process for customers’ buying habits. Some areas of a retail
manufacturers. store generate more sales per square foot and there-
fore are more valuable.
● A manufacturer’s location decision is strongly influ-
enced by local zoning ordinances. Some areas offer ● The goal of a manufacturer’s layout is to create a
industrial parks designed specifically to attract man- smooth, efficient work flow. Three basic options
ufacturers. Two crucial factors for most manufactur- exist: product layout, process layout, and fixed
ers are the reliability (and the cost of transporting) position layout. Two key considerations are worker
productivity and materials handling costs.

CHAPTER 14 • CHOOSING THE RIGHT LOCATION AND LAYOUT 587

Discussion Questions

14-1. Buzz Price, the location expert who helped Disney 14-9. What are the advantages and disadvantages of the
and other entrepreneurs find the ideal locations for central business district (CBD)?
their businesses, described the location decision in
the following way: “Guessing is dysfunctional. 14-10. What is a business incubator?
Using valid numbers to project performance is ratio- 14-11. One of the most important factors in choosing a
nal.” How can entrepreneurs find “valid numbers”
to help them project the performance of their busi- retail location is the compatibility of nearby stores
nesses in different locations? with the retail customer. Why?
14-12. Why is it costly for a small firm to choose a location
14-2. What factors should a manager consider when that is too small?
evaluating a region in which to locate a business? 14-13. What function does a small company’s sign
Where are such data available? serve? What are the characteristics of an effective
business sign?
14-3. Outline the factors important when selecting a state 14-14. Explain the Americans with Disabilities Act. Which
in which to locate a business. businesses does it affect? What is its purpose?
14-15. What is ergonomics? Why should entrepreneurs
14-4. What factors should a seafood processing plant, a apply the principles of ergonomics in the design of
beauty shop, and an exclusive jewelry store consider their facilities?
in choosing a location? List factors for each type of 14-16. Explain the principles of effective layouts for retail-
business. ers, service businesses, and manufacturers.
14-17. According to market research firm NPD Group, in
14-5. How will an entrepreneur decide the location for his 1985, women purchased 70 percent of all men’s
or her business? clothing; today, women buy just 34 percent of men’s
apparel. What implications does this have for
14-6. What are zoning laws? How do they affect the modern store layouts?
location decision? 14-18. What are some of the features that determine a good
manufacturing layout?
14-7. What is the trade area? What determines a small
retailer’s trade area?

14-8. What are the important considerations for an en-
trepreneur involved in the retail or service industry
when deciding on a business location?

Beyond the Classroom . . .

14-19. Interview a small business owner within the service operation? How much would the changes you sug-
industry in your area. How did the owner decide gest cost?
on the current location? What factors were kepts in
mind before deciding on the location? 14-23. Every year, Site Selection magazine selects the
states with the top business climates. Use the Internet
14-20. Interview a sample of local small business owners. to locate the latest state rankings. Which states top the
How did they decide on their particular locations? list? Which states are at the bottom of the list? What
What are the positive and negative features of their factors affect a state’s ranking? Why are these factors
existing locations? important to entrepreneurs’ location decisions?

14-21. An effective work space must be flexible enough 14-24. Visit the Web site for the Census Bureau at www
to accommodate and encourage all types of work .census.gov. Go to the census data for your town
for an organization. What criteria are used by the and use it to discuss its suitability as a location for
business owner to analyze the business location and the following types of businesses:
design the work space?
● A new motel with 25 units
14-22. Select a manufacturing operation, a wholesale
business, or a retail store and evaluate its layout ● A bookstore
using the guidelines presented in this chapter.
What changes would you recommend? Why? How ● An exclusive women’s clothing shop
does the new layout contribute to a more effective
● A Mexican restaurant

● A residential plumber

588 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

● A day care center demographic profile of your hometown or city or of
● A high-quality stereo shop the town or city in which you attend college. Using
● A family hair care center the demographic profile as an analytical tool, what
kinds of businesses do you think would be success-
14-25. Visit the Census Bureau’s Web site and use ful there? Unsuccessful? Explain.
the American FactFinder section to prepare a

Endnotes

Scan for Endnotes or go to www.pearsonglobaleditions.com/Scarborough

15 Global Aspects of
Entrepreneurship

Mike Kemp/Getty Images

Learning Objectives 2. Describe the principal strategies small businesses
have for going global.
On completion of this chapter, you will be able to:
3. Discuss the major barriers to international trade
1. Explain why “going global” has become and their impact on the global economy.
an integral part of many small companies’
marketing strategies. 4. Describe the trade agreements that will have
the greatest influence on foreign trade in the
twenty-first century.

589

590 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Until recently, the world of international business was much like astronomy before Copernicus,
who revolutionized the study of the planets and the stars with his theory of planetary motion. In
the sixteenth century, the Copernican system replaced the Ptolemaic system, which held that the
earth was the center of the universe with the sun and all the other planets revolving around it.
The Copernican system, however, placed the sun at the center of the solar system with all of the
planets revolving around it. Astronomy would never be the same.

In the same sense, business owners across the globe have been guilty of having Ptolemaic tun-
nel vision when it came to viewing international business opportunities. Like their pre-Copernican
counterparts, owners saw an economy that revolved around the nations that served as their home
bases. Market opportunities stopped at their homeland’s borders, and global trade was only for giant
corporations. American small businesses lag behind their counterparts in most countries around the
globe when it comes to exporting. Only 3.9 percent of U.S. small businesses engage in exporting.
In contrast, an average of 8 percent of small and medium enterprises in the European Union engage
in exporting. Estonia, Slovenia. and Finland have about 20 percent of small and medium businesses
engaging in exporting.1 The most common barriers keeping U.S. small businesses from exporting
are regulations, rising and unpredictable transportation costs, tariff and other trade barriers, time-
consuming foreign customs procedures, language and cultural differences, and lack of knowledge
of foreign markets.2 The majority of small businesses in the United States are content to focus on
the domestic market. However, 95 percent of the world population lives outside of the U.S borders!

ENTREPRENEURIAL PROFILE: Ron Ward: Western Forms Western Forms, a family-
owned business in Kansas City, Missouri, that manufactures forms for pouring concrete for
the construction industry, exports to more than 30 countries. The company’s initial foray into
global markets was modest, tapping Canada and Mexico, the closest international markets geo-
graphically. CEO Ron Ward says that customers in Canada and Mexico now account for more than
half of Western Forms’s sales.3 ■

Today, the global marketplace is as much the territory of small upstart companies as it is
that of giant multinational corporations. The world market for goods and services continues to
grow, fueled by a global economy that welcomes consumers with new wealth. By 2025, more
than 1 billion people globally will join the ranks of middle-class consumers, creating a tremen-
dous opportunity for small businesses.4 Powerful, affordable technology; the Internet; increased
access to information on conducting global business; and the growing interdependence of the
world’s economies have made it easier for small companies, many of which had never considered
going global, to engage in international trade. These micromultinational companies are proving
that even the smallest companies can succeed in the global marketplace.

As globalization transforms entire industries, even experienced business owners and manag-
ers must rethink the rules of competition on which they have relied for years. To thrive, they must
develop new business models and new sources of competitive advantages and be bold enough
to seize the opportunities that the global marketplace offers. Opportunities for global trade can
come from anywhere. Many small businesses focus on markets that are nearby and/or share a
common language, including Canada, the United Kingdom, and Australia. However, entrepre-
neurs also should pay attention to the top emerging markets, which include China, South Korea,
Malaysia, Chili, Thailand, Panama, Peru, Latvia, Poland, and Czech Republic.5

Entrepreneurs are discovering that the tools of global business are within their reach, the costs
of going global are decreasing, and the benefits of conducting global business can be substantial.
Nearly 67 percent of the world’s purchasing power lies outside the borders of the United States!6 By
2020, global middle-class consumption will increase from $21 trillion to $35 trillion, with more than
80 percent of that growth occurring outside of North America and Europe.7 Worldwide, countries
trade nearly $18 trillion in goods and services annually, a dramatic increase from $58 billion in 1948.8
There has never been a better time for small companies to become players in the global marketplace.

LO1 Why Go Global?

Explain why “going global” Failure to cultivate global markets can be a lethal mistake for modern businesses, whatever their
has become an integral part size. A few decades ago, small companies had to concern themselves mainly with competi-
of many small companies’ tors who were perhaps six blocks away; today, small companies face fierce competition from
marketing strategies.

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 591

companies that may be six time zones away! As a result, entrepreneurs find themselves under
greater pressure to expand into international markets and to build businesses without borders.
Today, the potential for doing business globally for companies of all sizes means that where
a business’s goods and services originate or where its headquarters is located is insignificant.
Operating a successful business increasingly requires entrepreneurs to see their companies as
global citizens rather than as companies based in a particular geographic region. For small com-
panies around the world, going global is a matter of survival, not preference. To be successful,
small companies must take their place in the world market. Unfortunately, most small companies
follow a reactive approach to going global (engaging in global sales because foreign customers
initiate the contact) rather than pursue a proactive global sales strategy that involves researching
and analyzing foreign markets that represent the best fit for their products and services.9

Going global can put a tremendous strain on a small company, but entrepreneurs who take
the plunge into global business can reap many benefits, including the ability to offset sales de-
clines in the domestic market, increase sales and profits, improve the quality of their products to
meet the stringent demands of foreign customers, lower the manufacturing cost of their products
by spreading fixed costs over a larger number of units, and enhance their competitive positions to
become stronger businesses. In fact, companies that sell their goods and services in other coun-
tries generate more sales revenue, are more profitable, have higher levels of productivity, and are
less likely to fail than those that limit their sales to the domestic market.10

Success in a global economy requires constant innovation; staying nimble enough to use
speed as a competitive weapon; maintaining a high level of quality and constantly improving it;
being sensitive to foreign customers’ unique requirements; adopting a more respectful attitude
toward foreign habits and customs; hiring motivated, multilingual employees; and retaining a
desire to learn constantly about global markets. In short, business owners must strive to become
“insiders” rather than just “exporters.”

Becoming a global entrepreneur requires a different mindset. To be successful, entrepreneurs
must see their companies from a global perspective and must instill a global culture through-
out their companies that permeates everything the business does. To these entrepreneurs and
their companies, national boundaries are irrelevant; they see the world as a market opportunity.
An absence of global thinking is one of the barriers that most often limit entrepreneurs’ ability
to move beyond the domestic market. Indeed, learning to think globally may be the first—and

Roy Delgado/www.Cartoonstock.com

592 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

most challenging—obstacle an entrepreneur must overcome on the way to creating a truly global
business. Global thinking is the ability to appreciate, understand, and respect the different be-
liefs, values, behavior, and business practices of companies and people in different cultures and
countries. This requires entrepreneurs to “do their homework” to learn about the people, places,
business techniques, potential customers, and culture of the countries in which they intend to
do business. Several U.S. government agencies, including the Department of Commerce, offer
vast amounts of information about all nations, including economic data that can be useful to en-
trepreneurs searching for market opportunities. Doing business globally presents extraordinary
opportunities only to those who are prepared.

LO2 Strategies for Going Global
Describe the principal
strategies small businesses Small companies pursuing a global presence have 10 principal strategies from which to choose: cre-
have for going global. ating a presence on the Web, relying on trade intermediaries, establishing joint ventures, engaging
in foreign licensing arrangements, franchising, using countertrading and bartering, exporting prod-
FIGURE 15.1 ucts or services, establishing international locations, importing and outsourcing, and becoming an
Ten Strategies for expat entrepreneur (see Figure 15.1).
Going Global
CREATING A WEB SITE In our technology-rich global environment, the fastest, least expensive,
and lowest-cost strategic option to establish a global business presence is to create a Web site.
As you saw in Chapter 9 on e-commerce, the Internet gives even the smallest business the ability
to sell its goods and services all over the globe. By establishing a presence online, a local candy
maker or a home-based luxury boat broker gains immediate access to customers around the
world. With a well-designed Web site, an entrepreneur can extend his or her reach to customers
anywhere in the world—without breaking the budget! A company’s Web site is available to
potential customers everywhere and provides exposure to its products or services 24 hours a day
seven days a week. For many small companies, the Internet has become a tool that is as essential
to doing business as the telephone.

Establishing an Internet presence has become an important part of many small companies’
strategies for reaching customers outside the United States. Internet World Stats estimates the
number of Internet users worldwide to be 2.4 billion. Just 273 million of them live in the United
States, leaving more than 2 billion potential Internet customers outside this country’s borders (see
Figure 15.2)!11 A study by the World Retail Congress reports that 23 percent of global retail sales
will take place online by 2015.12

Just as business owners who conduct international business in person must be sensitive to
the cultural nuances and differences in the business practices of other countries, entrepreneurs
who conduct business online must take these same factors into account when they design their
companies’ Web sites. Entrepreneurs must “think local” when they create Web sites that target
customers in other countries. Although having a single domain name with separate “language”

Establishing Becoming an
international expat entrepreneur
locations
Creating a Web site

Importing and Relying on trade
Outsourcing intermediaries

Exporting Creating joint ventures

Countertrading Foreign Licensing
and Bartering
International
Franchising

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 593

Oceania/Australia, Middle East, FIGURE 15.2
1.0% 3.7% Internet Users
Africa, Worldwide
Asia, 7.0%
44.8% Source: http://www
Latin America/ .internetworldstats.com/stats
Caribbean, .htm
10.6%

North America,
11.4%

Europe,
21.6%

buttons for translations is simpler and less expensive, e-commerce experts say having separate
domain names for each targeted country produces better sales results. The design of Web sites
that target foreign customers must reflect the local culture, customs, and language. For instance,
not all cultures read from left to right, and colors that may be appropriate in one culture may
be offensive to customers in another. A U.S. entrepreneur won’t have much luck listing “soccer
cleats” for sale on a Web site aimed at customers in the United Kingdom, where customers would
search for “football boots.” Although there are online tools to help translate keywords and Web
site content into multiple languages, the subtleties of language and culture require getting help
from people with specific expertise in a new market.

Before the advent of the Internet, small businesses usually took incremental steps toward
becoming global businesses. They began selling locally and then, after establishing a reputation,
expanded regionally and perhaps nationally. Only after establishing themselves domestically did
small businesses begin to think about selling their products or services internationally. The In-
ternet makes that business model obsolete because it provides small companies with a low-cost
global distribution channel that they can use from the day they are launched.

TRADE INTERMEDIARIES Although many small businesses handle their foreign sales efforts in- trade intermediaries
house, another alternative for getting into international markets with a minimum of cost and domestic agencies that
effort is to use a trade intermediary. Trade intermediaries are domestic agencies that serve as serve as distributors in
distributors in foreign countries for domestic companies of all sizes. They rely on their networks foreign countries for
of contacts, their extensive knowledge of local customs and markets, and their experience in domestic companies
international trade to market products effectively and efficiently all across the globe. These trade of all sizes.
intermediaries serve as the export departments for small businesses, enabling the small companies
to focus on what they do best and delegate the responsibility for coordinating foreign sales efforts export management
to the intermediaries. They are especially valuable to small companies that are getting started companies (EMCs)
in the global arena, often producing benefits that far outweigh their costs. Lawrence Harding, merchant intermediar-
president of High Street Partners, a trade intermediary that manages foreign sales for small ies that provide small
companies, points to the example of a company that imported telecommunications equipment into businesses with a low-
the United Kingdom to sell to its customers there. The deal triggered a hefty 17.5 percent duty cost, efficient, off-site
that Harding says the company could have avoided paying if it had imported the equipment in a international marketing
different way.13 department

Although a broad array of trade intermediaries is available, the following are ideally suited
for small businesses.

Export Management Companies Export management companies (EMCs) are an important
channel of foreign distribution for small companies just getting started in international trade
or for those that lack the resources to assign their own people to foreign markets. Most EMCs
are merchant intermediaries, working on a buy-and-sell arrangement with domestic small

594 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

You Be the Consultant

Going Global from the Outset

Entrepreneurs are discovering that doing business globally is not he launched his own company, he would operate it as a global
just for large corporations. Some entrepreneurs take their com- business from the start. Sullivan, an avid runner, came up with the
panies global from the outset, and their micro-multinational idea for his business after visiting his doctor, Andy Pruitt, founder
companies are reaping the benefits. of the Boulder Center for Sports Medicine in Boulder, Colorado, for
treatment for chronic foot pain. Pruitt told Sullivan that his running
Zee Wines USA shoes were the cause of his foot problem, and the two worked to-
gether to design a better running shoe using biomechanics, custom
Roy Goslin and his wife, Dianne Ferrandi, grew up in South Africa, padding, and inserts to create customized shoes that accommo-
where both had connections to that country’s wine industry. date runners’ foot shape and running style. For instance, they de-
Ferrandi’s parents owned vineyards and sold grapes to local vintners, veloped insoles that are tailored to fit each customer’s arch height.
and Goslin worked in materials and process management for one They launched Somnio in 2009 and immediately began developing
of South Africa’s largest wineries. Both Goslin and Ferrandi grew strategies to sell their running shoes in Europe and Asia.
up with wine as an integral part of meals. In 1998, recruited by a
large information technology consulting firm, the couple moved to After a four-month search, Sullivan hired Saskia Stock, who
Minneapolis, Minnesota, but they never lost their passion for the had been in charge of biomechanical research at MBT Shoes, a
fine wines of South Africa. Because few people in the United States Swiss footwear maker, to manage Somnio’s European division in
knew about the storied winemaking tradition and superb vineyards Zurich, Switzerland. The reason that Sullivan wanted a veteran of
of South Africa, Goslin and Ferrandi had difficulty finding wines the shoe industry to manage the company’s European operations
from their homeland in Minnesota. Their solution: start their own was to enable Somnio to enter into direct sales relationships with
wine import business that specializes in wines from South Africa. retailers rather than sell through foreign distributors. Sullivan is
They announced their decision at a dinner with friends, where one concerned that selling through distributors will cost him too much
friend suggested that they name their company “Z Wines.” (You’ve over the long run. When Somnio entered Asian markets, however,
got zee food, and we have zee wine,” he joked.) Sullivan opted to use foreign distributors there because they had
established connections that would take Somnio years to develop
In 2006, Goslin and Ferrandi started Zee Wines USA as and understood the nuances of doing business locally.
a home-based business with the goal of importing wines from
South Africa that they knew were the best the country had to of- Somnio, which is headquartered in La Selva Beach,
fer and wholesaling them to retail stores. Many of the wineries the California, manufactures its running shoes in China and sells them
company buys from have been operating for hundreds of years. in 20 countries, throughout the Americas, Europe, and Asia. The
With its diverse climate, rich soil, amazing biodiversity, and rich company generates $10 million in annual sales, more than half of
winemaking tradition, South Africa produces some of the world’s which comes from Europe.
finest, most distinctive wines. The couple knew they could import
wines from South Africa and sell them for just $10 to $15 per 1. As the global market grows, more small businesses are
bottle in the United States. expanding into other markets. What are the implications for
small companies that have the potential to conduct business
In addition to the South African wines they import, Goslin globally?
and Ferrandi also sell domestic wines from Washington, Oregon,
and California. With $500,000 in annual sales, their total portfolio 2. What advice can you offer the founders of Zee Wine USA
of wines numbers only about 100. Although the owners could about selling their products globally?
have pursued a more aggressive growth strategy, they chose to fo-
cus on wines that fit their business model of providing high value 3. Notice that Sean Sullivan used a direct sales approach to
for their customers. The company only accepts 1 to 2 percent of enter the European market but relied on foreign distribu-
the wines its owners evaluate. tors in the Asian market. What are the advantages and the
disadvantages of each approach? Why do most small com-
Somnio panies that sell internationally use trade intermediaries?

When Sean Sullivan was an executive at The North Face and Spe- Sources: Based on John Garland, “Roy Goslin and Dianne Ferrandi of Z Wines,” Heavy
cialized Bicycle Components, he noticed that international sales Table, March 2, 2011, http://heavytable.com/roy-goslin-and-dianne-ferrandi-of-z-
accounted for the majority of sales in some product categories. wines; Phil Bolsta, “Small Business Success Stories: ZWines USA,” Twin Cities Business,
Learning from his corporate experience, Sullivan decided that when December 2008, http://www.tcbmag.com/superstars/smallbusinesssuccessstories/
106542p1.aspx; and Ryan Underwood, “Made to Travel: Why More Start-Ups Are
Going Beyond Borders, Inc., March 2011, pp. 96–98.

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 595

companies, taking title to the goods and then reselling them in foreign markets; others work export trading
on commission. More than 1,000 EMCs operate across the United States, and many of them companies (ETCs)
specialize in particular industries, products, or product lines as well as in the foreign countries businesses that buy and sell
they target. For instance, Dorian Drake International, an EMC started in 1947, specializes in products in a number of
selling equipment around the world for U.S.-based companies in four industries—automotive, countries and offer a wide
food service, lawn and garden, and environmental. For more than 40 years, Dorian Drake has variety of import and export
managed global sales for American Lawn, the leading U.S. maker of manual reel lawn mowers, services to their clients.
a family-owned business founded in Shelbyville, Indiana, in 1895.14
manufacturer’s export
EMCs provide small businesses with a low-cost, efficient, independent international market- agents (MEAs)
ing and export department, offering services that range from conducting market research and businesses that act as inter-
giving advice on patent protection to arranging financing and handling shipping. The greatest national sales representa-
benefits that EMCs offer small companies are ready access to global markets and an extensive tives in a limited number of
knowledge base on foreign trade, both of which are vital for entrepreneurs who are inexperi- markets for noncompeting
enced in conducting global business. In return for their services, EMCs usually earn an extra domestic companies.
discount on the goods they buy from their clients or, if they operate on a commission rate, a
higher commission than domestic distributors earn on what they sell. EMCs charge commission export merchants
rates of about 10 percent on consumer goods and 15 percent on industrial products. Although domestic wholesalers who
EMCs rarely advertise their services, finding one is not difficult. The Federation of International do business in foreign
Trade Associations provides useful information for small companies about global business and markets.
trade intermediaries on its Web site, including a listing of EMCs. Industry trade associations and
publications and the U.S. Department of Commerce’s Export Assistance Centers also can help resident buying office
entrepreneurs to locate EMCs and other trade intermediaries. government- or privately
owned operations of one
Export Trading Companies Another tactic for getting into international markets with a minimum country established in
of cost and effort is through export trading companies. Export trading companies (ETCs) are another country for the
businesses that buy and sell products in a number of countries, and they typically offer a wide purpose of buying goods
range of services, such as exporting, importing, shipping, storing, distributing, and others, to their made there.
clients. Unlike EMCs, which tend to focus on exporting, ETCs usually perform both import and
export trades across many countries’ borders. Although EMCs usually create exclusive contracts
with companies for a particular product line, ETCs often represent several companies selling the
same product line. However, like EMCs, ETCs lower the risk of exporting for small businesses.
Some of the largest ETCs in the world are based in the United States and Japan. In fact, many
businesses that have navigated successfully Japan’s complex system of distribution have done so
with the help of ETCs.

In 1982, Congress passed the Export Trading Company Act to allow producers of similar
products to form ETC cooperatives without the fear of violating antitrust laws. The goal was to
encourage U.S. companies to export more goods by allowing businesses in the same industry to
band together to form ETCs.

Manufacturer’s Export Agents Manufacturer’s export agents (MEAs) act as international sales
representatives in a limited number of markets for various noncompeting domestic companies.
Unlike the close, partnering relationship formed with most EMCs, the relationship between the MEA
and a small company is a short-term one, and the MEA typically operates on a commission basis.

Export Merchants Export merchants are domestic wholesalers who do business in foreign
markets. They buy goods from many domestic manufacturers and then market them in foreign
markets. Unlike MEAs, export merchants often carry competing lines, meaning that they have
little loyalty to suppliers. Most export merchants specialize in particular industries, such as office
equipment, computers, and industrial supplies.

Resident Buying Offices Another approach to exporting is to sell to a resident buying office,
a government- or privately owned operation of one country established in another country for
the purpose of buying goods made there. Many foreign governments and businesses have set
up buying offices in the United States. Selling to them is just like selling to domestic customers
because the buying office handles all the details of exporting.

Foreign Distributors Some small businesses work through foreign distributors to reach inter-
national markets. Domestic small companies export their products to these distributors, who

596 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

handle all of the marketing, distribution, support, and service functions in the foreign country.
The key to success is screening potential distributors to find those that are reliable, financially
sound, and customer focused.

ENTREPRENEURIAL PROFILE: Dr. Roy Archambault: DryCorp DryCorp, located in
Wilmington, North Carolina, manufactures products that help waterproof other products.
DryCorp, which was founded by Dr. Roy Archambault, developed its first line of products to water-
proof casts, bandages, ostomies, and prosthetics using a rubber sleeve. The product allows patients
to swim, bathe, shower, and to receive hydrotherapy without any damage to the medical product
protected by the sleeve. DryCorp then developed a line of crystal clear bags that vacuum-seal elec-
tronic devices while still allowing them to be fully functional. Products include cases for tablets,
earphones, and backpacks. Because DryCorp’s products are highly seasonal, the company relies on
foreign distributors in markets such as Australia that have opposite seasons to the United States.15 ■

THE VALUE OF USING TRADE INTERMEDIARIES Trade intermediaries such as these are becoming
increasingly popular among small businesses attempting to branch out into world markets because
they make that transition much faster and easier. Most small business owners simply do not have
the knowledge, resources, or confidence to go global alone. Intermediaries’ global networks of
buyers and sellers allow their small business customers to build their international sales much
faster and with fewer hassles and mistakes. Entrepreneurs who are inexperienced in global sales
and attempt to crack certain foreign markets alone quickly discover just how difficult the challenge
can be. However, with their know-how, experience, and contacts, trade intermediaries can get
small companies’ products into foreign markets quickly and efficiently. The primary disadvantage
of using trade intermediaries is that doing so requires entrepreneurs to surrender control over their
foreign sales. However, by maintaining close contact with intermediaries and evaluating their
performance regularly, entrepreneurs can avoid major problems.

The key to establishing a successful relationship with a trade intermediary is conducting a
thorough screening to determine which type of intermediary—and which one in particular—will
best serve a small company’s needs. Entrepreneurs should look for intermediaries that special-
ize in the products their companies sell and that have experience and established contacts in the
countries they have targeted. An entrepreneur looking for an intermediary should compile a list
of potential candidates using some of the sources listed in Table 15.1. After compiling the list,
entrepreneurs should evaluate each one using a list of criteria to narrow the field to the most
promising ones. Interviewing a principal from each intermediary on the final list should tell
entrepreneurs which ones are best able to meet their companies’ needs. Finally, before signing
any agreement with a trade intermediary, it is wise to conduct thorough background and credit
checks. Entrepreneurs with experience in global trade also suggest entering short-term agree-
ments of about a year with new trade intermediaries to allow time to test their ability and willing-
ness to live up to their promises. Many entrepreneurs begin their global business initiatives with
trade intermediaries and then venture into international business on their own as their skill and
comfort levels increase.

domestic joint venture JOINT VENTURES Joint ventures, both domestic and foreign, lower the risk of entering global
an alliance of two or more markets for small businesses. They also give small companies more clout in foreign lands. In a
U.S. small companies for domestic joint venture, two or more U.S. small businesses form an alliance for the purpose of
the purpose of exporting exporting their goods and services. For export ventures, participating companies get antitrust
their goods and services immunity, allowing them to cooperate freely. The businesses share the responsibility and the
abroad. costs of getting export licenses and permits, and they split the venture’s profits. Establishing a
joint venture with the right partner has become an essential part of maintaining a competitive
foreign joint venture position in global markets for a growing number of industries.
an alliance between a U.S.
small business and a com- In a foreign joint venture, a domestic small business forms an alliance with a company in the
pany in the target nation. target nation. The host partner brings to the joint venture valuable knowledge of the local market
and its method of operation as well as of the customs and the tastes of local customers, making it
much easier to conduct business in the foreign country. Sometimes foreign countries place certain
limitations on joint ventures, for example, requiring host companies to hold a majority stake in
the venture.

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 597

TABLE 15.1 Resources for Locating a Trade Intermediary

Trade intermediaries make doing business around the world much easier for small companies, but finding the right one can be a challenge.
Fortunately, several government agencies offer a wealth of information to businesses interested in reaching into global markets with
the help of trade intermediaries. Entrepreneurs looking for help in breaking into global markets should contact the International Trade
Administration, the U.S. Commerce Department, and the Small Business Administration first to take advantage of the following services:

● Agent/Distributor Service (ADS). Provides customized searches to locate interested and qualified foreign distributors for
a product or service. (Search cost, $250 per country)

● Commercial Service International Contacts (CSIC) List. Provides contact and product information for more than 82,000 foreign
agents, distributors, and importers interested in doing business with U.S. companies.

● Country Directories of International Contacts (CDIC) List. Provides the same kind of information as the CSIC List but is
organized by country.

● Industry Sector Analyses (ISAs). Offer in-depth reports on industries in foreign countries, including information on distribution
practices, end users, and top sales prospects.

● International Market Insights (IMIs). Include reports on specific foreign market conditions, upcoming opportunities for U.S.
companies, trade contacts, trade show schedules, and other information.

● Trade Opportunity Program (TOP). Provides up-to-the-minute, prescreened sales leads around the world for U.S. businesses,
including joint venture and licensing partners, direct sales leads, and representation offers.

● International Company Profiles (ICPs). Commercial specialists will investigate potential partners, agents, distributors, or
customers for U.S. companies and will issue profiles on them.

● Commercial News USA. A government-published magazine that promotes U.S. companies’ products and services to 400,000
business readers in 176 countries at a fraction of the cost of commercial advertising. Small companies can use Commercial News
USA to reach new customers around the world for as little as $499.

● Gold Key Service. For a small fee, business owners wanting to target a specific country can use the Department of Commerce’s Gold
Key Service, in which experienced trade professionals arrange meetings with prescreened contacts whose interests match their own.

● Platinum Key Service. The U.S. Commercial Service’s Platinum Key Service is more comprehensive than its Gold Key Service,
offering business owners long-term consulting services on topics such as building a global marketing strategy, deciding which
countries to target, and serving the needs of customers in foreign markets.

● Matchmaker Trade Delegations Program. This program helps small U.S. companies establish business relationships in major
markets abroad by introducing them to the right contacts.

● Multi-State/Catalog Exhibition Program. The Department of Commerce presents companies’ product and sales literature to
hundreds of interested business prospects in foreign countries for as little as $450.

● Trade Fair Certification Program. This service promotes U.S. companies’ participation in foreign trade shows that represent the
best marketing opportunities for them.

● Globus and National Trade Data Bank (NTDB). Most of the information listed above is available on the NTDB, the U.S.
government’s most comprehensive database of world trade data. With the NTDB, small companies have access to information that
once only Fortune 500 companies could afford for an annual subscription rate of just $200.

● Economic Bulletin Board (EBB). Provides online trade leads and valuable market research on foreign countries compiled from
a variety of federal agencies.

● U.S. Export Assistance Centers. The Department of Commerce has established 19 export centers (USEACs) in major
metropolitan cities around the country to serve as one-stop shops for entrepreneurs who need export help.

● Trade Information Center. The center helps locate federal export assistance, provides export assistance, and offers a 24-hour
automated fax retrieval system that gives entrepreneurs free information on export promotion programs, regional market information,
and international trade agreements. Call USA-TRADE.

● Office of International Trade. Through the Office of International Trade, the Small Business Administration works with other
government and private agencies to provide a variety of export development assistance, how-to publications, online courses, and
information on foreign markets.

● Export-U2.com. This Web site offers free export webinars to business owners on topics that range from the basics, “Exporting
101,” to more advanced topics such as export financing arrangements. The site also provides links to many useful international
trade Web sites.

● U.S. Commercial Service. The U.S. Commercial Service, a division of the International Trade Administration, provides many of
the services listed in this table. Its Web site is an excellent starting point for entrepreneurs who are interested in exporting.

● Export.gov. This Web site from the U.S. Commercial Service is an excellent gateway to myriad resources for entrepreneurs who
are interested in learning more about exporting, including market research, trade events, and trade leads.

● Federation of International Trade Associations (FITA). The FITA Global Trade Portal is an excellent source for international
import and export trade leads and events and provides links to about 8,000 Web sites related to international trade.

598 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

ENTREPRENEURIAL PROFILE: Sean “Diddy” Combs and Diageo Beverages: DeLeon
Tequila Sean “Diddy” Combs, a successful entertainer and entrepreneur, formed a joint
venture with the British beverage company, Diageo Beverages, to purchase the Mexican tequila
brand DeLeon. DeLeon tequila sells at prices that range from $120 to more than $1,000 a bottle.
Both parties contributed cash to the transaction and are equal owners in the joint venture. In ad-
dition to the cash he invested, Combs offers strong marketing skills and connections to the enter-
tainment industry. In addition to its cash contribution, Diageo brings its industry leadership in the
adult beverage market.16 ■

The most important ingredient in the recipe for a successful joint venture is choosing the
right partner. Taking the following steps will help avoid problems:

● Select a partner that shares the company’s values and standards of conduct.

● Define at the outset important issues such as each party’s contributions and responsibilities,
the distribution of earnings, the expected life of the relationship, and the circumstances un-
der which the parties can terminate the relationship.

● Understand their partner’s reasons and objectives for joining the venture.

● Spell out in writing exactly how the venture will work and where decision-making authority lies.

● Select a partner whose skills are different from but compatible with those of the company’s.

● Prepare a “prenuptial agreement” that spells out what will happen in case of a “business
divorce.”

FOREIGN LICENSING Rather than sell their products or services directly to customers overseas,
some small companies enter foreign markets by licensing businesses in other nations to use their
patents, trademarks, copyrights, technology, processes, or products. In return for licensing these
assets, a small company collects royalties from the sales of its foreign licenses. Licensing is a
relatively simple way for even the most inexperienced business owner to extend his or her reach
into global markets. Licensing is ideal for companies whose value lies in its intellectual property,
unique products or services, recognized name, or proprietary technology. Although many
businesses consider licensing only their products to foreign companies, the licensing potential
for intangibles, such as processes, technology, copyrights, and trademarks, often is greater. Some
entrepreneurs earn more money from licensing their know-how for product design, manufacturing,
or quality control than they do from actually selling their finished goods in a highly competitive
foreign market with which they are not familiar. Foreign licensing enables a small business to
enter foreign markets quickly and easily and with virtually no capital investment. Risks to the
company include the potential loss of control over its manufacturing and marketing processes
and creating a competitor if the licensee gains too much knowledge and control. Securing proper
patent, trademark, and copyright protection beforehand can minimize those risks.

INTERNATIONAL FRANCHISING Franchising has become a major export industry for the United
States. Over the last several decades, a growing number of franchises have been attracted to
international markets to boost sales and profits as the domestic market has become increasingly
saturated with outlets and much tougher to wring growth from. Franchisors should consider
expanding into global markets when foreign markets present an important growth opportunity
for the franchise. Yum! Brands, the franchisor of KFC, Pizza Hut, and Taco Bell restaurants, has
a significant global presence with more than 40,000 restaurants in 117 countries. International
franchising, particularly in fast-growing markets such as India and China, has been essential to
the company’s growth; in fact, China alone accounts for 40 percent of Yum! Brands’ profits.17 To
be successful in global markets, a franchisor should have the following characteristics:

● Sufficient managerial and financial resources to devote to globalization

● A solid track record of success in the United States

● Adequate trademark protection for the franchise’s brand

● Time-tested training, support, and reporting procedures that help franchisees succeed18