Essentials_of_Entrepreneurship_and_Small_Business_Management,_Global

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 599

Franchisors that decide to expand internationally should take these steps:

1. Identify the country or countries that are best suited to the franchisor’s business concept.
Factors to consider include a country’s business climate, demographic profile, level of eco-
nomic development, rate of economic growth, degree of legal protection, language and cul-
tural barriers, and market potential. Franchisors making their first forays into global markets
should consider focusing on a single nation or a small group of similar nations.

2. Generate leads for potential franchisees. Franchisors looking for prospective franchisees
in foreign markets have many tools available to them, including international franchise
trade shows, their own Web sites, trade missions, and brokers. Many franchisors have had
success with trade missions, such as those sponsored by trade groups like the International
Franchise Association or the U.S. Department of Commerce’s Gold Key Program. These
trade missions are designed to introduce franchisors to qualified franchise candidates in
target countries. Others rely on brokers who have extensive business contacts in specific
countries.

3. Select quality candidates. Just as in any franchise relationship, the real key to success is
choosing the right franchisee. Because of the complexity and cost of international franchis-
ing, selecting quality franchisees is essential to success. Establishing an intranet allows
franchisors to stay in contact with their international franchisees across time zones.

4. Structure the franchise deal. Franchisors can structure international franchise arrange-
ments in a variety of ways, but three techniques are most popular: direct franchising, area
development, and master franchising.

● Direct franchising, common in domestic franchise deals, involves selling single-unit
franchises to individual operators in foreign countries. Although dealing with individual
franchisees makes it easier for the franchisor to maintain control, it also requires more
of the franchisor’s time and resources.

● Area development is similar to direct franchising except that the franchisor allows
the franchisee to develop multiple units in a particular territory, perhaps a province, a
county, or even an entire nation. A successful area development strategy depends on a
franchisor selecting and then supporting quality franchisees. In 2001, brothers Manpreet
and Gurpreet Gulri entered into an area development agreement with Subway to expand
the sandwich chain’s presence in India; they now operate more than 200 stores there.
“We work closely with local chefs and regional suppliers to ensure a good balance of
vegetarian and non-vegetarian items, along with many traditional Subway menu items,
all specifically selected to appeal to the Indian palate,” says Manpreet.19

● Master franchising is the most popular strategy for companies entering international
markets. In a master franchising arrangement, a franchisor grants an experienced mas-
ter franchisee the right to sell outlets to subfranchisees in a broad geographic area or
sometimes in an entire country. Franchisors use this method to expand into international
markets quickly and efficiently because their master franchisees understand local laws
and customs and the nuances of selling in local markets. Although master franchising
simplifies a franchisor’s expansion into global markets, it generates less revenue for
franchisers than direct franchising and gives them the least amount of control over their
international franchisees. Domino’s Pizza, with more than 5,000 outlets in 70 countries
outside the United States, relies on master franchises, especially in emerging markets
such as India, China, Malaysia, and Turkey. Jubilant FoodWorks Limited, Domino’s
Pizza’s master franchisee in India, operates nearly 450 outlets, but Richard Alison,
Domino’s Pizza’s international president, says the country has the potential to have
at least 1,000 locations.20

Just as they do in the United States, franchisors in international markets sell virtually every
kind of product or service imaginable—from fast food to child day care. In some cases, the prod-
ucts and services sold in international markets are identical to those sold in the United States.
However, most franchisors have learned that adaptation is the key to making sure their goods and
services suit local tastes and customs. Traveling the world, one discovers that American fast-food

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

giants such as Domino’s, KFC, and McDonald’s make significant modifications in their menu to
remain attractive to the demands of local customers.

ENTREPRENEURIAL PROFILE: Tony Chew: KFC Vietnam One of the more active re-
gions for international franchising is Southeast Asia. Indonesia, Thailand, the Philippines,
Malaysia, Singapore, Vietnam, Myanmar, Brunei, Cambodia, and Laos are experiencing rapid
growth in American franchised restaurants. One of the most popular franchises is KFC, which first
came to Vietnam in 1997 through the vision of Singapore entrepreneur and franchisee Tony
Chew. When Chew opened the first KFC in Vietnam, there was a limited power supply, poor
roads, an untrained workforce, and a weak business climate. KFC Vietnam (KFCV) currently oper-
ates 140 restaurants and employs 4,000 workers.21 ■

countertrade COUNTERTRADING AND BARTERING A countertrade is a transaction in which a company selling
a transaction in which a goods in a foreign country agrees to promote investment and trade in that country. The goal of the
company selling goods in transaction is to help offset the capital drain from the foreign country’s purchases. As entrepreneurs
a foreign country agrees to enter more and more developing countries, they will need to develop skills at implementing this
promote investment and strategy. In some cases, small and medium-size businesses find it advantageous to work together
trade in that country. with large corporations that have experience in the implementation of this marketing strategy.

bartering Countertrading suffers numerous drawbacks. Countertrade transactions can be complicated,
the exchange of goods and cumbersome, and time consuming. They also increase the chances that a company will get stuck
services for other goods with merchandise that it cannot move. They can lead to unpleasant surprises concerning the
and services. quantity and quality of products required in the countertrade. Still, countertrading offers one
major advantage: sometimes it’s the only way to make a sale!

Entrepreneurs must weigh the advantages against the disadvantages for their company before
committing to a countertrade deal. Because of its complexity and the risks involved, countertrad-
ing is not the best choice for a novice entrepreneur looking to break into the global marketplace.

Bartering, the exchange of goods and services for other goods and services, is another way of
trading with countries lacking convertible currency. In a barter exchange, a company that manufac-
tures electronics components might trade its products for the coffee a business in a foreign country
processes, which it then sells to a third company for cash. Barter transactions require finding a
business with complementary needs, but they are much simpler than countertrade transactions.

EXPORTING For many years, small businesses in the United States focused solely on the domestic
market, never venturing beyond its borders. However, growing numbers of small companies,
realizing the growth and profit potential that exporting offers, are making globalization part of
their marketing plans. Although small and medium-size companies account for nearly 98 percent
of the 302,000 U.S. businesses that export goods and services, they generate just one-third of the
nation’s export sales. Their impact is significant, however; small companies generate $2.1 billion
in day in export sales. Owners of small companies that export say that two of the main benefits
their companies reap are increased sales and profits and larger, more diversified customer bases.22

Many more small companies have the potential to export but are not doing so. The biggest
barrier facing companies that have never exported is not knowing where or how to start, but
entrepreneurs have a treasure trove of resources, training, and consulting on which they can draw.
The International Trade Administration’s Export Programs Guide provides entrepreneurs with
a comprehensive list of 100 federal programs in 20 agencies designed to help U.S. exporters.
The U.S. Commercial Service Web site is an excellent starting point for entrepreneurs who are
looking for international business partners to help their companies expand into global markets.
Many entrepreneurs also find the U.S. Small Business Administration’s Export Business Planner,
a comprehensive set of worksheets that guides users through the process of building an export
business plan, to be a valuable resource.

Another source of useful information are the U.S. Export Assistance Centers that serve as
single contact points for information on the multitude of federal export programs that are de-
signed to help entrepreneurs who want to start exporting. The U.S. government’s export Internet
portal gives entrepreneurs access to valuable information about exporting in general (finance,
shipping, documentation, and others) as well as details on individual nations (market research,
trade agreements, statistics, and more). Learning more about exporting and realizing that it is
within the realm of possibility for small companies—even very small companies—is the first and

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 601

often most difficult step in breaking the psychological barrier to exporting. The next challenge is
to create a sound export strategy:

Step 1. Recognize that even the tiniest companies and least experienced entrepreneurs
have the potential to export. Many entrepreneurs never considering exporting
because they think their companies are too small; however, a business’s size has
nothing to do with the global potential of its products. In fact, 33 percent of the

You Be the Consultant

Selling a Simple Product to a Global Market

Courtesy of John Aron Then in 1998, The Pasta Shoppe entered its first interna-
tional market, Japan, which remains its largest market outside
The Pasta Shoppe, located in Nashville, Tennessee, manufactures the United States. Its success in Japan is due to Japanese interest
and distributes pasta. John Aron and his wife Carey, cofounders in Western celebrations and holidays. John Aron recognized that
of The Pasta Shoppe, first came up with the idea for a pasta busi- international markets would extend the company’s season for its
ness while on their honeymoon in Italy. They were inspired by the holiday products due to the earlier production needed to move
many shapes of pasta they discovered as they traveled through- its product to Japanese distributors. The company quickly learned
out the many regions of Italy. What differentiates The Pasta Com- that to be successful, it had to customize its products and packag-
pany from its competitors is that it makes pasta in a variety of fun ing to fit the Japanese consumer market.
shapes that are tied to people’s favorite college sports teams and
to various holidays, such as Christmas, St Patrick’s Day, Halloween, The Pasta Shoppe’s first entry into Japan had to be cut short
and Thanksgiving. The Arons found a way to Americanize the va- in 2000 due to the outbreak of Asian flu. Because the two years
riety of pasta shapes that had caught their imaginations while on it sold in Japan were highly successful, the company reentered
their honeymoon. the Japanese market in 2003 after the Asian flu scare had passed.

Rather than compete with other mass production pasta busi- Based on its success in Japan, The Pasta Shoppe now exports
nesses, the Arons chose to build the company by focusing on small to Canada, Australia, the United Kingdom, Mexico, Chile, and
batch production using high-quality ingredients and a carefully de- Guam. The company is currently attempting to develop distribution
signed manufacturing process. The company buys all of its wheat into the Philippines and South Korea. However, although the Arons
from the Dakotas and uses specially designed bronze tools to cut the have tried, they have made no headway into exporting to China.
pasta into the various shapes. The Pasta Shoppe dries the pasta over-
night in carts, rather than using the speed drying machines favored by When considering a move into a new international market,
large manufacturers. Its products are sold online, through specialty re- the Arons use specific criteria to assess its attractiveness. In addi-
tailers, and as a fundraising product for schools and youth programs. tion to the quality of the foreign distributor and projected cash
The Pasta Shoppe is able to more favorably price its products by avoid- flow, timing is everything. The company looks for international
ing selling through mass retailers, which typically demand discounts. sales that do not conflict with sales in the domestic market, which
The company has experienced strong growth in the U.S. market since peak from September through December, because the U.S.
it was founded in 1994, even during economic downturns. market remains its most profitable market.

Pricing is key to success in international markets for The Pasta
Shoppe. “It’s our toughest priced sales channel,” says Aron.

1. Identify the risks and the benefits The Pasta Shoppe faces
by operating as a global business.

2. Identify some of the barriers that companies such as The
Pasta Shoppe encounter as they expand internationally.
What steps can entrepreneurs take to overcome these
obstacles?

3. What steps do you recommend that entrepreneurs such as
John Aron take before they make the decision to take their
companies global?

Sources: Based on John Aron, personal communication, May 20, 2014; Brian
Reisinger, “Pasta Shoppe elbows in on international markets,” Nashville Business
Journal, November 12, 2010, www.bizjournals.com/nashville/print-edition/2010/11/
12/pasta-shoppe-elbows.html?page=all; Carey Aron, “Why Fun Pasta—The Pasta
Shoppe,” Readable, n.d., www.allreadable.com/vid/why-fun-pasta-the-pasta-shoppe%
2C-nashville-tn-489722.html.

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

TABLE 15.2 Assessing Your Company’s Export Potential

1. Does your company have a product or service that has been successfully sold in the domestic market? A product’s or
service’s success in the domestic market is a good indicator of its potential success in markets abroad. However, because selling
domestically and internationally are entirely different ventures, entrepreneurs should read A Basic Guide to Exporting (http://
www.export.gov/basicguide/) to learn what to expect when selling internationally.

2. Does your company have or is your company preparing an international marketing plan with defined goals and strategies?
Many companies begin export activities haphazardly, without carefully screening markets or options for market entry. A
marketing plan allows your company to find and focus on the best export opportunities. Formulating an export strategy based
on good information and proper assessment increases the chances that you will choose the best options, that you will use your
company’s resources effectively, and, therefore, that your efforts will successful. To find market research on the countries you are
interested in selling to, visit the Market Research Library (http://export.gov/mrktresearch/index.asp).

3. Does your company have sufficient production capacity that can be committed to the export market? To export successfully,
your company must meet the demand that it creates in foreign markets. You may need more space and equipment to manufacture
for the specific countries you are selling to (who have their own product standards and regulations). Expanding into the
international marketplace will result in a higher number of units to manufacture, and you do not want this increase in production
to lower your company’s quality of output.

4. Does your company have the financial resources to actively support the marketing of your products in the targeted overseas
markets? Developing foreign markets requires financial resources. This is a big hurdle for many small companies because it
involves activities such as international travel, participation in trade shows, market research, and international business training.
However, there are many government programs to help finance companies’ export sales, including the Export-Import Bank
(Ex-Im Bank) (www.exim.gov), the U.S. Small Business Administration (www.sba.gov/content/export-loan-programs), the U.S.
Department of Agriculture (www.fas.usda.gov), and the Overseas Private Investment Corporation (www.opic.gov).

5. Is your company’s management committed to developing export markets and willing and able to dedicate staff, time, and
resources to the process? Management commitment is the number one determining factor for export success. Developing
an export market takes time and effort, and managers must be certain they can afford to allocate sufficient time to exporting.
Whether managers are willing to invest the time to build an export business plan is a good indicator of their commitment to an
export initiative.

6. Is your company committed to providing the same level of service to foreign customers that it gives to domestic customers?
This is a commitment every business must make before it begins selling in foreign markets. Successful exporters treat their
foreign customers with the same commitment and service as their domestic customers. They are responsive to inquiries from
international customers, work hard to build positive relationships with them, and establish systems to provide the same top-notch
service they provide to their domestic customers.

7. Does your company have adequate knowledge in modifying product packaging and ingredients to meet foreign import
regulations and cultural preferences? Selecting and preparing your product for export requires not only product knowledge
but also knowledge of the unique characteristics of each market your company is targeting. Sound market research and input
from foreign representatives tell a company about the potential to sell its products or services in specific target countries. Before
the sale can occur, however, a company may have to modify its products and services to satisfy customers’ tastes, needs, or
preferences and legal requirements in foreign markets. Entrepreneurs can learn about regulations and export controls at http://
export.gov/regulation/index.asp.

8. Does your company have adequate knowledge in shipping its product overseas, such as identifying and selecting
international freight forwarders and freight costing? When shipping a product overseas, entrepreneurs must be aware of
packaging, labeling, documentation, and insurance requirements. Violating these requirements often means severe and expensive
penalties. This is where international freight forwarders can help. These agents understand the export regulations of the U.S.
government, the import rules and regulations of foreign countries, appropriate methods of shipping, and the documents related
to foreign trade. Freight forwarders assist exporters in preparing price quotations by advising on freight costs, port charges,
consular fees, costs of special documentation, insurance costs, and handling fees. To find a freight forwarder, entrepreneurs can
visit the National Customs Brokers and Freight Forwarders Association of America at www.ncbfaa.org.

9. Does your company have adequate knowledge of export payment mechanisms, such as developing and negotiating letters
of credit? Experienced exporters have extensive knowledge of export payment mechanisms and extend credit cautiously. They
evaluate new customers with care and continuously monitor existing customers’ accounts. For general information on ways to
receive payments, methods of payment, and currency issues and payment problems, see A Basic Guide to Exporting (http://
export.gov/basicguide/) and other resources described in this chapter. Conducting a credit check of potential buyers is essential
because collecting delinquent accounts receivable from foreign customers is more difficult than collecting them from domestic
customers. Exporters can use the U.S. Commercial Service’s International Company Profiles (ICPs) to gain insight into the
creditworthiness of potential customers. ICPs contain financial profiles of foreign companies and information on their size,
capitalization, and number of years in business.

Source: Adapted from: “Export Questionnaire,” Export.gov, http://export.gov/begin/assessment.asp.

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 603

small companies that are exporters have no employees.23 If a company’s products
meet the needs of global customers, it has the potential to export. Studies suggest
that small companies that export are stronger and grow markedly faster than those
that do not. Table 15.2 provides nine questions designed to help entrepreneurs
assess the export potential of their companies.

ENTREPRENEURIAL PROFILE: William Haynes: Sabai Technology After William
Haynes was laid off during the financial crisis, he started Sabai Technology, a company
based in Simpsonville, South Carolina, that develops and sells wireless routers and network
equipment, with himself as the sole employee. Initially, Haynes sold only to domestic customers
until one of his customers, Strong VPN, opened the door to orders from companies in China.
International sales took off after people involved in an Egyptian uprising discovered that Sabai
Technology’s wireless routers could send and receive information that was blocked by govern-
ment filters. Haynes began working with the U.S. Commercial Service and U.S. Export Assis-
tance Centers, which led him to advertise his products in Commercial News USA, a publication
that goes to more than 400,000 readers in 178 countries. Today, international sales account for
80 percent of Sabai Technology’s sales, and the company, which exports to 120 countries, has
grown to 14 employees. Haynes uses superior customer service and speedy delivery to set his
company apart from the competition, most of which are much larger businesses.24 ■

Step 2. Analyze your product or service. Is it special? New? Unique? High quality?
Priced favorably because of lower costs or favorable exchange rates? Does it
fit well with the culture and traditions of a country or region? Process Barron,
owned by Cliff Moss and Ken Nolen, manufactures large fans used to clean air
in factories. The company, located in Pelham, Alabama, struggled when first at-
tempting to sell its products internationally. Moss and Nolen realized they lacked
the knowledge needed to be successful exporters. After sending members of the
management team to export seminars at a local university, the company began to
have success negotiating financing and payment terms with international custom-
ers. Its international accounts helped the company to grow even in the midst of
the Great Recession, which was not the case for many companies operating in the
industrial sector.25
In many foreign countries, products from the United States are in demand
because they have an air of mystery about them! In some cases, entrepreneurs find
that they must make slight modifications to their products to accommodate local
tastes, customs, and preferences. For instance, when Joseph Zaritski, owner of an
Australian juice company, began marketing his company’s products in Russia,
he met with limited success until he realized that package size was the problem.
Willing customers simply could not afford to purchase the two-liter bottles in
which the juice was packaged. Zaritski switched to one-liter bottles and saw sales
climb by 80 percent within six months!26

Step 3. Analyze your commitment. Are you willing to devote time and energy to
develop export markets? Does your company have the necessary resources?
Patience is essential. An exporting initiative can take from six to eight months
(or longer) to get off the ground, but entering foreign markets isn’t as tough as
most entrepreneurs think.

Step 4. Research markets and pick your target. Fifty-five percent of small businesses
that export sell to just four or fewer countries (see Figure 15.3). Before investing
in a costly sales trip abroad, however, entrepreneurs should search the Internet or
make a trip to the local library or the nearest branch of the Department of Com-
merce. Exporters can choose from a multitude of guides, manuals, books, newslet-
ters, videos, and other resources to help them research potential markets. Market
research must include more than just the size of the potential market; it should
include a detailed analysis of the demographic and buying habits of the customers
in it as well as the cultural nuances of selling there.

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

FIGURE 15.3 More than20; 15% Fewer than 5; 55%
11 to 20; 12%
Number of
Countries to 5 to 10; 18%
Which U.S. Small
Businesses Export

Source: Based on data from
2013 Small Business Export-
ing Survey, National Small
Business Association and
Small Business Exporters
Association, p. 6.

ENTREPRENEURIAL PROFILE: Wood Stone Ovens Wood Stone Ovens, based in
Bellingham, Washington, sells its restaurant cooking equipment to customers in more
than 75 countries. The company realized an unexpected benefit from its international sales ac-
tivities: As its sales team traveled to meet with customers around the globe, they came back
with many new product ideas. Exports account for 25 percent of Wood Stone Ovens’s annual
revenues.27 ■

Armed with research, entrepreneurs can avoid wasting time and money
on markets with limited potential for their products and can concentrate on
those with the greatest promise. The nations that account for the greatest export
volume for U.S. businesses are Canada, Mexico, China, Japan, and Germany.28
Some of the most helpful tools for researching foreign markets are the Country
and Industry Market Reports available at the U.S. government’s export Web
portal; these reports provide detailed information on the economic, political,
regulatory, and investment environment for countries ranging from Afghanistan
to Zimbabwe. Research tells entrepreneurs whether they need to modify their
existing products and services to suit the tastes and preferences of their foreign
target customers. Sometimes, foreign customers’ lifestyles, housing needs, body
size, and cultures require exporters to make alterations in their product lines.
Making just slight modifications to adapt products and services to local tastes
can sometimes spell the difference between success and failure in the global
market. Entrepreneurs also should consider traveling to trade shows in the coun-
tries they are targeting to witness firsthand customers’ responses to their prod-
ucts and services.

Step 5. Develop a distribution strategy. Should you use a trade intermediary or sell
directly to foreign customers? As you learned earlier in this chapter, many small
companies just entering international markets prefer to rely on trade intermediar-
ies to break new ground. Using intermediaries often makes sense until an entre-
preneur has the chance to gain experience in exporting and to learn the ground
rules of selling in foreign lands.

ENTREPRENEURIAL PROFILE: John Burke: Louisiana Caviar Company The Loui-
siana Caviar Company, founded by John Burke, sells its product to customers in an un-
likely foreign market: Russia. Louisiana Caviar Company harvests its caviar from bowfin fish in
Louisiana’s Atchafalaya Swamp, which is the largest wetland in the United States. The com-
pany sells caviar with a Cajun twist, flavoring the delicacy with various Cajun spices. The
Russian market opened up due to efforts to ban caviar from the Caspian Sea in Russia. Over-
fishing and pollution have endangered sturgeon, which are the traditional source of Russian
caviar. Louisiana Caviar Company exports 80 percent of its product, with half of its exports
going to Russia.29 ■

Step 6. Find your customer. According to a study by the U.S. International Trade
Commission, one of the most common problems among small business exporters
is finding prospective customers.30 After all, establishing a network of business
contacts takes time and resources. Small businesses can rely on a host of export
specialists to help them track down foreign customers. The U.S. Department of

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 605

Commerce and the International Trade Administration should be the first stops
on any entrepreneur’s agenda for going global. These agencies have the market re-
search available for locating the best target markets for a particular company and
specific customers in those markets. Industry Sector Analyses, International Mar-
ket Insights, and Customized Market Analyses are just some of the reports and
services global entrepreneurs find most useful. These agencies also have knowl-
edgeable staff specialists experienced in the details of global trade and in the
intricacies of foreign cultures. GlobalEDGE (http://globaledge.msu.edu), an inter-
national trade information portal, also offers useful information on doing business
in more than 200 countries, including directories, tutorials, online courses, and
diagnostic tools designed to help companies determine their potential for conduct-
ing global business. The International Finance Corporation’s Enterprise Surveys
give entrepreneurs useful profiles of the business environments in 135 countries,
ranging from overviews of basic infrastructure and business regulations to corrup-
tion and business obstacles. Through its Gold and Platinum Key services, the U.S.
Commercial Service provides entrepreneurs who want to take their companies
global with a list of prescreened distributors and potential customers and arranges
face-to-face meetings with them.

One of the most efficient and least expensive ways for entrepreneurs to locate
potential customers for their companies’ products and services is to participate in
a trade mission. These missions usually are sponsored by either a federal or a state
economic development agency or an industry trade association for the purpose of
cultivating international trade by connecting domestic companies with potential
trading partners overseas. A trade mission may focus on a particular industry or
may cover several industries but target a particular country. Pactrans Air & Sea,
Inc., a small business headquartered in Bensenville, Illinois, participated in a trade
mission to China organized by the SBDC office at Governors State University.
During the trade mission, Pactrans managers had 95 business appointments, gen-
erated 450 sales leads, negotiated two joint ventures, and closed contacts worth
more than $1 million during the trade mission. Pactrans owner Alex Pon antici-
pates adding 5 or 6 employees to his existing staff of 45 to accommodate the in-
creased business activity that resulted from the trade mission.31

Step 7. Find financing. One of the biggest barriers to small business exports is lack of fi-
nancing. Access to adequate financing is a crucial ingredient in a successful export
program because the cost of generating foreign sales often is higher and collection
cycles are longer than in domestic markets. The trouble is that bankers and other
providers of capital don’t always understand the intricacies of international sales
and view financing them as excessively risky. In addition, among major industrial-
ized nations, the U.S. government spends the least per capita to promote exports.
Several federal, state, and private programs are operating to fill this export fi-
nancing void, however. Loan programs from the Small Business Administration’s
include its Export Working Capital program (90 percent loan guarantees up to
$5 million), International Trade Loan program (90 percent loan guarantees up
to $5 million) and Export Express program (75 to 90 percent loan guarantees
up to $500,000). In addition, the Ex-Im Bank, the Overseas Private Investment
Corporation, and a variety of state-sponsored programs offer export-minded entre-
preneurs both direct loans and loan guarantees. The Ex-Im Bank, which has been
financing the sale of U.S. exports since 1934, provides small exporters with export
credit insurance and loans through its working capital line of credit and a variety
of preexport loan programs. The Overseas Private Investment Corporation pro-
vides loans and loan guarantees up to $250 million to support foreign investments
by small and medium-size companies and offers businesses discounted political
risk insurance. The Bankers Association for Foreign Trade is an association of
banks around the world that matches exporters in need of foreign trade financing
with interested banks.

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

letter of credit ENTREPRENEURIAL PROFILE: Lisa Howlett: Auburn Leather Company Auburn
an agreement between an Leather Company, located in Auburn, Kentucky, manufactures leather laces for foot-
exporter’s bank and the wear and sporting equipment. Auburn Leather expanded its international sales with the help
foreign buyer’s bank that of a small business insurance policy from the Ex-Im Bank, which assigns and insures Auburn
guarantees payment to the Leather’s export accounts receivable. This insurance gives lenders the confidence to provide
exporter for a specific ship- working capital financing for Auburn Leather’s export sales. Growth in international sales has
ment of goods. created more than 30 new jobs at Auburn Leather and has increased its annual revenues from
$7.4 million to more than $11 million. Export sales have grown from 33 percent of total sales to
bank draft 45 percent. Auburn Leather’s President, Lisa Howlett, says the growth from international sales
a document the seller has created 20 new jobs at her company.32 ■
draws on the buyer, requir-
ing the buyer to pay the Step 8. Ship your goods. Export novices usually rely on international freight forwarders
face amount either on sight and customs brokers—experienced specialists in overseas shipping—for help in
or on a specified date. navigating the bureaucratic morass of packaging and regulatory requirements, tar-
iffs, and paperwork demanded by customs. These specialists, also known as trans-
port architects, are to exporters what travel agents are to travelers and normally
charge relatively small fees for a valuable service. They not only move shipments
of all sizes to destinations all over the world efficiently, saving entrepreneurs
many headaches, but also are well versed in the regulations that govern exported
products and services. For example, packaging for Ganong Brothers, Canada’s
oldest candy maker, must read “5 mg” (with a space between the number and
unit of measurement) for products sold in Canada. To sell the same product in the
United States, just across the border from its factory, the company’s packaging
must read “5mg” (with no space between the number and unit of measurement).33
Exporters can find local freight forwarders and customs brokers at the National
Customs Brokers and Freight Forwarders Association of America’s Web site.
Shipping terms, always important for determining which party in a trans-
action pays the cost of shipping and bears the risk of loss or damage to the
goods while they are in transit, take on heightened importance in international
transactions.

Step 9. Collect your money. A survey by the National Small Business Association and
the Small Business Exporters Association reports that the top concern of com-
panies that export is collecting payment for the goods and services they sell.34
Collecting foreign accounts can be more complex than collecting domestic ones;
however, by picking their customers carefully and checking their credit references
closely, entrepreneurs can minimize bad-debt losses. Businesses that engage in
international sales use four primary payment methods (ranked from least risky to
most risky): cash in advance, a letter of credit, a bank (or documentary) draft, and
an open account. The safest method of selling to foreign customers is to collect
cash in advance of the sale because it eliminates the risk of collection problems
and provides immediate cash flow. However, requiring cash payments up front
severely limits a small company’s base of foreign customers.
A letter of credit is an agreement between an exporter’s bank and the for-
eign buyer’s bank that guarantees payment to the exporter for a specific ship-
ment of goods. In essence, a letter of credit reduces the financial risk for the
exporter by substituting a bank’s creditworthiness for that of the purchaser (see
Figure 15.4). A bank draft is a document the seller draws on the buyer, requir-
ing the buyer to pay the face amount (the purchase price of the goods) either
on sight (a sight draft) or on a specified date (a time draft) once the goods have
been shipped. With either letters of credit or bank drafts, small exporters must
be sure that all of the required documentation is present and accurate; otherwise,
they may experience delays in the payments due to them from the buyer or the
participating banks. Rather than use letters of credit or drafts, some exporters
simply sell to foreign customers on open account. In other words, they ship the
goods to a foreign customer without any guarantee of payment. This method is
riskiest because collecting a delinquent account from a foreign customer is even
more difficult than collecting past-due payments from a domestic customer.

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 607

Seller Buyer Seller ships goods to buyer FIGURE 15.4
according to letter of credit’s How a Letter of
Foreign buyer agrees to buy products; terms and submits shipping Credit Works
seller agrees to ship goods if buyer documents to bank issuing
arranges a letter of credit. letter of credit. Source: A Basic Guide to
Exporting, 10th edition,
Washington DC: U.S.
Department of Commerce,
International Trade Adminis-
tration, 2008, p. 5.

Seller’s Bank Buyer’s Bank $

$ $

Buyer requests that his bank grant a Buyer’s bank makes payment
letter of credit, which assures exporter to seller’s (confirming) bank.
payment if she presents documents Confirming bank then pays
proving goods were actually shipped. seller amount specified in
Bank makes out letter of credit to seller letter of credit.
and sends it to seller’s bank (called the
confirming bank).

One way that small exporters can minimize the risk of bad-debt losses on for-
eign credit sales is to purchase export credit insurance, which protects a com-
pany against the nonpayment of its foreign customers’ open accounts. The cost
of export credit insurance typically is a small percentage of the amount of the
foreign sale a company is insuring. Private insurers and the Ex-Im Bank offer
export credit insurance.

ESTABLISHING INTERNATIONAL LOCATIONS Once established in international markets, some
small businesses set up permanent locations there. Establishing an office or a factory in a foreign
land can require a substantial investment reaching beyond the budgets of many small companies.
In addition, setting up an international office can be an incredibly frustrating experience in
some countries where business infrastructure is in disrepair or is nonexistent. Hayden Hamilton,
founder of GreenPrint Technologies, a company that sells software that reduces printing costs
by eliminating unnecessary pages, opened an office in India, where he can get bargain rates
on quality software programming. He was frustrated when it took three hours to apply for a
telephone line—and one month to get it installed. Because power outages in India are common,
GreenPrint also had to purchase expensive backup generators.35

In some countries, securing necessary licenses and permits from bureaucrats often takes
more than filing the necessary paperwork; in some nations, bureaucrats expect payments to
“grease the wheels” of commerce. American entrepreneurs consider payments to reduce the
amount of red tape involved in an international transaction to be bribery, and many simply avoid
doing business in countries where “grease payments” are standard procedure. In fact, the Foreign
Corrupt Practice Act, passed in 1977, considers bribing foreign officials to be a criminal act. One
study by the World Bank of grease payments for the purpose of minimizing the red tape imposed
by foreign regulations concludes that the payments do not work; in fact, companies that actually
used them experienced greater government scrutiny and red tape in their international transac-
tions.36 Finally, finding the right person to manage an international office is crucial to success;
it also is a major challenge, especially for small businesses. Small companies usually have lean
management staffs and cannot afford to send key people abroad without running the risk of los-
ing their focus.

Small companies that establish international locations can reap significant benefits. Start-up
costs are lower in some foreign countries (but not all!), and lower labor costs can produce signifi-
cant savings. In addition, by locating in a country, a business gains a firsthand understanding of
local customers’ preferences, tastes, and habits and the nuances of how culture influences busi-
ness practices. In essence, the business becomes a local corporate citizen.

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

Courtesy of Peter Marcum ENTREPRENEURIAL PROFILE: Peter Marcum: DevDigi-
Courtesy of Scott Kuyper tal DevDigital has offices in Nashville, Tennessee, and
Baroda, India. DevDigital began as company that bought used
Internet network assets, such as routers and switches, from dis-
tressed companies at a steep discount. The company would refur-
bish the hardware and resell it to small independent network
companies. Eventually the company expanded into operating
digital networks. As profit margins for network operators became
razor thin, the company made another major strategic shift.
DevDigital purchased a small Web site programming shop in India
being sold by one of their customers. “My theory was that the
larger companies—Google, IBM, and Apple—were and had been
diversifying globally in their software production,” says Peter
Marcum, cofounder of DevDigital. “The problem for a smaller
U.S.-based operation, is who do you call, or trust, or where do you
go to get started, in an overseas location?” DevDigital made the
move into Web site development for smaller companies. It took
about four years to fully integrate the two locations. Due to its
cost advantage and stable employment, the company has been able to grow in the highly com-
petitive market of Web site development. DevDigital does about 80 percent work for hire, and the
remainder are projects in which they take equity in exchange for Web site development.
“My strongest advice to anyone wanting to set up off shore is find a local way in,” says Marcum.
“By that I mean you need a core group that will stay long-term as you build a team, just as you
would here in the U.S.”37 ■

IMPORTING AND OUTSOURCING In addition to selling their goods in foreign markets, small
companies also buy goods from distributors and manufacturers in foreign markets. In the United
States alone, companies import more than $2.7 trillion worth of goods and services annually.38
The intensity of price competition in many industries—from textiles and handbags to industrial
machinery and computers—means that more companies now shop the world market looking
for the best deals they can find. Because labor costs in countries such as Mexico, Taiwan, and
India are far below those in other nations, businesses there offer goods and services at very low
prices. Increasingly, these nations are home to well-educated, skilled workers who are paid far
less than comparable workers in the United States or Western Europe. For instance, a computer
programmer in the United States might earn $100,000 a year, but in India, a computer programmer
doing the same work earns $20,000 a year or less. As a result, many companies either import
goods or outsource work directly to manufacturers in countries where costs are far lower than
they would be domestically.

Alibaba.com, an online trading platform started in Hangzhou, China, in
1999, has enabled millions of small companies to find reliable suppliers and
vendors around the globe for the products and services they sell. Alibaba.com
boasts nearly 37 million registered users in more than 240 countries.

ENTREPRENEURIAL PROFILE: Nuvar Nuvar Inc., located in Holland,
Michigan, develops and designs office furniture and healthcare prod-
ucts. Nuvar’s in-house engineering assists its customers with product develop-
ment and design. Through a global network of manufacturing suppliers,
Nuvar sources component parts manufacturing from Europe (France, Germany,
and Italy), Asia (China, Taiwan, and Malaysia), and North America (Mexico and
Canada). Parts are then shipped to its facilities in Michigan, where they are
assembled, packaged, and shipped to the final customer. Although Nuvar
does not ship to international customers, its customers ship around the globe.
“We still deal with the repercussions of dealing internationally,” says Scott
Kuyper, International Supply Chain Lead at Nuvar. “Different markets may
have different requirements for testing, standards, etc. Because we’re in-
volved with product development, we really see this first hand.” With the
breadth of international relationships, Nuvar has learned the importance of
being open minded and flexible when it comes to differences in culture strat-
egy and economies of their various global partners.39 ■

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 609

Entrepreneurs who are considering importing goods and service or outsourcing their manu-
facturing to foreign countries should follow these steps:

● Make sure that importing or outsourcing is right for your business. Even though foreign
manufacturers often can provide items at significant cost savings, using them may not al-
ways be the best business decision. Some foreign manufacturers require sizable minimum
orders, sometimes hundreds of thousands of dollars’ worth, before they will produce a
product. Entrepreneurs sometimes discover that achieving the lowest price may require
a trade-off of other important factors, such as quality and speed of delivery.

● Establish a target cost for your product. Before setting off on a global shopping spree, en-
trepreneurs first should determine exactly what they can afford to spend on manufacturing
a product and make a profit on it. Given the low labor costs of many foreign manufacturers,
products that are the most labor intensive make good candidates.

ENTREPRENEURIAL PROFILE: Tom Haarlander: ARCiPLEX ARCiPLEX, headquar-
tered in Nashville, Tennessee, is a medical manufacturing company. ARCiPLEX works
with entrepreneurs and established companies to invent, design, develop, and produce
health and wellness products. Tom Haarlander, President and cofounder, made the strategic
decision to move its manufacturing from China to Mexico in early 2014. The company had
been using a Chinese manufacturer for a little over a year but found a lack of consistency in
the products from China, which resulted in warranty issues after the products were delivered
to customers. Haarlander sent team members to live in China to monitor quality control, but
the problems persisted. In an effort to improve its product quality and its team’s quality of
life, Haarlander decided to move manufacturing back to North America. Haarlander was able
to find manufacturers in the United States and sourced some work to a company in Mexico.
“This has allowed us to cut travel and various other overhead costs,” says Haarlander. “Our
cost per unit has risen, but our testing, quality control, headaches, and rework of product has
dropped dramatically, cutting the overall cost. In the long run, we know we have made the
best strategic decision for building a strong foundation for our company and we are proud
to be supporting work in North America.”40 ■

● Do your research before you leave home. Investing time in basic research about the
industry and potential suppliers in foreign lands is essential before setting foot on foreign
soil. Useful resources are plentiful, and entrepreneurs should use them, including the
Internet, the Federation of International Trade Associations, industry trade associations,
government agencies (e.g., the U.S. Commercial Service’s Gold Key Matching Service),
and consultants.

ENTREPRENEURIAL PROFILE: Jim Greene: Richland, LLC Richland, LLC, located in
Pulaski, Tennessee, is an industrial service company that supplies, assembles, fabricates,
installs, paints, sandblasts, and tests equipment that contains mechanical or electrical compo-
nents. Richland has contracts with TSKE Tsukishima Kankyo Engineering Ltd., a Japanese com-
pany, and Moritani, a German company. Tsukishima Kankyo and Moritani engage in many
joint projects around the globe. Richland recently partnered with the two companies in a
wastewater project for a client in Dubai that was developing a recreation area and golf course
for a multinational community in Dubai. Richland provided manufacturing and test assembly
for the water and wastewater treatment equipment that was shipped to Dubai. Jim Greene,
a partner and president of Richland, LLC, admits that the language barrier can be difficult
when dealing with partners from two different countries working for a client in another part
of the world. “Foreign nationals appreciate it when you attempt to learn their language,”
says Green, “Even if it is only ‘My name is Jim and welcome to Richland, LLC.’”41 ■

● Be sensitive to cultural differences. When making contacts, setting up business appoint-
ments, or calling on prospective manufacturers in foreign lands, make sure you under-
stand what constitutes accepted business behavior and what does not. This is where your
research pays off; be sure to study the cultural nuances of doing business in the countries
you will visit.

● Do your groundwork. Once you locate potential manufacturers, contact them to set up ap-
pointments and go visit them. Preliminary research is essential to finding reliable sources

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

expat entrepreneurs of supply, but “face time” with representatives from various companies allows entrepre-
entrepreneurs who keep neurs to judge the intangible factors that can make or break a relationship. Entrepreneurs
their citizenship in their who visit foreign suppliers often find that they receive better service because their suppliers
home country but live and know them personally.
run their businesses on
foreign soil. ● Protect your company’s intellectual property. A common problem that many entrepre-
neurs have encountered with outsourcing is “knockoffs.” Some foreign manufacturers see
nothing wrong with agreeing to manufacture a product for a company and then selling
their own knockoff version of it that they manufacture in a “ghost shift.” Securing a non-
disclosure agreement and a contract that prohibits such behavior helps, but experts that
securing a patent for the item in the source country itself (not just the United States) is a
good idea.

● Select a manufacturer. Using quality, speed of delivery, level of trust, degree of legal pro-
tection, cost, and other factors, select the manufacturer that can do the job for your company.

● Provide an exact model of the product you want manufactured. Providing a manufac-
turer with an actual model of the item to be manufactured will save lots of time, mistakes,
and problems.

● Stay in constant contact with the manufacturer and try to build a long-term relation-
ship. Communication is a key to building and maintaining a successful relationship with
a foreign manufacturer. Weekly teleconferences, e-mails, and periodic visits are essen-
tial to making sure that your company gets the performance you expect from a foreign
manufacturer.

EXPAT ENTREPRENEURS Some entrepreneurs take advantage of opportunities in foreign markets
by actually moving to a country and starting a new business. People who take up residence
and work in a foreign country are known as expatriates, or more commonly, expats. Expat
entrepreneurs are entrepreneurs who keep their citizenship in their home country but live and run
their businesses on foreign soil. American expat entrepreneurs can be found living in countries
on every continent. Expats from the same home country often form social groups to offer each
other support and keep a little bit of their homeland’s culture active in their lives. American
expats use social networking sites such as Facebook to help build community and share common
challenges faced by expat entrepreneurs. Some countries have been making it easier to become
an expat entrepreneur to encourage economic development. For example, Spain recently cut
the red tape associated with expats starting businesses to help ease its chronic unemployment
and low rate of entrepreneurial activity. Although being an expat entrepreneur creates unique
hurdles and problems, those with an adventurous spirit can find amazing experiences starting and
growing companies in other countries. The following You Be the Consultant feature highlights
three expat entrepreneurs who started businesses in Argentina, as told in David English’s book
Expat Entrepreneurs in Argentina.

LO3 Barriers to International Trade

Discuss the major barriers Governments traditionally have used a variety of barriers to block free trade among nations in
to international trade and an attempt to protect businesses within their own borders. The benefit of protecting their own
their impact on the global companies, however, comes at the expense of foreign businesses, which face limited access to
economy. global markets. Numerous trade barriers—domestic and international—restrict the freedom of
businesses in global trading (see Figure 15.5). Even with these barriers, global trade of goods and
services has grown to nearly $19 trillion.42

Domestic Barriers

Sometimes the biggest barriers potential exporters face are those right here at home. Three major
domestic roadblocks are common: attitude, information, and financing. Perhaps the biggest bar-
rier to small businesses exporting is the attitude that “My company is too small to export.” That’s
just for big corporations.” The first lesson of exporting is “Take nothing for granted about who

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 611

You Be the Consultant

Expat Entrepreneurs Find Opportunity in Argentina

“We developed these concepts to solve the problems I had as
a consumer,” says Evans.

The business, The Vines of Mendoza, was successful beyond
any of their plans. The Vines of Mendoza has grown to include op-
erating a wine store in the Park Hyatt Mendoza, managing more
than 100 private vineyard estates, overseeing a direct wine sales
business that exports Argentinian wine to the United States, and
operating their own winery. They also have opened their own five-
star resort for wine tourists.

Business owners featured in the book, Expat Entrepreneurs Carolyn Gallagher
in Argentina
Carolyn Gallagher grew up in Sacramento, California. While she
Courtesy of David English was in high school, she became close friends with an exchange
student from Argentina. Gallagher went to visit her friend in
Entrepreneurs who start new businesses in a foreign country, ex- Argentina after finishing school, fell in love with the country, and
pat entrepreneurs, can be found in countries all around the globe. envisioned moving there some day to settle down. Gallagher went
Expat entrepreneurs start new ventures in a foreign land for many to college at the University of California at Santa Barbara, where
different reasons—the specific opportunity, the desire to live in she studied geography and linguistics. After college she went to
a different country, the wish to leave their home country, or life work as a river guide, winery worker, and English tutor for con-
circumstances. Whatever the reason, entrepreneurs face unique struction companies to save money for her move to Argentina.
challenges operating businesses in a country other than their
homeland. What follows are profiles of three entrepreneurs from In 1998, Gallagher bought a one-way ticket to Mendoza.
a book, Expat Entrepreneurs in Argentina, by David English, who “I said to myself, ‘OK, I’m going on an adventure! I don’t
is an expat himself. know what I’ll end up doing, but I’ll figure it out,’” recalls Gallagher.
For two years she taught English. However, she wanted to
Michael Evans do more than teach. She wanted to start a business. Gallagher re-
turned to California to study cooking, wine making, and business,
Michael Evans’s career as an expat entrepreneur in Argentina be- while she worked in the wine industry.
gan with what he thought was going to be a one-week vacation In 2004, Gallagher returned to Argentina ready to find an
in Mendoza, which is the heart of wine country. What he found opportunity.
was that Mendoza had none of the amenities of other wine des- “I was on the lookout for niches I could fill in wine and edu-
tinations he had visited. cation,” she says. “I saw that tourism was taking off, and nobody
was doing multifaceted tours that combined outdoor adventure
“I came here expecting a consumer-friendly experience like I with cooking classes and great wine.”
had in Napa, Italy, and France,” says Evans. “But, I couldn’t find it Gallagher launched her business, Uncorking Argentina,
anywhere. Argentina felt like a new frontier.” which has been successful since it opened. In the meantime, Gal-
lagher married her Argentine boyfriend. The two are now happily
Evans decided to stay in Mendoza for six months to do re- raising their two children in the country she envisioned living in
search with a potential partner he had met, Pablo Giménez Riili, back when she first visited it right after high school.
whose family had been in the wine business for several decades.
In addition to having skills, knowledge, and local credibility that David English
Evans needed for this business, Giménez Riili’s approach to busi-
ness meshed well with Evans’s business philosophies. David English was a technology consultant for Qwest Commu-
nication in New York City on his way to meet with executives of
The two developed a business plan for a start-up to serve the CitiGroup to close a contract for a new project. On that sunny
emerging wine industry and its associated tourism. The concepts morning, everything changed. It was September 11, 2001. As he
of a small hotel, a wine tasting room, and a direct wine sales busi- left his offices on the way to the meeting, ashes began to fall.
ness emerged from their work together. People were saying that someone had flown a small plane into
one of the towers of the World Trade Center. English did not think
much about it. He hopped on the subway to go to his meeting.
When he emerged from the subway, the city was in chaos from

(continued)

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

You Be the Consultant (continued)

the attack on the World Trade Center’s Twin Towers. Although in Argentina, prepares and files tax returns for nonresident inves-
it was several more years before English left America to start his tors, consults with entrepreneurs looking to start a business in
new life in Argentina, he sees the events of that day as the turning Argentina, and develops study-abroad programs in Mendoza for
point in his life that led him down the path to eventually becom- leading universities from around the world.
ing an expat entrepreneur.
“Being an expat in a place like Argentina is about a lot more
After graduating from college, English had traveled to than running a business,” reflects English. “It’s also about playing
Argentina in 1997 through an exchange program run by the an active role in the community and looking for opportunities to
Rotary Club. English spent six weeks in Argentina visiting Rotarians be a positive influence.”
in Argentina and touring their businesses.
1. How are expat entrepreneurs’ assumptions about
“When I returned home, I dreamed about Argentina every conducting business internationally different than
night for weeks and immediately made plans to go back and entrepreneurs pursuing more traditional international
see more of the country with which I had fallen in love,” says strategies? Explain.
English.
2. What advice would you give to someone who wants to
He got that opportunity in 2003. He discovered a niche help- become an expat entrepreneur? Explain.
ing American businesses by serving as their connection with local
Argentines. He launched English & Associates with a single client 3. What lessons did each of these expat entrepreneurs learn
who was developing a wine business in Argentina. English en- that would be useful for others interested in this type of
rolled in an MBA program in Argentina that he credits with teach- lifestyle? Explain.
ing him about doing business within the culture of Argentina and
honing his Spanish communication skills. Source: Based on David English, Expat Entrepreneurs in Argentina (Mendoza,
Argentina: Expat Books, 2013). Available on Amazon.com.
The scope of his business broadened over time. English &
Associates provides due diligence for foreigners buying real estate

FIGURE 15.5 Most Frequently Encountered Impediments to International Trade

Most Frequently 90.0% 88.5% 82.2% Small and Medium-Sized Manufacturers
Encountered 80.0% Small and Medium-Sized Service Firms
Impediments to 70.0%
International Trade 79.1%
Percentage of Companies Encountering Impediments 78.0%
Source: U.S. International Trasnhispppoirtnagticoonstasnd
Trade Commission, Small cultLuraanlgbuaarrgieerasnd 73.4% 72.5%
and Medium-Sized Enter- sDialfefiscuplrtyoslpocecattisng
prises: Characteristics and 60.0% Foreign regulations55.8% 58.7%
Performance, Publication 4189, 50.0%
November 2010, pp. 6–8. 40.0% U.S. regulations53.6%53.4%51.1%
sufficieFnotrleyigprnosfiatlaebslenot
45.4%

30.0%

20.0%

10.0%

0.0%

Impediment to International Trade

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 613

TABLE 15.3 Global Business Assumptions

Old Assumption New Assumption
Exporting is too risky for my
small company. Exporting to “easy” markets such as Canada is no more risky
than selling to companies in the United States. Each international
Getting paid is cumbersome, market has its own level of risk. Entrepreneurs can identify the most
and I’ll lose my shirt. significant risks their companies face and reduce them by using the
extensive amount of affordable export assistance that is available now.
Exporting is too complicated.
Trade finance and global banking have evolved to the point where
My domestic market is secure. buying and selling goods and services internationally is routine,
I don’t need to export. safe, and efficient. Reliable collection methods, including credit
cards, online payments, and letters of credit, are readily available.
I’m too small to go global. Some delivery firms will collect payment from customers at the
My product or service probably time of delivery.
won’t sell outside the United
States. Most exporting requires minimal paperwork. Often, entrepreneurs
can research markets and find buyers from their computers using
I won’t be successful because free or low-cost information.
I don’t speak another language
and have never been abroad. Globalization has made buying and selling goods in multiple
markets easy. Few markets remain static, and new markets are
constantly opening. Most U.S. businesses are involved in or
affected by international markets, whether they realize it or not.
More small and medium-size companies have the potential to
benefit from going global, but doing so requires an international
marketing strategy.

No company is too small to go global. In fact, 72 percent of U.S.
exporters have fewer than 20 employees.

If your product or service sells well in the United States, there is a
good chance you can find a foreign market in which it will sell. In
addition, help is available for entrepreneurs who want to test the
appeal of their products and services in more than 100 countries
around the globe. In some markets, entrepreneurs must make
modifications to their products and services because of cultural,
regulatory, or other differences. However, most modifications
are small and simple to make. In addition, by learning to sell
successfully in other markets, small companies become stronger
and better able to compete in all of their markets.

Cultural knowledge and business etiquette are important, but you
can learn as you go. English is the language of business in many
countries, but you can easily hire translators and interpreters when
necessary. Researching cultural differences before engaging in
foreign transactions helps prevents embarrassing faux pas, but a
friendly disposition, a sense of humor, and a willingness to learn
can make up for many unintended mistakes.

Source: Based on “Table 1.1: Global Business Assumptions,” A Basic Guide to Exporting, 10th ed., 2008, U.S.
Department of Commerce, International Trade Administration, p. 7; “U.S. Export Loan Programs,” U.S. Small
Business Administration, http://www.sba.gov/content/export-loan-programs.

can export and what you can and cannot export” (see Table 15.3). The first step to building an
export program is recognizing that the opportunity to export exists. Another reason entrepreneurs
neglect international markets is a lack of information about how to get started. The keys to suc-
cess in international markets are choosing the correct target market and designing the appropri-
ate strategy to reach it. That requires access to information and research. Although a variety of
government and private organizations make volumes of exporting and international marketing
information available, many small business owners never use it. A successful global market-
ing strategy also recognizes that not all international markets are the same. Companies must be
flexible, willing to make adjustments to their products and services, promotional campaigns,
packaging, and sales techniques.

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

Hands On . . . How To

Build a Successful Global Company extensive network of connections in all corners of the globe.
Using her industry contacts, Abbruzzese found a Taiwanese
Brothers Jeff and Tony Logosz grew up enjoying water sports in investor who provided start-up capital for Morgan & Milo and
the Columbia River Gorge in the state of Washington. They ulti- introduced Abbruzzese to the owner of the factory in south-
mately found a way to turn their passion into a business, launch- ern China that makes many of the shoes that Morgan & Milo
ing Slingshot Sports to design and manufacture kiteboards. designs. Two other advisers on whom Abbruzzese relies are
industry veterans who have an extensive network of contacts
Slingshot Sports helped to create a market for kiteboards, in the shoe industry that have proved to be extremely valu-
which were the focus of a relatively new sport at the time. Sling- able to her company.
shot Sports soon began to find success promoting kiteboarding
and selling its products to a growing market. Learn about the cultural aspects of conducting business
in the countries in which your company operates. Busi-
One day, a distributor from the United Kingdom showed up ness dealings are a reflection of a country’s culture, and en-
at the Slingshot Sports offices in North Bonneville, Washington, trepreneurs should educate themselves about the nuances of
wanting to import its products. Like many small business owners, doing business in the host country to avoid committing embar-
the Logosz brothers had no idea how exporting worked. However, rassing cultural blunders. In the United States, businesspeople
the request prompted them to learn how to export their prod- are transaction oriented. They want to set up an appointment,
ucts. When they did, they found strong growth in demand for negotiate a deal quickly and efficiently, sign a contract, and
kiteboards around the globe. Distributors from around the world leave. In many other countries, landing a deal takes much
came clamoring for contracts to sell Slingshot Sports Kiteboards. longer because businesspeople expect to get to know their
potential partners first. Particularly in Asia, businesspeople
The company eventually expanded its product line by add- tend to be relationship oriented, doing business only with
ing wakeboards. Unlike kiteboards, wakeboards were a well- people they know, like, and respect. Developing relationships
established product in a market with many competitors. Rather can take time, making a network of connections all the more
than having global distributors seeking out Slingshot Sports at important. When doing business in Asia, entrepreneurs quickly
the national trade show, the company had to develop a sales learn that formal contracts, which are the foundation of busi-
strategy in which the founders traveled to markets around the ness deals in the United States, are not as important. They also
globe to pitch their new wakeboards. The strategy was successful, learn to adjust the speed at which they close deals and take
and sales of Slingshot Sports wakeboards soon exceeded all of more time to build relationships with reliable suppliers.
the Logosz’s projections. Following are some of the lessons the
Logosz brothers and other entrepreneurs have learned about Go there. As Slingshot Sports learned when it expanded into
operating a global small business. wakeboards, building a global business usually requires entre-
preneurs to travel to the countries in which they plan to do
Don’t assume that your company has to be big to be business. It’s an excellent way to build a network of contacts.
an international player. As the Logosz brothers learned, Participating in international trade missions, attending inter-
even very small companies have the opportunity to be suc- national trade shows, and using matching services such as the
cessful in the global arena. Success in international markets U.S. Department of Commerce’s Gold Key and Platinum Key
does not require size, but it does require commitment and a services are ideal methods for connecting with potential cus-
sound strategy. tomers, distributors, and suppliers.

Know what you don’t know. Perhaps the most important Recognize that foreign sales often put additional
item in a global entrepreneur’s briefcase is knowledge. Before demands on a company’s cash flow. Expanding a com-
embarking on any international business initiative, entrepre- pany’s sales efforts into international markets can strain a
neurs should take the time to educate themselves and their company’s cash flow, and many traditional lenders are hesi-
employees. This chapter is filled with useful resources, many tant to extend loans to cover foreign credit sales because they
of which are free, that are designed to help business owners perceive the risk to be too great. Help is available for small
get their global business efforts off to a good start. The start- companies, however. The Small Business Administration and
ing point for conducting international business successfully is the Ex-Im Bank offer loan and loan guarantee programs to
learning about best practices for key issues such as identifying finance small companies’ foreign credit sales. CellAntenna
target markets, developing distribution strategies, complying Corporation, a maker of cell phone jamming and control
with regulations, adapting products when necessary, collect- technology in Coral Springs, Florida, secured a $250,000 line
ing payments, and providing customer service. of credit through the Small Business Administration’s Export
Working Capital loan guaranty program to finance its export
Build a network of connections. Having a contact in a for- sales. The company recently landed a $100,000 order from a
eign country who can open doors to potential suppliers and prison in Australia. “Having a $250,000 line of credit makes it
customers greatly reduces the risk involved in international
business. Mia Abbruzzese, founder of Morgan & Milo, a chil-
dren’s shoe company, had launched several shoe lines during
her days as an executive for three large global shoe compa-
nies and knew that success in the shoe business requires an

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 615

Hands On . . . How To (continued)

easy for us to produce the equipment while receiving orders but purchases export credit insurance from the Ex-Im Bank to
from around the world,” says CEO Howard Melamed. mitigate the risk of nonpayment.

Make sure you collect payments from foreign sales. Sources: Based on “Slingshot Sports,” Export Washington, n.d., www.exportwashington
Collecting payments on delinquent foreign sales is more .com/why-export/success-stories/Pages/Slingshot-Sports.aspx; Diana Ransom, “Five
involved than collecting payments on delinquent domestic Tips for Getting Started in Exporting,” Entrepreneur, May 17, 2011, http://www
sales. The best way to avoid this problem is to sell to custom- .entrepreneur.com/article/219650; Ian Mount, “Tips for Increasing Sales in In-
ers who pay their bills on time. That means that conducting ternational Markets,” New York Times, April 21, 2010, http://www.nytimes
credit checks before selling to international customers is just .com/2010/04/22/business/smallbusiness/22sbiz.html; John Jantsch, “Around the
as important as it is before selling to domestic customers. Block or around the World,” Duct Tape Marketing, September 21, 2010, http://www
In addition, small companies can reduce the risk of foreign .ducttapemarketing.com/blog/2010/09/21/around-the-block-or-around-the-world;
credit sales by purchasing export credit insurance from either Anita Campbell, “Preparing Your Business to Go Global,” Small Business Trends,
private insurers or from the Ex-Im Bank. CellAntenna Corpo- November 19, 2010, http://smallbiztrends.com/2010/11/preparing-your-business-to-
ration routinely sells to foreign customers on open account go-global.html; Allessandra Bianchi, “Small & Global: The World as a Factory,” FSB,
June 2004, pp. 40–42; Sheri Qualters, “Operating on a Shoestring,” Boston Business
Journal, June 10, 2005, http://boston.bizjournals.com/boston/stories/2005/06/13/
smallb1.html; and 2011 National Export Strategy: Powering the National Export Ini-
tiative, Trade Promotion Coordinating Committee, Washington, DC, June 2011, p. 23.

An additional obstacle is the inability of small firms to obtain adequate export financing. Finan-
cial institutions that serve small companies often are not experienced in financing international sales
and are unwilling to accept the perceived higher levels of risk they create for the lender.

International Barriers

Domestic barriers aren’t the only ones that export-minded entrepreneurs must overcome. Trading
nations also erect obstacles to free trade. Two types of international barriers are common: tariff
and nontariff.

TARIFF BARRIERS A tariff is a tax, or duty, that a government imposes on goods and services tariff
a tax, or duty, that a gov-
imported into that country. Imposing tariffs raises the price of the imported goods—making ernment imposes on goods
and services imported into
them less attractive to consumers—and protects the domestic makers of comparable product that country.

and services. Established in the United States in 1790 by Alexander Hamilton, the tariff system
generated the majority of federal revenues for about 100 years. Currently, the Harmonized
Tariff Schedule, which sets tariffs for products imported into the United States, includes

37,000 categories of goods. The average U.S. tariff on imported goods is 1.74 percent (compared
to the global average of 2.69 percent).43 American tariffs vary greatly and depend on the particular

type of good. For instance, inexpensive men’s acrylic sweaters imported into the United States

carry a 32 percent tariff, but the tariff on cashmere sweaters is 4 percent; cheap sneakers are
taxed at 48 percent, but golf shoes carry an 8.5 percent tariff.44 Tariff rates also vary among

nations. Singapore, Switzerland, and Hong Kong impose no tariffs at all on imported goods, but
Bermuda’s is 15.2 percent.45

NONTARIFF BARRIERS Many nations have lowered the tariffs they impose on products and services quota
brought into their borders, but they rely on other nontariff structures as protectionist trade barriers. a limit on the amount
of a product imported
Quotas Rather than impose a direct tariff on certain imported products, nations often use quotas into a country.
to protect their industries. A quota is a limit on the amount of a product imported into a country.
Those who favor quotas argue that they protect domestic industries and the jobs they create.
Those who oppose quotas say that they artificially raise prices on the restricted goods, imposing
a hidden tax on customers who purchase them. China imposes a quota on foreign films, allowing
only 34 foreign films to be released each year. Before 2012, the quota was 20 foreign films per
year. China’s total box office sales are $3.57 billion annually, the third largest in the world, and
its box office sales are predicted to exceed $5 billion by 2015. China has 4,582 cinema complexes
and 18,195 movie screens, with more than 5,000 screens added just in 2013. Despite pressure
from the World Trade Organization (WTO) to eliminate the film quota, Chinese officials have
refused, expressing concern that removing the barrier would unleash a flood of foreign films that
might wipe out the local film industry.46

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

embargo Embargoes An embargo is a total ban on imports of certain products. The motivation for
a total ban on imports of embargoes is not always economic; it also can involve political differences, environmental
certain products into a disputes, war, terrorism, and other issues. For instance, the United States imposes embargoes
country. on products from nations it considers to be adversarial, including Cuba, Iran, Iraq, and North
Korea, among others. An embargo on trade with Cuba, started in 1962 when Fidel Castro
dumping nationalized all U.S. businesses on the island nation and formed an alliance with the Soviet
selling large quantities Union, still exists today. In 1994, the United States lifted a total trade embargo on Vietnam that
of goods at prices that had stood since 1975, when Saigon fell into communist hands at the end of the Vietnam War.
are below cost in foreign Today, the United States imports $24.6 billion worth of goods from Vietnam and exports goods
countries in an effort to worth $5.0 billion.47
grab market share quickly.
Embargoes also originate from cultural differences. For instance, the United States imposes
embargoes on any harp seal products from Norway under the Marine Mammal Protection Act.
Norway, where seal products make up a multi-million-dollar industry, has pushed for the elimina-
tion of the embargo, arguing that harp seals are not an endangered species.48

Dumping In an effort to grab market share quickly, some companies have been guilty of dumping
products: selling large quantities of them at prices that are below cost in foreign countries. The
United States has been a dumping ground for steel, televisions, shoes, and computer chips from
other nations in the past. Under the U.S. Antidumping Act, a company must prove that the foreign
company’s prices are lower here than in the home country and that U.S. companies are directly
harmed. Disputes over dumping brought before the WTO have increased significantly over the
last five years, and China has been the target of most of the complaints from WTO member
nations. The U.S. Department of Commerce, without the involvement of the WTO, recently ruled
that government-subsidized makers of solar cells and panels in China were guilty of dumping
their products in the United States at prices that average 31 percent below “fair value.” SolarWorld
Industries America and six other U.S.-based solar cell and panel manufacturers initiated the
charge, claiming that artificially low prices on solar products from China are crippling the
domestic industry. As part of its ruling, the U.S. Department of Commerce imposed punitive
dumping margins (the difference between the fair value of the items and their actual export price)
of 31 percent on the Chinese companies.49

Political Barriers

Entrepreneurs who go global quickly discover a labyrinth of political tangles. Although many
U.S. business owners complain of excessive government regulation in the United States, they
are often astounded by the onerous web of governmental and legal regulations and barriers they
encounter in foreign countries. One entrepreneur who established a business location in Russia
says he had to visit more than two dozen agencies to complete the necessary paperwork and get
90 different documents signed.50

Companies doing business in politically risky lands face the very real dangers of govern-
ment takeovers of private property; coups to overthrow ruling parties; kidnapping, bombings,
and other violent acts against businesses and their employees; and other threatening events. Their
investments of millions of dollars may evaporate overnight in the wake of a government coup
or the passage of a law nationalizing an industry (giving control of an entire industry to the
government).

Business Barriers

American companies doing business internationally quickly learn that business practices and
regulations in foreign lands can be quite different from those in the United States. Simply dupli-
cating the practices they have adopted (and have used successfully) in the domestic market and
using them in foreign markets is not always a good idea. Perhaps the biggest shock comes in the
area of human resources management, in which international managers discover that practices
common in the United States, such as overtime and employee benefits, are restricted, disfa-
vored, or forbidden in other cultures. Business owners new to international business sometimes
are shocked at the wide range of labor costs they encounter and the accompanying wide range
of skilled labor available. In some countries, what appear to be “bargain” labor rates turn out
to be excessively high after accounting for the quality of the labor force and the benefits their

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 617

governments mandate: from company-sponsored housing, meals, and clothing to profit sharing
and extended vacations. For instance, laws in many European countries mandate a minimum
of 20 days of vacation in addition to paid holidays, giving workers there an average of nearly
35 days off per year.51 Some countries’ labor laws make it extremely difficult or even impossible
to terminate employees once hired. Hefty taxes, ineffective legal systems, corruption, and shady
business associates can make doing business in foreign countries difficult.

Cultural Barriers culture
the beliefs, values, views,
Even though travel and communications technology has increased the ease and the frequency and mores that a nation’s
with which entrepreneurs engage in global transactions, the potential for cultural blunders has inhabitants share.
increased. The culture of a nation includes the beliefs, values, views, and mores its inhabitants
share. Differences in cultures among nations create another barrier to international trade. The
diversity of languages, business philosophies, practices, and traditions make international trade
more complex than selling to the business down the street. Consider the following examples:

● A U.S. entrepreneur, eager to expand into the European Union, arrives at the headquarters
of his company’s potential business partner in France. Confidently, he strides into the meet-
ing room, enthusiastically pumps his host’s hand, slaps him on the back, and says, “Tony,
I’ve heard a great deal about you; please, call me Bill.” Eager to explain the benefits of
his product, he opens his briefcase and gets right down to business. The French executive
politely excuses himself and leaves the room before negotiations ever begin, shocked by
the American’s rudeness and ill manners. Rudeness and ill manners? Yes—from the French
executive’s perspective.

● Another American business owner flies to Tokyo to close a deal with a Japanese executive.
He is pleased when his host invites him to play a round of golf shortly after he arrives. He
plays well and manages to win by a few strokes. The Japanese executive invites him to play
again the next day, and again he wins by a few strokes. Invited to play another round the
following day, the American asks, “But when are we going to start doing business?” His
host, surprised by the question, says, “But we have been doing business.”

● An American businesswoman in London is invited to a party hosted by an advertising
agency. Unsure of her ability to navigate the streets and subways of London alone, she
approaches a British colleague who is driving to the party and asks him, “Could I get a ride
with you?” After he turns bright red from embarrassment, he regains his composure and
politely says, “Lucky for you I know what you meant.” Unknowingly, the young woman
had requested a sexual encounter with her colleague, not a lift to the party!52

● One pharmaceutical company was about to market a weight loss pill under the name Tegro,

which sounds harmless enough in English. However, phonetically, the word sounds identi-
cal to the French phrase t’es gros, which translates “You are fat.” Another global company

attempted to market a technology training system whose name sounded exactly like the
Korean phrase for “porn movie.”53

When American businesspeople enter international markets for the first time, they often are
amazed at the differences in foreign cultures’ habits and customs. In the first scenario above, for
instance, had the entrepreneur done his homework, he would have known that the French are
very formal (backslapping is definitely taboo!) and do not typically use first names in business
relationships (even among longtime colleagues). In the second scenario, a global manager would
have known that the Japanese place a tremendous importance on developing personal relation-
ships before committing to any business deals. Thus, he would have seen the golf games for what
they really were: an integral part of building a business relationship.

Understanding and heeding these often subtle cultural differences is one of the most impor-
tant keys to international business success. Conducting a business meeting with a foreign execu-
tive in the same manner as one with an American businessperson could doom the deal from the
outset. Business customs and behaviors that are acceptable, even expected, in the United States
may be taboo in others, and entrepreneurs who fail to learn the differences in the habits and cus-
toms of the cultures in which they hope to do business are at a distinct disadvantage.

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

ENTREPRENEURIAL PROFILE: Aloompa Aloompa is

an app development business located in Nashville, Ten-

nessee, that specializes primarily in apps for music festivals. Its

first customer was the Bonnaroo Music and Arts Festival in

Manchester, Tennessee. The app includes a map of the festival

grounds, including the location of food vendors, bathrooms,

retail spaces, and stages. It also includes bios of performers,

audio samples of performers’ music, and reviews that can be

pushed out to Facebook, Instagram, and Twitter. After grow-

ing to more than two dozen music festivals in the United

States, Aloompa expanded to international festivals. The first

was the Playa del Carmen in Mexico. The app for this festival is

available in both English and Spanish. Aloompa is quickly add-

ing new festivals for customers in Asia, Europe, and South

America. “As Aloompa expanded into the international mar-

ket, it has had to learn how to communicate across culture bar-

riers and familiarize itself with a variety of business practices

across the globe,” says Caleb Jones in Business Development

for Aloompa. “For example, as we expanded we found it nec-

essary to start our deals in the South American market a full

month prior due to slower timelines. As we move further into

Courtesy of Tyler Seymour, Aloompa the international market, it has given us an appreciation for

the vast array of cultures that make up international commerce, and a great desire to continue

business ventures abroad.”54 ■

Culture, customs, and the norms of behavior differ greatly among nations, and making the
correct impression is extremely critical to building a long-term business relationship. Consider
the following examples:

● In Europe and China, just as in the United States, punctuality for business meetings is
important. In Latin America, Africa, and many Middle Eastern countries, however, business
meetings rarely start at the scheduled time, something that does not seem to bother locals.

● In Great Britain, businesspeople consider it extremely important to conduct business
“properly”—with formality and reserve. Boisterous behavior such as backslapping or
overindulging in alcohol and ostentatious displays of wealth are considered ill mannered.
The British do not respond to hard-sell tactics but do appreciate well-mannered executives.
Politeness and impeccable manners are useful tools for conducting business successfully.

● In Colombia, foreigners are expected to be on time for meetings, although native
Colombians are rarely punctual. Be ready to wait. Once the meeting begins, Colombians
stand closer together when talking. However, unlike many other South Americans, they
engage in less physical contact during a conversation. Be ready for relaxed conversa-
tion before getting down to business. It is considered rude to jump right into business
discussions.55

● In India, a limp handshake and avoiding eye contact are not signs of weakness or dislike;
they convey respect.56

● When doing business in Greece, U.S. executives must be thoughtful of their hand gestures;
the hand-waving gesture that means “good-bye” in the United States is considered an insult
in Greece.57

● In Japan and South Korea, exchanging business cards, known in Japan as meishi, is an im-
portant business function (unlike in Great Britain, where exchanging business cards is less
popular). A Western executive who accepts a Japanese companion’s card and then slips it
into his pocket or scribbles notes on it has committed a major blunder. Tradition there says
that a business card must be treated just as its owner would be—with respect. Travelers
should present their own cards using both hands with the card positioned so that the recipi-
ent can read it. (The flip side should be printed in Japanese, an expected courtesy.)

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 619

● Business attire is very important when doing business in Argentina. Business dress is
conservative, with men and women generally wearing dark suits. Eye contact should be
maintained throughout a business conversation.58

● Exercise caution when giving gifts. Although gift giving is standard practice in Japan, busi-
nesspeople in other countries, such as Malaysia, may see a gift as a bribe. In many coun-
tries, gifts of flowers are considered inappropriate because they connote romantic attention.
In South Korea, giving a clock as a gift is considered good luck, but in China, it is consid-
ered a bad omen.59 Avoid giving gifts to business associates that are traditional symbols of
their own cultures, such as chocolates to the Swiss or tea to the Chinese.

● In China, entrepreneurs will need an ample dose of the “three Ps”: patience, patience, and
patience. Nothing in China—especially business—happens fast, and entrepreneurs wanting to
do business there must be persistent! In conversation and negotiations, periods of silence are
common; they are a sign of politeness and contemplation. The Chinese view personal space
much differently than Americans; in normal conversation, they will stand much closer to their
partners. At a business meal, sampling every dish, no matter how exotic, is considered polite.
In addition, do not expect to conduct business the week before or after the Chinese New Year
(“Yuandan”), whose dates vary from year to year, when many businesses are closed.

● Starting business relationships with customers in the Pacific Rim usually requires a third-
party contact because Asian executives prefer to do business with people they know. In
addition, building personal relationships is important. Many business deals take place over
informal activities in this part of the world. American entrepreneurs doing business in the
Pacific Rim should avoid hard-sell techniques, which are an immediate turnoff to Asian
businesspeople. Harmony, patience, and consensus make good business companions in this
region. It is also a good idea to minimize the importance of legal documents in negotia-
tions. Although getting deals and trade agreements down in writing always is advisable,
attempting to negotiate detailed contracts (as most American businesses tend to do) would
insult most Asians, who base their deals on mutual trust and benefits.

International Trade Agreements LO4

With the fundamental assumption that free trade among nations results in enhanced economic Describe the trade
prosperity for all parties involved, the last 50 years have witnessed a gradual opening of trade agreements that will have
among nations. Hundreds of agreements have been negotiated among nations in this period, with the greatest influence on
each contributing to free trade across the globe. Although completely free trade across interna- foreign trade in the twenty-
tional borders remains elusive, the following trade agreements have reduced some of the barriers first century.
to free trade that had stood for many years.

WORLD TRADE ORGANIZATION The World Trade Organization (WTO) was established in January
1995 and replaced the General Agreement of Tariffs and Trade (GATT), the first global tariff
agreement, which was created in 1947 and was designed to reduce tariffs among member nations.
The WTO, currently with 160 member countries, is the only international organization that
establishes rules for trade among nations. Its member countries represent more than 97 percent of
all world trade. The rules and agreements of the WTO, called the multilateral trading system, are the
result of negotiations among its members. The WTO actively implements the rules established by
the Uruguay Round negotiations of GATT from 1986 to 1994 and continues to negotiate additional
trade agreements. The ninth round of negotiations, the Doha Development Agenda, began in 2001.
As of 2014, there was still no definitive conclusion to this round of negotiations. Through the
agreements of the WTO, members commit themselves to nondiscriminatory trade practices and to
reducing barriers to free trade. The WTO’s agreements spell out the rights and obligations of each
member country. Each member country receives guarantees that its exports will be treated fairly
and consistently in other member countries’ markets. The WTO’s General Agreement on Trade
in Services addresses specific industries, including banking, insurance, telecommunications, and
tourism. In addition, the WTO’s intellectual property agreement, which covers patents, copyrights,
and trademarks, defines rules for protecting ideas and creativity across borders.

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

In addition to the development of agreements among members, the WTO is involved in
the  resolution of trade disputes among members. The WTO system is designed to encourage
dispute resolutions through consultation. If this approach fails, the WTO has a stage-by-stage
procedure that can culminate in a ruling by a panel of experts.

free trade area NORTH AMERICAN FREE TRADE AGREEMENT The NorthAmerican Free TradeAgreement (NAFTA)
an association of countries created a free trade area among Canada, Mexico, and the United States. A free trade area is an
that have agreed to elimi- association of countries that have agreed to eliminate trade barriers, both tariff and nontariff, among
nate trade barriers, both partner nations. Under the provisions of NAFTA, these barriers were eliminated for trade among the
tariff and nontariff, among three countries, but each remained free to set its own tariffs on imports from nonmember nations.
partner nations.
NAFTA forged one of the world’s largest free trade areas, a unified United States–Canada–
Mexico market of 465 million people with a total annual output of $20.1 trillion in goods and
services.60 This important trade agreement binds together the three nations on the North American
continent into a single trading unit stretching from the Yukon to the Yucatan. NAFTA’s provisions
called for the reduction of tariffs to zero on most goods traded among these three nations. NAFTA’s
provisions have enhanced trade among the United States, Canada, and Mexico. Since NAFTA’s
passage in 1994, total trade between the United States and Mexico has increased 522 percent, and
total trade with Canada has increased 200 percent.61 It also has made that trade more profitable and
less cumbersome for companies of all sizes and has opened new opportunities for many businesses.
Since NAFTA’s passage, trade among the three nations has more than tripled; these countries now
conduct nearly $3.1 billion in trilateral trade each day!62

ENTREPRENEURIAL PROFILE: Tanya Shaw: Unique Solutions In 2002, Tanya Shaw
launched Unique Solutions, a company based in Dartmouth, Nova Scotia, that markets the
Intellifit Virtual Fitting Room, a high-tech scanner that is capable of capturing 200,000 measure-
ments on a fully clothed person in just 20 seconds. After a visit to a mall or retail store for a brief
scan, customers receive a report that gives them key body measurements they can use to purchase
made-to-measure garments from a database of companies that Unique Solutions maintains or to
make shopping for off-the-rack clothing more a more pleasant and efficient experience. The com-
pany’s Me-Ality shopping guide matches shoppers’ body shapes with specific sizes at retailers
ranging from Banana Republic and Coldwater Creek to J. Crew and Talbot’s. Shaw decided to
leave the company’s headquarters in Nova Scotia, but because NAFTA created opportunities in the
United States and Mexico, she moved her marketing and sales division to California and partnered
with a New Zealand company, TJ’s Jeanswear, that has a factory in Parras, Mexico. TJ’s Jeanswear
produces and delivers custom-made jeans to Unique Solutions customers. Shaw credits the col-
laborative business environment created by NAFTA as her small business sought the formation of
international partnerships.63 ■

DOMINICAN REPUBLIC–CENTRAL AMERICA FREE TRADE AGREEMENT The Dominican Republic–
Central America Free Trade Agreement (CAFTA-DR) is to Central America what NAFTA is to
North America. The agreement, which was implemented in stages between 2006 and 2008, is
designed to promote free trade among the United States and six Central American countries: Costa
Rica, El Salvador, Guatemala, Honduras, the Dominican Republic, and Nicaragua. In addition
to reducing tariffs among these nations, CAFTA-DR protects U.S. companies’ investments and
intellectual property in the region, simplifies the export process for U.S. companies, and provides
easier access to Central American markets.

Conclusion

To remain competitive, small businesses must assume a global posture. Global effectiveness
requires entrepreneurs to be able to leverage workers’ skills, company resources, and customer
know-how across borders and throughout cultures across the world. They also must concen-
trate on maintaining competitive cost structures and a focus on the core of every business—the
customer! Although there are no surefire rules for going global, small businesses that want to
become successful international competitors should observe these guidelines:

● Take the time to learn about doing business globally before jumping in. Avoiding mistakes
is easier and less expensive than cleaning up the results of mistakes later.

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 621

● If you have never conducted international business, consider hiring a trade intermediary
or finding a local partner to help you.

● Make yourself at home in all three of the world’s key markets: North America, Europe, and
Asia. This triad of regions is forging a new world order in trade that will dominate global
markets for years to come.

● Appeal to the similarities within the various regions in which you operate but recognize the
differences in their specific cultures. Although the European Union is a single trading bloc
composed of 28 countries, smart entrepreneurs know that each country has its own cultural
uniqueness and do not treat the nearly 507 million people in them as a unified market. “Gone
are the days when you could just roll out one product for the global market,” says Hamad
Malik, Middle East marketing director for the South Korean electronics company LG.64

● Develop new products for the world market. Make sure your products and services measure
up to world-class quality standards.

● Familiarize yourself with foreign customs and languages. Constantly scan, clip, and build
a file on other cultures: their lifestyles, values, customs, and business practices.

● Learn to understand your customers from the perspective of their culture, not your own.
Bridge cultural gaps by adapting your business practices to suit their preferences and
customs.

● “Glocalize.” Make global decisions about products, markets, and management but allow
local employees to make tactical decisions about packaging, advertising, and service.

● Recruit and retain multicultural workers who can give your company meaningful insight
into the intricacies of global markets. Entrepreneurs with a truly global perspective iden-
tify, nurture, and use the talents and knowledge multicultural workers possess.

● Train employees to think globally, send them on international trips, and equip them with
state-of-the-art communications technology.

● Hire local managers to staff foreign offices and branches.

● Do whatever seems best wherever it seems best, even if people at home lose jobs or
responsibilities.

● Consider using partners and joint ventures to break into foreign markets you cannot
penetrate on your own.

● Evaluate opportunities to become an expat entrepreneur.

By its very nature, going global can be a frightening experience. Most entrepreneurs who have
already made the jump, however, have found that the benefits outweigh the risks and that their
companies are much stronger because of it.

Chapter Summary by Learning Objective

1. Explain why “going global” has become 2. Describe the principal strategies small
an integral part of many small companies’ businesses have for going global.
marketing strategies.
● Perhaps the simplest and least expensive way for a
● Companies that move into international business small business to begin conducting business glob-
can reap many benefits, including offsetting sales ally is to establish a Web site. Companies that sell
declines in the domestic market; increasing sales goods on the Web should establish a secure ordering
and profits; extending their products’ life cycles; and payment system for online customers.
lowering manufacturing costs; improving competi-
tive position; raising quality levels; and becoming ● Trade intermediaries, such as EMCs, ETCs, MEAs,
more customer oriented. export merchants, resident buying offices, and

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

foreign distributors, can serve as a small company’s 3. Discuss the major barriers to international
“export department.” trade and their impact on the global economy.

● In a domestic joint venture, two or more U.S. small ● Three domestic barriers to international trade are
companies form an alliance for the purpose of ex- common: the attitude that “we’re too small to ex-
porting their goods and services abroad. In a foreign port,” lack of information on how to get started in
joint venture, a domestic small business forms an global trade, and a lack of available financing.
alliance with a company in the target area.
● International barriers include tariffs, quotas, embar-
● Some small businesses enter foreign markets by goes, dumping, and political, business, and cultural
licensing businesses in other nations to use their barriers.
patents, trademarks, copyrights, technology, pro-
cesses, or products. 4. Describe the trade agreements that will have
the greatest influence on foreign trade in the
● Franchising has become a major export industry twenty-first century.
for the United States. Franchisers that enter foreign
markets rely on three strategies: direct franchising, ● The WTO was established in 1995 to implement the
area development, and master franchising. rules established by the Uruguay Round negotia-
tions of GATT from 1986 to 1994, and it continues
● Some countries lack a hard currency that is convert- to negotiate additional trade agreements. The WTO
ible into other currencies, so companies doing busi- has 160 member nations and represents more than
ness there must rely on countertrading or bartering. 97 percent of all global trade. The WTO is the
A countertrade is a transaction in which a business governing body that resolves trade disputes among
selling goods in a foreign country agrees to promote members.
investment and trade in that country. Bartering in-
volves trading goods and services for other goods ● NAFTA created a free trade area among Canada,
and services. Mexico, and the United States. The agreement cre-
ated an association that knocked down trade bar-
● Once established in international markets, some riers, both tariff and nontariff, among the partner
small businesses set up permanent locations there. nations.
Although they can be very expensive to establish
and maintain, international locations give businesses ● CAFTA-DR created a free trade area among the
the opportunity to stay in close contact with their United States and six nations in Central America:
international customers. Costa Rica, El Salvador, Guatemala, Honduras, the
Dominican Republic, and Nicaragua. In addition to
● Many small companies shop the world for the goods reducing tariffs among these nations, CAFTA pro-
and services they sell. The intensity of price compe- tects U.S. companies’ investments and intellectual
tition has made importing and outsourcing success- property in the region, simplifies the export process
ful strategies for many small businesses. for U.S. companies, and provides easier access to
Central American markets.
● Some entrepreneurs choose to exploit opportunities
in foreign markets by moving to those countries and
becoming expat entrepreneurs.

Discussion Questions

15-1. Why must entrepreneurs learn to think globally? 15-9. What is the fastest, least expensive, and lowest-cost
15-2. What forces are driving small businesses into inter- option for a global business?

national markets? 15-10. What advantages and disadvantages does taking
15-3. What advantages does going global offer a small on an international partner through a joint venture
offer?
business owner?
15-4. What are the key ingredients needed to being 15-11. What is the definition of foreign licensing?
15-12. How can an entrepreneur help to offset the capital
successful in a global economy?
15-5. Outline the ten strategies that small businesses can drain from a foreign country’s purchases?
15-13. Describe the characteristics of a successful fran-
use to go global.
15-6. Describe the various types of trade intermediaries chiser in global markets.
15-14. Describe the barriers businesses face when trying to
that small business owners can use.
15-7. What functions do each type of trade intermediary conduct business internationally.
15-15. What are the three major domestic roadblocks for a
perform?
15-8. What is the difference between a domestic joint ven- potential exporter?

ture and a foreign joint venture?

CHAPTER 15 • GLOBAL ASPECTS OF ENTREPRENEURSHIP 623

15-16. Name the two types of international barriers. 15-20. What is a free trade area?
15-17. Why are some people against the use of quotas? 15-21. Identify the areas covered in the WTO’s intellectual
15-18. What impact do tariffs and quotas have on interna-
property agreement.
tional trade? 15-22. What was agreed on by members of the WTO?
15-19. What impact has agreements such as WTO, NAFTA, 15-23. What advice would you offer an entrepreneur inter-

and CAFTA had on small companies that want to go ested in launching a global business effort?
global?

Beyond the Classroom . . .

15-24. Go to lunch with a student from a foreign country 15-30. What steps should a small business owner take to
and discuss what products and services are most break into the most promising markets for U.S.
needed there. entrepreneurs?

15-25. Ask a student from a foreign country how business 15-31. Identify those nations that are currently the least
systems there differ from ours. promising for U.S. entrepreneurs.

15-26. Ask a student from a foreign country about govern- 15-32. Describe why the least promising nations are not
ment regulation and how it affects business in his or attractive markets.
her country.
15-33. Select a nation that interests you and prepare
15-27. Ask the student from a foreign country about the a report on its business customs and practices.
cultural differences between the United States and
his or her country. 15-34. Explain the similarities with business customs and
practices in United States.
15-28. Ask the student from a foreign country about trade
barriers that his or her government has erected. 15-35. Explain the differences with business customs and
practices in United States.
15-29. Work with a partner from your class. Choose a coun-
try of your preference, other than your own. Identify
the business customs and practices in your country
and compare with the country of your choice.

Endnotes

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

16 Building a New Venture Team
and Planning for the Next
Generation

Morsa Images/Getty Images

Learning Objectives 3. Explain how to create a company culture that
encourages employee retention.
On completion of this chapter, you will be able to:
4. Describe the steps in developing a management
1. Explain the challenges involved in the succession plan for a growing business that
entrepreneur’s role as leader and what it takes to allows a smooth transition of leadership to the
be a successful leader. next generation.

2. Describe the importance of hiring the right 5. Explain the exit strategies available to
employees and how to avoid making hiring entrepreneurs.
mistakes.

624

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 625

Leadership: An Essential Part of an Entrepreneur’s Job LO1

To be successful, an entrepreneur must assume a wide range of roles, tasks, and responsibilities, Explain the challenges
but none is more important than the role of leader. Some entrepreneurs are uncomfortable assum- involved in the entrepreneur’s
ing this role, but they must learn to be effective leaders if their companies are to grow and reach role as leader and what it
their potential. Leadership is the process of influencing and inspiring others to work to achieve a takes to be a successful
common goal and then giving them the power and the freedom to achieve it. Without leadership leader.
ability, entrepreneurs—and their companies—never rise above mediocrity. Entrepreneurs can
learn to be effective leaders, but the task requires dedication, discipline, and hard work. In the leadership
past, business owners often relied on an autocratic management style, one built on command and the process of influenc-
control. Today’s workforce is more knowledgeable, has more options, and is more skilled and, ing and inspiring others to
as a result, expects a different, more sophisticated style of leadership. Mark Leslie, founder of work to achieve a common
Veritas Software and under whose leadership the company grew from $95,000 in annual sales to goal and then giving them
more than $1.5 billion in sales in just 11 years, says leadership is no longer about command and the power and the freedom
control. Companies must attract the best and brightest people and create an environment in which to achieve it.
they can use their intelligence and judgment to make decisions.1

The rapid pace of change shaping the economy also is placing new demands on leaders.
Technology is changing the ways in which people work, the ways in which the various parts of
an organization operate and interconnect, and the ways in which competitors strive for market
dominance. To remain competitive, companies must operate at a new, faster speed of business,
and that requires a new style of leadership. Leaders of small companies must gather information
and make decisions with lightning-fast speed, and they must give workers the resources and the
freedom to solve problems and exploit opportunities as they arise. Effective leaders delegate
authority and responsibility and empower employees to act in the best interest of the business. In
this way, leaders demonstrate trust in employees and respect for their ability to make decisions.
Many entrepreneurs have discovered that the old style of leadership has lost its effectiveness and
that they must develop a new, more fluid, flexible style of leadership that better fits the needs of
modern workers and competitive conditions.

Until recently, experts compared a leader’s job to that of a symphony orchestra conductor.
Like the symphony leader, an entrepreneur made sure that everyone in the company was play-
ing the same score, coordinated individual efforts to produce a harmonious sound, and directed
the orchestra members as they played. The conductor (entrepreneur) retained virtually all of the
power and made all of the decisions about how the orchestra would play the music without any
input from the musicians themselves. Today’s successful entrepreneur, however, is more like the
leader of a jazz band, which is known for its improvisation, innovation, creativity, and freewheel-
ing style. “The success of a small [jazz band] rests on the ability to be agile and flexible, skills
that are equally central to today’s business world,” says Michael Gold, founder of Jazz Impact, a
company that teaches management skills through jazz.2 Business leaders, like the leaders of jazz
bands, should exhibit the following characteristics:

Innovative. Leaders must step out of their own comfort zones to embrace new ideas; they
avoid the comfort of complacency.

Passionate. One of entrepreneurs’ greatest strengths is their passion for their businesses.
Members of their team feed off of that passion and draw inspiration from it.

Willing to take risks. Playing it safe “is not an option in jazz or for any company that
wants to be solvent ten years from now,” says Gold.3

Adaptable. Although leaders must stand on a bedrock of resolute values, like jazz band
leaders, they must adapt their leadership styles to fit the situation and the people involved.

Management and leadership are not the same, yet both are essential to a company’s success.
Leadership without management is unbridled; management without leadership is uninspired.
Leadership gets a small business going; management keeps it going. In other words, leaders are
the architects of small businesses; managers are the builders. Some entrepreneurs are good man-
agers yet are poor leaders; others are powerful leaders but are weak managers. The best bet for
the latter is to hire people with solid management skills to help them to execute the vision they

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

have for their companies. Stephen Covey, author of Principle-Centered Leadership, explains the
difference between management and leadership in this way:

Leadership deals with people; management deals with things. You manage things; you lead
people. Leadership deals with vision; management deals with logistics toward that vision.
Leadership deals with doing the right things; management focuses on doing things right.
Leadership deals with examining the paradigms on which you are operating; management
operates within those paradigms. Leadership comes first, then management, but both are
necessary.4

Leadership and management are intertwined; one without the other means that a small busi-
ness is going nowhere. Leadership is especially important for companies in the growth phase,
when entrepreneurs are hiring employees (often for the first time) and must keep the com-
pany and everyone in it focused on its mission as growth tests every seam in the organizational
structure.

Effective leaders exhibit certain behaviors:

● They define and then constantly reinforce the vision they have for the company. Effec-
tive leaders have a clear vision of where they want their companies to go, and they concen-
trate on communicating that vision to those around them. Unfortunately, this is one area in
which employees say their leaders could do a better job. Clarity of purpose is essential to
a successful organization because people want to be a part of something that is bigger than
they are; however, the purpose must be more than merely achieving continuous quarterly
profits. Nick Saban, one of the most successful college coaches in recent memory, says a
clear vision is the first ingredient for any successful organization. The others are a plan to
implement the vision, a leader who sets a good example and develops principles and values
that support the vision, and convincing people to buy into the vision.5
In the 1930s, Walt Disney asked his team of animators to stay late one evening be-
cause he had a vision that would transform his company: Rather than continue making the
short cartoons the company had become known for, he wanted to make the first full-length
animated movie, a concept that at the time was revolutionary. Over the course of three and
a half hours, Disney created an unmistakable vision for the young company by acting out
all of the parts of the characters in Snow White and the Seven Dwarfs. Not only was the
movie a commercial and critical success (becoming the top grossing movie of all time until
it was unseated in 1939 by Gone with the Wind) and winning a special Academy award
(a full-size Oscar accompanied by seven “dwarf” Oscars), it paved the way for dozens of
other full-length animated films and transformed the entire company into an entertainment
powerhouse.6

● They create a set of values and beliefs for employees and passionately pursue them.
Values are the foundation on which a company’s vision is built. Leaders should be like bea-
cons in the night, constantly shining light on the principles, values, and beliefs on which
they founded their companies. Whenever the opportunity presents itself, entrepreneurs
must communicate with clarity the company’s bedrock values and principles to employees
and other stakeholders. Some entrepreneurs may not think that it is necessary to do so, but
successful leaders know they must hammer home the connection between their companies’
values and mission and the jobs workers perform every day.

● They establish a culture of ethics. One of the most important tasks facing leaders is to
mold a highly ethical culture for their companies. They also must demonstrate the character
and the courage necessary to stick to the ethical standards they create—especially in the
face of difficulty.

● They develop a strategic plan that gives the company a competitive advantage. Ideally,
employees participate in building a successful strategic plan, but the leader is the principal
strategic architect of the company. The leader also is responsible for implementing the plan
with flexibility and the ability to adapt it to changing conditions.

● They respect and support their employees. To gain the respect of their employees, lead-
ers must first respect those who work for them. Successful leaders treat every employee

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 627

with respect. They know that a loyal, dedicated workforce is a company’s most valuable
resource, and they treat their employees that way.

● They set the example for their employees. Leaders’ words ring hollow if they fail to
“practice what they preach.” Few signals are transmitted to workers faster than a leader
who sells employees on one set of values and principles and then acts according to a
different set. This behavior quickly undermines a leader’s credibility among employees,
who expect leaders to “walk their talk.” That is why integrity is perhaps the most important
determinant of a leader’s effectiveness.

● They are authentic. Employees quickly see through leaders who only pretend to be what
they are not. Authenticity does not make someone a leader, but a leader cannot be success-
ful without it. Authenticity is a vital part in developing trust among employees. Successful
leaders follow the philosophy of Popeye, the spinach-munching, crusty sailor who first
appeared in a cartoon strip in 1929 and was famous for saying, “I yam what I yam, and
that’s all what I yam.”7

● They create a climate of trust in the organization. Leaders who demonstrate integrity
win the trust of their employees, an essential ingredient in the success of any organiza-
tion. Honest, open communication and a consistent pattern of leaders doing what they say
they will do serve to build trust in a business. Research suggests that building trust among
employees is one of the most important tasks of leaders wherever they may work. A re-
cent survey of the CEOs of the 500 fastest-growing small companies in the United States,
top managers said the most important traits of outstanding leaders were trustworthiness,
sincerity, and the capacity to inspire.8

● They build credibility with their employees. To be effective, leaders must have credibility
with their employees, a sometimes challenging task for entrepreneurs, especially as their
companies grow and they become insulated from the daily activities of their businesses. To
combat the problem of losing touch with the problems their employees face as they do their
jobs, many managers periodically return to the front line to serve customers. Undercover
Boss, a popular television show, disguises CEOs and sends them to work in frontline jobs
in their companies. In addition to seeing just how difficult many jobs can be, all of the
CEOs get a superb refresher course in how important every worker’s role is to the success
of the company and how the policies they and other top managers create often make work-
ers’ jobs harder. Michael Rubin, founder and CEO of GSI Commerce, a company that pro-
vides distribution and call center services, learned so much from his frontline experience
that he now requires all of the GSI’s executives to spend time working in the company’s
warehouses and call centers. The idea is that top managers will make better decisions about
policies and procedures if they see firsthand the impact of those decisions on customers
and frontline employees. When 7-Eleven CEO Joe DePinto went undercover, an encounter
with a talented night-shift clerk who was considering leaving the company for a brighter
future elsewhere led him to implement a “talent identification program” designed to
promote promising employees within the company.9

● They focus employees’ efforts on challenging goals and keep them driving toward those
goals. When asked by a student intern to define leadership, one entrepreneur said, “Leadership
is the ability to convince people to follow a path they have never taken before to a place they
have never been—and upon finding it to be successful, to do it over and over again.”10

● They provide the resources employees need to achieve their goals. Effective leaders know
that workers cannot do their jobs well unless they have the tools they need. They provide
workers not only with the physical resources they need to excel but also with the necessary
intangible resources, such as training, coaching, and mentoring.

● They communicate with their employees. Leaders recognize that helping workers to see
the company’s overarching goal is just one part of effective communication; encouraging
employee feedback and then listening is just as vital. In other words, they know that com-
munication is a two-way street. Open communication takes on even greater importance
when a company faces a difficult or uncertain future.

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

● They value the diversity of their workers. Smart business leaders recognize the value of
their workers’ varied skills, abilities, backgrounds, and interests. When channeled in the
right direction, diversity can be a powerful weapon in achieving innovation and maintain-
ing a competitive edge. Good leaders get to know their workers and to understand the di-
versity of their strengths. Especially important to young workers is a leader’s capacity for
empathy, the ability to see things from another person’s viewpoint.

● They celebrate their workers’ successes. Effective leaders recognize that workers want
to be winners, and they do everything they can to encourage top performance among their
people. The rewards they give are not always financial; in many cases, it may be as simple
as a handwritten congratulatory note.

● They are willing to take risks. Entrepreneurs know better than most that launching a busi-
ness requires taking risks. They also understand that to remain competitive, they must
constantly encourage risk taking in their companies. When employees try something inno-
vative and it fails, they don’t resort to punishment because they know that doing so would
squelch creativity in the organization.

● They encourage creativity among their workers. Rather than punish workers who take
risks and fail, effective leaders are willing to accept failure as a natural part of innova-
tion and creativity. They know that innovative behavior is the key to future success and do
everything they can to encourage it among workers.

● They maintain a sense of humor. One of the most important tools a leader can have is
a sense of humor. Without it, work can become dull and unexciting for everyone.

ENTREPRENEURIAL PROFILE: Richard Branson: Virgin Group Sir Richard Branson,
founder of Virgin Group, a diversified company whose businesses range from airlines
and bridal gowns to cosmetics and consumer electronics, is famous for creating a work envi-
ronment of fun for himself and his employees. Branson has put on a wedding dress, bungee
jumped, and hosted off-site events designed strictly to allow employees to have fun. The
culture of fun at Virgin Group has built an ésprit de corps that gives the company a unique
advantage that competitors find difficult to match, and crown prince Richard Branson is its
architect.11 ■

● They create an environment in which people have the motivation, the training, and the
freedom to achieve the goals they have set. Leaders know that their success is determined
by the success of their followers. The goal is to make every employee the manager of his or
her job. The leader’s role is to provide employees with the resources and support they need
to be successful.

● They create a work climate that encourages maximum performance. Leaders understand
that they play a significant role in shaping a company culture that sets high standards of
performance. Anne Wojcicki, founder of 23andMe, a genetic testing company, says her
primary role is to get everyone in the company to think bigger.12

● They become a catalyst for change. With market and competitive climates changing so
rapidly, entrepreneurs must reinvent their companies constantly. Although leaders must
cling to the values and principles that form the bedrock of their companies, they must be
willing to change, sometimes radically, the policies, procedures, and processes within their
businesses. If a company is headed in the wrong direction, the leader’s job is to recognize
that and to get the company moving in the right direction.

● They develop leadership talent. Effective leaders look beyond themselves to spot tomor-
row’s leaders and take the time to help them grow into their leadership potential. A vital
component of every leader’s job is to develop the next generation of leaders.

● They keep their eyes on the horizon. Effective leaders are never satisfied with what they
and their employees accomplished yesterday. They know that yesterday’s successes are not
enough to sustain their companies indefinitely. They see the importance of building and
maintaining sufficient momentum to carry their companies to the next level. “A leader’s job

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 629

is to rally people toward a better future,” says Marcus Buckingham, who has spent nearly
two decades studying effective leaders.13 Just like winning athletes, good leaders visualize
a successful future and then work to make it happen.

Table 16.1 presents 12 questions leaders should address if they want their companies to excel.

TABLE 16.1 12 Questions That Every Leader Should Address

Jim Collins, coauthor of business best-sellers Good to Great and Great by Choice, has spent 25 years researching great companies
and has integrated the results of his research into 12 questions that leaders must address if they want their companies to excel. Collins
advises leaders to discuss one of the following questions every month and repeat the process annually:

1. Do we want to build a great company, and are we committed to doing the things that are required to make our company
great? Becoming a great company starts by making this fundamental choice, understanding the implications of choosing to build
a great company, and then making the commitment to take the necessary steps to achieve greatness.

2. Do we have the right people on the bus and in the key seats? Leaders must decide whether the people who will carry the
company forward are the right people. Are they capable? Motivated? Committed? Leaders must answer this question before they
decide where they want the business to go, and that sometimes means getting the wrong people off the bus.

3. What are the brutal facts? Leaders cannot make good decisions unless they have access to facts, both good and bad.
Confronting the negative, most troubling issues is essential because ignoring them represents a serious threat not only to
a company’s success but also to its survival. The key is to confront the facts without losing faith.

4. What are we best at, and what do we have an unbounded passion for? By answering this question, leaders are defining their
companies’ fundamental economic engine. Isaiah Berlin wrote, “The fox knows many things, but the hedgehog knows one big
thing.”* In other words, a fox is easily distracted, but a hedgehog, like an outstanding company, is focused, determined, and
relentless. A company’s hedgehog combines its passion and its distinctive competence with what it can make money doing (its
economic engine). What is the company’s hedgehog?

What you are deeply
passionate about

Hedgehog
Concept

What you can What drives
be the best in your economic
the world at
engine

5. What is our company’s 20-Mile March, and are we hitting it? Collins refers to Roald Amundsen’s successful attempt in
1911 to be the first person to reach the South Pole by committing to traveling 20 miles a day, no matter what the weather or
other obstacles he and his team encountered. Every company has a specific performance goal it must hit year in and year out to
be successful. Has the company identified that goal and committed to achieving it? How successful has the company been in
achieving the goal? Measuring performance in the 20-Mile March means that leaders must develop a meaningful set of metrics
and monitor them constantly.

6. Where do empirical data tell us that we should be placing our big bets? A company should invest major resources in a new
initiative only if leaders already know that it is likely to succeed. That requires conducting low-cost, low-risk tests on a range of
possible options (“shooting bullets”) to figure out what works before unleashing the full power of the organization’s resources on
an initiative (“firing a cannonball”). The empirical evidence from the tests guides leaders’ decisions about where to aim the cannon.

(continued)

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

TABLE 16.1 12 Questions That Every Leader Should Address (continued)

7. What are the core values and core purpose on which we want to build this enterprise over the next 100 years? The challenge
is not only to build a company that can endure the long haul but also to build one that is worthy of enduring. Leaders must
identify the core values and core purpose they would be willing have their companies built around 100 years in the future no
matter what changes occur in the external environment.

8. What is our 15- to 25-year BHAG? A BHAG is “big, hairy audacious goal.” To build a great, enduring company, leaders must
have a BHAG that is tangible, energizing, and highly focused and that people can understand immediately with little or no
explanation. The BHAG should be linked to the company’s core values and purpose. In addition, achieving the BHAG should
require a company to make a quantum leap in its capabilities and its aptitude.

9. What could kill our company, and how can we protect our flanks? Paranoia is productive when it helps a business survive the
inevitable bad surprises that come along and avoid the disasters they are capable of producing. The idea is for leaders not to be
plagued by constant fear but to be sensitive to changing conditions in the environment and ask, “What if . . .?” Great leaders are
always watching the horizon for the threat of storms—and opportunities. They also prepare for the inevitable stormy times by
building up cash reserves.

10. What should we stop doing to increase our discipline and focus? Effective leaders are disciplined when it comes to pursuing
business opportunities. They know that determining what their companies should not do is as important as determining what
they should do. Although an “opportunity of a lifetime” may arise, excellent leaders know that pursuing it is meaningless (and
downright dangerous) unless it fits inside the three circles of their “hedgehog.”

11. How can we increase our return on luck? All companies are affected by both good luck and bad luck. What counts is what a
company does with the luck it encounters—good and bad. How can the company glean the greatest benefit from good luck and
minimize the damage that a run of bad luck causes?

12. Are we becoming a Level 5 leadership team and cultivating a Level 5 management culture? Collins calls the highest level
of leadership Level 5, which builds enduring greatness in a company through a paradoxical blend of personal humility and
professional will. “The central dimension for Level 5 is a leader who is ambitious first and foremost for the cause, for the
company, for the work, not for himself or herself; and has an absolutely terrifying iron will to make good on that ambition,”
says Collins. Are you and your management team providing Level 5 leadership?

*Archilochus, (c680 bc– c. 645 bc) Greek poet and mercenary. Translated by Isaiah Berlin, “The Hedgehog and the Fox: An Essay on Tolstoy’s View
of History” © Isaiah Berlin 1953 (London: Weidenfeld and Nicolson Ltd.1953)

Source: Bo Burlingham and Jim Collins, “Hedgehogs, Cannonballs, BHAGs, and Bullets,” Inc., June 2012, p. 71; Neil Phillips, “The Entrepreneur’s
Hedgehog,” The Coach Toolkit, October 20, 2009, http://www.thecoachtoolkit.com/2009/10/the-entrepreneurs-hedgehog; Troy Schrock, “Great by
Choice and Strategy Execution,” CEO Advantage, December 8, 2011, http://www.ceoadvantage.com/blog/tag/jim-collins; Jim Collins, Vision Frame-
work, 2002, p. 2; Stephen Blandino, “Productive Paranoia: Lesson #3 from Jim Collins’ Good to Great,” Stephen Blandino, January 3, 2012, http://
stephenblandino.com/2012/01/productive-paranoia-lesson-3-from-jim-collins-great-by-choice.html; Jim Collins, “Jim Collins and Level 5 Leadership,”
Management-Issues, January 3, 2006, http://www.management-issues.com/2006/5/24/mentors/jim-collins-and-level-5-leadership.asp; and “Roald
Amundsen, Alone on the Ice,” WGBH Educational Foundation, 1999, http://www.pbs.org/wgbh/amex/ice/peopleevents/pandeAMEX87.html.

servant leadership Leading an organization, whatever its size, is one of the biggest challenges any entrepreneur
a leadership style in which faces. Yet for an entrepreneur, leadership success is one of the key determinants of a company’s
a leader takes on the role success. Research suggests that there is no single “best” style of leadership; the style a leader uses
of servant first and leader depends, in part, on the situation at hand. Some situations are best suited for a participative leader-
second. ship style, but in others, an authoritarian style actually may be best. Research by Daniel Goleman
and others suggests that today’s workers tend to respond more to adaptive, humble leaders who
are results oriented and who take the time to cultivate other leaders in the organization.14 The
practice is known as servant leadership, a phrase coined by Robert Greenleaf in 1970. Servant
leaders are servants first and leaders second, putting their employees and their employees’ needs
ahead of their own. They are concerned more about empowering others in the organization than
about enhancing their own power bases. “Servant-leaders ask, ‘What do people need? How can
I help them to get it? What does my organization need to do? How can I help my organization to
do it?’” explains Kent Keith, CEO of the Greenleaf Center for Servant Leadership. “Rather than
embarking on a quest for personal power, servant-leaders embark on a quest to identify and meet
the needs of others.”15 At ENGEO, a geotechnical and hydrologic engineering consulting firm in
San Ramon, California, managers see themselves as servant leaders whose jobs are to “lead from
the bottom” by supporting employees as they perform their daily work. That means managers
train and empower workers to make decisions that in many other companies only managers are
authorized to make.16

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 631

One business writer explains servant leadership this way:

Real leadership is grounded in a higher level of self-interest that’s tied to the interests of
those who trust and follow their leader. It [creates] an atmosphere of confidence and light
of clarity that flows from and surrounds the leader and that fills the room with the exhilara-
tion of possibility.17

To tap into that exhilaration of possibility, an entrepreneurial leader must perform many
important tasks, including the following:

● Hire the right employees for the entrepreneurial team and constantly improve their skills.

● Create a culture for motivating and retaining employees.

● Plan for “passing the torch” to the next generation of leadership.

Building an Entrepreneurial Team: LO2
Hiring the Right Employees
Describe the importance of
As a company grows, the people an entrepreneur hires determine the heights to which the com- hiring the right employees
pany can climb—or the depths to which it will plunge. Experienced managers understand that the and how to avoid making
quality of their workforce affects the company’s ability to thrive. Acquiring that human capital, hiring mistakes.
however, can be difficult. In a recent survey, North American human resource managers ranked
acquiring necessary talent as their top concern.18 The problem is particularly acute for small
companies, which usually cannot afford to match the salaries and benefit packages their larger
rivals offer employees. More than one-third of small business owners say their companies are
somewhat or significantly understaffed.19 In addition, 11 percent of business owners report that
the job searches they conduct never produced a suitable candidate, and 28 percent say the posi-
tions for which they were hiring remained vacant for up to three months.20

The decision to hire a new employee is an important one for every business, but its impact
is magnified many times in a small company. One new employee represents a significant in-
vestment and a significant risk. Adding just one or two employees can significantly increase a
company’s ability to generate sales. However, in a small company, one bad hiring decision can
poison the entire culture, reduce employee productivity, and disrupt any sense of teamwork.
Unfortunately, hiring mistakes in business are all too common: 66 percent of companies in the
United States report that they made a bad hire within the last year.21 The culprit in most cases?
The company’s selection and hiring process.

Hiring mistakes are incredibly expensive, and no company, especially small ones, can afford
too many of them. The higher the position is in an organization and the longer the tenure of the
person who holds that position, the higher the cost associated with replacing a “bad hire.” Em-
ployers report that their hiring mistakes result in lower productivity (36 percent), negative impact
on employee morale (32 percent), time lost and cost incurred in recruiting and training another
worker (31 percent), and diminished customer satisfaction (18 percent).22 Even the best training
program cannot overcome a flawed hiring decision. One study reported in the Harvard Business
Review concludes that 80 percent of employee turnover is caused by bad hiring decisions.23 The
most common causes of a company’s poor hiring decisions include the following:

● Managers who rely on candidates’ descriptions of themselves rather than requiring candi-
dates to demonstrate their abilities.

● Managers who fail to follow a consistent, evidence-based selection process. Forty-seven
percent of managers admit they make hiring decisions in 30 minutes or less, and 44 percent
of managers say they rely on their intuition to make hiring decisions.

● Managers who fail to provide candidates with sufficient information about what the jobs
for which they are hiring actually entail, which results in a job-skill mismatch.24

● Managers who succumb to pressure to fill a job quickly.

● Managers who fail to check candidates’ references.25

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

FIGURE 16.1 3.0% 2.6%
2.5%
Annual Growth
Rate in the U.S. Annual Growth Rate (%) 2.0%
Labor Force
1.6%
Source: Bureau of Labor
Statistics, 2012.

1.5% 1.3%

1.0% 0.8% 0.8%

0.7% 0.7%

0.5% 0.5%

0.0%
1970–80 1980–90 1990–2000 2000–10 2010–20 2020–30 2030–40 2040–50

As crucial as finding good employees is to a small company’s future, it is no easy task be-
cause entrepreneurs face a labor shortage, particularly among knowledge-based workers. The
severity of this shortage will become more acute as baby boomers retire in increasing numbers
and the growth rate of the U.S. labor force slows (see Figure 16.1). According to the National
Commission for Employment Policy, the impact of these demographic changes will be a “skilled
worker gap” (in which the demand for skilled workers outstrips the supply) of 14 million in
2020.26 The result is that small businesses already find themselves pursuing the best talent not
just across the United States but across the globe. A recent study by ManpowerGroup reports that
35 percent of companies around the world have difficulty filling jobs because of a lack of avail-
able talent. The United States is above the global average with 39 percent of companies having
difficulty filling jobs because of a lack of talent.27

Unfilled jobs are expensive; the average company loses more than $14,000 for every job that
is vacant for at least three months. Employers report that their extended job vacancies result in
a negative impact on employee morale (41 percent), work that does not get done (40 percent),
delays in delivery times (34 percent), diminished customer service (30 percent), lower quality
of work because remaining employees are overworked (30 percent), and diminished employee
motivation (29 percent).28

ENTREPRENEURIAL PROFILE: Kevin Madden: Group One Safety and Security Kevin
Madden, president of Group One Safety and Security, a 16-employee company in Stuart,
Florida, that installs security and video surveillance systems in homes and commercial properties,
has two job openings for technicians that have gone unfilled for 18 months. Although hourly pay
rates for the jobs range from $16 to $30, depending on qualifications and experience, the jobs
remain unfilled. Madden frequently declines new projects, costing his Group One sales, because
he is not willing to jeopardize his company’s reputation for providing excellent customer service
due to a lack of technical support staff.29 ■

High employee turnover rates cost companies as well. The voluntary turnover rate for em-
ployees is 16.6 percent, which means that the average employee’s tenure at a company is about
six years. The average cost that a company incurs when an employee leaves is 20 percent of the
employee’s annual salary (for employees who earn less than $50,000 annually) and 213 percent
of the annual salary for an executive who leaves.30 A company with 25 employees can expect to
lose, on average, about four employees per year. If those employees earn an average of $40,000,
the cost to the company is $32,000 per year ($40,000 × 20% = $8,000 per employee. 4 employ-
ees × $8,000 = $32,000). To reduce their employee turnover rates, companies can employ the
following strategies:

● Provide rewarding and challenging work.

● Pay employees fairly.

● Provide training opportunities and mentoring relationships.

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 633

● Offer flexible work schedules.

● Provide simple (and inexpensive) rewards such as thank-you notes for extra effort or “good
job” notes for jobs well done.

● Conduct exit interviews when employees leave to determine areas that require
improvement.

A recent study by IBM reports that 71 percent of CEOs across the globe say the most impor-
tant factor in their companies’ ability to provide sustained economic value to their customers is
the quality of their employees.31 Smart business owners recognize that the companies that have
the most talented, best-trained, and most motivated workforces will be the winners.

As a result of the intense competition for quality workers among businesses, employers often
feel pressured to hire someone, even if that person is not a good fit for the job. A study by Devel-
opment Dimensions International reports that 34 percent of hiring managers admit to making bad
hiring decisions because they were under pressure to fill a job.32 The result is the almost always
an expensive hiring mistake for the company. Smart entrepreneurs maintain their hiring standards
even when the pressure is on to fill a position.

ENTREPRENEURIAL PROFILE: Dane Atkinson: SumAll Dane Atkinson, cofounder of
SumAll, a business analytics company in New York City, believes that hiring “fast” increases
the odds of hiring mistakes. At SumAll, every new employee goes through a 45-day probationary
period, during which time he or she is assigned to a mentor and receives regular reviews from a
dedicated selection committee. At the end of the probationary period, selection committee mem-
bers vote on whether to hire the candidate permanently. If the candidate passes that vote, the re-
mainder of the employees in the company vote, and one “no” vote sends the candidate packing.
About 70 percent of candidates make it through the process and are hired permanently. The pro-
cess works; in the two years since it has been in place, only one employee has left the company.33 ■

How to Hire Winners

Even though the importance of hiring decisions is magnified in small companies, small busi-
nesses are most likely to make hiring mistakes because they lack the human resources experts
and the disciplined hiring procedures that large companies have. In many small businesses, the
hiring process is informal, and the results often are unpredictable. In the early days of a company,
entrepreneurs rarely take the time to create job descriptions and specifications; instead, they usu-
ally hire people because they know or trust them rather than for their job or interpersonal skills.
As the company grows, business owners hire people to fit in around these existing employees,
often creating a very unusual, inefficient organization structure built around jobs that are poorly
planned and designed.

The following guidelines can help entrepreneurs to become employers of choice and to hire
winners as they build their team of employees.

COMMIT TO HIRING THE BEST TALENT Smart entrepreneurs follow the old adage, “A players
hire A players; B players hire C players.” They are not threatened by hiring people who may be
smarter and more talented than they are. In fact, they recognize that doing so is the best way to
build a quality team. What skill sets do CEOs say are essential to employees’ success? According
to the IBM study of global CEOs, the most important skills are the ability to collaborate with
others (75 percent), the ability to communicate effectively (67 percent), creativity (61 percent),
flexibility (61 percent), and analytical and quantitative skills (50 percent).34

ELEVATE RECRUITING TO A STRATEGIC POSITION IN THE COMPANY The recruiting process is the
starting point for building quality into a company. Chris McCann, cofounder of NextDigest, a
company that publishes newsletters for technology entrepreneurs, says that after finding money
the most difficult challenge start-ups face is finding talent.35 Assembling a quality workforce
begins with a sound recruiting effort. By investing time and money in the crucial planning phase
of the staffing process, entrepreneurs can generate spectacular savings down the road by hiring
the best talent. Recruiting is so important that many entrepreneurs are actively involved in the
process themselves. Visionary entrepreneurs never stop recruiting because top-quality talent is
hard to find and is extremely valuable. Tom Bonney, founder of CMF Associates, a fast-growing

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

financial consulting firm in Philadelphia, knows that finding superior talent is essential to the
success of his service business and says he never stop recruiting.36 Unfortunately, Bonney is
in the minority; only 38 percent of hiring managers say they constantly recruit. Their principal
barrier: lack of time.37

Attracting a pool of qualified job candidates requires not only constant attention but also
creativity, especially among smaller companies that often find it difficult to match the more gen-
erous offers large companies make. With a sound recruiting strategy and a willingness to look in
new places, however, smaller companies can hire and retain high-caliber employees. The follow-
ing techniques will help:

Look inside the company first. One of the best sources for top prospects is inside the
company itself. A promotion-from-within policy serves as an incentive for existing workers
to upgrade their skills and to produce results. In addition, an entrepreneur already knows
the employee’s work habits, and the employee already understands the company’s culture.
Unfortunately, companies fill only one-third of their job vacancies from within.38

Look for employees with whom your customers can identify. For an entrepreneur whose
company sells women’s shoes, hiring young women straight out of college to manage the
company’s social media presence makes sense; however, hiring young women for sales
positions in a company that sells makeup to middle-age women does not. At the Vermont
Country Store, a business in Rockingham, Vermont, now in its fifth generation of family
ownership, half of the employees are older than 50, which benefits the company because
the average customer is in his or her 60s.39

NICK Wass/Invision/AP ENTREPRENEURIAL PROFILE: Greg Selkoe: Karmaloop Greg Selkoe, founder and
CEO of Karmaloop, a Boston-based e-commerce company that operates a growing
hipster media empire representing more than 500 brands, looks for employees who resemble
the company’s target customers, members of verge culture. “What makes us successful is that
our employees reflect the street culture that we market to,” says Selkoe. “Some are DJs or
musicians or artists. They’re young; the median age here is 26, and from almost every race,
religion, and ethnicity. Basically, they are the market we sell to.”40 ■

Encourage employee referrals. To cope with the shortage of available talent, many com-
panies are offering their employees (and others) bonuses for referring candidates who
come to work and prove to be valuable employees. Employees serve as reliable screens
because they do not want to jeopardize their reputations with their employer. Employee
referrals have proved to be an excellent source of quality employees. Although employee
referrals are the source of only 6.9 percent of applicants, they account for 39.9 percent of
those hired. Employees hired through employee referrals also have higher retention rates
than those hired by job Web sites and job boards.41 The Nerdery, a Web design firm in
Bloomington, Minnesota, finds about 25 percent of its new hires through referrals from
existing employees.42 To encourage employee referrals, many companies offer incentives
for successful hires. Rewards companies offer to employees for successful referrals range
from cash and iPads to big-screen televisions and exotic vacations. At CarGurus, a Web site
that helps car buyers navigate the often intimidating process of researching and purchasing
a car, founder and serial entrepreneur Langley Steinert offers employees cash bonuses for
recommending quality job candidates.43

Make employment advertisements stand out. Getting employment ads noticed in
traditional media is becoming more difficult because they get lost in the swarm of ads
from other companies.

ENTREPRENEURIAL PROFILE: Amy Rees Anderson: MediConnect Global When
Amy Rees Anderson was CEO of MediConnect Global, a fast-growing medical records
retrieval and electronic document management company, she created several offbeat videos
that featured brief, home-made clips of employees demonstrating their silly and unusual
talents (for example, one employee balanced a toilet plunger on one finger and then suc-
tioned it to his stomach) to make her company’s recruiting ad stand out and to communicate
the sense of fun in the company’s culture. The videos opened with a graphic that said,

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 635

“Featuring the Elite Talent of MediConnect Global” before showing the employees’ “talents”
and closing with a graphic that said, “What’s your elite talent? Apply now.” The low-cost ads
were successful, not only producing many new hires that Anderson says the company would
have missed otherwise but also improving employee morale.44 ■

Use multiple channels to recruit talent. Although newspaper ads still top employers’ list
of job postings, many businesses are successfully attracting candidates through other me-
dia, particularly the Internet. The goal is to spread wide a company’s recruiting net. Posting
job listings on the company’s Web page, on its social media accounts, on career-oriented
Web sites such as Monster, CareerBuilder, and others not only expands a small company’s
reach far beyond ads in a local newspaper but also is very inexpensive. A recent survey by
Jobvite reports that 98 percent of recruiters use LinkedIn to recruit employees, 42 percent
use Facebook, and 33 percent use Twitter. In addition, 73 percent of the companies used
these social media tools to make successful hires, and 42 percent say adding social media
as a recruiting tool increased the quality of the applicant pool.45 Employers also are con-
necting with potential employees (not all of whom are actively seeking new jobs) through
their employees’ social media sites and network of contacts. A social media recruiting
strategy works well for technology companies such as Red Hat Inc. (the company that dis-
tributes the Linux operating system), which finds 50 percent of its new hires through social
networks.46 Mobile apps and technology such as smart phones provide another mechanism
for reaching job candidates. One recent survey reports that 72 percent of job seekers want
to receive career opportunity information on their smart phones (and 45 percent of job
seekers have applied for a job using their smart phones).47

Recruit on campus. For many employers, college and university campuses remain an
excellent source of workers, especially for entry-level positions. In a recent survey, 39 per-
cent of college graduates say a small or medium-size business would be the ideal place to
work (compared to 27 percent who believe a large corporation would be the ideal place to
work).48 After screening résumés, a recruiter can interview a dozen or more high-potential
students in just one day by conducting on-campus interviews. Entrepreneurs must ensure
that the recruiters they send to campuses are professional, polished, and prepared to repre-
sent their companies well because 42 percent of students say their impression of a recruiter
is the primary determinant of their perception of the company.49

Forge relationships with schools and other sources of workers. Internships and co-op
programs can be excellent sources of future employees. As colleges and universities offer
students more internship and co-op opportunities, small businesses can benefit from host-
ing one or more students for a semester or for a summer. Internships and co-op programs
offer companies low-risk opportunities to “test-drive” potential employees, observe stu-
dents’ work habits, and sell top performers on permanent positions on graduation. A recent
study by the National Association of Colleges and Employers reports that employers offer
full-time jobs to 56.5 percent of their interns. In addition, 72.9 percent of interns who are
hired for full-time positions are still working for the same companies five years later.50

ENTREPRENEURIAL PROFILE: Burnstein von Seelen Burnstein von Seelen, a preci-
sion castings company located in Abbeville, South Carolina, that specializes in produc-
ing cast products from copper-based materials, faced a shortage of skilled machine tool
operators, and three-fourths of its machinists were at or near retirement age. Managers
worked with the Metal Trades Department at a local technical college, Piedmont Technical
College, to create a co-op apprenticeship program in which students could attend classes for
a semester and work for a semester. Kenny Price, the first student to participate in the pro-
gram, started as an apprentice with Burnstein von Seelen and now has a full-time job as a
machine tool operator. The co-op apprenticeship program has been so successful that the
company is expanding it.51 ■

Recruit “retired” workers. By 2020, 20.4 percent of workers in the United States will
reach retirement age.52 Many of these baby boomers plan to continue working after reach-
ing retirement age to maintain their lifestyles, however. The Bureau of Labor Statistics
estimates that 13.2 million people over the age of 65 will be in the workforce in 2022,

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

an increase from 7.3 million today, and small businesses should be ready to hire them.53
With a lifetime of work experience, time on their hands, and a strong work ethic, “retired”
workers can be the ideal solution to many entrepreneurs’ labor problems and can be a valu-
able asset to small firms.

Consider using offbeat recruiting techniques. To attract the workers they need to sup-
port their growing businesses, some entrepreneurs have resorted to creative recruiting
techniques. As part of its recruiting efforts, Range Resources Corporation, a natural gas
company, sponsors a unique float in the local Fourth of July parade, invites prospective
employees to mingle with current employees at cookouts, and sends employee representa-
tives prepared to talk about working at the company to more than 1,000 community events
each year.54 Other ideas include the following:

● Sending young recruiters to mingle with college students on spring break. Deloitte,
an accounting and consulting firm, takes dozens of college students to various loca-
tions for Spring Break. Rather than party on the beach, however, the students work
alongside Deloitte employees in a program called Maximum Impact, focusing on com-
munity projects ranging from sprucing up community parks and repairing homes for
the elderly to preparing taxes and assisting in soup kitchens. Sara Ferguson, who took
part in a Maximum Impact trip to Galveston, Texas, while she was a college student,
now works for Deloitte. Ferguson says the experience gave her unique insight into the
company’s culture and assured her that Deloitte was the type of company for which she
wanted to work.55

● Using social networks, such as Facebook, LinkedIn, Twitter, and company blogs to
reach potential employees, especially young ones.

● Sponsoring a “job-shadowing” program that gives students and other prospects the
opportunity to observe firsthand the nature of the work and the work environment.

● Inviting prospective employees to a company tailgating party at a sports event.
● Inviting potential candidates to participate in a company-sponsored event. Corey Reese,

cofounder of Ness Computing, a company that makes practical apps for the iPhone,
sponsors “hackathon” events on college campuses that attract the technologically savvy
computer software engineers he must hire for the fast-growing company.56
● Posting “what it’s like to work here” videos created by current employees on the
company’s Facebook page, YouTube, and other video sites.
● Inviting potential candidates to meet and mingle with a company’s workforce at infor-
mal, fun events. Ness Computing regularly invites potential employees to company-
sponsored barbecues and picnics.
● Keeping a file of all of the workers mentioned in the “People on the Move” column in
the business section of the local newspaper and then contacting them a year later to see
whether they are happy in their jobs.57

Offer what workers want. Adequate compensation and benefits are important consid-
erations for job candidates, but other, less tangible factors also weigh heavily in a pros-
pect’s decision to accept a job. To recruit effectively, entrepreneurs must consider what
a McKinsey and Company study calls the “employee value proposition,” the factors that
would make the ideal employee want to work for their businesses. Flexible work schedules
and telecommuting that allow employees to balance the demands of work and family life
attract quality workers to small companies. Human resource managers say the most impor-
tant factor in a company’s ability to attract and retain the best workers, especially young
ones, is a flexible work schedule. (The second most important factor is a culture character-
ized by trust, open communication, and fairness.)58 Employees agree. In a recent survey,
83 percent of workers say they would be more loyal to their companies if they had flexible
work schedules.59

Many of the companies listed on Fortune’s “100 Best Companies to Work For” offer
low-cost but valuable (from their employees’ perspectives) benefits, such as take-home
meals, personal concierge services that coordinate everything from dry cleaning to auto
maintenance for employees, exercise facilities, and discounts on the merchandise they sell.60

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 637

TABLE 16.2 Affordable Alternative Benefits

Although small companies typically cannot match their larger rivals on the employee benefits packages they offer, with some
creativity entrepreneurs can provide less expensive options that increase employee retention, motivation, and morale.

Perhaps You Cannot Offer . . . But You Might . . .
Tuition reimbursement for college classes
Implement a flex-time schedule that allows employees to attend classes at
Paid leave a nearby college or university
Comprehensive health insurance
Use job sharing so that two part-time employees share one full-time job
An on-site fitness center
Hold a wellness day in which a local health care provider performs basic
401(k) retirement plan with employer match health screens for employees

Counseling services Set up a basketball goal in a corner of the parking lot or a ping-pong table
in the office or negotiate a reduced fee for employees at the local YMCA
Child care subsidies
Invite a local investment adviser to provide financial counseling and
retirement advice to employees

Allow employees to bring their dogs to work; research shows that allowing
pets in the workplace reduces stress and increases job satisfaction

Negotiate discounts at a local preschool for employees’ children or allow
employees to telecommute from home several days a week

Source: Based on Paula Andruss, “Affordable Alternatives,” Entrepreneur, May 2012, p. 57; “Pets at Work Keep Workers Happy,” U.S. News and World
Report, April 2, 2012, http://health.usnews.com/health-news/news/articles/2012/04/02/pets-at-work-keep-workers-happy.

ENTREPRENEURIAL PROFILE: April Kumzelman: Fat Wallet Fat Wallet, an online dis-
count retailer, provides employees with a valuable, low-cost benefit—the flexibility they
need to achieve work–life balance. The company’s “no-miss” policy tells employees not to miss
important family or school events because of work. “It doesn’t cost us any money, and people re-
ally appreciate it,” says human resources director April Kunzelman. “Flexibility pays huge benefits
for a small company like ours.”61 ■

Table 16.2 provides examples of affordable alternative benefits that small businesses can
offer employees.

Create Practical Job Descriptions and Job Specifications job analysis
the process by which a
Business owners must recognize that what they do before they interview candidates for a posi- firm determines the duties
tion determines to a great extent how successful they will be at hiring winners. The first step is and nature of the jobs to
to perform a job analysis, the process by which a firm determines the duties and nature of the be filled and the skills and
jobs to be filled and the skills and experience required of the people who are to fill them. With- experience required of the
out a proper job analysis, a hiring decision is, at best, a coin toss. The first step in conducting a people who are to fill them.
job analysis is to develop a job description, a written statement of the duties, responsibilities,
reporting relationships, working conditions, and methods and techniques as well as materials and job description
equipment used in a job. A results-oriented job description explains what a job entails and the a written statement of
duties the person filling it is expected to perform. A detailed job description includes a job title, the duties, responsibilities,
job summary, primary responsibilities and duties, nature of supervision, the job’s relationship to reporting relationships,
others in the company, working conditions, the job’s location, definitions of job-specific terms, working conditions, and
and a description of the company and its culture. methods and techniques as
well as materials and equip-
Preparing job descriptions is a task that most small business owners overlook; however, this ment used in a job.
may be one of the most important parts of the hiring process because it creates a blueprint for the job.
Without this blueprint, managers tend to hire the person with experience whom they like the best.

ENTREPRENEURIAL PROFILE: Sherri Comstock: The Cheshire Cat and The Spotted
Crocodile Sherri Comstock, owner of The Cheshire Cat and The Spotted Crocodile, two
jewelry and gift boutiques in Grayslake, Illinois, admits to failing to write meaningful job descrip-
tions. “One of the biggest mistakes we’ve made is not defining the job as well as we should,” she
says. “If the position is not well-defined before you hire the person to fill it, a bad fit is all but
inevitable.”62 ■

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

You Be the Consultant

Avoid These Hiring Mistakes

One week after hiring a shipping manager for her online personal- to determine whether they are likely to make good full-time
ized gifts business, The Younique Boutique, Brina Bujkovsky knew employees. When internships or apprenticeships are not
something was wrong. Other employees saw the new hire slip- practical, some companies use interviews that put candi-
ping in and out of the building with a backpack. One day at lunch, dates into situations they are likely to encounter on the job
he left to “make a personal call” but did not return for several to see how they handle them.
hours. When he finally showed up, he was extremely intoxicated.
Bujkovsky fired him immediately. • Check references—always. Checking candidates’ refer-
ences takes time, but the payoff can be huge. Some compa-
Hiring mistakes like the one Bujkovsky made are quite com- nies check “one-off” references, those people with whom a
mon and can be expensive, especially for small companies. Spot- candidate worked but are not listed as references on the ap-
ting problem employees before they are hired, however, is not plication. Asking listed references for other potential refer-
always easy because bad employees often are adept at hiding ences and searching social media sites such as LinkedIn and
their problems until well after they are hired. What steps can en- Facebook can produce these valuable unofficial references.
trepreneurs take to avoid making critical hiring mistakes?
• Look for candidates’ profiles on social media
• Know what you want. Before hiring anyone, an entrepre- platforms. Social media can be useful not only for find-
neur should create a job description and a job specification. ing candidates but also for learning more about them.
These important documents spell out the duties and respon- Although it is not a good idea to ask for candidates’ social
sibilities of the job and define the skills, traits, and experi- media passwords (it actually is illegal in six states), reviewing
ence of the ideal candidate. their social media profiles can be quite revealing. A recent
survey by Jobvite reports that 94 percent of recruiters use
• Don’t be in a hurry. Rushing through the hiring process or plan to use social media to hire employees. In another
almost always guarantees a hiring mistake. Hiring a new study, 43 percent of hiring managers say they have found
employee is a long-term commitment; make sure you information on social media that caused them not to hire
devote sufficient time to making the right decision. a candidate. Conversely, 20 percent of hiring managers say
they found information on social media that led them to
• Involve others in the selection process. Involving others hire a candidate.
in the selection process lowers the probability that “warning
signs” about a candidate will go unnoticed. After her hir- 1. Why are hiring mistakes so expensive for companies,
ing mistake, Bujkovsky changed the selection process in her particularly small businesses?
company to include her entire team in the interview process.
2. Suppose your best friend is about to hire someone to work
• Ask the right questions and listen carefully to candi- in his or her company. List at least three other tips that will
dates’ answers. Smart entrepreneurs always prepare for enable him or her to avoid making a hiring mistake.
interviews and have a set of prepared questions that are
designed to probe each candidate’s experience, personality, Source: Based on “5 Ways to Spot Bad Employees Before They’re Hired,” All
background, and work ethic. They also listen carefully (even Business Experts, January 1, 2013, http://experts.allbusiness.com/5-ways-to-spot-
for what candidates don’t say) and watch their body lan- bad-employees-before-theyre-hired/#.U6w6C0BrTOs; 2013 Social Recruiting Survey
guage during the interview. Results, Jobvite, 2013, p. 2; Kristin Piombino, “Social Media Costs Candidates Their
Jobs, Report Says,” Ragan, July 9, 2013, http://www.ragan.com/Main/Articles/Social_
• “Test drive” candidates whenever possible. Internships media_costs_candidates_their_jobs_report_sa_46973.aspx; Greg Fisher, “Eight Rea-
and apprenticeships allow employers to observe candidates sons You Made a Bad Hire,” Perspectives, June 24, 2013, http://blog.betterweekdays
.com/blog/employers/324758/eight-reasons-you-made-a-bad-hire.

Useful sources of information for writing job descriptions include the manager’s knowl-
edge of the job, the worker(s) currently holding the job, and the Dictionary of Occupational
Titles, which is available online. This dictionary, published by the U.S. Department of Labor,
lists more than 20,000 job titles and descriptions and serves as a useful tool for getting a small
business owner started when writing job descriptions. Internet searches also are a valuable
tool for finding resources for writing job descriptions. There, entrepreneurs can find templates
and descriptions they can easily modify to fit their companies’ needs. Table 16.3 provides an
example of the description drawn from the Dictionary of Occupational Titles for an unusual
job, a worm picker.

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 639

TABLE 16.3 A Sample Job Description from the Dictionary
of Occupational Titles

Worm Picker—gathers worms to be used as fish bait; walks about grassy areas, such as gardens, parks,
and golf courses and picks up earthworms (commonly called dew worms and nightcrawlers). Sprinkles
chlorinated water on lawn to cause worms to come to the surface and locates worms by use of lantern or
flashlight. Counts worms, sorts them, and packs them into containers for shipment. (# 413.687-014)

The second objective of a job analysis is to create a job specification, a written statement job specification
of the qualifications and characteristics needed for a job stated in terms such as education, skills, a written statement of
and experience. A job specification shows the small business manager the kind of person to re- the qualifications and
cruit and establishes the standards an applicant must meet to be hired. In essence, it is a written characteristics needed for
“success profile” of the ideal employee. Does the person have to be a good listener, empathetic, a job stated in terms such
well organized, decisive, and a “self-starter”? Should he or she have experience in Python pro- as education, skills, and
gramming? One of the best ways to develop this success profile is to study the top performers experience.
currently working for the company and to identify the characteristics that make them successful.
Before hiring new sales representatives, sales managers at Blackboard, Inc., a Washington, D.C.,
company that sells software for the educational market, study their top sales producers to identify
the characteristics they demonstrate in four areas—skills, experience, knowledge, and personal-
ity traits. Table 16.4 provides an example that links the tasks for a sales representative’s job
(drawn from the job description) to the traits or characteristics an entrepreneur identified as nec-
essary to succeed in that job. These traits become the foundation for writing the job specification.

Plan an Effective Interview

Once an entrepreneur knows what to look for in a job candidate, he or she can develop a plan for
conducting an informative job interview. Research shows that planned interviews produce much
more reliable hiring results than unstructured interviews in which interviewers “freewheel” the
questions they ask candidates. Unstructured interviews produce no better results than flipping a
coin to decide whether to hire a candidate, but structured interviews produce highly valid hiring
results.63 Too often, business owners go into an interview unprepared, and as a result, they fail to
get the information they need to judge the candidate’s qualifications, qualities, and suitability for
the job. A common symptom of failing to prepare for an interview is that the interviewer rather
than the candidate does most of the talking.

Conducting an effective interview requires an entrepreneur to know what he or she wants
to get out of the interview in the first place and to develop a series of questions to extract that
information. The following guidelines will help entrepreneurs develop interview questions that
will give them meaningful insight into an applicant’s qualifications, personality, and character:

Involve others in the interview process. Solo interviews are prone to errors. A better pro-
cess is to involve other employees, particularly employees with whom the prospect would
be working, in the interview process either individually or as part of a panel.

TABLE 16.4 Linking Tasks from a Job Description to the Traits Necessary
to Perform a Job Successfully

Job Task Trait or Characteristic
“Outgoing”; persuasive; friendly
Generate and close new sales “Self-starter”; determined; optimistic; independent; confident
Make 15 “cold calls” per week Good listener; patient; empathetic
Analyze customers’ needs and recommend proper
equipment Organized; polished speaker; “other oriented”
Counsel customers about options and features needed Honest; “numbers oriented”; comfortable with computers and spreadsheets
Prepare and explain financing methods Customer oriented; relationship builder
Retain existing customers

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

situational interview ENTREPRENEURIAL PROFILE: Richard Sheridan: Menlo Innovations At Menlo
an interview in which the Innovations, a successful custom software company in Ann Arbor, Michigan, collabora-
interviewer gives candidates tion among workers is paramount because employees typically work together on projects in
a typical job-related situa- pairs all day. Menlo Innovations’s hiring process reflects its emphasis on collaboration in what
tion (e.g., a job simulation) cofounder Richard Sheridan calls “extreme interviewing.” Candidates team up in pairs to
to see how they respond tackle 20-minute exercises that are typical of the projects they would work on at Menlo In-
to it. novations while employees and managers observe them. To drive home the company’s focus
on teamwork, each team of candidates shares a single pencil. Candidates complete three
Kathy Willens/AP Photo exercises so that employees can observe them. After an extreme interviewing session, em-
ployees collectively decide which candidates to invite back. Those selected spend a day work-
ing for pay with two employees on a project. Those who pass that test come back for a
three-week trial employment period. Only after completing the trial successfully do they be-
come Menlo Innovations employees.64 ■

Develop a series of core questions and ask them of every candidate. To give the screen-
ing process more consistency, smart business owners rely on a set of relevant ques-
tions they ask in every interview. Of course, they also customize each interview using
impromptu questions based on an individual candidate’s responses. “The most effective
way to hire fantastic, loyal employees who will fit into your company culture and help you
meet your goals is to hire them for their inherent abilities (which can’t be taught), such as
personality, learning style, and core values,” says Mike Michalowicz, a successful serial
entrepreneur who started his first business at age 24. “You do this by identifying behavior
patterns during the interview process. If you ask questions designed to identify the patterns,
you can predict how prospective employees will behave.”65

Ask open-ended questions (including on-the-job “scenarios”) rather than questions
calling for “yes or no” answers. These types of questions are most effective because they
encourage candidates to talk about their work experience in a way that will disclose the
presence or the absence of the traits and characteristics the business owner is seeking. Peter
Bregman, CEO of Bregman Partners, a company that helps businesses implement change,
says one of the most revealing questions that an interviewer can ask candidates is, “What
do you do in your spare time?” The answer to this question offers unique insight that helps
interviewers differentiate between those who are merely competent and those who are
stars. Bregman points to the example of Captain C. B. “Sully” Sullenberger, the pilot who
safely landed a disabled jet with 155 passengers on the Hudson River using skills that he
learned from his hobby: flying gliders.66

Create hypothetical situations that candidates would be likely to encounter on the
job and ask (or better yet watch) how they would handle them. Building the interview
around these kinds of questions gives the owner a preview of the candidate’s actual work
habits and attitudes. Some companies take this idea a step further and put candidates into
a simulated work environment to see how they prioritize activities and handle mail, e-mail,
and a host of “real-world” problems they are likely to encounter on the job, ranging from
complaining customers to problematic employees. Known as situational interviews, their
goal is to give interviewers keener insight into how candidates would perform in the work
environment.

ENTREPRENEURIAL PROFILE: Andy Dunn: Bonobos Andy Dunn, cofounder and
CEO of clothing company Bonobos, says that situational interviews are the most im-
portant screening tool his company uses. The company asks candidates to perform the jobs
for which they are interviewing. For instance, a person who applies for a job as a Customer
Service Ninja has the chance to respond to e-mail questions and complaints from actual cus-
tomers. At the executive level, Bonobos invites candidates to offer advice on a big decision
the company faces and has even allowed them to run meetings to develop solutions to spe-
cific problems.67 ■

Probe for specific examples in the candidate’s past work experience that demon-
strate the necessary traits and characteristics. A common mistake interviewers make
is failing to get candidates to provide the detail they need to make an informed decision.

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 641

Ethics and Entrepreneurship

Honesty in Job Descriptions go are amazing, but you’re still doing this incredibly hard work,”
says one employee. “You’re going to put in 10- to 12-hour days,”
Explorer Ernest Shackleton reportedly placed this advertisement adds another. The video discourages most applicants, but those
in a British newspaper to recruit the crew for his 1914 expedition who do apply tend to be just the kind of young people Lindblad
with the goal of “crossing the South Polar continent from sea to is looking for to take on a six-month assignment of taking care of
sea,” a distance of 1,800 miles in the face of some of the most guests’ safety and comfort. “If they get on board and say, ‘This
grueling and dangerous conditions possible. Nearly 5,000 men is not what I expected,’ then shame on us,” says Kris Thompson,
applied, from which Shackleton selected 28 of the most capable vice president of human resources.
men, carefully matching their skills and abilities to the challenges
that the journey would present. On August 1, 1914, Shackleton Tony Hsieh, CEO of Zappos, the online shoe retailer whose
and his crew left London on their ship, the Endurance, to docu- 10 core values include “deliver WOW through service” and “cre-
ment the largely unexplored Antarctic. On October 27, 1915, after ate fun and a little weirdness,” relies on an unusual policy to make
watching the Endurance splinter after being stuck in pack ice for sure his company hires only those employees who are most com-
10 months, Shackleton and his crew began a harrowing journey mitted to fulfilling the company’s mission. After the first week of
of survival that would not end until August 20, 1916, 22 months the company’s four-week training program, during which employ-
after their expedition began. Even though Shackleton’s ad stated ees earn a full salary, Zappos presents them with “The Offer”: Stay
“safe return doubtful,” Shackleton and his entire crew returned with the company or take a $3,000 payout to leave, no strings at-
safely to London after an amazing adventure. tached. Only about 10 percent of new employees take the money
and leave. Hsieh says that those who remain are more likely to
Like Shackleton, smart entrepreneurs know that writing job believe in Zappos’s values and to commit themselves to uphold-
descriptions that make jobs sound more interesting, glamorous, ing the company’s commitment to customer service. Every year,
and exciting than they really are not only is misleading but also Zappos publishes the Zappos Culture Book, in which employees
creates problems for their businesses. To avoid high turnover rates, have the opportunity to write anything they want about Zappos’s
low morale, and abysmal productivity rates among their employ- core values and its culture, what the values and culture mean to
ees, entrepreneurs must paint realistic pictures of jobs when they them, and what they do to uphold them. In the foreword of a
create job descriptions. Recruiters at Lindblad Expeditions, a com- recent edition of the Zappos Culture Book, Hsieh wrote, “For us
pany that takes guests on adventure cruises to exciting destina- to succeed as a service company, we need to create, maintain, and
tions around the globe, makes sure that job applicants get an grow a culture where employees want to play a part in providing
unvarnished picture of what their jobs would entail—warts and great service. . . . As we grow as a company and hire new people,
all. Prospective employees receive a DVD that shows crew mem- we need to make sure that they understand and become a part
bers performing their daily tasks—from serving meals to guests of our culture.”
and seeing wildlife on the Galapagos Islands to washing windows
and swabbing toilets. “The things you see and the places that you 1. Why is it important for entrepreneurs to create honest job
descriptions to potential employees? What are the implica-
tions for entrepreneurs who fail to do so?

2. Is it ethical for small companies to present to potential em-
ployees only the “fun” aspects of a job and to gloss over its
less appealing components?

3. Lindblad Expeditions and Zappos sometimes receive criti-
cism for being too extreme in the honesty of their recruiting
approaches. Do you agree? Explain.

Sources: Based on Shackleton’s Expedition, NOVA, http://www.pbs.org/wgbh/
nova/shackleton/1914; Boost Retention with Honest Job Previews,” Manager’s
e-Bulletin, July 24, 2008, pp. 1–2; “Would You Give an Employee $1,000 to Quit?”
Marketing Profs, June 2, 2008, pp. 1–2; Lisa Everitt, “Zappos Tells New Employ-
ees: Please Go Away,” BNet, May 21, 2008, http://industry.bnet.com/retail/100066/
zappos-tells-new-employees-please-go-away; Bud Bilanich, “Zappos and Employee
Engagement and Commitment,” Common Sense Solutions to Tough Business
Problems, November  20, 2007, http://bbilanich.typepad.com/blog/2007/11/last-
week-i-blo.html; and Matt Rosoff, “Tony Hsieh: Don’t Rule Out a Zappos Air-
line,” Business Insider, September 28, 2011, http://articles.businessinsider.com/
2011-09-28/tech/30211874_1_customer-service-tony-hsieh-virgin-brand.

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

Experienced interviewers use the phrase “Tell me more” to harvest meaningful information
about candidates.

Ask candidates to describe a recent success and a recent failure and how they dealt
with them. Smart entrepreneurs look for candidates who describe their successes and their
failures with equal enthusiasm because they know that peak performers put as much into their
failures as they do their successes and usually learn something valuable from their failures.

Arrange a “noninterview” setting that allows several employees to observe the candi-
date in an informal setting. Giving candidates a plant tour, setting up a coffee break, or
taking them to lunch gives more people a chance to judge a candidate’s interpersonal skills
and personality outside the formal interview process. These informal settings can be very
revealing.

ENTREPRENEURIAL PROFILE: Scott Lerner: Solixr Scott Lerner, founder of Solixr,
an all-natural energy drink company, says that he learns a great deal about job candi-
dates in noninterview settings and often invites candidates to several lunches or to accom-
pany him on in-store demonstrations. These informal settings give Lerner better insight into
candidates’ qualifications and personalities and how well they will fit into his company’s
culture.68 ■

Table 16.5 shows an example of some interview questions one business owner uses to un-
cover the traits and characteristics he seeks in a top-performing sales representative.

Conduct the Interview
An effective interview contains three phases: breaking the ice, asking questions, and selling the
candidate on the company.

BREAKING THE ICE In the opening phase of the interview, the manager’s primary job is to diffuse
the tension that exists because of the nervousness of both parties. Many skilled interviewers use
the job description to explain the nature of the job and the company’s culture to the applicant.
Then they use “icebreakers,” questions about a hobby or special interest, to get the candidate to
relax and begin talking.

ASKING QUESTIONS During the second phase of the interview, the employer asks the questions
from the question bank to determine the applicant’s suitability for the job. The interviewer’s
primary job at this point is to listen. Effective interviewers spend about 25 percent of the interview
talking and about 75 percent listening. They also take notes during the interview to help them
ask follow-up questions based on a candidate’s comments and to evaluate a candidate after the
interview is over. Experienced interviewers also pay close attention to a candidate’s nonverbal
clues, or body language, during the interview. They know candidates may be able to say exactly
what they want with their words but their body language does not lie!

TABLE 16.5 Interview Questions for Candidates for a Sales Representative Position

Trait or Characteristic Question
Outgoing; persuasive; friendly; self-starter;
determined; optimistic; independent; confident How do you persuade reluctant prospects to buy?
Good listener; patient; empathetic; organized;
polished speaker; “other” oriented What would you say to a fellow salesperson who was getting more than his share
Honest; customer oriented; relationship builder of rejections and was having difficulty getting appointments?
How do you feel when someone questions the truth of what you say? What do
Other questions: you do in such situations?
If you owned a company, why would you hire yourself?
If you were head of your department, what would you do differently?
How do you recognize the contributions of others in your department?
If you weren’t in sales, what other job would you be in?

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 643

Some of the most valuable interview questions are designed to gain insight into a candidate’s puzzle interview
creativity and capacity for abstract thinking. Known as puzzle interviews, their goal is to de- an interview that includes
termine how candidates think by asking them offbeat questions, such as “You are shrunk to the offbeat questions to deter-
height of a nickel and thrown into a blender. Your mass is reduced so that your density is the same mine how job candidates
as usual. The blades start moving in 60 seconds. What do you do?” (a classic interview question at think and reason and to
Google).69 “How many cows are in Canada?” is another favorite Google interview question. Other judge their capacity for
companies use questions such as “A penguin walks through that door wearing a sombrero. What creativity.
does he say, and why is he here? (asked at Clark Construction Group),” “If we came to your house
for dinner, what would you prepare for us?” (a question asked by interviewers at Trader Joe’s),
“How would you design Bill Gates’s bathroom?” (a favorite at Microsoft), or “What is the angle
of the two hands on a clock when the time is 11:50? (asked at Bank of America).”70 The logic and
creativity that candidates use to derive an answer to these questions is much more important than
the answer itself.

Entrepreneurs must be careful to avoid asking candidates illegal questions. At one time,
interviewers could ask wide-ranging questions covering just about every area of an applicant’s
background. Today, interviewing is a veritable minefield of legal liabilities waiting to explode in
the unsuspecting interviewer’s face. Although the Equal Employment Opportunity Commission,
the government agency responsible for enforcing employment laws, does not outlaw specific
questions, it does recognize that some questions can result in employment discrimination. If a
candidate files charges of employment discrimination against a company, the burden of proof
shifts to the employer to prove that all pre-employment questions are job related and nondis-
criminatory. In addition, many states have passed laws that forbid the use of certain questions or
screening tools in interviews. To avoid trouble, business owners should keep in mind why they
are asking a particular question. The goal is to identify individuals who are qualified to do the job
well. By steering clear of questions about subjects that are peripheral to the job itself, employers
are less likely to ask questions that will land them in court. Wise business owners ask their at-
torneys to review their bank of questions before using them in an interview. Table 16.6 provides
a quiz for you to test your knowledge of the legality of certain interview questions.

SELLING THE CANDIDATE ON THE COMPANY In the final phase of the interview, the employer
tries to sell desirable candidates on the company. This phase begins by allowing the candidate
to ask questions about the company, the job, or other issues. Experienced interviewers note the
nature of these questions and the insights they give into the candidate’s personality. This part
of the interview offers the employer a prime opportunity to explain to the candidate why the
company is an attractive place to work. Remember that the best candidates will have other offers,
and it’s up to you to make sure they leave the interview wanting to work for your company.
Pointing out the benefits of working for a small company, such as a flexible work schedule,
regular feedback, the opportunity to contribute directly to a meaningful mission, and the chance
for growth and advancement, can influence a candidate’s decision. Finally, before closing the
interview, the employer should thank the candidate and tell him or her what happens next (e.g.,
“We’ll be contacting you about our decision within two weeks.”).

Contact References and Conduct a Background Check

Entrepreneurs should take the time to conduct background checks and contact candidates’ refer-
ences. Background checks are inexpensive to perform but can save companies many thousands
of dollars by identifying “red flags” in candidates’ backgrounds, helping them avoid making
expensive hiring mistakes. By performing a basic background check, employers can steer clear
of candidates with criminal or other high-risk backgrounds. Although some states ban the prac-
tice, conducting credit checks on job candidates (which legally require the candidates’ written
permission) also can be quite revealing, giving employers insight into candidates’ dependability
and trustworthiness. A recent study by the Society of Human Resource Managers reports that
69 percent of employers conduct criminal background checks on all of their job candidates and
47 percent of employers conduct credit checks. Fourteen percent of businesses do not conduct
background checks on any job candidates, and small businesses are less likely to conduct back-
ground checks than large businesses.71 One expert says failing to conduct background checks on
potential employees is the equivalent of walking up to a stranger and handing him or her the keys

to your house.72 To avoid legal problems, employers must be able to show a connection between
the type of background check conducted and the applicant’s job duties and must conduct the
background check for all applicants for the job. Employers also should have applicants sign a
separate disclosure document authorizing the employer to conduct a background check.

Checking potential employees’ social networking pages such as Facebook, Twitter, and
LinkedIn also can provide a revealing look at their character. A study by CareerBuilder reports
that 39 percent of employers investigate job candidates’ social networking sites and that 43 per-
cent have discovered something there that caused them to reject a candidate (see Figure 16.2).73

Answers: 1. Legal. Employers can screen candidates on their current use of illegal drugs. 2. Illegal. Employers
cannot ask about a candidate’s past drug addiction because drug addiction is covered by the Americans with
Disabilities Act; casual drug use, however, is not covered. 3. Illegal. Employers cannot ask about an applicant’s
arrest record, but they can ask whether a candidate has ever been convicted of a crime. 4. Legal. Although employers
cannot ask about a candidate’s arrest record, they can ask whether he or she has been convicted of a crime. 5. Illegal.
Employers cannot ask questions that could lead to discrimination against a particular group (e.g., women, physically
challenged, and so on). 6. Legal. 7. Illegal. The Civil Rights Act of 1964 bans discrimination on the basis of race,
color, sex, religion, or national origin. 8. Legal. 9. Illegal. Unless a person’s physical characteristics are necessary for
job performance (e.g., lifting 100-pound sacks of mulch), employers cannot ask candidates such questions.
10. Legal. 11. Illegal. Notice the fine line between question 10 and question 11; this is what makes interviewing so
challenging. 12. Illegal. This question violates the Civil Rights Act of 1964. 13. Illegal. What relevance would this
have to an employee’s job performance? 14. Illegal. Under the Americans with Disabilities Act, which prohibits
discrimination against people with disabilities, people who are HIV positive or have AIDS are considered “disabled.”
15. Illegal. Workers who file workers’ compensation suits are protected from retribution by a variety of federal and
state laws. 16. Illegal. This question also violates the Americans with Disabilities Act. 17. Illegal. This question
violates the Civil Rights Act of 1964. 18. Currently legal—but creepy—and creates the possibility that employers
would have access to information about which they cannot legally ask, such as religion, marital status, and others,
which creates a potential legal liability. Six states have banned employers from asking job candidates for their social
media passwords.

1. Are you currently using illegal drugs? □ □
2. When was the last time you used illegal drugs? □ □
3. Have you ever been arrested? □ □
4. Have you ever been convicted of a crime? □ □
5. Do you have any children or do you plan to have children? □ □
6. Are you willing to travel as part of this job? □ □
7. When and where were you born? □ □
8. Is there any limit on your ability to work overtime or travel? □ □
9. How tall are you? How much do you weigh? □ □
10. Do you drink alcohol? □ □
11. How much alcohol do you drink each week? □ □
12. Would your religious beliefs interfere with your ability to do the job? □ □
13. What contraceptive practices do you use? □ □
14. Are you HIV positive? □ □
15. Have you ever filed a lawsuit or workers’ compensation claim against □ □

a former employer? □ □
16. Do you have physical/mental disabilities that would interfere with doing
□ □
your job? □ □
17. Are you a U.S. citizen?
18. What is your Facebook password?

Legal Illegal Interview Question

Some interview questions can lead an employer into legal problems. Test your knowledge concerning
which questions are legal to ask in an interview using the following quiz.

TABLE 16.6 Is It Legal?

SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS 644

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 645

Candidate posted provocative or 50% FIGURE 16.2
inappropriate photos
48% Why Hiring
Candidate shared information about Managers Rejected
drinking or using drugs 33% Job Candidates’
after Checking
Candidate was critical of a previous 30% Their Social Media
employer Profiles
28%
Candidate demonstrated poor 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Source: Based on “More Em-
communication skills ployers Finding Reasons Not
Percentage of Hiring Managers to Hire Candidates on Social
Candidate made discriminatory Media, Finds CareerBuilder
remarks Survey,” CareerBuilder,
June 27, 2013.
0%

Although many business owners see checking references as a formality and pay little at-
tention to it, others realize the need to protect themselves (and their customers) from hiring
unscrupulous workers. Is it really necessary? Yes! According to a survey of hiring professionals,
53 percent of candidates either exaggerate or falsify information on their résumés.74 Yahoo Inc.
once fired its CEO just five months after hiring him when the company’s board of directors dis-
covered that his résumé contained false information about his academic credentials.75 Checking
references thoroughly can help employers uncover false or exaggerated information. Rather than
contacting only the references listed, experienced employers call applicants’ previous employers
and talk to their immediate supervisors to get a clear picture of the applicant’s job performance,
character, and work habits. At Bonobos, an online menswear company, managers conduct “off-
list” reference checks, contacting people who have worked with a candidate but are not listed as
references on the candidate’s résumé. Andy Dunn, cofounder and CEO, says that in most cases,
these off-list references enhance a candidate’s application, but on occasion they have alerted the
company to problem areas in a candidate’s background. Using LinkedIn to find common connec-
tions to former employers, colleagues, or employees is an efficient way to expand a candidate’s
reference pool.76

Many employers implement a probationary trial period for new hires that may range from
two weeks to several months. Doing so increases the probability that the company has found the
right person for the job. After two weeks on the job at Whole Foods Market, team members of
new hires vote on whether to keep the new employees or to let them go.77

Experienced small business owners understand that the hiring process provides them with
one of the most valuable raw materials their companies count on for success—capable, hard-
working people. They know that hiring an employee is not a single event but rather the beginning
of a long-term relationship. Table 16.7 features some strange but true incidents that employers
have encountered during the selection process.

Creating an Organizational Culture That Encourages LO3
Employee Motivation and Retention
Explain how to create
Culture a company culture that
encourages employee
A company’s culture is the distinctive, unwritten, informal code of conduct that governs its be- retention.
havior, attitudes, relationships, and style. It is the essence of “the way we do things around here.”
In many small companies, culture plays as important a part in gaining a competitive edge as culture
strategy does. Culture has a powerful impact on the way people work together in a business, how the distinctive, unwritten,
they do their jobs, and how they treat their customers. Company culture manifests itself in many informal code of conduct
ways—from how workers dress and act to the language they use. For instance, at some compa- that governs an organiza-
nies, the unspoken dress code requires workers to wear suits and ties, but at others employees tion’s behavior, attitudes,
routinely come to work in jeans and T-shirts. At CustomInk, a company founded by three former relationships, and style.
college classmates, Marc Katz, Mike Driscoll, and Dave Christensen, that makes custom T-shirts,
the dress code includes jeans, flip-flops, and (no surprise) T-shirts. However, the company

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

TABLE 16.7 Strange but True!

Human resource managers typically review résumés and job applications quickly. In fact, 68 percent of hiring managers say they
spend less than two minutes on average reviewing a résumé or application, and 17 percent of hiring managers spend no more than
30 seconds on average reviewing resumes. If you read enough résumés, conduct enough interviews, and check enough references,
sooner or later you will encounter something bizarre. Consider the following examples (all true):

● During the interview, one candidate answered a phone call to set up an interview with a competitor of the company with which he
was interviewing.

● One candidate for a management position listed “gator hunting” as a skill on his résumé. Another candidate included “versatile
toes” as a strength on her résumé.

● One applicant’s résumé was written in Klingon, a fictional language spoken by humanoid warriors from Star Trek. Another
candidate acted out a Star Trek role during the interview.

● When interviewing for a job that required working in Antarctica, one candidate claimed that he spoke “Antarctican.”

● After having lunch with a job candidate, a business owner took the applicant to her office for more discussion. The discussion
ended, however, when the applicant dozed off and began snoring.

● One candidate decorated her résumé with pink rabbits. Another applicant revealed that her résumé was set up to be sung to the
tune of “The Brady Bunch.”

● One candidate walked into the interviewer’s office, picked up the candy dish on her desk, and emptied its entire contents into her
pocket.

● When asked what person, living or dead, he would most like to meet, one candidate replied, “The living one.”

● One applicant checked his Facebook page during the interview, and another kept her iPod headphones in her ears during the
interview.

● One candidate popped his false teeth out of his mouth when discussing dental benefits with the interviewer.

● One candidate wore a Boy Scout uniform to his interview but never explained to the interviewers why.

● A candidate explained that promptness was one of her strengths—even though she showed up 10 minutes late for the interview.

● On his résumé, a candidate for an accounting position described himself as “detail-oriented” and spelled the company’s name
incorrectly.

● During an interview, one candidate asked the interviewer, “What company is this again?” Another asked the interviewer if he could
have a sip of the interviewer’s coffee.

● During the interview, one candidate told the interviewer that he wanted a job that did not require him to “work a lot.”

● One candidate asked if he could bring his rabbit to work with him, adding that the rabbit was focused and reliable but that he
himself had been fired before.

● One man who forgot to wear socks to his interview remedied the problem by coloring his ankles with a black felt-tip marker.

● One candidate asked the interviewer for a hug at the end of the interview.
Recommendations from previous employers can sometimes be quite entertaining too. The following are statements from managers
about workers:

● “Works well when under constant supervision and cornered like a rat in a trap.”

● “This young lady has delusions of adequacy.”

● “A photographic memory but with the lens cover glued on.”

● “If you were to give him a penny for his thoughts, you’d get change.”

● “If you stand close enough to him, you can hear the ocean.”

● “He’s so dense that light bends around him.

Sources: Based on “Employers Share Most Memorable Interview Blunders,” CareerBuilder, January 16, 2014, http://www.careerbuilder.com/share/
aboutus/pressreleasesdetail.aspx?sd=1/16/2014&id=pr798&ed=12/31/2014; “CareerBuilder Releases Study of Common and Not-So-Common Re-
sume Mistakes That Can Cost You the Job,” CareerBuilder, September 11, 2013, http://www.careerbuilder.com/share/aboutus/pressreleasesdetail.aspx?
id=pr780&sd=9/11/2013&ed=09/11/2013; “Hiring Managers Rank Best and Worst Words to Use in a Résumé in New CareerBuilder Survey,” Career-
Builder, March 13, 2014, http://www.careerbuilder.com/share/aboutus/pressreleasesdetail.aspx?sd=3%2f13%2f2014&siteid=cbpr&sc_cmp1=cb_
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CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 647

slogan, “Don’t let the flip-flops fool ya,’” characterizes the company’s
strong work ethic and expectation of high performance.78 Although it is
an intangible characteristic, a company’s culture has a powerful influ-
ence on everyone the company touches, especially its employees, and on
the company’s ultimate success.

ENTREPRENEURIAL PROFILE: Eileen Fisher: Eileen Fisher At
Eileen Fisher, a clothing company named for its dynamic founder,
the culture conveys a strong sense of family, unity, and social responsibil-
ity. Founder Eileen Fisher relies on a participative style of management,
and employees, who work in six offices and 63 stores across the United
States, enjoy flexible work schedules and a unique set of benefits, includ-
ing a generous $3,000 clothing allowance on top of their employee dis-
counts and paid sabbaticals. They also receive an annual $1,000 wellness
allowance and free in-office or in-store massages every month. In 2006,
Fisher created an employee stock ownership plan through which her
employees own nearly one-third of the company and share in its profits. Eileen Fisher also gives
back to local communities by matching employees’ contributions to charities and allowing an
employee-controlled committee to decide how to allocate grants the company donates. Fisher
compares her company to a garden in which she planted seeds and now has the joy of watching
it grow and thrive.79 ■

An important ingredient in a company’s culture is the performance objectives an entrepre-
neur sets and against which employees are measured. If entrepreneurs want integrity, respect,
honesty, customer service, and other important values to be the foundation on which a posi-
tive culture can flourish, they must establish measures of success that reflect those core values.
Effective executives know that building a positive organizational culture has a direct, positive
impact on the financial performance of an organization. The intangible factors that make up an
organization’s culture have an influence, either positive or negative, on the tangible outcomes of
profitability, cash flow, return on equity, employee productivity, innovation, and cost control. An
entrepreneur’s job is to create a culture that has a positive influence on the company’s tangible
outcomes.

Sustaining a company’s culture begins with the hiring process. Beyond the normal require-
ments of competitive pay and working conditions, the hiring process must focus on finding em-
ployees who share the values of the organization. In winning workplaces, entrepreneurs build a
culture of trust, treat their workers fairly, respect their personal lives, provide opportunities for
growth and advancement, and provide them with jobs that are interesting, meaningful, and fun.
The result is a team of people who give their best ideas and efforts to the business.80

ENTREPRENEURIAL PROFILE: Aaron Levie and Dylan Smith: Box.net At Box.net, a
cloud software development company in Los Altos, California, cofounders Aaron Levie and
Dylan Smith expect their employees to invest long hours to meet their weekly project deadlines.
In their hiring process, they look for software engineers who are highly competitive and hard
driving—the “I-can’t-rest-until-I’ve-noodled-out-an-answer” types. To attract those types of work-
ers, Levie and Smith say they spend a significant portion of their time building the right culture.
They reward their hardworking employees with perks such as swing sets and ping-pong tables to
relieve stress, free dinners, and facilities so that workers can sleep and shower if they stay late to
work on a project. Box.net also encourages collaboration and innovation with its semiannual
Hackathon, an event in which teams of employees take new product ideas from early stage to
implementation in a single night. Levie and Smith have successfully created a culture of “we’re all
in this together” in which the company’s approval rating among employees is an impressive
97 percent.81 ■

Creating a culture that supports a company’s strategy is no easy task, but entrepreneurs who
have been most successful at it believe that having a set of overarching beliefs serves as a pow-
erful guide for everyday action. Culture arises from an entrepreneur’s consistent and relentless
pursuit of a set of core values that everyone in the company can believe in. “Values outlive busi-
ness models,” says management guru Gary Hamel.82

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

Nurturing the right culture in a company can enhance a company’s competitive position
by improving its ability to attract and retain quality workers and by creating an environment in
which workers can grow and develop. As a new generation of employees enters the workforce,
companies are discovering that more relaxed, open cultures have an edge in attracting the best
workers. These companies embrace nontraditional, fun cultures that incorporate concepts such
as casual dress, team-based assignments, telecommuting, flexible work schedules, free meals,
company outings, and many other unique options. Barbara Corcoran, a regular on the televi-
sion show Shark Tank, built her company, The Corcoran Group, into the largest residential real
estate brokerage firm in New York by creating a fun, engaging culture, which is a reflection of
her leadership style. “The more fun I created in the company, the more creative and innovative it
became,” she says. “Fun is the most underutilized tool in the leadership tool belt,” according to
Corcoran, who started her business with a $1,000 loan and ultimately sold it for $66 million.83

Modern organizational culture relies on several principles that are fundamental to creating a
productive, fun workplace that enables employees and the company to excel.

RESPECT FOR WORK AND LIFE BALANCE Successful companies recognize that their employees
have lives away from work. Generation X and Millennial workers, in particular, want to work
for companies that erase the traditional barriers between home life and work life by making it
easier for them to deal with the pressures they face away from their jobs. These businesses offer
flexible work schedules, part-time jobs, job sharing, telecommuting, sabbaticals, and on-site day
care and dry cleaning.

ENTREPRENEURIAL PROFILE: Pamela Noble: Noble-Davis Consulting Noble-Davis
Consulting, a retirement plan administration and consulting service founded by Pamela
Noble, not only attracts top-quality talent but also reaps the benefits of high productivity and
employee retention by emphasizing work–life balance. The company provides its employees with
flexible work schedules, self-determined vacations, and the opportunity to work from home when
appropriate, benefits that allow employees to more easily balance their work–life demands.
Meeting team goals calls for special celebrations, including bowling and movie nights or Whirly-
ball outings. Employees also can earn year-end performance bonuses, some of which have ex-
ceeded $20,000.84 ■

A SENSE OF PURPOSE As you learned in Chapter 5, one of the most important jobs an entrepreneur
faces is defining the company’s vision and then communicating it effectively to everyone the
company touches. Effective companies use a strong sense of purpose to make employees feel
connected to the company’s mission. Anne Wojcicki, founder of 23andMe, a company based in
Mountain View, California, that provides genetic testing services, emphasizes the importance
of linking every employee’s job to the company’s mission (“to be the world’s trusted source of
personal genetic information”). Everyone in the company, including Wojcicki, sets individual
and team goals for the next six months that are distributed throughout the company. Each
week, everyone in the company writes a weekly summary of his or her progress toward those
goals. Every employee receives the summaries, and Wokcicki spends an hour reading them and
following up with questions.85

A SENSE OF FUN For some companies, the line between work and play is blurred. The founders
of these businesses see no reason for work and fun to be mutually exclusive. In fact, they
believe that a workplace that creates a sense of fun makes it easier to recruit quality workers and
encourages them to be more productive and more customer oriented. “Healthy and sustainable
organizations focus on the fundamentals: quality, service, fiscal responsibility, leadership—but
they didn’t forget to add fun to that formula,” says Leslie Yerkes, a consultant and author.86 Once
a month, former collegiate athlete Missy Park, founder of Title Nine, a maker of women’s fitness
and athletic apparel, and her employees in the company’s Berkeley, California, offices participate
in impromptu exercises, such as bouncy ball races. Once a year, employees compete in the Title
Nine Olympics, which includes kickball, dodge ball, tugs-of-war, office chair foosball, and other
unusual sports. The winning team gets a paid day off.87

ENGAGEMENT Employees who are fully engaged in their work take pride in making valuable
contributions to the organization’s success and derive personal satisfaction from doing so.