CHAPTER 3: THE ETHICAL AND SOCIAL RESPONSIBILITIES OF THE

ENTREPRENEUR

Business Ethics. Ethics is the study of moral obligation involving the distinction
between right and wrong. Consequently, the study of ethics paved the way for the
adaption of the general rules of conduct in society.

The rules about how entrepreneurs ought to behave are referred to as business
ethics. The ethical behavior required of entrepreneurs is determined by the
following:

1. the public
2. interest groups like the Society of Prevention of Cruelty to Animals
3. business organizations and
4. the individual’s personal morals and values.

Adherence to ethical standards contributes to the smooth flow of business

exchanges. It establishes trust between buyers and sellers and between lenders and
borrowers.

Factors Influencing Ethical Behavior

Ethical behavior, whether by a person or a business entity, is influenced by any or a

combination of the following:
1. situation
2. reward system
3. individual differences and
4. other factors.

Circumstances vary, and the reactions of firms or individuals also vary. For instance,
a firm that behaves ethically during prosperous times may act unethically during
financial hardships.

The expectation of high rewards for committing unethical behavior motivates a

person to do it. However, when he knows that there is a possibility that he would be
censured, the motivation is diminished. For instance, a person who is considering
adulterating his products to increase profits will be more inclined to do it especially
if the community does not strongly condemn such acts. Another example is
photocopying original works of others.

When a person is in competition with others, and e wants to be sure o winning, he is

more inclined to adapt unethical behavior. An example is a trader who spreads
rumors to discredit competitors.

How Ethical Behavior is Encouraged

If the entrepreneur believes that business success requires good ethical behavior,
his next concern would be to encourage his people to adapt good ethical behavior.
There are certain ways of encouraging ethical behavior among employees.

These are the following:

1. Adaption of a Code of Ethics.

Code of Ethics. A formal document indicating the entrepreneurship’s adapted

principle of appropriate behavior. A code of ethics is very useful to the firm
espousing ethical behavior. It serves as a basic reference for employees who make
big or small decisions.

A code of ethics can be made effective if the following requirements are met:

a. It should refer to specific unethical practices like receiving gifts, avoiding

warranty claims, bid-rigging, making fictitious claims, etc.
b. It must be supported by top management, support comes in various forms
such as providing sufficient funds for its implementation and assigning
specific employees to handle ethical infractions of other employees, and the
like.

Ethical behavior of personnel occurs only when the entrepreneur develops a code of
ethics and successfully implements it.

2. Institution of Rewards and Punishments Concerning Ethical Behavior.

A code of ethics is sufficient for some people if ethical if ethical behavior is required.
For many people, however, this may not be enough to motivate them to act
ethically. If the entrepreneurship wants to have some measure of control over the
behavior of its personnel, a system of reward and punishment must be instituted.
Punishments could take the form of dismissal, demotion, suspension, or reprimand.

3. Adaption of Internal Programs for Resolving Conflicts.

Conflicts arise, even when ethical conduct of personnel is concerned. For example,
a subordinate may think his superior is acting unethically regarding promotions. The
subordinate may harbor ill feelings toward his superior if the subordinate is not
provided with a means to ventilate his grievance.

4. Creation of ethics review committees.

To encourage ethical behavior, the entrepreneurship may create an ethics review

committee. This committee is usually composed of company employees as well as
some who are not employed by the company. These persons have undergone
special training in ethics. The committee provides advice to the entrepreneur and
his staff concerning sensitive ethical issues. Ethics review committees are not yet
popular in Philippine entrepreneurship, but it is slowly adapted by government
corporations like state colleges and universities. This is not a bad option if the
entrepreneur wants ethical conduct from his employees

5. Provision of Training in Ethics for Employees.

Company personnel who are exposed to activities that are ethically charged must
be provided with sufficient training in ethics. Such training should make them
sufficiently prepared to deal with various ethical issues they would encounter in
their respective workplaces.

Ethics in training is more appropriate for persons occupying sensitive positions in

purchasing, waste disposal, personnel, research and development, sales, and
manufacturing.

6. Top Management Support.

As mentioned earlier, it is very difficult for any program or activity to succeed

without sufficient support from top management.

Ethical Issues Facing Entrepreneurships

Entrepreneurships face ethical questions daily. These spring from the following
relationships:

1. Between the company and the customers

2. Between the company and its personnel and employees
3. Between the company and its business associates
4. Between the company and the investors and the financial community.

Relations with Customers

When ethical abuses are committed, the most probable victims are customers. This
is expected because of the high frequency of transactions between the company
and the customers. Entrepreneurs should provide support for consumer rights which
are as follows:

1. The right to be safe. Consumers expect that the products and services that
they buy will do them no harm.
2. The right to be informed. Consumers make purchasing decisions often.
The quality of their decisions, however, will depend on whether or not they
are properly informed.
3. The right to choose. Firms that intend to adhere to business ethics should
strive to protect consumers’ right to choose, what products or services they
need and intend to purchase.
 4. The right to be heard. Customers have the right to communicate their
concerns to entrepreneurships they patronize. This may be used to express
appreciation about what the company is doing, or to provide information
about defects in the products the customer bought.

Relations with Personnel and Employees

There is always the possibility that business firms will commit unethical acts toward
their employees. Since entrepreneurs and their staff make decisions on various
business activities like hiring, promotion, transfer, compensation and dismissal, it is
uncommon for ethical lapses to happen every now and then.

Good ethical conduct requires entrepreneurs to be aware of their responsibilities to

employees. These are the following:

1. Workplace safety
2. Quality of life issues
3. Avoiding discrimination
4. Preventing sexual harassment

Relations with Business Association

Entrepreneurships operate on coordination with the efforts of suppliers, agents and

various types of middlemen. During business transactions between the players
mentioned and the firms, some ethical questions may come into force. Unethical
practices must not be allowed to happen in a company that upholds good ethical
conduct.

Relations with Investors and Financial Community

The country’s financial system survives partly because investors and other players
have placed a certain degree of trust in firms they deal with. The degree of trust is
maintained at a high level if the investors and the financial community feel the
business forms practice good business ethics, especially if they think that their
investments are well protected. If that is so, the desired level of investment is
maintained.
CHAPTER 4: ENTREPRENEURIAL PERSONALITY

Operating a business enterprise is a very challenging occupation. The rate of failure

among those who dared to make attempts is high. Only a small number of them
become successful and the levels of their success differ. Clearly, entrepreneurship if
not for everyone. How do we know that a person is a good prospect? What
determines success or failure? It is important for those who are interested in
entrepreneurship to know the answers to those questions. There are two
complementary factors that determine success or failure in an entrepreneurship.

a. Environment. An entrepreneurship will survive and grow in an environment

that is friendly. Nature provides us with examples of what happens to entities
living in certain environments. For instance, giant clams thrive in the ocean,
but not in the river. The coconut palm will grow in the Philippines but not in
Sweden.

In the same manner, entrepreneurships will survive and grow only in

economic environments of free enterprise. Full blooming entrepreneurships
cannot be expected to flourish in economies that are not fully supportive of
free enterprise.
b. Personality of the entrepreneur

Every person has a personality that is unique and different from others. Each
personality has a corresponding type of job that fits it. A certain personality,
however, may fit in more than one type of job, although the level of fitness
will be different with each job. A given personality, for instance, may perfectly
fit the entrepreneur’s job, moderately fits the teacher’s job, built id not fitted
for the engineer’s job.

What is personality?

Personality refers to the pattern of characteristics that distinguishes one

person from another. It includes the person’s traits, values, self-image,
intelligence, and visible behavior patterns.

A brief description of the foregoing personality types according to Hollands:

 Characteristics of Entrepreneurs

Successful entrepreneurs possess certain characteristics that are unique and

different from those having other occupations. Based on research by experts,
the following traits are considered vital to a successful career in
entrepreneurship:

1. Drive. Success in entrepreneurship becomes possible when the

entrepreneur is self-motivated enough to pursue his chosen course
without relenting even in the face of adversity. If he fails in his first
attempt, he makes another attempt. He repeats the attempts until he
succeeds.

2. Thinking Ability. The entrepreneurs job involves solving problems and

making decisions. Then he finds the correct solutions to problems that
confront him and then makes decisions that are implemented, b=he comes
closer to realizing his goals.
3. Human Relations Ability.
4. Ability to Communicate. Communication skill is a very important
characteristic an entrepreneur must have if success is expected. The ability
to understand and be understand makes it easier for the entrepreneur to
transact business with customers, bankers, and government officials.

5. Technical Knowledge. Operating an entrepreneurship requires the

performance of major and minor tasks. In running a restaurant, for instance,
important task may include the following: recruitment of personnel,
purchasing of materials, bookkeeping, sanitation, cashiering, cooking, and
others. He restaurant entrepreneur must at least be familiar with and possess
some technical knowledge about how the various tasks are performed.

6. Reasonable Risk Taker. This is the first and foremost trait of

entrepreneurship. Starting any business involves a considerable amount
of risk of failure. Therefore, the courage and capacity to take the said risk
are essential for an entrepreneur.

7. Self-Confident. A person cannot achieve much unless he has sufficient

confidence in himself. In any undertaking, a person’s belief in his ability leads
him to actual performance and eventual success. When a person has self-
confidence, he does his job without inhibition.

8. Goal Setter. Goals are very useful motivational tools, especially those
related to accomplishing the objectives of entrepreneurs. A goal performs the
following functions:

a. It direct one’s attention to a specific target;

b. It encourages one to exert effort toward achieving something specific
c. It encourages persistence
d. It fosters the creation of strategies and action plans

9. Accountable. The success of enterprise will depend much on the willingness

of subordinates to comply with the wishes of the entrepreneur. Compliance
can be expected if the entrepreneur is accountable enough to take
responsibility for whatever happens to the firm.

10. Innovative. In a world, where almost everything has been done,

innovation is a priceless gift to have. Innovation basically means generating a
new idea with which you can start a business and achieve a substantial
 amount of profits. Innovation can be in the form of a product, i.e., launching a
product that no one is selling in the market. It can also be in the form of
process, i.e. doing the same work in a more efficient and economical way.

Innovation may be the only way the entrepreneur can achieve the
following:
a. Penetrate the Market
b. Improve Employee Turnover
c. Reduce Manufacturing cost.
d. Improve Collection Rate.

An easy example of product innovation could be the launching of touch

screen cell phones when the world was still using a keypad on cell phones.

Another type of innovation can be the one concerned with usage. For
examples, cell phones are now used for various functions such as viewing,
creating and editing various files and documents, thus, eliminating the
need for computers to a large extent.

What Motivates a Person to become Entrepreneurs?

Not everyone desires to be ab entrepreneur. Those who do, however, are motivated
by any or all of the following:
1. Desire to be One’s Own Boss. There are times when an employee sees
some good opportunities for his employer’s business. When he recommends
action to be undertaken and is ignore, the employee may just proceed to
take the opportunity and organize his own business.

2. Desire for Financial Rewards. Getting employed is the desire of most

people. This is understandable because many people want sure monthly
income. Some people, however, do not get satisfaction from a fixed monthly
income which, most often, is inadequate. Some think that they deserve to be
properly rewarded for their skills. The means open to them is
entrepreneurship.

3. Desire to Create One’s Own Job Security. Some employees feel their jobs
are not secure. They think they could be fired for a variety of reasons.
Persons who cannot bear to worry about job security may just decide to
become entrepreneur.

4. Desire to improve One’s Quality of Life. Oftentimes employees do not

have control over their work schedules. So, to some people, engagement in
entrepreneurship provides them with control over their work schedules. An
entrepreneur can choose a type of business that will be compatible with the
quality of life he desires.
The Entrepreneur and the Manager Distinguished

CHAPTER 5: STRATEGIC PLANNING FOR SMALL BUSINESS

The resources at the disposal of the entrepreneur are always thought to be limited.
Despite the limitations, however, entrepreneurs are not discouraged from pursuing
their objectives. They can make use of some techniques that have been proven
valuable in business operations.

In the quest for attainment of business objectives, one technique has slowly been
adapted by businesspersons. The concept, called strategic planning, is borrowed
from the military, and has found useful applications in large corporate enterprises.
Its relevance to small business, however, has also been recognized. It is not unusual
for a new business venture to spend more than what it earns during the first few
years of operation. If this is expected by the entrepreneur, he will not be surprised.
Expectations, however, can be more meaningful if the entrepreneur is engaged in
strategic planning.

What is Strategic Planning?

Strategic planning refers to the process of determining the primary objectives of

the entrepreneurship and then adopting courses of action and allocating resources
to achieve those objectives. The definition involves three distinct steps.

I. The Determination of Objectives. The objectives of the firm are important

components of the firm's strategic planning activities but before these are
determined, the firm's mission statement must first be developed.

The Mission Statement. This term refers to the basic description of the
fundamental nature, rationale, and direction of the firm. It consists of three
concerns:

1. how the entrepreneur intends to use his resources.

2. how the entrepreneur expects to relate to the ever-changing environment;
and
3. the kinds of values the entrepreneur intends to offer to his customers.

An example of a mission statement is indicated below.

"The mission of Birdie Poultry Products is to provide the various poultry

requirements of consumers. The services of retailers located in the various malls
and public markets in Nueva Ecija are tapped as means of distributing our products.
In addition to the assortment of products, we stress quality and efficient service. We
intend to cover all towns of Nueva Ecija within five years through effective pricing
and promotion."

Strategic Objectives. This term refers to specific performance targets that the
entrepreneurship hopes to accomplish. The objectives define, in specific terms, how
the firm's mission will be realized.

Examples of strategic objectives are the following:

1. expand production capacity by 50% within two years.

2. increase sales by 50% by the year 2012.
3. increase market share by 10% every two years.
4. increase the number of outlets by three within three years.

II. Adoption of Course of Action. After the primary (or strategic) objectives are
established, the entrepreneur must develop a strategy which is alternately called
course of action. A strategy is a carefully designed plan for achieving the firm's
objectives. A strategy indicates how the entrepreneur will attempt to accomplish
the goals with the resources available.
 Examples of strategies are the following:

1. establish branches in strategic locations;

2. design a system that will attract persons with high potentials to work with
the company;
3. engage in the recruitment of retailers from nearby provinces; and
4. engage in building up the company's image as a reliable supplier of quality
poultry products.

In developing realistic strategies, the entrepreneur can make use of the most
popular tools.

1. SWOT Analysis. The firm which is fully aware of its internal environment
(specifically its strengths and weaknesses) as well as its external
environment (specifically threats and opportunities) is most likely to develop
a strategy that considers the firm's needs.

SWOT analysis is an organized method of assessing a firm's strengths and

weaknesses and the opportunities and threats in the external environment
that confront or will confront the firm. The purpose of SWOT analysis is to
match the firm's strengths and weaknesses with external opportunities and
threats to determine what strategy to adopt.

The firm's strength refers to a skill, a competence, a valuable

9rganizational resource or competitive capability, or an achievement that
gives the firm a market advantage.

Examples of strengths are as follows:

1. a recording firm's unique line-up of contract singers;

2. a company's ownership of the land that is the source of high-grade
material required for producing its
products;
3. the strategic location of the firm's sales offices; and
4. the firm's exclusive supply contract with a reliable manufacturer.

The firm's weakness refers to something a company lacks or does poorly

(compared with others) or a condition that puts it at a disadvantage. It must
be noted, however, that depending on the competitive situation, a weakness
may or may not make a company vulnerable to competition.

Examples of weaknesses are as follows:

1. lack of qualified managers;

2. poor design of the firm's products;
3. low employee morale; and
4. poor location of the firm's sales offices.
 Opportunity refers to the chance offered by the external environment to
improve the firm's situation significantly.

Examples of opportunities are the following:

1. For a motorcycle trading firm - the escalating cost of fuel;

2. For a small restaurant - the withdrawal from business of a major
competitor;
3. For a tailor residing in a provincial city- the absence of a reliable tailoring
shop; and
4. For a newspaper dealer - an exclusive supply contract for the entire
province offered by a major
national publisher.

Threats refer to a challenge posed by an unfavorable trend or development

in the external environment that would lead to, in the absence of purposeful
entrepreneurial action, the erosion of the entrepreneurship's position.

Examples of threats are the following:

1. To the grocery store - the proposed opening of a mall in the vicinity;

2. To the restaurant located along the highway - the proposed construction of
a diversion road bypassing the highway and the restaurant;
3. To the local dealer of skin-whitening soap and cream - the proposed
dissolution of the company
supplying the product; and
4. To the local operator of 20 units of public utility tricycles - the proposed
city ordinance banning tricycles from plying the major streets of the city.

2. Forecasts of Future Sales Performance. Forecasts are supplementary

tools for SWOT analysis. It is an estimate or prediction of the future sales or
income of the firm. Forecasts may be short-term (one year or less), medium-
term (one to five years), long-term (over five years).

Sales forecasts are often determined through a combination of statistical and

intuitive forecasts tempered by the experience of the entrepreneur.

Implementing Strategic Plans. Strategies are useless unless they are

implemented. To put strategies into action, the following activities are required:

1. Identifying Specific Methods. Strategies determine the best way to use

resources. There is a need, however, to develop tactics which will be used to
implement the strategies. Tactics are more detailed, and they are used to
determine how the specific task can best be accomplished time with available
resources. If "establish branches in strategic locations" is a stated strategy, the
tactical plan to implement it may appear as follows:

1. identify strategic locations;

2. determine the potentials of the identified strategic locations; and
 3. set a timetable for installing the branches.

III. Deploying the Resources. The specific aim of planning is to be able to deploy
the right quality and quantity of resources in the various activities required to
achieve the objectives. The resources would be indicated in terms of human and
nonhuman elements.

Fundamental Strategies for Small Business. There are certain basic strategies
that are necessary for the survival of small business. These are the following:

1. Flexibility Strategy. Small business ventures are not usually afforded the
advantages enjoyed by large business. It is very difficult for small business to effect
changes in its environment because its resources are usually limited. For instance, a
small business cannot match the advertising budget of a large business if they are
in competition with one another.

When hindrances such as those prevent the small business from pursuing its
objectives, it must consider other means. This is possible if the small business is
flexible enough. For instance, when the small appliance dealer does not have the
facility to deliver goods directly to the customer, the entrepreneur can hire the
services of a small transport operator. Another option could be the granting of a
discount to offset the delivery expense that will be shouldered by the customer.

2. Strategy of Effectiveness as a Higher Priority. Effectiveness is sometimes

sacrificed for the sake of efficiency. Although efficiency is a desirable goal, it is
oftentimes disastrous for small business to neglect effectiveness.

A firm that concentrates on efficiency may be able to reduce its expenses, but it
may not be able to generate sufficient income to keep it afloat.

At the early stages in the life of the small firm, when the venture is still trying to
gain a foothold in the market, turning out the first products and closing the first sale
are of a more basic concern than making a profit. As concerns for organization and
structure are aimed at increasing efficiency, such activities must in the beginning
give way to effectiveness.

3. Strategy of Starting Simple. In starting a new business venture, the

entrepreneur often encounters problems related to financing. The temptation is
great for the entrepreneur to finance all the activities required in operating the
venture. As expected, however, funds are not always sufficient. It may be wise for
the entrepreneur to let his subordinates perform the simpler tasks and subcontract
those that will need more elaborate employee skills and/or special equipment. An
example is the manufacturer of salted peanuts who cannot produce packaging for
his products at costs lower than what a package manufacturer produces. As a
result, he accepted the package manufacturer's offer of a subcontract.

In choosing the subcontract option, the entrepreneur is afforded with the following
advantages:
1. he has more time to attend to more important tasks like searching for new
markets; and
2. he is relieved of the burden of financing the subcontracted task.

The general idea is for the small business venture to start simple and absorb slowly
the more complicated tasks as it grows.

Strategy Concerns of Small Business. In determining what strategy to adapt,

the entrepreneur is confronted with two general situations:
1. Is he organizing a new business? or
2. Is he currently running an old business?

New Business. This term refers to one that will be operated for the first time by
the small business operator. If so, his options consist of the following:

1. acquiring an existing business;

2. organizing a new business; and
3. buying a franchise.

When making a choice between the three options, the entrepreneur or the small
business operator must consider the advantages and disadvantages of each. The
resources of the prospective entrepreneur are also an important factor.

Strategies for a Going Concern. The strategic problems of small business are not
as intense as those of large business. Even if small business cannot compete head-
on with big business, its size has a built-in maneuverability which is a very
important competitive weapon.

Any or all the following strategies are applicable to small business:

1. Segment markets - The small business operator will have to identify the
market segment with which it has an
expertise, then compete.

2. Efficient use of research and development – Since the small business cannot
fight the research and development efforts of big companies, it must concentrate its
R and D efforts to lowering process costs or to bring new products to the market.

3. Think small - The small business can still be strong with being small. The
emphasis must be on profits rather than sales growth, and specialization rather
than diversification.

Why Small Business Operators Ignore Strategic Planning. Important as it is,

strategic planning in small business management is often ignored. This situation is
true in many parts of the world including the Philippines. The reasons could be any
of the following:

1. Lack of Expertise - Few small business operators are trained in strategic

planning.
2. Inability to Get Started - Even if small business operators are convinced about
the importance of planning, they fail to get started for lack of sufficient exposure to
planning activities.

3. Uncontrollable, often Intangible Variables - The uncontrollable and often

intangible variables complicate planning which later discourages the small business
operator from repeating the exercise.

4. Resource Poverty - Planning requires time, but the small business operator
often does not have it. This is so because he must attend to the problems related to
lack of adequate capital, managerial experience, outside advice, management
specialist, and other key assets.

5. Focus on Daily Operations - The daily requirements of small business usually

keep the small business operator so busy that he is left with no time for planning.

6. Failure to Realize the Importance of Strategic Planning - The small

business operator is exposed to the environment of successful Filipino businessmen
who do not engage in strategic planning. This gives sufficient reason to disregard
the benefits of strategic planning. It is ironic that even if studies show the
usefulness of strategic planning, this activity is not fully appreciated.

FORMS OF SMALL BUSINESS OWNERSHIP

The forms of ownership applicable to small business are sole proprietorship,
partnerships, and corporation.
A. Sole Proprietorship

 A business owned and operated by single person.

Advantage of Sole Proprietorship

1. Ease and Cost of Formation. Among the three forms of ownership, the sole
proprietorship is the easiest and least costly to establish. The only requisites for its
legal existence to commence are the following the sole owner’s resolution to start
operating, and getting the required permit and license.
2. Secrecy. One way of effectively competing with others is for the businessperson
to determine the plans as well as the strengths and weaknesses of his competitors.
The sole proprietor is ahead in this regard because he has the advantage of keeping
his intentions secret. This is possible because he does not have, and he is not
required by law, to share information with anyone. Thus, he can proceed with his
activities in secrecy. His competition can only guess what his intended moves are.
3. Distribution and Use of Profits. If, because of his efforts, his business made
large profits, the sole proprietorship is the sole beneficiary. He does not have to
share the profits with anyone.
4. Control of the Business. The power to control the business is vested solely to
the single proprietorship. This authority is very important especially under critical
moments of competition.
5. Government Regulation. The sole proprietorship is spared from various
government rules which cover partnerships and corporations. Also, sole
proprietorships are required to submit fewer reports to the government.
6. Taxation. The net income of the sole proprietorship is regarded as the personal
income of the sole owner and is taxed accordingly. This is not so in the case of
partnerships and corporations wherein net incomes are taxed and will be subject to
taxation again when the owners individually receive their share of the profits.
7. Closing the Business. Sole proprietorships can be dissolved at will. Although
this is done when necessary, it remains an option of the owner. Once the owner
makes a decision to cease operations, he does not need to seek the approval of co-
owners or partners because he is the sole owner.
Disadvantages of Sole Proprietorships
1. Possibility that the Owner Lacks Ability and Experience. The success of
the sole proprietorship will depend largely on the management and entrepreneurial
skill of the owner. The firm will need a generalist with sufficient exposure to the
various specialized functions required, like marketing, production, finance,
accounting, personnel, and research and development.
2. Difficulty in Attracting and Keeping Quality Employees. The assurance that
the firm will survive for a long period is not a feature of sole proprietorships. As a
consequence, good employees will tend to join a more stable enterprise which is
most often a corporation.
3. Difficulty in Raising Additional Capital. In a sole proprietorship, the amount
of capital that could be raised will depend on the financial resources of the sole
owner. Even if he can obtain credit, the amount will depend on his sole capacity to
pay. This problem is especially felt when business expansion is required and more
difficult when credit is getting tight and interest rates are going up.
4. Limited Life of the Firm. The existence of the sole proprietorship depends on
the physical well-being of the owner. The health on the part of the owner could
cause bankruptcy. His death will mean liquidation of the business.
5. Unlimited Liability of the Proprietor. Any liability incurred by the sole
proprietorship extends to the owner’s personal assets. In theory, the sole proprietor
could lose even his shirt if all other assets have been exhausted in liquidating all
claims against his business. Unlimited liability is the greatest disadvantage of sole
proprietorships.
B. Partnership

 A legal association of two or more persons as co-owners of an unincorporated

business.
 Formed with the purpose of eliminating some of the disadvantages of sole
proprietorships while retaining some of their advantages.

Advantages of Partnership
1. Ease of Formation. Like sole proprietorship, partnership is easy to form. The
only requirement before the partnership start to operate is for the partner to agree
on the basic aspect of the business like the nature of the business, location,
capitalization, and the like.
**A written agreement called partnership agreement is drawn to formalize what
has been agreed upon.
2. Pooling of Knowledge and Skills. The combined knowledge and the skills of
the partners provide the partnership with the distinct advance. One partner, for
instance, may be very good at marketing, while another may have the proven track
record in research and development. These skills may be used to t5hge advantage
of the partnership. This condition lead to specialization which is a very important
competitive tools in business.
3. More Sources of Capital. The combined resources of the partners provide a
bigger source of funding. Also, the partnership can enjoy the benefits of a higher
credit rating. A combination of the resource potentials of the partners and a high
credit rating is regarded as a formidable financing capability of the firm.
4. Ability to Attract and Retain Employees. Attracting and retaining good
employees is a difficult inherent to sole proprietorship. Partnership are able to
overcome this difficult by offering partner status to valuable employees. This
advance also minimizes the potential harm that may be done when a key employee
moves over to another firm.
5. Tax Advantage. The income of the partnership is not taxed separately from the
partners’ income. Any profit derived by the partners are taxed as their individual
incomes.
Disadvantages of Partnerships
1. Unlimited Liability. Partnership, like sole proprietorship, are saddled with the
disadvantage of unlimited liability. Although one or more partners may opt to have
limited liability, the remaining partner carries the burden of the unlimited liability.
2. Limited Life. When partner dies or withdraws from the business, the partnership
is terminated. In essence, the life of the partnership is more limited than that of the
sole proprietorship. This is so because the life of the sole proprietorship depends on
the state of health and the willingness of the sole owner to continue while a life of a
partnership depends on the state of the health and willingness of the partners to
continue. If there are partners, the risk of the termination of the life of the partner-
ship is five times greater than the sole proprietorship.
3. Potential Life Between Partners. There are occasions when partners disagree
on certain ways of operating the business, and there are many potential areas of
disagreement. Among these are the following adding new products or services
carried by the business, hiring new employees, decisions on credit extensions, and
the grant of additional benefits to employees.
4. Difficulty in Dissolving the Business. Partnerships are not as easy to dissolve
as sole proprietorships. Whatever assets or liabilities are left after dissolving a sole
proprietorship is the concern of the sole owner. In a partnership dissolution, it may
not be easy to divide whatever assets are left for distribution to the partners as
some of the assets may be fixed or immovable.
Types of Partnerships
1. General Partnership is an association of two or more persons, each with
unlimited liability, and who are actively involved in the business.
2. Limited Partnership is an arrangement in which the liability of one or more
partners is limited to the amount of assets they invested in the business.
Partnership Agreement

 A document designed to prevent or at least minimize disagreements between

partners.
 It usually covers the following:

a. purpose of the business;

b. terms of the partnership;
c. goals of the partners and the partnership;
d. financial contribution made by each partner at the beginning and during the
lifetime of the business;
e. distribution profits and losses;
f. withdrawal of contributed assets or capital by a partner;
g. management powers and work responsibilities of each partner;
h. provisions for expelling a partner;
i. provisions for admitting new partners;
j. provisions for continuing the business in the events of a partner’s death, illness,
disability, or withdrawal;
k. provision for determining the value of a departing partner’s interest and method
of payment of that interest;
l. methods of setting disputes through mediation or arbitration; and
m. duration of the agreement and the terms of dissolution of the business.

C. Corporation

 A legally chartered enterprise with most of the legal rights of a person,

including the right to conduct a business, to own and sell property, to borrow
money, and to sue and be sued.

Advantages of Corporation
1. Limited Liability. The liability of a stockholder is limited to his shareholding. He
may lose the entire value of his stocks in the event of a bankruptcy. Beyond the
said value, he has no more liability.
2. Ease of Expansion. The authority granted to a corporation to sell its own share
of stock provides a means to pool large amounts of funds. The price per share of the
stocks can be made low enough to attract even the smallest investor. As the
ownership of the shares of stock can be easily transferred, this feature motivates
further the prospective investor to buy shares.
3. Ease of Transferring Ownership. If a stockholder loses interest in maintaining
part ownership of the corporation, he may disassociate himself from it by selling or
donating his shares to another person. This feature allows the corporation to
change ownership as often as required without actually dissolving it.
4. Relatively Long Life. Corporations are established to have a life of up to 50
years and is extendible for longer periods. Because ownership is readily
transferrable, the death or withdrawal of any or all stockholders do not terminate
the corporation. This advantage makes the corporation the most stable among the
three forms of ownership.
5. Greater Ability to Hire Specialized Management. He expanded operations
of corporations make it possible to subdivide the overall task into smaller
specialized positions. As the created positions will be a little more exacting than
those for sole proprietorships and partnerships. The said requirements pave the way
for hiring fully trained management experts. With specialized management, the
corporation is provided with an opportunity to grow and develop more vigorously.
Disadvantages of Corporation
1. More Expensive and Complicated to Organize. Among the three forms of
ownership, the corporation requires more time and money to organize. A
corporation may start operations only after receiving from the Securities and
Exchange Commission (SEC) a certificate of incorporation. The SEC will only issue
the certificate of incorporation after reviewing the articles of incorporation
previously submitted by the initial set of corporate officers.
The articles of incorporation contain the following:
 Name of the corporation;
 Specific purpose or purposes;
 Principal office of the corporation;
 Term of existence of the corporation;
 Names, nationalities and residences of incorporators;
 Number of directors;
 Amount of authorized capital stock; and
 Others matters.

The treasurer’s affidavit indicating payment of minimum subscribed capital stock is

also a requirement. The articles of incorporation and the treasurer’s affidavit must,
point by point, conform with the requirements of the Corporation Code.
2. Double Taxation. The profits derived by stockholders are taxed twice by the
government:

1. First, when the corporation realizes profits; and

2. Second, when individual stockholders declare as part of their personal
income the dividends they receive from the corporation.

3. More Extensive Government Restrictions and Reporting Requirements.

Corporations are subject to stringent government restrictions and are required to
submit various reports on a periodic basis.
4. Employees Lack Personal Identification and Commitment. Many
stockholders are detached from the daily operations of the corporation. Those who
are employed by the corporation mostly do not own even a share of the company’s
stocks. The relationship between the corporation and the employees are too
impersonal. Employees do not feel identified with the corporation and therefore,
lack commitment to their work. The extra concern provided by employees of sole
proprietorships and partnerships sometimes spell the difference between success
and failure. Such concern is rarely present in a corporate work atmosphere.
ORGANIZING, DIRECTING, AND CONTROLLING THE SMALL BUSINESS
A small business must be properly organized, directed, and controlled. As early as
the start-up stage, it must adapt an appropriate organizational structure.
A. Organizing the Small Business
Organizing is the means by which management blends human and nonhuman
resources through the design of a formal structure of tasks and authority.
The Owner’s Concern in the Organizational Structure
1. activities necessary to reach the goals must be identified;
2. an analysis of the jobs to be performed must be made; and
3. the placement of people with the interest and qualifications in performing the
jobs.
Organizational Structure
1. Specialization
 Divides the total work into small, specialized tasks and assigns employees to
specific tasks.
 The purpose of specialization is to make employees more efficient.
2. Departmentalization
 Jobs are grouped into working units, the process.
 The units formed are called departments, units, groups, or divisions.

3. Delegation of Authority
 An organization grows beyond phase one, some of the tasks will have to be
assigned to subordinates who will be delegated with commensurate
authorities.

4. Span of Management
 Small business operator must consider the number of subordinates reporting
to a supervisor or to himself.

5. Hierarchy of Objectives
 It is expected to achieve a certain objective which most often is related to the
realization of profits.

6. Degree of Centralization
 It is characterized by the concentration of authority for decision-making in
the hands of one or a few, usually the sole proprietor, the senior partner or
top management.

B. Adapting a Small Business Organizational Structure

The organization is the vehicle by which the SBO or the entrepreneur will achieve
his business objectives. In the day-to-day operations of the business, he is
confronted with the formal and informal organizations.
Types of Formal Organization
1. Line Type based on the direct flow of authority from the chief executive to the
subordinates.
2. Functional Type adapts some kinds of specialized functions.
3. Line and Staff Type directly responsible for the achievement of organizational
objectives and which are indirectly influenced by staff functions through advice,
recommendations, research, and technical expertise.
4. Committee Type formal organizational group created to carry out a specific
organizational task.

Two Types of Committees are:

a. Ad hoc Committee is created for a short-term purpose and has a limited life.
b. Standing Committee is relatively permanent and performs a specific, recurring
task, like reviewing budgets, hiring practices, and pricing policies.

C. Directing the Small Business

Directing refers to guiding and motivating employees to accomplish organizational
objectives. It involves explaining procedures, issuing orders, and seeing that
mistakes are corrected.
Required Skills for Effective Directing
1. Communication with Subordinates
Communication defined as a meaningful exchange of information through
messages.

Functions of Communication
a. Information Function the SBO uses communication as a means to gather
information he needs for making decisions.
b. Motivational Function communication is used to motivate subordinates to
contribute to the achievement of company goals.
c. Control Function the clarifications provided through communication in terms of
duties, authority, and responsibilities lay the ground for effective control.
d. Emotive Function communication provides subordinates with an outlet for self-
expression.

Communication Process
a. Sender is the one who speaks or dictates the message.
b. Encoder transcribes what is spoken or dictated and prepares it for sending.
c. Medium conveys or transmit the message through written, oral, nonverbal, or
electronic means.
d. Decoder interprets the message.
e. Receiver receives the message.

2. Providing Counseling Service there are certain instances when the actuations
of some employees do not jibe with the required activities designed to accomplish
the company’s objectives. When these happen, there is a need to redirect the
efforts of the concerned employees.
3. Motivating it is widely accepted that motivated employees are crucial to the
achievement of enterprise objectives. These employees tend to work better and
complain less.
4. Maintaining Discipline much as the small business owner likes to avoid
negative actions, there are instances where punishment and disciplinary measures
are used to eliminate undesired behavior and poor performance.
Discipline any action directed towards an employee for failing to follow company
rules, standards, or policies.
Progressive Discipline when SBO applies corrective measures in increasing
degrees to get an employee to voluntarily correct inappropriate behavior.
1. Verbal Warning this is the first stage of disciplinary measures, where an
employee is told by the SBO or his supervisor about his or her undesirable behavior.
2. Written Warning this warning in writing sent to an employee by the SBO,
saying that unless there is a positive change in the behavior of the employee, he or
she will be dismissed.
3. One-day Suspension if after the written warning, the undesirable behavior is
repeated, a one-day absence without pay is prescribed.
4. Three-day Suspension the employee is suspended for three days without pay
if the undesirable behavior still continues.
5. Termination the employee is terminated if his or her behavior is still not
improved.
D. Controlling the Organization
Controlling refers to the process of efficient performance to attain the objectives
of the firm.
Required Skills for Controlling
A. Establishing Goals and Standards
B. Measuring Performance against the Established Goals and Standards
C. Reinforcing Successes and Correcting Shortcomings
Kinds of Control

Stage Appropriate Control Tools

Start-up Simple accounting records and personal supervision
Early Growth Operational budgets, management by objectives
Late Growth Greater use of budgets, standard cost systems, use of computer
Resource More sophisticated use of control measures indicated in the late
Maturity growth stage

MARKETING THE SMALL BUSINESS

A. Small Business and the Marketing Concept
Marketing
 Function concerned with planning and implementing the conception, pricing,
promotion, and distribution of products or services that will satisfy the firms
objectives.
Marketing Strategy
 The general guide the SBO will use to achieve the firm’s marketing goal.
 It is a plan for getting products and services into the hands of customers in a
timely, cost-effective, and appropriate manner.

Marketing Strategy Planning

 A small business activity which seeks to find attractive opportunities and
develop profitable marketing strategies.

B. Target Marketing refers to the activity of selecting well-defined groups of

potential customers and tailoring a marketing mix to their needs and preferences.

 Target Market is defined as the particular segment the frim wishes to

serve.

C. Marketing Mix refers to the set of marketing tools that the firm uses to pursue
its marketing objectives in the target market.
Marketing Tools are the controllable variables that when properly blended
constitute the marketing mix.
a. Product the tangible commodity or the intangible service that the small
business firm offers for sale to prospective customers.
b. Price the amount of money paid by the customer to the small business firm so
the customer can use the product.
c. Promotion the provision of required information to prospective customers so
that they are persuade to buy.
 Personal Selling involves the use of the service of salesmen to influence
the prospective buyer’s purchasing decision.
 Mass Selling involves simultaneous persuading of large numbers of
prospects to buy the firms products.
 Sales Promotion refers to promotion activities other than personal selling,
advertising, and publicity.

d. Place it makes its products or services available in the location and time
required by buyers.
D. Importance of Market Research
Size of the Market Area knowing the needs of the target customers will be very
helpful in designing the right marketing mix.
Types of Market Research
1. Primary Research the firm could obtain data about potential customers and
competitors.
 Observation Method involves collecting data by observing the actions of a
person or a group of persons.
 Survey Method consists of gathering data by interviewing people (personal
interview, telephone survey, by mail, or by the internet).
 Experimental Method involves observing the results of changing one variable
in a situation while holding all other conditions constant.
2. Secondary Research are those gathered by other persons or institutions to
satisfy their own specific requirements.
 Company’s Records
 Libraries
  Government Agencies
DETERMINING THE RIGHT LOCATION
Right Location refers to that one which will bring the highest possible benefits to
the firm.
Wrong Location is one will bring the most disadvantages to the small business.
A. General Criteria for Selecting a Business Location
1. Selecting the Region
 Population Growth
 Average Annual Income of Families
2. Selecting the Province
 Proximity to Markets
 Proximity to Supply of Raw Materials
 Labor Supply
 Business Climate
3. Selecting the City or Town
 Population Trends
 Local Laws and Regulations
 Competition
 Compatibility with the Community
 Transportation
 Public Services
 Police and Fire Protection
 Reputation of the Location

B. Steps in Selecting a Business Location for Retailers

1. Choosing Viable Community
Viable Community is one that has the capacity to provide an adequate nd
profitable sales volume for the business.
 Economics areas with stable economic base must be chosen by the SBO
rather than those without a stable economic base.
 Population information about the characteristics of the population relevant
to the decision must be obtained.
 Competition no matter how large an area is; it can only support a certain
number of competing firms.
2. Selecting the Trading Area
Trading Area is the geographic area from which a business draws its customers.
 Primary Trading Area is where 50 to 60 percent of the retailer’s customers
come from. It is closest to where the retailing firm is located and possesses
the highest density of customers of the firm.
 Secondary Trading Area is where 20 to 25 percent of the firm’s customers
come from.
 Fringe Trading Area is where the remaining customers of the firm come
from.
Types of Location
a. Central Business District (CBD) refers to an unplanned shopping area around
the geographic point at which all public transportation systems coverage.
b. Shopping Center refers to a centrally owned and managed shopping district
which planned, has balanced tenancy, and is surrounded by parking facilities.
c. Free-Standing Retailer is generally located along major traffic arteries without
any adjacent retailers selling competing products to share traffic.
3. Evaluating the Specific Area after determining the trading area where the
small retail business will be located, the specific site must be pinpointed.

PROMOTING THE SMALL BUSINESS

A. Promotion and Customer Demand
Promotion defined as activities, including advertising, personal selling, sales
promotion, public relations, and direct marketing used by SBOs to persuade
prospective customers to buy the company’s products or services.

B. Methods of Promotion
1. Advertising any paid form of nonpersonal presentation and promotion of ideas,
goods, and services by an identified sponsor.

Types of Advertising
a. Retail Advertising is made by various retail stores such as grocery stores and
bakeries to attract customers.
b. Service Advertising is made by various service establishments such as
transportation, recreation, and insurance.
c. Trade Advertising is made by manufacturers to motivate wholesalers and
retailers to carry their products.
d. Industrial Advertising is made by manufacturers to motivate other
manufacturers to use their products and services.
e. Institutional Advertising is designed to create a favorable image for a firm.

Types of Advertising Media

a. Newspapers most viable media for advertising if the advertiser would like to
reach a great number of urban dwellers and a wide variety of audience.
b. Consumer Magazines purchased by certain types of buyers depending on the
nature of the magazine.
c. Radio widest reach among the various media and inexpensive.
d. Television provides a powerful combination of visual and audio effects to the
audience.
e. Outdoor Advertising consists of posters, painted bulletins and spectaculars.
f. Direct Mail most selective of all the media forms; it reaches only the individuals
and organizations the advertiser wishes to contact.
g. Cable TV those which are attached to subscriber’s homes to the exclusion of all
others.
h. Yellow Pages widely used by national and local advertisers.
i. Transit consists of those that appear inside and outside of buses.
j. Point of Purchase refers to those appearing in outlets where goods are sold.
k. Internet a global networks linking millions of users and as such, offers many
possibilities for the advertiser.
l. Cell Phones tools of electronic communication using two forms; the spoken word
and the text.
2. Personal Selling direct face to face communication between sellers and
prospective buyers.
Purpose of Personal Selling
a. finding prospects
b. convincing prospect to buy
c. keeping customers satisfied
Types of Salespersons
a. Order Getters the jobs are to increase the firm’s sales.
b. Order Takers serve the purchase orders of current customers.
c. Support Personnel facilitate the selling function.

Selling Process
a. Prospecting the stage where a search for and qualification of potential
customers.
b. Preapproach consists of the time and effort spent in determining which
approach will best suit a prospect.
c. Approach the salesperson makes contact with the prospect.
d. Presentation presenting the product to the customer with the objective of
convincing.
e. Meeting Objections it comes naturally from prospects.
f. Close salesperson asks the prospect to buy the product.
g. Follow-up requires that the sales person must determine if actual delivery has
been made on the date and specifications agreed upon.

3. Sales Promotion a short-term inducement of value offered to arouse interest in

buying a good or service.
Sales Promotional Tools
a. Samples offer of a trial amount of a product
b. Coupons certificate that offer buyers savings when they purchase specific
products
c. Packages a set of complementing products to come up with one bundle at a
specific price
d. Premiums goods offered either for free or at a low cost to provide incentive for
consumers to buy a product
e. Patronage Rewards bonuses in the form of cash or items of value that can be
redeemed for regular purchases made
f. Point of Purchase Promotion includes displays and promotions that take place
at the point of sale
g. Contests and Games a chance to win something such as a trip or cash

4. Public Relations a form of promotion designed to favorably influence attitudes

toward an organization, its products and its policies.

Two Components of Public Relation

a. Publicity is the generation of news about a person, product or organization that
appears in broadcast or electronic media.
Forms of Publicity
 News Release is a brief memo or report containing news information.
 Press Agentry is the planning and staging of an event in order to generate
publicity.
b. Public Affairs it deals with community groups.
Forms of Public Affairs
 Lobbying is the attempt to persuade a government official or governing
body to adopt policies, procedures or legislation in favor of the lobbying
group or organization.
 Community Involvement undertakes company participation in community
activities.