Small Business Can Learn From Big Business

I just read a comparison between the market values of the two largest U.S. automakers and Japan’s two largest automakers. The market value of GM and Ford combined is $8.1 billion. The market value of Toyota and Honda combined is $146.3 billion—over 18 times greater than the U.S. big two.

Why is the American auto industry on life support, while Japan’s is alive, healthy, and prosperous? Most of Japan’s cars, that are sold in the U.S., are built in the United States. Japan’s auto makers belong to the same U.S. unions, pay the same wages, charge comparable prices for their products…and yet, they are many times more successful. Why do you suppose that is?

To find the answer I think we only have to look as far as the customer satisfaction surveys conducted by J. D. Powers, Consumer Reports, and the like. American automobiles just do not satisfy the consumers as well as the Japanese automobiles do, and they haven’t for a long time. According to the surveys, Japanese autos are better designed, higher quality, and just built better. In other words, Japanese automakers provide more value for the money.

How does this apply to small business?
Value for their money is also what our own customers and clients search for. It doesn’t matter if you are a one-person web site design studio, or General Motors…if you do not provide the best value for your customers or clients money—you will fail. It is as simple as that. Maybe it is time for all of us to take stock of what we are delivering to our customers and clients.

Toyota does it; Honda does it; Costco does it; Avon does it—why can’t we?

What Can We Learn From Costco?

In their November 2008 issue, Fast Company magazine featured an interview with Jim Sinegal, CEO and cofounder of Costco. While most retailers are whining about the economy, in August Costco had an increase in same-store sales of 9%. The reason for this is very simple; there are no secret programs, or special incentives to buy there…just good old-fashioned business sense. Here are the key points in Jim’s interview that we can all learn from.

  • Don’t gouge your customers. The interviewer pointed out that some suppliers still balk at Jim’s policy of not marking products up more than 15%. So much for supply and demand marketing.
  • Treat your customers well. Jim: “Customers shop with us for value. They don’t shop with us for cheap prices on cheap merchandise. They expect us to deliver value on quality….The final analysis is, the customers vote at the checkout.” This is something for all of us to remember.
  • Treat your employees well. Wall Street complains that Costco treats its customers and employees better than they do their shareholders. They pay their workers an average of $17 per hour, and 90% of health insurance costs, for both full-time and part-time employees. Yet, revenues have grown 70% in the last five years, and their stock has doubled.
  • Know your competition. Jim: “Hardly a week goes by that I’m not in a Sam’s.” Do we study our own competition that closely?
  • Try new things. Sales on Costco’s e-commerce site are expected to hit $1.6 billion this year, a 33% increase over 2007. Coffins are one of their big e-commerce sellers. Who would have thought?
  • Do not be afraid to fail. Jim: “You don’t have enough space in your magazine to talk about all the things that we’ve tried that didn’t work out.” How bold are we about trying new things?
  • Manage by walking around. Jim: “You know, there certainly are days when I’ll visit 12 (stores). I will be traveling to our warehouses every single week between now and Christmas…I try to approach the visits from the standpoint of the customer. Does the building have the right goods out? Is it well stocked and clean and safe? Nothing is a bigger turnoff than poor housekeeping.” Spending quality time with our customers and employees is going to be one of the keys to surviving this recession.
  • Be innovative. Jim: “We just reconfigured our cashews. They were in a round canister, and we put them in a square canister. It sounds crazy, but we saved something like 560 truckloads a year of that one product.” In today’s chaotic world, innovation is not optional.
  • Keep overhead low. Jim answers his own phone and sends his own faxes. I read somewhere else, a while back, that Jim uses the same desk, in the same small office where he started 25 years ago. Many of us can take a lesson from that.

Obviously, Costco is a reflection of its CEO and the values he brings to his business. But then, aren’t all our businesses a reflection of the values of the owner?

Something to think about.

Federal Regulations Unfair to Small Business.

American businesses pass on to the American people $1.1 trillion in costs of complying with federal regulations. This is more cost per U.S. household than the cost of health insurance.

Smaller businesses bear the heaviest load of the cost of business regulations. They spend four and a half times as much per employee to comply with environmental regulations, and 67 percent more per employee on tax compliance than big businesses do.

This is data recently released by the Office of Advocacy of the Small Business Administration. The Office of Advocacy has been trying for decades to get many of these regulations modified for small businesses—all to no avail to date.

Yet, small businesses—with fewer than 500 employees—are truly the backbone of U.S. Industry. Here are some little known facts about the importance of small businesses in America:

Small Firms:

  • Represent 99.7 percent of all employer firms.
  • Employ half of all private sector employees.
  • Pay nearly 45 percent of total U.S. private payroll.
  • Have generated 60 to 80 percent of net new jobs annually over the past decade.
  • Made up 97 percent of all identified exporters.
  • Hire 40 percent of high tech workers (scientists, engineers, and computer workers).
  • Produce 13 times more patents per employee than large patenting firms, and these patents are twice as likely as large firm patents to be among the one percent most cited.

(The Office of Advocacy of the Small Business Administration also recently published this information.)

So, in spite of all the challenges thrown at small businesses…by government agencies and private institutions alike…small businesses have remained the backbone of America’s Free Enterprise system.

Now, with the economy in the tank, our small businesses are in even greater jeopardy. Let us not allow the politicians to build the barriers any higher.

Home Office Deduction

Of the 21 million non-farm small businesses in the U.S., 53 percent of them are home based. Unfortunately, these small businesses fall under most of the same tax requirements and regulations as the large corporations. That is why taking tax deductions for having your office in your home is so complex. Many of us do not even bother with this deduction any longer. The Office of Advocacy of the Small Business Administration states that, tax compliance is 67 percent more burdensome for the smallest businesses compared to their larger competitors.

Now, Senator Olympia Snowe (R-ME) has introduced a bill in the Senate to simplify home office deductions: “Home Office Deduction Simplification and Improvement Act of 2008” (S.3371), and Representative Charles Gonzalez (D-TX) has introduced companion legislation (H.R. 7074) in the House.

The issue of onerous tax regulations on small businesses has been debated for many years. I attended my first conference on this issue over 20 years ago, and little has been done—by either political party— since then.

If you have a small home-based business, I would highly recommend that you look at S.3371 and H.R. 7074. If you think they would benefit your tax situation, drop an email to your respective Senators and Representative encouraging passage.

By the Way, What is an Entrepreneur?

There has been quite a bit of chatter on the Internet lately about Michael Gerber’s book, The E-Myth Revisited. In his book, Gerber proclaims that unless you have employees, you are NOT an entrepreneur. Without hiring employees, you are merely a “technician” doing what you always did. He goes on to say, “The purpose of going into business is to get free of a job so you can create jobs for other people.” This should come as shocking news to the 21.1 million non-employee businesses (70% of the total) in the U.S. (not to mention the world).

No, I do not believe Gerber’s premise for a second. Dozens of blogs and web sites offer definitions of what an entrepreneur is. There are also multiple dictionaries with definitions of the title, entrepreneur. They all say pretty much the same thing. Here is a compilation of those definitions:

An entrepreneur is a person who organizes and operates a business, usually with considerable initiative, while taking on greater than normal financial risks in order to do so.

Michael offers a very good approach for growing a business by hiring employees, but I think he does a real disservice to the majority of small business owners who do not want to take on employees, or do not intend to grow beyond a certain point. These are the same businesses that pump a trillion dollars a year into the United States GDP. I can’t imagine what the world contribution is.

Being an entrepreneur is hard work and takes a lot of time, passion, money, and intestinal fortitude to become a successful businessperson. I believe every shop owner; every market vendor, every home-based business owner, and every non-employee business owner in the world fulfills the above definition and deserves to be called “Entrepreneur.”

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