Chapter 1: Foundations of Entrepreneurship

Chapter 1

The Foundations of Entrepreneurship

Multiple Choice Questions: 1. A recent study by Ernst and Young found that 78% of influential Americans belie e that entrepreneurship !ill be the defining trend of this century. "he entrepreneurial opportunity that topped their list !as: a. the #nternet b. globali$ation c. do!nsi$ing of corporate America d. %one of the abo e. Current competiti e conditions fa or: a. large companies !ith their hierarchies and layers of management. b. companies in industries that !ere once regulated by go ernment but ha e recently been deregulated. c. small companies that can 'uic(ly mo e into and out of niche mar(ets as they emerge and recede. d. )oth A and ) are correct. +hich of the follo!ing is %," a characteristic of the typical entrepreneura. Confidence in his.her ability to succeed b. /alue of money o er achie ement c. 0esire for immediate feedbac( d. A future orientation +hich of the follo!ing is %," a characteristic of the typical entrepreneura. 0esire for responsibility b. 2igh degree of commitment c. 3o! energy le els d. Confidence in his.her ability to succeed Characteristics of entrepreneurs include all of the follo!ing E5CE6": a. "olerance for ambiguity b. Fle7ibility c. 8(ill at organi$ing d. 3o! degree of commitment

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Entrepreneurs are characteri$ed by: a. s(ill at organi$ing. b. desire for immediate feedbac(. c. high energy le els. d. All of the abo e. Entrepreneurs !ho repeatedly start businesses and gro! to a sustainable si$e before stri(ing out again are (no!n as :::::: entrepreneurs. a. ,pportunistic b. 6ersistent c. 8erial d. %one of the abo e. 8ur eys sho! that o!ners of small businesses belie e that they :::::::::::::::: than if they !or(ed for a large company. a. !or( harder b. earn more money c. are happier d. All of the abo e. #n a large organi$ation< an indi idual may be stifled and limited by a !ide ariety of factors. )ut< by o!ning one=s o!n business< the only limits are one=s o!n creati ity< talent< and determination. #n this sense< small business o!nership offers the ad antage of: a. the opportunity to reach one=s full potential. b. the opportunity to reap unlimited profits. c. the chance to learn from others= mista(es. d. %one of the abo e. +hich of the follo!ing is a benefit of entrepreneurshipa. "he opportunity to gain control o er your o!n destiny b. "he opportunity to reach your full potential c. "he opportunity to do !hat you en?oy d. All of the abo e "he only boundaries imposed on an entrepreneur@s success are those imposed by: a. society. b. his.her o!n creati ity< enthusiasm< and ision. c. financial institutions. d. licensing agencies. +hich of the follo!ing is %," a characteristic of the entrepreneurial e7periencea. Ancertainty b. Ambiguity c. Buaranteed success d. 2ard !or( ::::% of ne! businesses fail !ithin t!o years< !hile ::::% fail !ithin si7 years. a. *4C91 b. 41C91 c. *4C8> d. 91C8> "he ma?ority of ne! business o!ners !or(:

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Chapter 1: Foundations of Entrepreneurship

a. b. c. d. 14.

fe!er than 1> hours per !ee(. more than 1> hours per !ee(. more than 7> hours per !ee(. more than 8> hours per !ee(.

+hich of the follo!ing is a potential disad antage of o!ning your o!n businessa. Ancertainty of income b. Dis( of losing your entire in estment c. 2igh le el of stress d. All of the abo e. +hich of the follo!ing forces is dri ing the entrepreneurial trend in our nationa. #ncreased entrepreneurial educational opportunities b. EEcommerce and the +orld +ide +eb c. "echnological ad ancements and modern business machinery d. All of the abo e. +hich of the follo!ing is %," one of the forces dri ing the entrepreneurial trend in our countrya. 8hift a!ay from a ser ice economy b. #ndependent lifestyle c. #nternational opportunities d. EEcommerce and the +orld +ide +eb "he ser ice sector of the A.8. economy produces :::::% of the ?obs and :::::% of the B06 in the country. a. ;&C 84 b. 79C 74 c. 94C 99 d. 4>C &1 Fost entrepreneurs launch their businesses bet!een the ages of :::: and :::::. a. &>C *1 b. &4C 11 c. *>C 11 d. *4C 1; +hich of the follo!ing statements concerning small businesses and international mar(ets is FA38Ea. Although terrorism and global recession ha e slo!ed the gro!th of international trade some!hat< global opportunities for small businesses ha e a longEterm positi e outloo(. b. Although the A.8. is an attracti e mar(et< appro7imately ;4 percent of the !orld=s population li es outside its borders. c. )ecause e7porting is so comple7 and re'uires a company to ha e so many international e7perts on staff< e7porting is not feasible for small businesses. d. 8mall companies comprise ;7% of all businesses engaged in e7porting< yet they account for only *>% of the nation@s e7port sales. 8mall companies that ha e e7panded successfully into foreign mar(ets tend to rely on all but !hich of the follo!ing strategiesa. Desearch foreign mar(ets thoroughly

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Chapter 1: Foundations of Entrepreneurship

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Focus on many countries initially Atili$e go ernment resources designed to help small companies establish an international presence Forge alliances !ith local partners

+hich of the follo!ing statements is.are %," true of Beneration 5a. "hey are the most entrepreneurial generation in history. b. "hey are three times more li(ely to start businesses than other generations. c. "hey are responsible for appro7imately 8>% of all business startEups. d. All of the abo e are true. +hich of the follo!ing statements about !omenEo!ned businesses is FA38Ea. "he businesses !omen start tend to be smaller than those men start. b. +omen o!n about &8% of all pri atelyEheld businesses in the A.8. c. "he sur i al rate of !omenEo!ned businesses is much lo!er than that of A.8. businesses o erall. d. Fost !omenEo!ned companies are concentrated in retailing and ser ices. +omen o!n about :::::% of all pri atelyEheld businesses in the Anited 8tates. a. 8 b. &8 c. 18 d. 98 +omen are opening businesses at a rate of appro7imately :::: times that of the national a erage. a. 1.4 b. & c. * d. 1 +hich of the follo!ing statements is %," true regarding the di ersity of entrepreneursa. FinorityEo!ned businesses ha e come a long !ay in the past decade< and their success rate is climbing. b. FinorityEo!ned businesses no! account for appro7imately oneEthird of all businesses in the A.8. c. #mmigrants !ith more education and e7perience than those of the past are coming to the A.8. and succeeding in entrepreneurial entures. d. "he numbers of partEtime and homeEbased entrepreneurs are rising. :::::% of all A.8. businesses are familyEo!ned and managed. a. &4 b. 4> c. 7> d. ;> +hich of the follo!ing is %," a characteristic of a successful !or(ing relationship bet!een copreneursa. A clear definition of one partner as GbossG and the other as GsubordinateG b. Compatible business and life goals c. Complementary business s(ills d. A clear di ision of roles and authority based on each partner=s s(ills and abilities

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+hich of the follo!ing is %," a characteristic of copreneursa. Futual respect b. Complementary business s(ills c. A clear di ision of roles and authority d. An understanding that one is the superior and the other is the subordinate Appro7imately :::::% of corporate managers !ho are Gcast offG as companies do!nsi$e become entrepreneurs. a. 4 b. 14 c. &> d. 14 Felinda and Hohn 6ere$< both corporate attorneys in %e! Yor( City< ha e gro!n tired of their lengthy daily commute< the stress of their ?obs< and the o erbearing policies of their employers. "hey ha e decided to lea e their si7Efigure ?obs and together open a guide ser ice in +yoming. Felinda and Hohn are: a. corporate castoffs b. corporate dropouts c. copreneurs d. ) and C are correct. "he ma?ority of small companies are concentrated in the ::::::: and ::::::: industries. a. manufacturingC retail b. manufacturingC ser ice c. retailC ser ice d. !holesaleC retail "he nation=s small businesses: a. employ more than 41% of the nation=s pri ate sector !or( force. b. create more ?obs than do big businesses. c. account for 17% of business sales. d. All of the abo e. +hat percentage of companies in the A.8. are considered GsmallGa. 48 b. 94 c. 7; d. ;; 0a id )irch< president of the research firm Cognetics< suggests that three percent of small businesses created :::::::: percent of ne! ?obs. a. &> b. 4> c. 7> d. ;> 8mall companies: a. created fe!er ?obs than big companies in the last decade. b. are concentrated in the manufacturing and retail sectors. c. are the leaders in offering training and ad ancement opportunities to !or(ers.

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Chapter 1: Foundations of Entrepreneurship

d. account for appro7imately 1> percent of the nation=s B06 and &4% of business sales. *7. +hich of the follo!ing is %," true regarding the research of 0a id )irch< president of Cogneticsa. IBa$ellesJ gro! &>% or more per year and ha e at least K1>><>>> in annual sales. b. IFiceJ ne er gro! much and don@t create many ne! ?obs. c. "he largest businesses are Ielephants<J !hich ha e continued to shed ?obs for se eral years. d. "he ma?ority of small companies are Iga$elles.J #n terms of inno ation and research< small businesses: a. create four times the inno ations per research and de elopment dollar than mediumE si$ed firms and &1 times the inno ations per research and de elopment dollar than large companies. b. contribute &>% more inno ations per employee than large companies. c. ha e created such important inno ations as air conditioning< FF radio< the laser< the automatic transmission and the personal computer. d. All of the abo e. +hich of the follo!ing products !as %," in ented by a small businessa. Air conditioning b. Camcorder c. FF radio d. Escalator Hohn has come to you for ad ice on starting a business enture. 2e !ants to (no! the best !ay to gain the e7perience he@ll need. You suggest that he: a. read a small business boo(. b. see( e7perience in the field he !ishes to enter by !or(ing for another firm for a !hile. c. determine his !ea(nesses and return to school for a term or t!o. d. ?ust ?ump in and learn as he goes. "he primary cause of small business failures is ::::::. a. lac( of capital b. management mista(es c. poor location d. improper in entory control Entrepreneurs tend to be o erly :::::::: and mis?udge the :::::::: re'uirements of going into business. a. optimistic< personal b. optimistic< financial c. pessimistic< financial d. optimistic< professional +hich one of the follo!ing is one of the ten deadly mista(es entrepreneur@s ma(ea. +ea( mar(eting efforts b. Anderstanding financial statements c. 8ee(ing help from e7perts d. Controlled gro!th According to management e7pert 6eter 0ruc(er< startup companies can e7pect to outgro!

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Chapter 1: Foundations of Entrepreneurship

their capital bases each time sales increase ::::: percent. a. 4 to 1> b. &> to *> c. 1> to 4> d. 7> to 8> 14. All of the follo!ing are symptoms of ten deadly mista(es entrepreneurs ma(e E5CE6": a. belie ing a product !ill sell itself. b. figuring things out as they go. c. e7tending credit ?ust to ma(e a sale. d. tempering optimism !ith reality. "he only people !ho :::: are those !ho ne er do anything or ne er attempt anything ne!. a. succeed b.prosper c. profit d.fail ,ne hallmar( of successful entrepreneurs is the ability to: a. be !illing to gamble. b. fail intelligently. c. o erloo( past successes. d. repeat the same mista(e. +hich of the follo!ing !as %," identified as one of the suggestions for small business successa. 0e elop a business plan as you gro! your business. b. Fanage your financial resources and understand financial statements. c. Lno! your business in depth. d. 3earn to manage people successfully. +hich of the follo!ing is.are true regarding business plansa. 6ro ide a path!ay to success b. Allo! entrepreneurs to replace faulty assumptions !ith facts before ma(ing the decision to go into business c. Create a benchmar( against !hich entrepreneurs can measure actual company performance d. All of the abo e. Fost entrepreneurs belie e that ::::: is !hat matters most< but ::::: is the most important financial resource for a small business o!ner. a. cashC profit b. profitC cash c. profitC in entory d. in entoryC cash

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True/False Questions: 41. Current competiti e conditions fa or large companies o er smaller ones because of their ability to use their si$e to achie e efficiency and economies of scale.

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#ncreased entrepreneurial acti ity is a phenomenon uni'ue to the A.8. "he &1st century has seen record numbers of entrepreneurs launching businesses. Fembers of Beneration 5 no longer see launching a business as being a ris(y career path. 8e entyEeight percent of influential Americans belie e that entrepreneurship !ill be the defining trend of this century. Entrepreneurs are not !illing to gi e up a steady paychec(. Desearch has isolated a set of characteristics that can predict !ho !ill succeed as an entrepreneur. An indi idual !ho possesses all of the characteristics of the typical entrepreneur is irtually guaranteed success in launching a small business. 8erial entrepreneurs repeatedly start businesses and gro! them to a sustainable si$e before stri(ing out again.

9>. "he typical entrepreneur alues money o er achie ement. 91. 9&. "he only boundaries imposed on an entrepreneur@s success are those imposed by his or her o!n creati ity< enthusiasm< and ision. 8ur eys sho! that small business o!ners belie e they !or( harder< earn more money< and are happier than if they !or(ed for a large company. True, Medium, Page 6 9*. 91. 94. 99. 97. 98. "he opportunity to reap impressi e profits is the primary moti ation for most entrepreneurs. "o most entrepreneurs< there is little difference bet!een !or( and playC the t!o are synonymous. "he ma?ority of ne! business o!ners !or( fe!er than 1> hours per !ee(. "he ma?ority of ne! business o!ners de ote more than 1> hours per !ee( to their companies. ,ne ad antage of being your o!n boss and o!ning a small business is that !or( hours are ery fle7ible and leisure time is abundant. An important factor helping to dri e the entrepreneurial trend in our economy is the fa orable attitude Americans ha e to!ards entrepreneurs. 9;. Fost entrepreneurs start their business bet!een the ages of &> and &;. 7>. %early t!oEthirds of entrepreneurs start their businesses bet!een the ages of &4 and 11. 71. "he number of colleges and uni ersities offering courses in small business management and

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entrepreneurship is declining. 7&. 7*. 71. 74. 79. )ecause of their lo! startup costs< ser ice businesses are popular !ith entrepreneurs. Fodern technology and office machines enable oneEperson< homeEbased businesses to loo( much bigger than they are to their customers. A recent small business #nternet sur ey sho!s small businesses that use the !eb to mar(et their products and ser ices outEperform those that don@t. Appro7imately ;4 percent of the !orld=s population li es !ithin the borders of the A.8. 8mall companies comprise ;7% of all businesses engaged in e7porting< yet they account for only *>% of the nation@s e7port sales. "here is concern o er the future of entrepreneurship because so fe! high school and college students !ant to start their o!n companies. 0i ersity may be considered a characteristic of entrepreneurs< as they don@t fit any statistical norm. Finority o!ned businesses ha e come a long !ay in the past decade< and their success rate is climbing. Although their businesses gro! more slo!ly than those o!ned by men< !omenEo!ned businesses ha e a higher sur i al rate than A.8. businesses o erall. #ncreasing numbers of !omen are disco ering that the best !ay to brea( the Gglass ceilingG that pre ents them from rising to the top of many organi$ations is to start their o!n companies. Although about 9;% of !omenEo!ned companies are concentrated in the retailing and ser ice sectors< female entrepreneurs are branching out rapidly into pre iously maleE dominated industries. Fost homeEbased businesses are simple cottage industries such as crafts or se!ing. A ma?or ad antage of launching a business partEtime is the lo!er ris( it offers in case the business fails. 8uccessful IcopreneursJ create a di ision of labor based on e7pertise. %ot all familyEo!ned businesses are smallC in fact< o er oneEthird of the Fortune 4>> companies are family businesses. Fost family businesses sur i e to the second and third generations. ,f the &4 million businesses in the A.8.< about 1> percent are familyEo!ned and managed. About &> percent of do!nsi$ed corporate managers ha e become entrepreneurs.

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)ecause they ha e college degrees< a !or(ing (no!ledge of business< and years of management e7perience< both corporate castoffs and corporate dropouts !ho become entrepreneurs !ill most li(ely increase the small business sur i al rate. Corporate do!nsi$ing has spa!ned a generation of entrepreneurs (no!n as Gcorporate castoffs.G 0a id )irch considers Iga$ellesJ those businesses that gro! at &>% or more per year and gross at least K1>><>>> in annual sales. 8mall companies ha e created t!oEthirds to threeEfourths of the net ne! ?obs in the A.8. economy. True, Medium, Page 21

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About 74 percent of the businesses in the A.8. can be considered Gsmall.G 3arge companies create significantly more inno ations per research and de elopment dollar spent than small firms. )ecause of their si$e and limited resources< small businesses rarely create inno ations that are important to the A.8. economy. An often fatal error made by many small business o!ners is to open their businesses on a Ishoestring<J causing them to be undercapitali$ed. "he primary cause of small business failure is lac( of capital.

1>>. About &1 percent of ne! businesses fail !ithin si7 years. 1>1. "he faster a small company gro!s< the greater its appetite for cash. 1>&. "o boost sales< small businesses< especially startups< should grant credit to anyone !ho !ants to buy their products or ser ices. 1>*. As an entrepreneur< you are al!ays !or(ing for someone else M your customers. 1>1. "he lifeblood of the small businessNsalesNis influenced hea ily by choice of location. 1>4. E7panding a business usually re'uires no significant changes in structure or business practices. 1>9. Establishing prices that !ill generate the necessary profits means that business o!ners must understand ho! much it costs to ma(e< mar(et< and deli er their products and ser ices. 1>7. 8mall business o!ners are more li(ely to underprice their products and ser ices rather than

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o erprice them. 1>8. #f an entrepreneur has a good enough product or ser ice to sell< a business plan is not really necessary since the product or ser ice !ill sell itself. 1>;. Fost entrepreneurs ha e a sound business plan. 11>. 8uccessful entrepreneurs recogni$e that their most aluable asset is their time< and they learn to manage it effecti ely to ma(e themsel es and their companies more producti eC ha ing passion about their businesses< products< and customers enables them to stay moti ated. Essay Questions: 111. +hat is an entrepreneur- Bi e a brief profile of a typical entrepreneur. +hat is the primary moti ation for the typical entrepreneur11&. 0iscuss the potential benefits and dra!bac(s of entrepreneurship. 11*. 0escribe the factors that are dri ing the current entrepreneurial trend in the A.8. economy. 111. 0iscuss the role that the follo!ing groups are playing in leading the ongoing surge in entrepreneurial acti ity: !omen minorities immigrants partEtime entrepreneurs homeEbased entrepreneurs family businesses copreneurs corporate castoffs corporate dropouts
114. 0iscuss the impact of small businesses on the A.8. economy< including sales< B06< ?ob

creation< and inno ation. 119. 0escribe the ten deadly mista(es of entrepreneurship and ho! to a oid them. 117. 0escribe the small business failure rate. +hat are the primary causes of business failures< and !hat steps can an entrepreneur ta(e to a oid becoming a business failure statisticChapter 1

The Foundations o Entrepreneurship Mini!Case Case 1!1: "ill#s $ilemma )ill 2udson !as a real craftsman !hen it came to being a machinist. )ill had learned almost all that he (ne! from 2ugo 2uffman< his first and only employer. )ill 2udson !as married and had three young children. 2e !as ** years old and had !or(ed for 2ugo e er since he finished his tour in the army. #n 1& years )ill had polished his s(ills under the !atchful and

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critical eye of 2ugo 2uffman. 2ugo !as 'uic( to recogni$e )ill@s talent for the trade. )ill had a positi e attitude about learning and displayed a dri e for perfection that 2ugo admired. 2ugo@s Fachine 8hop !as a successful small business. #ts success !as based mostly on the reputation for 'uality that had been established o er its 1& years in operation. 2ugh had come to this country !ith his ne! !ife< 2ilda< !hen he !as in his late t!enties. %o! the business !as a success< but 2ugo remembered the early years !hen he and 2ilda had to struggle. 2ugo !anted the business to continue to produce the highest 'uality craftsman products possible. ,n a Friday e ening< he called )ill into his office at closing time< poured him a cup of halfE dayEold coffee< and began to tal( !ith him about the future. I)ill< 2ilda and # are getting old and # !ant to retire. #t@s been 1& years of fun but these old hands need a rest. #n short< 2ilda and # !ould li(e you to buy the business. +e both feel that your heart is in this craft and that you !ould al!ays retain the 'uality that !e ha e stood for.J )ill !as ta(en bac( by the offer. 2e< of course< (ne! 2ugo !as getting older< but had no idea 2ugo !ould retire. )ill and his !ife< Anna< had only K1<&>> in the ban(. Fost of )ill@s salary !ent for the normal costs of rearing three children. 2ugo (ne! )ill did not ha e the money to buy the business in cash< but he !as !illing to ta(e a portion of the profits for the ne7t 14 years and a modest initial in estment from )ill. )ill had< for the past four years< made most of the technical decisions in the shop. )ill (ne! the customers and !as !ell respected by the employees. 2e had ne er been in ol ed in the business side of the operation. 2e !as a high a school graduate but had ne er ta(en business courses. )ill !as told by 2ugo that e en after deducting the percentage of the profits he !ould o!e under the sales agreement< he !ould be able to almost double his annual earnings. )ill !ould ha e to ta(e on all the business functions himself because Anna had no business training either.
Questions

1. +hich entrepreneurial characteristics does )ill ha e that may be important to his success+hich characteristic could lead to his failure&. +hat steps should )ill ta(e to a oid the pitfalls common to a small business*. #f you !ere 2ugo< !ould you sell )ill the business under the terms discussed in the caseE7plain.

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