Chapter 3: Entrepreneurship, New Ventures, and Business ...

Copyright © 2019 Pearson Education, Inc. 3-1

Chapter 3: Entrepreneurship, New Ventures, and Business

Ownership

Chapter Overview

Have you ever wanted to be your own boss? Think of going to work when you want to. Think of

how it would be to call your own shots. Although it’s anything but easy, starting your own

business can be rewarding. The U.S. economic system welcomes entrepreneurship and offers

various forms of business ownership. This chapter discusses small business, its importance to the

U.S. economy, and the popular areas of small business. It looks at:

Key characteristics of entrepreneurial personalities and activities

Business plans

Start-up decisions made by small businesses

Sources of financial aid available

Trends in small business start-ups

Key reasons for success and failure among small businesses

Finally, the chapter discusses different forms of business ownership and the advantages and

disadvantages of each, as well as the basic issues involved in managing a corporation and special

issues related to corporate ownership.

Learning Objectives

3-1. Define small business, discuss its importance to the U.S. economy, and explain popular

areas of small business.

3-2. Explain entrepreneurship and describe some key characteristics of entrepreneurial

personalities and activities.

3-3. Describe distinctive competence, the business plan and the start-up decisions made by

small businesses and identify sources of financial aid available to such enterprises.

3-4. Discuss the trends in small business start-ups and identify the main reasons for success

and failure among small businesses.

3-5. Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages

and disadvantages of each.

3-6. Describe corporations, discuss their advantages and disadvantages, and identify different

kinds of corporations; explain the basic issues involved in managing a corporation and

discuss special issues related to corporate ownership.

Business Essentials 12th Edition Ebert Solutions ManualFull Download: https://alibabadownload.com/product/business-essentials-12th-edition-ebert-solutions-manual/

This sample only, Download all chapters at: AlibabaDownload.com

https://alibabadownload.com/product/business-essentials-12th-edition-ebert-solutions-manual/


LIST OF IN-CLASS ACTIVITIES: Instructor’s Choice

Activity Description Time Limit

1. Ice-Breaker: The Role

of Small Business

Students discuss the role of small business

in their communities. 15 min.

2. Up for Debate: The

Wide World of Risk

Students are divided into groups to

discuss ways in which the entrepreneurial

spirit has been evident throughout U.S.

history, and how entrepreneurship is

valuable to an economic system.

30 min.

3.Small-Group

Discussion:

Entrepreneurship and the

Growth of Businesses

Groups of students weigh the importance

of entrepreneurship in the development of

fast-growing businesses.

20 min.

4. Small-Group

Discussion: What’s the

Next Big Thing?

Groups of students design a new business

and identify possible products/services

being sold as well as possible customers.

45 min.

5. Small-Group

Discussion: How Can We

Succeed in the Software

Industry?

Students identify the factors that help a

company in the software industry become

a success.

30 min.

6. Class Discussion:

Conjuring Up Profits?

Students identify what makes a successful

company, at least in terms of usage,

financially successful.

30 min.


CHAPTER OUTLINE

Learning Objective 3-1: Define small business, discuss its importance to the U.S. economy, and explain popular

areas of small business.

What Is a “Small” Business?

A small business is independent (that is, not part of a larger business) and has relatively little

influence in its market. The U.S. Department of Commerce and the Small Business

Administration (SBA), define the size of a business based on its industry and the number of

employees. According to SBA standards, a small business can have as many as 1,500 employees.

A. The Importance of Small Business in the U.S. Economy

Most U.S. businesses employ fewer than 20 people, and most U.S. workers are employed by

small firms. The contribution of small business can be measured through its impact on job

creation, innovation, and its importance to big business.

1. Job Creation. Small businesses are an important source of new jobs; in recent years,

small businesses have accounted for 40 percent of all new jobs in the high-technology

sectors of the economy alone.

2. Innovation. Small business produces 16 times as many patents per employee as large

patenting firms.

3. Contributions to Big Business. Most products made by big businesses are sold to

consumers by small ones.

B. Popular Areas of Small-Business Enterprise

Major small-business industry groups include the following:

1. Services. This is the fastest-growing segment of small business at approximately 56%.

Services range from marriage counseling to computer software to management consulting

to professional dog walking.

2. Retailing. Retailers, which sell products made by other firms directly to consumers,

account for 12 percent of all firms with fewer than 20 employees; retail businesses let

entrepreneurs focus limited resources on narrow market segments.

3. Construction. About 12 percent of businesses with fewer than 20 employees are

involved in construction. Projects are primarily locally based.

4. Wholesaling. Wholesalers buy products in bulk from manufacturers and sell them to

retailers; wholesalers are the middlemen. About 5 percent of all firms are in this

category.


5. Finance and Insurance. These firms account for about 4 percent of all firms with fewer

than 20 employees. Many are affiliates of or agents for larger national firms. Small

locally owned banks are also common in smaller communities and rural areas.

6. Manufacturing. More than any other industry, manufacturing lends itself to big

business. Still, about 4 percent of firms with fewer than 20 employees are involved in

manufacturing and may outperform big firms in innovation-driven industries.

7. Transportation. About 3 percent of all companies with fewer than 20 employees are in

transportation and related businesses.

8. Other. The remaining 4 percent or so of small businesses with fewer than 20 employees

are in other areas, including research and development laboratories and independent

media companies.

KEY TEACHING TIP

The definition of small business is different depending on whom you consult. The

textbook defines a small business as one that (a) is independent (not part of a larger

business) and (b) has little influence in its market. The U.S. Small Business

Administration defines companies with as many as 1,000 employees as “small,”

depending on industry, whereas the U.S. Department of Commerce considers a business

“small” if it has fewer than 500 employees.

QUICK QUESTION

In what ways is entrepreneurship an important part of our economic system?

Use In-Class Activity 1: Ice-Breaker: The Role of Small Business

Time Limit: 15 minutes


Learning Objective 3-2: Explain entrepreneurship and describe some key characteristics of entrepreneurial

personalities and activities.

Entrepreneurship Entrepreneurs are people who assume the risk of business ownership. Entrepreneurship is the

process of seeking business opportunities under conditions of risk. Many entrepreneurs are

driven to launch new businesses by the goal of gaining independence from working for

somebody else and securing a financial future for themselves. Many such entrepreneurs,

however, may not aspire to grow the businesses much beyond their capacity to run them.

A. Entrepreneurial Characteristics

Successful entrepreneurs are often distinguished from others through a set of characteristics,

including:

1. Resourcefulness

2. A concern for customer relations

3. A desire for autonomy

4. The ability to handle ambiguity

5. A desire for risk-taking

KEY TEACHING TIPS

Ask how many students want to launch a business. (Typically, one-third to one-half of

each class will raise their hands.) Call on these students to share their interests, including

type of business and timeframe. You can then use their personal goals to illustrate

concepts for each section you teach.

Remind students that the goals of an entrepreneur can range from independence and

financial security to growth and expansion, even to transform the venture into a large

business.

QUICK QUESTIONS

What are some local examples of businesses that fit into the following small-business

industry groups: services, retailing, manufacturing, and transportation?

What are some common characteristics shared by all entrepreneurs?

Use In-Class Activity 2: Up for Debate: The Wide World of Risk


Use In-Class Activity 3: Small-Group Discussion: Entrepreneurship and the Growth of

Businesses



Learning Objective 3-3: Describe the distinctive competence, business plan and the start-up decisions made by

small businesses and identify sources of financial aid available to such enterprises.

Starting and Operating a New Business

Entrepreneurs must make a number of decisions when they start their business. They must decide

whether to buy an existing business or to start one from scratch. In addition, they must determine

sources of financing needed and when to seek advice from others. Another integral part of

starting a small business is a well-crafted business plan.

A. Understanding Distinctive Competencies

An organization’s distinctive competencies are the aspects of business that the firm performs

better than its competitors. The distinctive competencies of small business usually fall into

three areas:

1. Identifying Niches in Established Markets: An established market is one in which

many firms compete according to relatively well-defined criteria. A niche is simply a

segment of a market that is not currently being exploited. In general, small entrepreneurial

businesses are better at discovering these niches than are larger organizations.

2. Identifying New Markets: Successful entrepreneurs excel at discovering whole new

markets. Two ways this often happens are 1) transferring a product or service that is well

established in one geographic market to a second market; and 2) creating an entire new

industry.

3. First-Mover Advantages: A first-mover advantage is any advantage that comes to a firm

because it exploits an opportunity before any other firm does. The ability to move quickly

is key to taking advantage.

B. Crafting a Business Plan

A business plan summarizes business strategy for the new venture and shows how it will be

implemented.

1. Setting Goals and Objectives: A business plan should discuss the entrepreneur’s goals

and objectives, the strategies used to obtain them, and how these strategies will be

implemented.

2. Sales Forecasting: The sales forecast requires that the entrepreneur demonstrate an

understanding of the market, the strengths and weaknesses of existing firms, and the means

by which the new venture will compete. The sales forecast impacts many of the other

decisions regarding the business.

3. Financial Planning: This is the entrepreneur’s plan for turning all activities into dollars. It

shows how much money is needed to open for business and how much is needed to keep it

going until it starts earning a profit.


C. Starting the Small Business

Small business owners begin by understanding the true nature of their businesses.

1. Buying an Existing Business: Existing businesses have already proven their ability to

attract customers and to establish rapport with lenders, suppliers, and the community. Most

consultants recommend that entrepreneurs buy existing businesses because the odds of

success are greater.

2. Franchising: A franchise agreement involves two parties, a franchisee (the local owner)

and a franchiser (the parent company). Franchisees benefit from the parent corporation’s

experience and expertise. The franchiser may pick the store location, negotiate the lease,

purchase equipment, and supply financing. Franchisees invest in ready-made businesses

but also receive expert help in running them. Startup costs vary quite widely. For example,

a McDonald’s franchise has an initial fee of at least $1 million, but a Fantastic Sam’s hair

salon is $185,000.

3. Starting from Scratch: Risks with this approach are greater than with buying an existing

business. However, starting from scratch does allow the entrepreneur the satisfaction to

grow an idea into a successful business. An entrepreneur must identify who and where the

customers are, how much customers will pay for the product, how much of the product

should be expected to sell, who the competitors are, and why customers will purchase this

product rather than the competitors’ products.

D. Financing the Small Business

Many sources for business financing are available. Personal resources account for more than

two-thirds of all money invested; smaller portions of funding come from banks, independent

investors, and government loans.

1. Venture capital companies are groups of investors seeking to profit on companies with

rapid growth potential; money is invested in return for partial ownership. Small business

investment companies are licensed to borrow money from the SBA and invest it in or loan

it to small businesses.

2. SBA Financial Programs: Under the SBA’s 7(a) loans program, small businesses may

borrow from commercial lenders with the SBA guaranteeing to repay a maximum of 75

percent of a loan over $150,000. The SBA’s special purpose loans target businesses with

special needs, such as those meeting international demands. For loans under $35,000, the

SBA offers a micro-loan program.

Aside from its financing role, the SBA offers management counseling programs at virtually

no cost. One of the SBA’s management counseling projects is its Small Business

Development Center (SBDC) program.

3. Other sources of financing include overseas financing and online companies that focus on

small businesses.


KEY TEACHING TIPS

Make sure that students understand that, as a general rule, the more resources required,

the harder it is to start a new business.

Remind students that the odds for success are greater when buying an existing business

than building one from scratch. An existing business provides a tested system, trained

employees, a recognized name, and established suppliers.

Remind students that personal resources account for over two-thirds of all of the money

invested in new small businesses; half of that is used to purchase existing businesses.

QUICK QUESTIONS

What is the purpose of a business plan?

What are some of the advantages and disadvantages of franchising (to the franchisee)?

Where can a person find money to start a new venture?

What is the main reason that most venture capital companies invest in new businesses?

What types of assistance can an entrepreneur expect from the Small Business

Administration?

Use In-Class Activity 4: Small-Group Discussion: What’s the Next Big Thing?


HOMEWORK

Franchises

Now is a good time to assign Application Exercise 10 from the end-of-chapter materials in the

textbook. The assignment asks students to research a popular food industry franchise analyzing

the requirements to purchase as well as the up-front and ongoing cost.

At-Home Completion Time: 30 minutes


Learning Objective 3-4: Discuss the trends in small business start-ups and identify the main reasons for success and

failure among small businesses.

Trends, Successes, and Failures in New Ventures

A. Trends in Small-Business Start-Ups

Several factors account for the thousands of new business start-ups in the United States each

year.

1. Emergence of E-Commerce: The rapid emergence of electronic commerce is the most

significant recent trend. Because e-commerce provides new and different ways of doing

business, it has enabled savvy entrepreneurs to create and expand businesses far easier and

quicker than ever before.

2. Crossovers from Big Business: Many businesses are started by individuals who leave

positions in large corporations to put their experience to work for themselves.

3. Opportunities for Minorities and Women: The number of businesses started by

minorities and women is growing rapidly.

4. Global Opportunities: Many entrepreneurs are finding business opportunities throughout

the world.

5. Better Survival Rates: New businesses now have a better chance of survival than ever

before; the SBA estimates that over half of all new businesses can expect to survive for

four years. One third make it for ten years or more.

B. Reasons for Failure

Four general factors contribute to small-business failure:

1. Managerial incompetence or inexperience

2. Neglect

3. Weak control systems

4. Insufficient capital

C. Reasons for Success

Four general factors contribute to small-business success:

1. Hard work, drive, and dedication

2. Market demand for the products or services being provided

3. Managerial competence

4. Luck


KEY TEACHING TIPS

Emphasize to students that electronic commerce is the most significant trend among

small-business start-ups. You might want to ask them for examples of recent successful

e-commerce start-ups, such as Facebook, Twitter, and SnapChat..

Although starting a new business is risky, make sure you tell students that the small-

business failure rate has declined since the 1980s. The SBA estimates that one third of all

new start-ups now survive ten years.

QUICK QUESTION

What do people with big-business experience bring to a new venture?

Use In-Class Activity 5: Small-Group Discussion: How Can We Succeed in the Software

Industry?



Learning Objective 3-5: Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages

and disadvantages of each.

Noncorporate Business Ownership

A. Sole Proprietorships

A sole proprietorship is owned and usually operated by one person; about 74 percent

of all U.S. businesses are sole proprietorships though they provide only 4 percent of total

business revenues.

1. Advantages of Sole Proprietorships: Freedom, ease in forming, low start-up costs, and

tax benefits are the advantages of this form of ownership.

2. Disadvantages of Sole Proprietorships: Unlimited liability, lack of continuity, and a

possible lack of resources and/or managerial and financial limitations from the single

individual are the major drawbacks of this form of organization.

B. Partnerships

A general partnership, the most common type, is a sole proprietorship multiplied

by the number of partner-owners. Partners may invest unequal sums of money. In most cases,

partners share the profits equally or in proportion to their investment in the partnership.

1. Advantages of Partnerships: The ability to grow with the addition of new talent and

money, few legal requirements, and tax advantages are benefits of this form of ownership.

2. Disadvantages of Partnerships: Unlimited liability in that each partner may be liable for

the debts incurred in the name of the partnership, lack of continuity, and difficulty of

transferring ownership are the major drawbacks of this form of ownership.

3. Alternatives to General Partnerships: Because of the disadvantages of partnerships,

general partnerships are the least popular forms of business. Limited partnerships have

been formed to compensate for some of these disadvantages. This type of agreement allows

for limited partners who cannot share in a firm’s management and are liable only to the

limits of a partner’s investment. There is, however, a requirement that there is at least one

general partner who actively manages a firm and has unlimited liability for the debt.

Master Limited Partnerships is a form of ownership that sells shares to investors who are

repaid from the firm’s profits. The master partner retains at least 50 percent ownership and

runs the business.

C. Cooperatives

Cooperatives combine the freedom of sole proprietorships with the financial power

of corporations. These groups of sole proprietorships or partnerships agree to work


together for their common benefit. They give members greater production power, greater

marketing power, or both, though they are limited to serving the specific needs of their

members.

KEY TEACHING TIPS

Make sure that students understand the different forms of business ownership. For

example, a sole proprietorship is owned and usually operated by one person; 74 percent

of all U.S. businesses are sole proprietorships.

Students often forget that unlimited liability is a major drawback to a sole proprietorship

and a partnership. With unlimited liability, if the business fails to generate enough

money, bills must be paid out of the owner’s pocket.

Remind students that a general partnership is a sole proprietorship multiplied by the

number of partner-owners.

Remind students that a limited partnership allows for limited partners who are liable for

debts only to the extent of their investments in the company; a limited partnership must

have at least one general partner for liability purposes.

Remind students that a cooperative provides the advantages of a sole proprietorship with

the financial power of a corporation.

QUICK QUESTIONS

What are some of the advantages and disadvantages of sole proprietorships?

What are some of the advantages and disadvantages of partnerships?

HOMEWORK

Interview a Sole Proprietor or General Partner

Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as

homework. The assignment asks students to interview the owner/manager of a sole

proprietorship or a general partnership and determine why the person chose that form of

ownership.

At-Home Completion Time: 60 minutes


Learning Objective 3-6: Describe corporations, discuss their advantages and disadvantages, and identify different

kinds of corporations; explain the basic issues involved in managing a corporation and

discuss special issues related to corporate ownership.

Corporations

Both large and small corporations account for 17 percent of all businesses, but generate about 81

percent of all sales revenues in the United States.

A. The Corporate Entity

Characteristics of corporations include legal status as separate entities, property rights and

obligations, and indefinite life spans. Corporations may sue and be sued; buy, hold, and sell

property; make and sell products to customers; commit crimes, and be tried and punished for

them.

1. Advantages of Incorporation. These include limited liability, continuity, and the ability

to raise money.

2. Disadvantages of Incorporation. Ease of transferring ownership, legal requirements and

regulations, and start-up cost are drawbacks of incorporation. In addition, double taxation

plagues a corporation, because a regular corporation must pay income taxes on profits and

stockholders must pay taxes on income returned by their investments.

B. Types of Corporations

Stock is held by only a few people and is not available for sale to the public in a closely held

(or private) corporation. When shares are publicly issued, the firm becomes a publicly held

(or public) corporation. The S corporation is a hybrid of a private corporation and

partnership. In a limited liability corporation, owners are taxed like partners, with each

paying personal taxes only. Professional corporations are most likely comprised of doctors,

lawyers, accountants, or other professionals. A multinational (or transnational)

corporation spans national boundaries.

C. Managing a Corporation

Once the corporate entity comes into existence, it must be managed by people who

understand the principles of corporate governance. Defined by the firm’s bylaws, corporate

governance involves stockholders, the board of directors, and corporate officers.

1. Stock Ownership and Stockholders’ Rights. Stockholders are the owners of a

corporation. Corporations sell shares, called stock, to investors who then become

stockholders, or shareholders. Profits are distributed among stockholders in the form of

dividends, and corporate managers serve at stockholders’ discretion.

2. Board of Directors. The board of directors is the governing body of the corporation and

communicates with stockholders and other stakeholders, sets policies, and is legally

responsible for corporate actions.


3. Officers. Appointed by the board of directors, officers oversee the day-to-day operations

of the corporation. The chief executive officer, or CEO, oversees overall operations.

D. Special Issues in Corporate Ownership

1. Joint Ventures and Strategic Alliances: In a strategic alliance, two or more organizations

collaborate on a project for mutual gain; when partners share ownership of what is

essentially a new enterprise, it is called a joint venture.

2. Employee Stock Ownership Plans (ESOPs): ESOPs allow employees to own a significant

share of the corporation through trusts established on their behalf.

3. Institutional Ownership: Institutional investors include mutual funds and pension funds

that buy enormous blocks of stock.

4. Mergers and Acquisitions: A merger occurs when two firms combine to create a new

company; in an acquisition, one firm buys another outright. Many deals that are loosely

called mergers are really acquisitions.

5. Divestitures and Spin-Offs: A divestiture occurs when a firm sells off unrelated and/or

underperforming businesses. When a firm sells part of itself to raise capital, the strategy is

known as a spin-off.

KEY TEACHING TIPS

Ownership in a corporation is represented through the sale of stock. Remind students that

shareholders own the corporation.

Remind students that stock in a publicly held corporation is available for sale to the

public, whereas stock in a closely held corporation (private) is not available for sale to

the general public.

Make sure students understand that stockholders elect the board of directors, who, in turn,

hire the officers—including the CEO, president, and vice presidents.

Students don’t always understand why companies merge. Discuss the possible reasons,

including an attempt to increase product lines, expand operations, or go international.

QUICK QUESTIONS

What is meant by “double taxation?”

How do joint ventures and strategic alliances allow companies to spread risk?


Use In-Class Activity 6: Class Discussion: Conjuring Up Profits?


Learning Catalytics is a "bring your own device" student engagement, assessment,

and classroom intelligence system. It allows instructors to engage students in class

with realtime diagnostics. Students can use any modern, web-enabled device

(smartphone, tablet, or laptop) to access it. For more information on using

Learning Catalytics in your course, contact your Pearson Representative.

IN-CLASS ACTIVITIES

In-Class Activity 1: Ice-Breaker: The Role of Small Business

Activity Overview:

This activity helps students understand the role of small business in their communities.


What to Do:

1. Ask students to list small businesses.

2. Ask students to share how those businesses are important to their towns or communities,

whether small businesses in the area complement each other in the products and services they

offer, and in what way(s) these businesses help big businesses. (10 minutes)

Don’t Forget:

Be sure to review the definition of small business prior to the activity.

Wrap-Up:

Bring the discussion to a close by introducing how many small businesses create jobs, launch

innovations, and promote big businesses. Remind students that almost all businesses begin small.


In-Class Activity 2: Up for Debate: The Wide World of Risk

Activity Overview:

This activity is designed to get students thinking about the importance of entrepreneurship in the

U.S. economy.


What to Do:

1. Divide the class into small groups and have them list various examples of how entrepre-

neurial spirit has been/is evident throughout this country’s history. How is entrepreneurship

valuable to an economic system? In what types of businesses is entrepreneurship especially

important? (15 minutes)

2. Reassemble the class and discuss the degree of entrepreneurial spirit evidenced by the group.

In which area(s) of the U.S. economy is entrepreneurship most important? (15 minutes)

Don’t Forget:

Entrepreneurship is a factor of production and an essential part of a free-market economy. Risk-

taking promotes heavy competition, which in turn improves quality and maintains market

pricing, which is valuable to the U.S. economy.

Wrap-Up:

To wrap up the discussion, remind students that exhibiting entrepreneurial spirit indicates a high

level of risk-taking, for which Americans are known.


In-Class Activity 3: Small-Group Discussion: Entrepreneurship and the

Growth of Businesses

Activity Overview:

This activity asks students to weigh the importance of entrepreneurship in the development of

fast-growing businesses; this activity is based on Application Exercise 10 of the end-of-chapter

materials.


What to Do:

1. Divide the class into small groups and ask each group to identify two or three of the fastest-

growing businesses in the United States. (5 minutes)

2. Ask each group to consider what role entrepreneurship has played in the growth

of these firms. (5 minutes)

3. Reassemble the class and ask students to share their results. (10 minutes)

Don’t Forget:

A number of fast-growing businesses are flourishing in the United States; students can consider

assessing some of the more popular, commonly cited businesses like JetBlue, Starbucks,

Walmart, Dell, and Southwest Airlines. (If students require a little extra time to research a

company, you may want to use this activity as a homework assignment.)

Wrap-Up:

Remind students that entrepreneurial success can be driven by many variables. Some

entrepreneurs launch a business with the goal of independence, whereas others seek growth and

expansion. Still others may not know exactly where they are headed.


In-Class Activity 4: Small-Group Discussion: What’s the Next Big Thing?

Activity Overview:

This activity is designed to encourage students to be innovative in designing a business.


What to Do:

1. Place students in four-member groups and ask each group to come up with an innovative

business idea. Groups should consider the following questions: (30 minutes)

What is my product or service?

Who are my customers?

Where are my customers located?

Is my business idea easily copied?

If there are substitutes for my product or service, how can I make my product/service

stand out from competitors’ offerings?

2. Reassemble the class and ask each group to share their ideas. (15 minutes)

Don’t Forget:

Encourage students to be as innovative as possible in completing this activity; some of the

seemingly silliest ideas have become multimillion-dollar ventures. If you want them to develop

their ideas even more, you may want to assign Step 1 as group homework and then discuss their

progress as a class the next time you meet.

Wrap-Up:

Bring the activity to a close by taking a class vote on which idea is the best of those presented.


In-Class Activity 5: Small-Group Discussion: How Can We Succeed in the

Software Industry?

Activity Overview:

This activity asks students to identify what helps a company become a success or a failure.


What to Do:

1. Divide the class into small groups and ask each group to put together a list of factors that

might mean the difference between the success and failure of a new company entering the

business software industry. Can small start-ups realistically hope to compete with companies

such as Microsoft? (15 minutes)

2. Reassemble the class and ask students to share their results. (15 minutes)

Don’t Forget:

No set pattern for success or failure has been established in any industry.

Wrap-Up:

Remind students that managerial incompetence, neglect, weak control systems, and insufficient

capital are the primary reasons for business failure. Hard work, market demand for the products

or services being provided, managerial competence, and luck contribute to business success.


In-Class Activity 6: Conjuring up Profits?

This activity should generate a lot of discussion since most of the students have a Facebook

account and have probably seen the movie, The Social Network..

DISCUSSION QUESTIONS

1. Why do you think Facebook has been so successful?

Answers will vary, but most students will cite the drive of its founder, the unique product,

ease of use, etc.

2. Facebook is a corporation. Why do you think the firm uses this form of ownership?

Again, answers will vary but most students probably will cite limited liability due to the

lawsuits when the company was founded. They will probably note the favorable financing for

corporations and IPOs.

3. What threats might derail Facebook’s success? What steps might the firm take today in order

to thwart those threats?

Answers will vary but most students will probably mention privacy issues, competitors, and

decline in ad revenue.

4. Suppose Mark Zuckerberg asked you for advice on how to generate more profits from

Facebook. What would you tell him?

This question gives students an opportunity to use their creativity to suggest future directions

for Facebook.


ANSWERS FOR END OF CHAPTER ACTIVITIES

QUESTIONS FOR REVIEW

3-1. Why are small businesses important to the U.S. economy?

Small businesses create new jobs, foster entrepreneurship and innovation, and supply goods

and services needed by larger businesses. (Learning Objective 1 – AACSB – application of

knowledge)

3-2. Which industries are easiest for a small business to enter? Which are hardest? Why?

The easiest industries for new start-ups include services, which is the fastest-growing

segment of small business. In addition, start-ups in retailing, construction, and wholesaling

are relatively easy. Start-ups in finance and insurance may be more difficult because these

businesses are mostly affiliates of or agents for larger national firms. Start-ups in manu-

facturing and transportation are difficult because of the higher initial outlay of cash required.

(Learning Objective 1 – AACSB – application of knowledge)

3-3. What are the primary reasons for new business failure and success?

Reasons for failure include managerial incompetence or inexperience, neglect, weak control

systems, and insufficient capital. Reasons for success include hard work and dedication,

market demand for the products or services being provided, managerial competence, and

luck. (Learning Objective 4 – AACSB – application of knowledge)

3-4. What are the basic forms of noncorporate business ownership? What are the key

advantages and disadvantages of each?

The basic forms of noncorporate business ownership include proprietorships and

partnerships. Proprietors answer to no one but themselves, and they enjoy easy entry and exit

into and out of the market. Further, tax laws permit owners to treat sales revenues and

operating expenses as part of their personal finances, paying taxes based on their personal tax

rate. However, proprietors experience unlimited liability, making them liable for all debts

incurred by the business. Finally, proprietors face a potential lack of continuity and can

depend only on their own resources and, perhaps, their limited managerial and financial

capabilities. The partnership, on the other hand, can grow by being able to add new talent and

money. In addition, the skills and experience of one partner can complement the skills and

experience of another partner. As with the proprietorship, big drawbacks facing a partnership

are unlimited liability and potential lack of continuity. (Learning Objective 5 – AACSB –

reflective thinking)


QUESTIONS FOR ANALYSIS

3-5. After considering the characteristics of entrepreneurs, do you think that you would be a

good candidate to start your own business? Why or why not?

Answers will vary but many students want to start their own business so this question should

generate a lively discussion. Their analysis should contrast their personality characteristics

with those of successful entrepreneurs. (Learning Objective 2 – AACSB –application of

knowledge, reflective thinking)

3-6. If you were going to open a new business, what type would it be? Why?

Answers will vary, but many students will choose businesses within those industries that

offer ease in market entry, primarily because resource availability may be limited to most

students; they may not have built much personal credit and are likely not at the peak of their

income-earning capacity. (Learning Objective 3 and 4 – AACSB – application of

knowledge)

3-7. Would you prefer to buy an existing business or start from scratch? Why?

Answers will vary, but some students may find the added difficulty in starting from scratch

especially challenging, but preferable. Others will likely want to benefit from an existing

business. (Learning Objective 4 – AACSB application of knowledge, reflective

thinking)

3-8. Why might a closely held corporation choose to remain private? Why might it choose to

be publicly traded?

Such corporations may choose to remain private if control retention is the aim. Many closely

held corporations choose to become public to generate additional funding. (Learning

Objective 6 – AACSB – application of knowledge)

APPLICATION EXERCISES

3-9. Interview the owner/manager of a sole proprietorship or a general partnership. What

characteristics of that business form led the owner to choose it? Does he or she ever

contemplate changing the form of the business?

Answers will vary, but most students will discover that proprietors in small businesses are

attracted to the simplicity in starting up and in being their own boss, in spite of the

disadvantage of unlimited liability. Those contemplating changing the form of business

ownership may be considering the advantages of additional capital and/or forms of

managerial expertise added to the business. (Learning Objectives 2 and 5 – AACSB –

application of knowledge)


3-10. Although more than half of all small businesses don’t survive five years, franchises have a

much better track record. However, it can be difficult to buy a franchise. Research a popular

food industry franchise, such as Panera Bread, Sonic, California Tortilla, or Subway, and

detail the requirements for net worth and liquid cash for the franchisee as well as up-front

and annual fees.

This should be an interesting and eye-opening exercise. Students should carefully evaluate

the costs and the various success rates among popular restaurant concepts. A good source of

information for this exercise is Restaurant News. (Learning Objective 3 – AACSB –

application of knowledge)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 3-11 TO 3-15

(Learning Objectives 2, 3, 4, and 5 – AACSB – application of knowledge and interpersonal

relations and teamwork)

This exercise helps students focus on the reality of being an entrepreneur, the costs of starting a

business, obtaining financing, and the steps that an entrepreneur has to follow to have any chance

of success. Students should discuss the pros and cons of various forms of financing noting the

likelihood of obtaining said financing, start-up costs, and the pros and cons of various forms of

ownership. Although there are no right or wrong answers, students should have engaged in

rigorous discussion and analysis before presenting their answers.

The starting point for nearly every new successful venture is a business plan. The key

components include (a) setting out the goals and objectives of the new business, (b) what are the

sales forecasts of the new business and (c) the business’s financial plan. The most important

reason for writing a business plan is that it will help the entrepreneur really think through the

viability of the business idea. Having to put ideas, plans, and expectation in writing is sobering,

and the very step of writing a business plan will have prevented many would-be entrepreneurs

from launching foolish ventures. The second reason for the business plan is to help attract

financing for the new venture. This might come from friends, banks, or venture capitalists.

TEAM EXERCISE, A TASTY IDEA 3-16 TO 3-18

(Learning Objective 3 – AACSB – application of knowledge, analytical thinking)

At the very least the business partners will be required to have a formal business plan that

includes (a) setting out the goals and objectives of the new business, (b) what are the sales

forecasts of the new business, and (c) the business’s financial plan.

Students will identify a variety of sources of funding including loans, SBA-funded programs,

venture capitalists, friends and family, internet sources, etc. Students should consider the pros

and cons of the funding sources. For example, venture capital as a source may have “strings

attached” that might interfere with plans for the business. However, if the terms were especially

favorable (e.g., low interest rate, long life of loan) and the entrepreneur has future plans that

would use the funds effectively, the venture capital may be welcomed.


When deciding on the form of business, students will need to carefully analyze the pros and cons

of each focusing especially on unlimited liability, the role of decision making, dissolution, ease

of start-up, cost, etc.

EXERCISING YOUR ETHICS: BREAKING UP IS HARD TO DO

(Learning Objective 5 – AACSB – ethical understanding and reasoning, analytical

thinking)

3-19. What are the reasons the business has been successful? How did each partner contribute to

the success?

The business presumably is successful because it offers products and services that customers

find valuable. Each partner contributed to the business based on the individual strengths they

brought to the partnership. This led to a balance of contributions that worked well.

3-20. Looking ahead, what are the biggest risks to their venture?

Risks include Mark needing to perform well in areas that are not his strengths, but the biggest

risk may be the status of Mark and Connie’s interpersonal relationship. This relationship was

the basis for initially creating the partnership, so if the relationship changes, it can risk the

success of the business.

3-21. Is it fair for Connie to work fewer hours than Mark? What changes could they make to

create equity and fairness in their agreement?

Answers will vary, but students will want to consider whether changes should be made to the

partnership agreement to account for the changing contributions by Mark and Connie. If

Mark feels the 50/50 arrangement is no longer appropriate, the two will need to determine

what the new ratio should be. Connie will need to show how working only two days instead

of the original four, plus the stated inventory and payment problems, justifies a continuation

of the original agreement. For the partnership to continue, all tasks should be reviewed and

responsibilities evaluated and reassigned.

CASES:

IT ALL STARTED WITH A LATE FEE

(Learning Objective 6 – AACSB – analytical thinking, application of knowledge)

3-22. What are some of the primary reasons Netflix has been successful?

Netflix has been successful because it has focused on convenience and ease of use for which

consumers are very willing to pay. It continually innovates to stay ahead of competitors.

3-23. Netflix is a corporation. Why do you think the firm uses this form of ownership?

Netflix is structured as a corporation because it provides multiple advantages such as limited


liability, easier access to financing, and continuity of operation.

3-24. What threats might derail Netflix’s success? What steps might the firm take today to thwart

those threats?

Just as Netflix has driven Blockbuster out of business, it is possible that another competitor

could emerge that would be a threat to Netflix. Students might suggest a strategic alliance

with television and movie producers to secure Netflix’s position. Netflix is already taking

steps in this direction with the original series it now offers.

3-25. Suppose Reed Hastings asked you for advice on how to make Netflix better. What would

you tell him?

Answers will vary but students will probably focus on cost, ease of use, technology changes,

competitors, etc.

ICE CREAM HEADACHE

(Learning Objective 3 – AACSB – analytical thinking, application of knowledge)

3-26. What would be the advantages of buying a Cold Stone Creamery franchise as opposed to

starting a business from scratch?

Answers will vary, but some students may find the added difficulty in starting from

scratch challenging, but preferable due to the increased independence. Others will likely want

to benefit from a well-established franchise. After all, the corporation provides start-up

assistance and ongoing support.

3-27. What are the disadvantages of buying a Cold Stone Creamery franchise?

Students will likely mention the start-up cost, ongoing costs, and loss of autonomy as

disadvantages.

3-28. While franchise owners must have at least $125,000 of cash available, average start-up

costs are more than double this amount. What are the most likely sources of funding for a

franchise?

The responses will include: SBA programs, banks, personal savings, and franchiser-supplied

financing.

3-29. How would you research a franchise purchase before making the decision to invest?

A potential franchisee could contact the FTC for information, search the Internet for articles

on a particular franchise, and contact current franchisees to hear about their experiences and

concerns.


3-30. Do you think that you would be interested in owning a Cold Stone Creamery franchise?

Why or why not?

Answers will vary depending on students’ interest.

Business Essentials 12th Edition Ebert Solutions ManualFull Download: https://alibabadownload.com/product/business-essentials-12th-edition-ebert-solutions-manual/

This sample only, Download all chapters at: AlibabaDownload.com

https://alibabadownload.com/product/business-essentials-12th-edition-ebert-solutions-manual/

Chapter 3: Entrepreneurship, New Ventures, and Business ...

Documents

Transcript of Chapter 3: Entrepreneurship, New Ventures, and Business ...