Essentials of Entrepreneurship and Small Business Management 6th Edition by Scarborough – Test Bank

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Essentials of Entrepreneurship and Small Business Management 6th Edition by Scarborough – Test Bank

 

Essentials of Entrepreneurship & Small Business Management, 6e (Scarborough)

Chapter 2   Inside the Entrepreneurial Mind: From Ideas to Reality

 

1) The ability to develop new ideas and to discover new ways of looking at problems and opportunities is called:

  1. A) entrepreneurship.
  2. B) innovation.
  3. C) creativity.
  4. D) creative thinking.

Answer:  C

Diff: 1             Page Ref: 33

AACSB:  Reflective Thinking

 

2) An entrepreneurial “secret” for creating value in the marketplace is:

  1. A) applying creativity and innovation to solve problems.
  2. B) creating new products and services.
  3. C) learning by doing.
  4. D) applying lessons learned from history.

Answer:  A

Diff: 2             Page Ref: 33-34

AACSB:  Analytic Skills

 

3) The ability to apply creative solutions to problems and opportunities to enhance or to enrich people’s lives is called:

  1. A) entrepreneurship.
  2. B) innovation.
  3. C) creativity.
  4. D) creative thinking.

Answer:  B

Diff: 1             Page Ref: 33-34

AACSB:  Reflective Thinking

 

4) Harvard’s Ted Levitt says that creativity is ________ new things, and innovation is ________ new things.

  1. A) thinking; doing
  2. B) doing; thinking
  3. C) seeing; doing
  4. D) thinking; applying

Answer:  A

Diff: 2             Page Ref: 33-34

AACSB:  Reflective Thinking

 

 

5) Entrepreneurship is a constant process that relies on:

  1. A) creativity, innovation, and profit.
  2. B) the ability to win over the consumer.
  3. C) creativity, innovation, and application in the marketplace.
  4. D) intellectual property rights.

Answer:  C

Diff: 3             Page Ref: 33-35

AACSB:  Analytic Skills

6) ________ is necessary for building a competitive advantage and for business survival.

  1. A) One single idea
  2. B) A motivated owner
  3. C) Creativity
  4. D) A low-priced product

Answer:  C

Diff: 1             Page Ref: 35

AACSB:  Reflective Thinking

 

7) Creativity often involves creating something from nothing.  However, it is more likely to result in:

  1. A) elaborating on the present.
  2. B) putting old things together in new ways.
  3. C) taking something away to create something simpler or better.
  4. D) All of the above

Answer:  D

Diff: 3             Page Ref: 35-36

AACSB:  Reflective Thinking

 

8) When developing creative solutions to modern problems, entrepreneurs must:

  1. A) go beyond merely using whatever has worked in the past.
  2. B) limit the creative process to only profitable ventures.
  3. C) remember what has worked in the past.
  4. D) pay attention to limiting factors.

Answer:  A

Diff: 2             Page Ref: 35-36

AACSB:  Reflective Thinking

 

9) Research shows that anyone can learn to be creative.  The problem is:

  1. A) many organizations fail to foster an environment that encourages creativity.
  2. B) most people never tap into their pools of innate creativity.
  3. C) most people have never been taught to be creative.
  4. D) All of the above

Answer:  D

Diff: 2             Page Ref: 36-37

AACSB:  Analytic Skills

 

 

10) Research into the operation of the human brain shows that each hemisphere of the brain:

  1. A) develops symmetrically.
  2. B) controls similar functions.
  3. C) does not dominate the other hemisphere.
  4. D) processes information differently.

Answer:  D

Diff: 2             Page Ref: 36-37

AACSB:  Analytic Skills

11) The left brain is guided by:

  1. A) kaleidoscopic, lateral thinking.
  2. B) linear, vertical thinking.
  3. C) asymmetrical thinking.
  4. D) intuitive thinking.

Answer:  B

Diff: 2             Page Ref: 36-37

AACSB:  Analytic Skills

 

12) The right brain is guided by:

  1. A) kaleidoscopic, lateral thinking.
  2. B) linear, vertical thinking.
  3. C) asymmetrical thinking.
  4. D) logical thinking.

Answer:  A

Diff: 2             Page Ref: 36-37

AACSB:  Analytic Skills

 

13) Which hemisphere of the brain is responsible for language, logic, and symbols?

  1. A) Right hemisphere
  2. B) Left hemisphere
  3. C) Lateral hemisphere
  4. D) Intuitive hemisphere

Answer:  B

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

14) Which hemisphere of the brain is responsible for the body’s emotional, intuitive, and spatial functions?

  1. A) Right hemisphere
  2. B) Left hemisphere
  3. C) Vertical hemisphere
  4. D) Logical hemisphere

Answer:  A

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

 

15) Which hemisphere of the brain processes information in a step-by-step fashion?

  1. A) Right hemisphere
  2. B) Left hemisphere
  3. C) Lateral hemisphere
  4. D) Intuitive hemisphere

Answer:  B

Diff: 2             Page Ref: 37

AACSB:  Analytic Skills

16) Which hemisphere of the brain processes information all at once and by relying heavily on images?

  1. A) Right hemisphere
  2. B) Left hemisphere
  3. C) Vertical hemisphere
  4. D) Logical hemisphere

Answer:  A

Diff: 2             Page Ref: 37

AACSB:  Analytic Skills

 

17) ________ vertical thinking is narrowly focused and systematic, proceeding in a highly logical fashion from one point to the next.

  1. A) Left-brained
  2. B) Right-brained
  3. C) Unconventional
  4. D) Intuitive

Answer:  A

Diff: 2             Page Ref: 37

AACSB:  Analytic Skills

 

18) ________ lateral thinking is somewhat unconventional and unstructured.

  1. A) Left-brained
  2. B) Right-brained
  3. C) Systematic
  4. D) Logical

Answer:  B

Diff: 2             Page Ref: 37

AACSB:  Analytic Skills

 

19) In his book A Whack on the Side of the Head, Roger von Oech views a “playful attitude” as:

  1. A) frivolous.
  2. B) fundamental to creative thinking.
  3. C) a mental block.
  4. D) limiting individual creativity.

Answer:  B

Diff: 1             Page Ref: 39

AACSB:  Reflective Thinking

 

 

20) All of the following represent barriers to creativity that entrepreneurs impose upon themselves except:

  1. A) focusing on being too logical.
  2. B) being too practical.
  3. C) blindly following rules.
  4. D) searching for more than one answer.

Answer:  D

Diff: 2             Page Ref: 39-42

AACSB:  Reflective Thinking

21) Roger von Oech believes that blindly following rules leads to:

  1. A) order, which stimulates creativity.
  2. B) a clearer vision and business venture.
  3. C) new ways of doing things.
  4. D) a mental block towards creativity.

Answer:  D

Diff: 2             Page Ref: 39

AACSB:  Reflective Thinking

 

22) Joseph Schumpeter wrote that entrepreneurs perform the vital function of:

  1. A) challenging accepted ways of doing things.
  2. B) creative destruction.
  3. C) revolutionizing current patterns of production.
  4. D) All of the above

Answer:  D

Diff: 2             Page Ref: 41

AACSB:  Reflective Thinking

 

23) Entrepreneurs can stimulate their own creativity and encourage it among workers by:

  1. A) expecting and tolerating failure.
  2. B) avoiding problems.
  3. C) limiting rewards.
  4. D) not taking chances.

Answer:  A

Diff: 2             Page Ref: 41-42

AACSB:  Reflective Thinking

 

24) Which of the following is not one of the ways entrepreneurs can stimulate their own creativity and encourage it among their workers?

  1. A) Provide creativity training.
  2. B) Encourage curiosity.
  3. C) View challenges as problems.
  4. D) Develop a corporate culture that both fosters and rewards creativity.

Answer:  C

Diff: 3             Page Ref: 41-42

AACSB:  Reflective Thinking

 

 

25) Employees must be given the tools and resources they need to be creative.  One of the most valuable resources is:

  1. A) providing challenges.
  2. B) rules and guidelines.
  3. C) time.
  4. D) money.

Answer:  C

Diff: 3             Page Ref: 43

AACSB:  Communication

26) Hiring a diverse workforce:

  1. A) helps in enhancing organizational creativity.
  2. B) allows for different ideas and varying methods of problem solving.
  3. C) brings in people from different backgrounds, with different cultural experiences, hobbies, and interests.
  4. D) All of the above

Answer:  D

Diff: 1             Page Ref: 43

AACSB:  Multicultural & Diversity

 

27) The ________ environment has an impact on the level of people’s creativity.

  1. A) physical
  2. B) sounds in the
  3. C) extermal
  4. D) internal

Answer:  A

Diff: 1             Page Ref: 44

AACSB:  Reflective Thinking

 

28) All of the following are enhancements to individual creativity except:

  1. A) keeping a journal to record thoughts and ideas.
  2. B) limiting your reading sources.
  3. C) taking time off.
  4. D) allowing yourself to be creative.

Answer:  B

Diff: 1             Page Ref: 46-48

AACSB:  Analytic Skills

 

29) Which of the following is not an enhancement to individual creativity?

  1. A) Listening to other people
  2. B) Recognizing the creative power of mistakes
  3. C) Keeping a toy box in your office
  4. D) Working without breaks until the project is complete or the problem is solved

Answer:  D

Diff: 2             Page Ref: 46-48

AACSB:  Reflective Thinking

 

 

30) Which stage of the creative process includes on-the-job training?

  1. A) Implementation
  2. B) Preparation
  3. C) Illumination
  4. D) Verification

Answer:  B

Diff: 2             Page Ref: 49

AACSB:  Reflective Thinking

31) Which stage of the creative process requires one to develop a solid understanding of the problem or decision?

  1. A) Investigation
  2. B) Preparation
  3. C) Illumination
  4. D) Verification

Answer:  A

Diff: 2             Page Ref: 49-50

AACSB:  Analytic Skills

 

32) Which stage of the creative process involves viewing the similarities and differences in the information collected?

  1. A) Transformation
  2. B) Incubation
  3. C) Illumination
  4. D) Verification

Answer:  A

Diff: 2             Page Ref: 50

AACSB:  Analytic Skills

 

33) The ability to see the similarities and the connections among various data and events is called:

  1. A) convergent thinking.
  2. B) divergent thinking.
  3. C) transformational thinking.
  4. D) illumination.

Answer:  A

Diff: 2             Page Ref: 50

AACSB:  Analytic Skills

 

34) The ability to see the differences among various data and events is called:

  1. A) convergent thinking.
  2. B) divergent thinking.
  3. C) transformational thinking.
  4. D) illumination.

Answer:  B

Diff: 2             Page Ref: 50

AACSB:  Analytic Skills

 

35) ________ thinking is the ability to see similarities and ________ thinking is the ability to see differences among various data and events.

  1. A) Divergent; convergent
  2. B) Convergent; divergent
  3. C) Convergent; transformational
  4. D) None of the above

Answer:  B

Diff: 2             Page Ref: 50

AACSB:  Analytic Skills

36) During the incubation phase of the creative process, the entrepreneur might do all of the following EXCEPT which one to let ideas “marinate” in his mind?

  1. A) Do something totally unrelated for awhile.
  2. B) Relax and play regularly.
  3. C) Work on the problem or opportunity in a different environment.
  4. D) Don’t allow one’s self to daydream.

Answer:  D

Diff: 2             Page Ref: 50-51

AACSB:  Analytic Skills

 

37) At which stage of the creative process does a spontaneous breakthrough occur, allowing all of the previous stages to come together to produce the “Eureka factor” or the “light bulb goes on”?

  1. A) Implementation
  2. B) Preparation
  3. C) Illumination
  4. D) Verification

Answer:  C

Diff: 2             Page Ref: 51

AACSB:  Analytic Skills

 

38) “Verification” refers to:

  1. A) validating the idea as accurate and useful.
  2. B) possibly conducting experiments, running simulations, test marketing a product or service.
  3. C) possibly asking questions such as “will it work?” and “is it really a better solution?”
  4. D) All of the above

Answer:  D

Diff: 2             Page Ref: 51-52

AACSB:  Analytic Skills

 

39) The focus of this step in the creative process is to transform the idea into reality.

  1. A) Implementation
  2. B) Preparation
  3. C) Illumination
  4. D) Verification

Answer:  A

Diff: 2             Page Ref: 52

AACSB:  Analytic Skills

40) ________ is a process in which a small group of people interacts to produce a large quantity of imaginative ideas.

  1. A) Groupthink
  2. B) Mind-mapping
  3. C) Brainstorming
  4. D) Prototyping

Answer:  C

Diff: 1             Page Ref: 54

AACSB:  Communication

41) Effective brainstorming involves all of the following except:

  1. A) a small group of people.
  2. B) an open uninhibited environment.
  3. C) an effective method to evaluate ideas.
  4. D) very little structure.

Answer:  C

Diff: 2             Page Ref: 54-55

AACSB:  Communication

 

42) ________ is a graphical technique that encourages thinking on both sides of the brain, visually displays the various relationships among the ideas, and improves the ability to view a problem from many sides.

  1. A) Brainstorming
  2. B) Mind-mapping
  3. C) Prototyping
  4. D) Groupthink

Answer:  B

Diff: 1             Page Ref: 55

AACSB:  Analytic Skills

 

43) Mind-mapping is a useful tool for jump-starting creativity.  It includes all of the following except:

  1. A) sketching a picture to symbolize the problem or area of focus in the center of a sheet of paper.
  2. B) writing down every idea that comes into your mind, connecting each idea to the central picture.
  3. C) allowing your mind to rest for a few minutes before integrating the ideas.
  4. D) forcing creativity when ideas start to trickle.

Answer:  D

Diff: 2             Page Ref: 55

AACSB:  Analytic Skills

 

 

44) The “theory of inventive problem solving” is a left-brained, scientific, systematic process based on innovative patents and is referred to as:

  1. A) JIT.
  2. B) RP.
  3. C) TQM.
  4. D) TRIZ.

Answer:  D

Diff: 2             Page Ref: 56-58

AACSB:  Analytic Skills

 

45) The premise behind ________ is that transforming an idea into an actual model will lead to improvements in its design.

  1. A) rapid prototyping
  2. B) mind-mapping
  3. C) brainstorming
  4. D) inventions

Answer:  A

Diff: 2             Page Ref: 58

AACSB:  Analytic Skills

46) The three principles (three Rs) of rapid prototyping are:

  1. A) develop a rough model, rapidly, and for the right price.
  2. B) develop a complete model, rapidly, and for the right problem.
  3. C) develop a rough model, rapidly, and for the right problem.
  4. D) develop a right model, roughly, for the right price.

Answer:  C

Diff: 2             Page Ref: 58

AACSB:  Analytic Skills

 

47) Steps in the patent process include:

  1. A) establishing whether it is a novelty.
  2. B) documenting and verifying the date the idea was first conceived.
  3. C) searching existing patents.
  4. D) All of the above

Answer:  D

Diff: 2             Page Ref: 58-61

AACSB:  Analytic Skills

 

48) To which governmental office must applications for patents be submitted?

  1. A) The U.S. Patent and Trademark Office
  2. B) The individual State Offices of Patent Development
  3. C) The Federal Trade Commission
  4. D) The Securities and Exchange Commission

Answer:  A

Diff: 2             Page Ref: 58

AACSB:  Analytic Skills

 

 

49) To protect patent claims, an inventor should be able to verify and document the:

  1. A) research conducted to create the invention.
  2. B) fact that the invention was created in another country.
  3. C) date on which the idea was first conceived.
  4. D) initial sales of the invention.

Answer:  C

Diff: 2             Page Ref: 60

AACSB:  Analytic Skills

 

50) More than ________ percent of those holding patents win their infringement suits.

  1. A) 15
  2. B) 30
  3. C) 45
  4. D) 60

Answer:  D

Diff: 2             Page Ref: 61, Figure 2.5

AACSB:  Analytic Skills

51) Any distinctive word, phrase, symbol, name, or logo a firm uses to distinguish itself or its products is called a:

  1. A) trademark.
  2. B) patent.
  3. C) copyright.
  4. D) service mark.

Answer:  A

Diff: 1             Page Ref: 62

AACSB:  Analytic Skills

 

52) Which of the following questions should you consider before entering a lawsuit to protect intellectual property?

  1. A) Can you afford the loss of time, money, and privacy the lawsuit will bring?
  2. B) Can the opponent afford to pay if you win?
  3. C) Do you expect to get enough from the suit to pay for the costs of hiring an attorney?
  4. D) All of the above

Answer:  D

Diff: 2             Page Ref: 62-63

AACSB:  Analytic Skills

 

53) A ________ is an exclusive right that protects the creators of original works such as literary, dramatic, musical, and artistic works.

  1. A) trademark
  2. B) patent
  3. C) copyright
  4. D) service mark

Answer:  C

Diff: 1             Page Ref: 64

AACSB:  Analytic Skills

 

54) Copyrights protect the creator of original works such as:

  1. A) software, choreography, and motion pictures.
  2. B) symbols, names, and designs.
  3. C) text and verbiage of any kind.
  4. D) slogans and designs.

Answer:  A

Diff: 2             Page Ref: 64

AACSB:  Use of IT

 

55) Creativity is the ability to apply creative solutions to problems and opportunities to enhance or enrich people’s lives.

Answer:  FALSE

Diff: 1             Page Ref: 33

AACSB:  Reflective Thinking

 

56) Innovation is the ability to develop new ideas and to discover new ways of looking at problems and opportunities.

Answer:  FALSE

Diff: 1             Page Ref: 33

AACSB:  Reflective Thinking

57) Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities.

Answer:  TRUE

Diff: 1             Page Ref: 33

AACSB:  Reflective Thinking

 

58) Innovation is the ability to apply creative solutions to problems and opportunities to enhance or enrich people’s lives.

Answer:  TRUE

Diff: 1             Page Ref: 33

AACSB:  Reflective Thinking

 

59) Successful entrepreneurs come up with ideas and then find ways to make them work to solve a problem or fill a need.

Answer:  TRUE

Diff: 2             Page Ref: 34

AACSB:  Reflective Thinking

 

60) Creativity and innovation are the signature of large, entrepreneurial businesses.

Answer:  FALSE

Diff: 1             Page Ref: 34

AACSB:  Reflective Thinking

 

61) Creativity and innovation are the signature of small, entrepreneurial businesses.

Answer:  TRUE

Diff: 1             Page Ref: 34

AACSB:  Analytic Skills

62) Although creativity sometimes involves generating something from nothing, it more likely results in elaborating on the present, putting old things together in new ways, or taking something away to create something simpler or better.

Answer:  TRUE

Diff: 2             Page Ref: 34

AACSB:  Analytic Skills

 

63) Innovation must be a constant process because most ideas do not work and most innovations fail.

Answer:  TRUE

Diff: 3             Page Ref: 34-35

AACSB:  Reflective Thinking

 

64) For every 3,000 new product ideas, four make it to the development stage, two are actually launched, and only one becomes successful in the market.

Answer:  TRUE

Diff: 3             Page Ref: 35

AACSB:  Analytic Skills

 

65) On average, new products account for two-thirds to three-fourths of companies’ sales.

Answer:  FALSE

Diff: 3             Page Ref: 35

AACSB:  Analytic Skills

66) Creativity is not only an important source for building a competitive advantage, but it also is necessary for survival.

Answer:  TRUE

Diff: 2             Page Ref: 35

AACSB:  Reflective Thinking

 

67) History is always a reliable predictor of the future of business.

Answer:  FALSE

Diff: 2             Page Ref: 35

AACSB:  Reflective Thinking

 

68) Entrepreneurs must embrace traditional assumptions and perspectives about how things ought to be because they support creativity.

Answer:  FALSE

Diff: 2             Page Ref: 35

AACSB:  Reflective Thinking

 

69) Creative thinking involves research into the operation of the human brain and the roles each hemisphere of the brain plays.

Answer:  TRUE

Diff: 1             Page Ref: 36

AACSB:  Analytic Skills

 

 

70) Successful entrepreneurship requires left-brain thinking.

Answer:  FALSE

Diff: 2             Page Ref: 37

AACSB:  Analytic Skills

 

71) The left brain is guided by linear, vertical thinking.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

72) The left brain relies on kaleidoscopic, lateral thinking.

Answer:  FALSE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

73) While most people see what they have always seen, creative entrepreneurs are able to see beyond preconceptions.

Answer:  TRUE

Diff: 2             Page Ref: 37

AACSB:  Analytic Skills

 

74) Research shows that each hemisphere of the human brain processes information differently and that one side of the brain tends to be dominant over the other.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

75) The right brain is guided by linear, vertical thinking.

Answer:  FALSE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

76) The right brain relies on kaleidoscopic, lateral thinking.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

77) The left brain handles language, logic, and symbols.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

78) The right brain takes care of the body’s emotional, intuitive, and spatial functions.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

79) The right brain processes information intuitivelyall at once, relying heavily on images.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

80) Right-brain thinking draws on the power of divergent reasoning, which is the ability to create a multitude of original, diverse ideas, while left-brain thinking counts on convergent reasoning, the ability to evaluate multiple ideas and choose the best solution to a given problem.

Answer:  TRUE

Diff: 3             Page Ref: 37

AACSB:  Analytic Skills

 

81) Entrepreneurship requires both left- and right-brained thinking.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

82) The left brain processes information in a step-by-step fashion.

Answer:  TRUE

Diff: 1             Page Ref: 37-38

AACSB:  Analytic Skills

 

83) Entrepreneurs need to rely on left-brain thinking to generate innovative product, service, or business ideas and use right-brain thinking to judge the market potential of the ideas they generate.

Answer:  FALSE

Diff: 3             Page Ref: 37

AACSB:  Analytic Skills

84) Intuition is based on the accumulated knowledge and experiences a person encounters over the course of a lifetime and resides in the subconscious.

Answer:  TRUE

Diff: 1             Page Ref: 37

AACSB:  Analytic Skills

 

85) A paradigm is a preconceived idea of what the world is, what it should be like, and how it should operate and this can influence creativity.

Answer:  TRUE

Diff: 3             Page Ref: 38

AACSB:  Analytic Skills

 

86) The left brain processes information intuitivelyall at once, relying heavily on images.

Answer:  FALSE

Diff: 1             Page Ref: 37-38

AACSB:  Analytic Skills

 

 

87) The right brain processes information in a step-by-step fashion.

Answer:  FALSE

Diff: 1             Page Ref: 37-38

AACSB:  Analytic Skills

 

88) Right-brained individuals tend to challenge tradition, custom, and routine.

Answer:  TRUE

Diff: 2             Page Ref: 37-38

AACSB:  Analytic Skills

 

89) Left-brained individuals realize that there may be more than one right answer.

Answer:  FALSE

Diff: 2             Page Ref: 37-38

AACSB:  Analytic Skills

 

90) Successful entrepreneurs push technological and economic boundaries forward and sometimes make unconventional decisions.

Answer:  TRUE

Diff: 2             Page Ref: 39

AACSB:  Use of IT

 

91) The rapidly accelerating rate of change has created an environment in which staying in a leadership position requires constant creativity, innovation, and entrepreneurship.

Answer:  TRUE

Diff: 2             Page Ref: 39-41

AACSB:  Analytic Skills

 

92) Viewing play as frivolous is a mental block that stifles creativity.

Answer:  TRUE

Diff: 2             Page Ref: 40-41

AACSB:  Analytic Skills

93) “Constantly being practical” is a mental block that can stifle creativity.

Answer:  TRUE

Diff: 2             Page Ref: 40

AACSB:  Analytic Skills

 

94) Businesses typically foster an environment that encourages creativity.

Answer:  FALSE

Diff: 3             Page Ref: 43

AACSB:  Reflective Thinking

 

95) Ambiguity tends to destroy creativity.

Answer:  FALSE

Diff: 3             Page Ref: 41

AACSB:  Analytic Skills

 

 

96) Failure is an important part of the creative process, as it provides a chance to learn how to succeed.

Answer:  TRUE

Diff: 2             Page Ref: 41-42

AACSB:  Analytic Skills

 

97) Employees tend to riseor fallto the level of expectations entrepreneurs have of them.

Answer:  TRUE

Diff: 2             Page Ref: 42

AACSB:  Communication

 

98) Research shows that not everyone can be creative.

Answer:  FALSE

Diff: 2             Page Ref: 42

AACSB:  Analytic Skills

 

99) Hiring a diverse workforce makes it more difficult to achieve creativity in the workplace.

Answer:  FALSE

Diff: 2             Page Ref: 43

AACSB:  Multicultural & Diversity

 

100) Entrepreneurs can encourage creative thinking in their employees by setting examples of creative behavior and rewarding creative behavior when exhibited by their employees.

Answer:  TRUE

Diff: 2             Page Ref: 43-45

AACSB:  Reflective Thinking

 

101) Enhancing individual creativity may be cultivated through such activities as modeling, encouragement, recognition, allowing failure, listening, talking to children, and taking time off.

Answer:  TRUE

Diff: 2             Page Ref: 46-48

AACSB:  Reflective Thinking

102) The creative process involves seven distinct steps including preparation, investigation, transformation, incubation, illumination, verification, and implementation.

Answer:  TRUE

Diff: 3             Page Ref: 48-52

AACSB:  Analytic Skills

 

103) “Convergent thinking” is the ability to see the differences among data and events.

Answer:  FALSE

Diff: 1             Page Ref: 50

AACSB:  Analytic Skills

 

 

104) “Divergent thinking” is the ability to see similarities and connections among various data and events.

Answer:  FALSE

Diff: 1             Page Ref: 50

AACSB:  Reflective Thinking

 

105) It may appear in the incubation stage of the creative process that the entrepreneur is loafing, as he is taking time to reflect on the information collected.

Answer:  TRUE

Diff: 2             Page Ref: 50-51

AACSB:  Reflective Thinking

 

106) The illumination stage of the creative process is often called the “Eureka factor” and is characterized by a spontaneous breakthrough.

Answer:  TRUE

Diff: 2             Page Ref: 51

AACSB:  Reflective Thinking

 

107) The typical entrepreneurial philosophy is “Ready, aim, aim, aim…”

Answer:  FALSE

Diff: 2             Page Ref: 52

AACSB:  Analytic Skills

 

108) When “brainstorming,” individuals should be encouraged to use “idea hitchhiking,” or building new ideas on those already suggested.

Answer:  TRUE

Diff: 2             Page Ref: 54

AACSB:  Analytic Skills

 

109) During a brainstorming session, company rank and department affiliation are irrelevant.

Answer:  TRUE

Diff: 2             Page Ref: 54

AACSB:  Analytic Skills

 

110) Mind-mapping is a graphical technique that encourages thinking on both sides of the brain, visually displays the various relationships among ideas, and improves the ability to view a problem from many sides.

Answer:  TRUE

Diff: 2             Page Ref: 55

AACSB:  Analytic Skills

111) TRIZ is an acronym for a systematic approach to help solve technical problems based on the study of hundreds of the most innovative patents.

Answer:  TRUE

Diff: 2             Page Ref: 56-58

AACSB:  Analytic Skills

 

 

112) Rapid prototyping, transforming an idea into an actual model, typically does not lead to improvements in design.

Answer:  FALSE

Diff: 2             Page Ref: 58

AACSB:  Analytic Skills

 

113) A patent protects the creator of original works of authorship such as for software.

Answer:  FALSE

Diff: 2             Page Ref: 58-61

AACSB:  Analytic Skills

 

114) A patent gives the inventor the exclusive right to make, use, or sell an invention for 50 years.

Answer:  FALSE

Diff: 2             Page Ref: 58

AACSB:  Analytic Skills

 

115) Trademarks are distinctive words, symbols, designs, names, or logos used for company identification.

Answer:  TRUE

Diff: 1             Page Ref: 62

AACSB:  Analytic Skills

 

116) The major problem with relying on the legal system to enforce ownership rights is the cost of infringement lawsuits, which can quickly exceed the budget of most small businesses.

Answer:  TRUE

Diff: 2             Page Ref: 62-63

AACSB:  Analytic Skills

 

117) The U.S. Copyright Office does not require registering the creative work because registering it does not give creators greater protection over their work.

Answer:  FALSE

Diff: 2             Page Ref: 64

AACSB:  Analytic Skills

 

118) What is the entrepreneurial “secret” for creating value in the marketplace?

Answer:  Creativity and innovation should be used in combination to allow the entrepreneur to solve real-world problems and to exploit opportunities and the profits that come with them.  Creativity should always be directed and complement the business plan.  Creativity is the ability to develop new ideas and to discover new ways of looking at problems and to exploit opportunities that people face every day. Innovation is the ability to apply creative solutions to those problems and opportunities to enhance and enrich people’s lives.

Diff: 3             Page Ref: 33-35

AACSB:  Reflective Thinking

 

119) Explain the differences between the left and right sides of the brain.

Answer:  The left brain is guided by linear, vertical thinking, whereas the right brain relies on kaleidoscopic, lateral thinking.  The left brain handles language, logic, and symbols, whereas the right brain takes care of the body’s emotional, intuitive, and spatial functions.  The left brain processes information in a step-by-step fashion, whereas the right brain processes it intuitivelyall at once, relying heavily on images.  Left-brained vertical thinking is narrowly focused and systematic, whereas right-brained lateral thinking is somewhat unconventional, unsystematic, and unstructured.

Diff: 2             Page Ref: 36-39

AACSB:  Analytic Skills

 

120) List five of the barriers that limit creativity.

Answer:  The five barriers are a subset of the following list:

∙     Search for the one “right” answer

∙     Focus on “being logical”

∙     Blindly follow the rules

∙     Constantly be practical

∙     View play as frivolous

∙     Become overly specialized

∙     Avoid ambiguity

∙     Fear looking foolish

∙     Fear mistakes and failure

∙     Believe that “I’m not creative”

Diff: 3             Page Ref: 39-42

AACSB:  Analytic Skills

 

121) List five ways entrepreneurs can stimulate their own creativity and encourage it among workers.

Answer:  The five ways entrepreneurs can stimulate their own creative and encourage it is a subset of the following list:

∙     Expect creativity

∙     Embrace diversity

∙     Expect and tolerate failure

∙     Encourage curiosity

∙     View problems as challenges

∙     Provide creativity training

∙     Provide support

∙     Reward creativity

∙     Model creative behavior

Diff: 3             Page Ref: 43-46

AACSB:  Analytic Skills

 

122) List five ways individuals can enhance their own creativity.

Answer:  The five ways individual creativity can be enhanced should come from the following list:

∙     Allow yourself to be creative.

∙     Give your mind fresh input every day.

∙     Recognize the creative power of mistakes.

∙     Keep a journal handy to record your thoughts and ideas.

∙     Listen to other people.

∙     Read books on stimulating creativity or take a class on creativity.

∙     Talk to a child.

∙     Keep a toy box in your office.

∙     Take some time off.

Diff: 3             Page Ref: 46-48

AACSB:  Reflective Thinking

 

123) List and briefly explain the seven steps in the creative process and discuss the step that you consider to be the most critical.

Answer:

  1. PreparationGet your mind ready for creative thinking through formal education, OJT, work experience, etc. This helps to build creativity and innovation.
  2. InvestigationDevelop a solid understanding of the problem or decision.
  3. TransformationView the similarities and differences in the information collected.
  4. IncubationTake time to reflect on the information collected.
  5. IlluminationA spontaneous breakthrough occurs, causing the “light bulb to go on.” All of the previous stages come together to produce the “Eureka factor.”
  6. VerificationValidate the idea as accurate and useful. May include conducting experiments, running simulations, test marketing a product or service, etc.to verify that the new idea will work and is practical.
  7. ImplementationTransform the idea into reality.

Diff: 3             Page Ref: 48-52

AACSB:  Reflective Thinking

 

124) Why is it important for an entrepreneur to use techniques like mind-mapping, which use both sides of the brain?

Answer:  Mind-mapping, a graphical technique that encourages thinking on both sides of the brain, visually displays the various relationships among ideas, and improves the ability to view a problem from many sides.  Since entrepreneurs themselves tend to be left- or right-brained thinkers, techniques like mind-mapping encourage them to look at problems and opportunities in a different way.  Mind-mapping is also a useful tool that includes: sketching a picture symbolizing the problem, connecting each idea to the central picture or words with a line, and allowing your mind to rest for a few minutes before beginning to integrate the ideas.

Diff: 2             Page Ref: 55

AACSB:  Reflective Thinking

 

125) List the steps an entrepreneur should follow in order to enhance his/her chances of receiving a patent.

Answer:  An entrepreneur should follow these six steps to enhance his/her success in receiving a patent:

  1. Establish the invention’s novelty.
  2. Document the device.
  3. Search existing patents.
  4. Study search results.
  5. Submit the patent application.
  6. Prosecute the patent application.

Diff: 2             Page Ref: 58-60

AACSB:  Analytic Skills

 

126) Explain “brainstorming” and list at least five of the guidelines for a successful brainstorming session.

Answer:  Brainstorming is a process in which a small group of people interact with very little structure with the goal of producing a large quantity of novel and imaginative ideas.  The goal is to create an open, uninhibited atmosphere that allows member of the group to “freewheel” ideas.  Five guidelines should come from the following list:

 

∙     Keep the group smallfive to eight members.

∙     Have a well-defined problem for the group to address, but do not reveal it ahead of time.

∙     Limit the session to 40-60 minutes.

∙     Appoint someone to be the recorder and write every idea on a flip chart.

∙     Use a seating pattern that encourages communication and interaction.

∙     Encourage all ideas from the team, even wild and extreme ones.

∙     Establish a goal of quantity of ideas rather than quality.

∙     Forbid evaluation or criticism of any idea during the session.

∙     Encourage participants to use “idea hitchhiking” or to “piggyback”/build new ideas on those already suggested.

Diff: 2             Page Ref: 69

AACSB:  Analytic Skills


Mini Case 2-1: Protecting Your Intellectual Property

 

Devo, Anthony, and Spencer were childhood friends who had always talked about starting a business together after college graduation. Devo had the financial background and startup capital to contribute and Spencer and Anthony had the technical knowledge they believed would give them the competitive advantage needed to become an industry leader.

 

During their early college years, Anthony and Spencer developed a new and innovative way to manufacture computer components. When they shared their idea with Devo, he was able to draw up a detailed business plan to present to potential investors when the three were ready to launch their venture. They had been very careful not to disclose anything about their innovative idea to other colleagues or any of their friends and were anxious to get started.

 

After selecting the company name “Millennium Computers” the three friends come to you for advice on intellectual property rights.

 

127) To protect their innovative process for manufacturing computer components from unauthorized use, which type of intellectual property should the threesome apply for? Identify the office to which they should apply and outline the steps involved in the process.

Answer:  They should apply for a patent through the Patents and Trademark Office (PTO). To receive a patent, the inventor must follow these steps:

  1. Establish the invention’s novelty
  2. Document the device or process
  3. Search existing patents
  4. Study search results
  5. Submit the patent application
  6. Prosecute the patent application

Diff: 3             Page Ref: 58-63

AACSB:  Reflective Thinking

 

128) Should they consider protecting or registering their company name? Which intellectual property would cover this concern? Could they use the name without registering it?

Answer:  Entrepreneurs do not have to register trademarks to establish their rights to use those marks; however, registering a mark with the (PTO) does give entrepreneurs greater power in protecting their marks.

Diff: 2             Page Ref: 63-63

AACSB:  Analytic Skills

 

 

129) Since the primary weapon to protect intellectual property is the legal system, what would you advise the friends if they have to protect intellectual property sometime in the future by threatening a lawsuit?

Answer:  The major problem with relying on the legal system to enforce ownership rights is the cost of infringement lawsuits, which can quickly exceed the budget of most small firms. Before bringing a lawsuit, the entrepreneurs must consider the following issues:

∙     Can the opponent afford to pay them if they win?

∙     Will they expect to get enough from the suit to cover the costs of hiring an attorney and preparing a case?

∙     Can they afford the loss of time, money, and privacy from the ensuing lawsuit?

Diff: 2             Page Ref: 62-63

AACSB:  Analytic Skills

Essentials of Entrepreneurship & Small Business Management, 6e (Scarborough)

Chapter 4   Conducting a Feasibility Analysis and Crafting a Winning Business Plan

 

1) The process of determining whether an entrepreneur’s idea is a viable foundation for creating a successful business is known as a:

  1. A) business plan.
  2. B) strategic analysis.
  3. C) industry analysis.
  4. D) feasibility analysis.

Answer:  D

Diff: 1             Page Ref: 101

AACSB:  Analytic Skills

 

2) Porter’s five forces model assess industry attractiveness by surveying these five factors:

  1. A) potential entrants, suppliers, buyers, substitutes, and rivalry among existing firms.
  2. B) potential entrants, suppliers, buyers, similar products, and rivalry among existing firms.
  3. C) potential entrants, suppliers, raw materials, substitutes, and rivalry among existing firms.
  4. D) potential entrants, competitors, buyers, substitutes, and rivalry among existing firms.

Answer:  A

Diff: 3             Page Ref: 102-104

AACSB:  Analytic Skills

 

3) The strongest of the five forces in most industries is:

  1. A) rivalry among companies competing in the industry.
  2. B) bargaining power of buyers.
  3. C) threat os new entrants to the industry.
  4. D) threat of substitute products or services.

Answer:  A

Diff: 2             Page Ref: 102

AACSB:  Analytic Skills

 

4) Switching costs, the number of buyers, and if  the items represent a relatively small portion of the cost of finished products are key consideration regarding the:

  1. A) threat of new entrants to the industry.
  2. B) rivalry among companies competing in the industry.
  3. C) bargaining power of suppliers.
  4. D) bargaining power of buyers.

Answer:  D

Diff: 2             Page Ref: 103

AACSB:  Analytic Skills

 

 

5) Low capital requirements, cost advantages that are not related to company size, and the lack of brand loyalty are considerations regarding the:

  1. A) threat of new entrants to the industry.
  2. B) threat of substitute products.
  3. C) bargaining power of buyers.
  4. D) rivalry among companies competing in the industry.

Answer:  A

Diff: 2             Page Ref: 103

AACSB:  Analytic Skills

6) Products or services that may be sought as alternative solutionssuch as purchasing tax planning software rather than paying a CPA to assist with preparing your taxesare referred to as:

  1. A) buyers products.
  2. B) rivalry products.
  3. C) substitute products.
  4. D) competitive alternatives.

Answer:  C

Diff: 3             Page Ref: 104

AACSB:  Analytic Skills

 

7) The force from the five forces model that considers economies of scale, initial capital requirements, cost advantages relevant to company size, and lack of brand loyalty is the:

  1. A) barganinig power of suppliers.
  2. B) threat of new entrants.
  3. C) threat of substitute products or services.
  4. D) rivalry among companies competing.

Answer:  B

Diff: 3             Page Ref: 104

AACSB:  Analytic Skills

 

8) The primary purpose of the five forces matrix is to:

  1. A) assign values to each of the five elements.
  2. B) provide a graphic.
  3. C) list the five forces in rank order.
  4. D) assess the five forces as compared to a standard value.

Answer:  A

Diff: 2             Page Ref: 104, Table 4.1

AACSB:  Analytic Skills

 

 

9) The process in which entrepreneurs test their business models on a small scale before committing serious resources to launch a business that might not work is known as:

  1. A) business modeling.
  2. B) business prototyping.
  3. C) business planning.
  4. D) product or service feasibility analysis.

Answer:  B

Diff: 2             Page Ref: 105

AACSB:  Analytic Skills

 

10) An analysis that determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service is refereed to as:

  1. A) product or service feasibility analysis.
  2. B) business prototyping.
  3. C) business plan analysis.
  4. D) financial feasibility analysis.

Answer:  A

Diff: 1             Page Ref: 105

AACSB:  Analytic Skills

11) Conducting ________ research involves collecting data firsthand and analyzing it while ________ research involves gathering data that has already been complied and is available.

  1. A) primary; secondary
  2. B) secondary; primary
  3. C) primary; industry
  4. D) product; secondary

Answer:  A

Diff: 1             Page Ref: 106

AACSB:  Analytic Skills

 

12) One form of primary research is:

  1. A) to review published articles.
  2. B) Internet research.
  3. C) library research.
  4. D) a focus group.

Answer:  D

Diff: 1             Page Ref: 107

AACSB:  Analytic Skills

 

13) The financial feasibility analysis takes these aspects into consideration:

  1. A) capital requirements, human resources, and return on investment.
  2. B) capital requirements, estimated earnings, and return on investment.
  3. C) capital requirements, estimated earnings, and return on sales.
  4. D) capital requirements, estimated earnings, and return on owner’s equity.

Answer:  B

Diff: 2             Page Ref: 109

AACSB:  Analytic Skills

14) The final aspect of the financial feasibility analysis combines the estimated earings and the capital requirements to determine the:

  1. A) estimated earnings.
  2. B) total capital requirements.
  3. C) net profit.
  4. D) rate of return on the capital invested.

Answer:  D

Diff: 2             Page Ref: 109

AACSB:  Analytic Skills

 

15) The primary purpose of a business plan is to:

  1. A) attract lenders and investors.
  2. B) enable an entrepreneur to take her company public.
  3. C) guide a company by charting its future course and devising a strategy for success.
  4. D) meet SEC and other legal requirements designed to protect lenders and investors.

Answer:  C

Diff: 2             Page Ref: 109-110

AACSB:  Analytic Skills

16) A business plan is a written summary of:

  1. A) an entrepreneur’s proposed business venture.
  2. B) a business venture’s operational, financial, and marketing details.
  3. C) the skills and abilities of a business venture’s managers.
  4. D) All of the above

Answer:  D

Diff: 1             Page Ref: 110

AACSB:  Communication

 

17) A business plan:

  1. A) is a valuable managerial tool that helps an entrepreneur focus on developing a course for the business in the future.
  2. B) is a valuable tool for convincing lenders or investors to put money into the business.
  3. C) forces an entrepreneur to think a business idea through, considering both its positive and its negative aspects.
  4. D) All of the above

Answer:  D

Diff: 1             Page Ref: 110

AACSB:  Communication

 

18) A solid business plan:

  1. A) forces potential entrepreneurs to look at their business idea in the harsh light of reality.
  2. B) requires a potential entrepreneur to assess the venture’s chances of success more objectively.
  3. C) helps prove to outsiders, such as potential lenders and investors, that a business idea can be successful.
  4. D) All of the above

Answer:  D

Diff: 1             Page Ref: 110

AACSB:  Analytic Skills

19) The second essential purpose for creating a business plan is:

  1. A) to guide the operation of the company by charting its future course and devising a strategy for following it.
  2. B) to attract lenders and investors.
  3. C) to file with the SEC before a public stock offering.
  4. D) to attract potential managers and employees to run the new venture.

Answer:  B

Diff: 2             Page Ref: 110

AACSB:  Communication

 

20) The three “tests” associated with a business plan are:

  1. A) reality, competitive, and value.
  2. B) competitive, profitability, and value.
  3. C) value, reality, and profitability.
  4. D) reality, value and litmus.

Answer:  A

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

21) The ________ test that a business plan must pass in order to attract financing from lenders and investors involves proving that a market for the company’s product or service actually does exist and that the company actually can build it for the cost estimates included in the plan.

  1. A) reality
  2. B) competitive
  3. C) value
  4. D) profitability

Answer:  A

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

22) The reality test that a business plan must pass in order to attract financing from lenders and investors involves proving:

  1. A) that the company can gain a competitive advantage over its key competitors.
  2. B) that the business venture will provide lenders and investors a high probability of repayment or an attractive rate of return.
  3. C) that a market for the company’s product or service actually does exist and that the company can actually build it for the cost estimates included in the plan.
  4. D) that the industry in which the business will compete is growing faster than the overall economy and has room for more competitors.

Answer:  C

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

 

23) The competitive test that a business plan must pass in order to attract financing from lenders and investors involves proving:

  1. A) that the company can gain a competitive advantage over its key competitors.
  2. B) that the business venture will provide lenders and investors a high probability of repayment or an attractive rate of return.
  3. C) that a market for the company’s product or service actually does exist and that the company can actually build it for the cost estimates included in the plan.
  4. D) that the industry in which the business will compete is growing faster than the overall economy and has room for more competitors.

Answer:  A

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

24) The value test that a business plan must pass in order to attract financing from lenders and investors involves proving:

  1. A) that the company can gain a competitive advantage over its key competitors.
  2. B) that the business venture will provide lenders and investors a high probability of repayment or an attractive rate of return.
  3. C) that a market for the company’s product or service actually does exist and that the company can actually build it for the cost estimates included in the plan.
  4. D) that the industry in which the business will compete is growing faster than the overall economy and has room for more competitors.

Answer:  B

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

25) Potential investors tend to believe that if an entrepreneur cannot develop a good plan, the entrepreneur:

  1. A) is probably the action-oriented sort of person they need running a business.
  2. B) needs to hire a consultant to write the plan for him.
  3. C) probably lacks the discipline to run a business.
  4. D) is just like the majority of entrepreneurs and will probably do quite well.

Answer:  C

Diff: 2             Page Ref: 111

AACSB:  Communication

 

26) Which of the following statements is not true according to the “two-thirds rule?”

  1. A) Only two-thirds of entrepreneurs with a sound and viable business venture will find financial backing.
  2. B) Entrepreneurs who do get financing for their business will get only two-thirds of the capital they initially requested.
  3. C) Entrepreneurs who do get financing for their businesses will find that it takes them two-thirds longer to get it than they anticipated.
  4. D) Only two-thirds of entrepreneurs will take the time to prepare a business plan.

Answer:  D

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

27) Before putting their money into a business idea, potential lenders and investors:

  1. A) look for entrepreneurs who have evaluated the risk in the business venture realistically and have a strategy for addressing it.
  2. B) want proof that the business will become profitable.
  3. C) want proof that the business will produce a reasonable return on their investment.
  4. D) All of the above

Answer:  D

Diff: 1             Page Ref: 112

AACSB:  Communication

 

28) ________ is an entrepreneur’s best insurance against launching a business destined to fail or mismanaging a potentially successful company.

  1. A) Bankrolling the business with plenty of startup capital
  2. B) Creating a solid business plan
  3. C) Spending lots of money on marketing and advertising
  4. D) Hiring a team of accountants and attorneys as advisors

Answer:  B

Diff: 2             Page Ref: 112

AACSB:  Reflective Thinking

29) Which of the following is true regarding the process of building a business plan?

  1. A) It allows an entrepreneur to replace “I think” with “I know” and to make mistakes on paper, which is cheaper than making them in reality.
  2. B) It reduces the risk and uncertainty of launching a company by “teaching” the entrepreneur more about the industry, the market and the proposed venture.
  3. C) It requires an entrepreneur to subject the business idea to a more objective and critical evaluation.
  4. D) All of the above

Answer:  D

Diff: 2             Page Ref: 112

AACSB:  Analytic Skills

 

30) Which of the following is true about the preparation of a business plan?

  1. A) The format should follow a “cookie-cutter” approach to ensure uniformity and consistency with others and to promote ease of understanding.
  2. B) The elements of the plan may be standard, but the content should reflect the unique aspects of the business and the excitement of the entrepreneur.
  3. C) The plan should cover every standard element in great detail and be at least 100 pages long to prove to potential lenders and investors that the entrepreneur has studied the business and the market opportunity.
  4. D) Entrepreneur should avoid seeking the advice of professionals, such as accountants, business professors, and attorneys.

Answer:  B

Diff: 2             Page Ref: 112

AACSB:  Communication

 

 

31) Ideally, a business plan should range from ________ pages in length.

  1. A) 10 to 20
  2. B) 25 to 40
  3. C) 50 to 70
  4. D) 75 to 100

Answer:  B

Diff: 2             Page Ref: 112

AACSB:  Communication

 

32) The ________ is also known as the “elevator pitch” and is written last, but is included as the first part of the business plan; it should summarize all the relevant points in about two pages.

  1. A) loan proposal
  2. B) business history
  3. C) business profile
  4. D) executive summary

Answer:  D

Diff: 1             Page Ref: 114

AACSB:  Communication

 

33) The executive summary section of the business plan:

  1. A) should be a concise summary of the business venture.
  2. B) should be no more than two pages long.
  3. C) must capture the reader’s attention and entice her to read the rest of the plan.
  4. D) All of the above

Answer:  D

Diff: 1             Page Ref: 114

34) The executive summary section of the business plan:

  1. A) is the last section of the plan but should be the first part written.
  2. B) should be no more than 8 or 10 pages long.
  3. C) should summarize the essence of the plan in a capsulated form and should capture the reader’s attention.
  4. D) All of the above

Answer:  C

Diff: 2             Page Ref: 114-115

AACSB:  Communication

 

35) The ________ serves as the “thesis statement” for the entire business plan and is the broadest expression of a company’s purpose and defines the direction in which it will move.

  1. A) executive summary
  2. B) mission statement
  3. C) company history
  4. D) marketing strategy

Answer:  B

Diff: 2             Page Ref: 115

AACSB:  Communication

 

 

36) The company history section of the business plan typically includes:

  1. A) significant financial and operational events.
  2. B) highlights of the key goals and objectives the company has accomplished in the past.
  3. C) a brief description of when and how the company was formed and how it has evolved over time.
  4. D) All of the above

Answer:  D

Diff: 2             Page Ref: 115

AACSB:  Communication

 

37) The ________ highlights significant financial and operational events in the company’s life and should concentrate on the company’s accomplishments.

  1. A) executive summary
  2. B) company history
  3. C) business and industry profile
  4. D) marketing strategy

Answer:  B

Diff: 2             Page Ref: 115

AACSB:  Communication

 

38) Issues such as market size, growth trends, ease of market entry and exit, the presence of cyclical or seasonal sales trends, and the competitive dynamics of an industry appear in the ________ section of the business plan.

  1. A) executive summary
  2. B) company history
  3. C) business and industry profile
  4. D) marketing strategy

Answer:  C

Diff: 2             Page Ref: 115

AACSB:  Communication

39) The ________ acquaints lenders and investors with the nature of the business and the general goals and objectives of the company.

  1. A) executive summary
  2. B) company history
  3. C) business and industry profile
  4. D) marketing strategy

Answer:  C

Diff: 2             Page Ref: 115

AACSB:  Communication

 

 

40) ________ are broad, long-range statements of what a company plans to achieve in the future that guide its overall direction and addresses the question, “Why am I in business?”

  1. A) Goals
  2. B) Strategies
  3. C) Objectives
  4. D) Key performance factors

Answer:  A

Diff: 1             Page Ref: 116

AACSB:  Communication

 

41) ________ are short-term, specific targets which are attainable, measurable, and controllable.

  1. A) Objectives
  2. B) Policies
  3. C) Goals
  4. D) Standard operating procedures

Answer:  A

Diff: 1             Page Ref: 116

AACSB:  Communication

 

42) The section that describes “how to get there” and describes a competitive edge that sets the business apart is referred to as the:

  1. A) business strategy.
  2. B) executive summary.
  3. C) industry profile.
  4. D) vision statement.

Answer:  A

Diff: 2             Page Ref: 116

AACSB:  Communication

 

43) In the business strategy section of the business plan, the entrepreneur should explain to investors:

  1. A) significant financial and operational events in the life of the company.
  2. B) how she intends to accomplish the company’s goals and objectives.
  3. C) the nature and characteristics of the target market.
  4. D) All of the above

Answer:  B

Diff: 2             Page Ref: 116

AACSB:  Communication

 

44) Which of the following would be included in the description of the product or service section of the business plan?

  1. A) The position of the product in the product life cycle
  2. B) A summary of any patents, copyrights, or trademarks protecting the product or service
  3. C) A description of the features and the benefits customers get by purchasing the company’s products or services
  4. D) All of the above

Answer:  D

Diff: 1             Page Ref: 117

AACSB:  Communication

 

45) A ________ is a descriptive fact about a product or service; a ________ is what the customer gains from that characteristic.

  1. A) feature; benefit
  2. B) feature; trait
  3. C) benefit; feature
  4. D) benefit; trait

Answer:  A

Diff: 1             Page Ref: 117

AACSB:  Communication

 

46) What is the lesson to be learned about writing a business plan from Leo Burnett’s statement, “Don’t tell people how good you make the goods; tell them how good your goods make them?”

  1. A) The plan should emphasize the features of the company’s products and services rather than their benefits.
  2. B) The plan should describe how the business will transform tangible product or service features into important but often intangible customer benefits.
  3. C) The plan should recognize that advertising is a waste of money for startup companies.
  4. D) The plan should focus on developing sales in a niche rather than across an entire industry.

Answer:  B

Diff: 2             Page Ref: 117

AACSB:  Communication

 

 

Refer to the following information to answer the questions below:

 

Describing her company’s revolutionary design for a bottle cap, Kyoto says, “It has a special locking mechanism that you know is engaged when a red panel is showing through this little window on top of the cap. If you want to keep unauthorized handsfor instance, those of childrenfrom opening the bottle, you engage the locking mechanism.  Unlike other childproof caps, however, this design does not frustrate adults who might have arthritis and elderly people whose grip may not be as strong as it once was.” Removing the cap from the bottle in no time with just a few turns, Kyoto says, “They can open the cap quite easily by disengaging the locking mechanism this way … see? You get the safety of a childproof cap without the problems most adults have getting them off!”

 

47) The special locking mechanism on Kyoto’s new cap is a ________ of the product.

  1. A) feature
  2. B) unique selling proposition
  3. C) benefit
  4. D) All of the above

Answer:  A

Diff: 2             Page Ref: 117

AACSB:  Communication

48) The fact that with Kyoto’s new cap “you get the safety of a childproof cap without the problems most adults have getting them off” is a ________ of the product.

  1. A) feature
  2. B) trait
  3. C) benefit
  4. D) attribute

Answer:  C

Diff: 2             Page Ref: 117

AACSB:  Communication

 

49) Which of the following would be considered a benefit of Kyoto’s new cap?

  1. A) The special locking mechanism
  2. B) The red panel showing through the little window on top of the cap signaling that the locking mechanism is engaged
  3. C) The fact that you get the safety of a childproof cap without the problems most adults have getting them off
  4. D) All of the above

Answer:  C

Diff: 2             Page Ref: 117

AACSB:  Communication

 

 

50) Which of the following questions will probably not be addressed in the marketing strategy section of the business plan?

  1. A) Who are my target customers, what are their characteristics, and how many are in my company’s trading area?
  2. B) What, why, and when do my target customers buy?
  3. C) What exit policy do I have in place for my investors?
  4. D) How should I seek to position my company in its market(s)?

Answer:  C

Diff: 2             Page Ref: 117-118

AACSB:  Analytic Skills

 

51) When formulating a marketing strategy, small companies usually are most successful when they:

  1. A) try to be “everything to everybody.”
  2. B) focus on a particular market niche where they can excel at meeting customers’ needs and wants.
  3. C) compete with their larger rivals on the basis on price.
  4. D) discover what the market leader is doing and pursue a “me-too” strategy that imitates the leader.

Answer:  B

Diff: 2             Page Ref: 117-118

AACSB:  Analytic Skills

52) Defining the company’s target market, its characteristics, and its potential is part of which element of the business plan?

  1. A) Description of the product or service
  2. B) Marketing strategy
  3. C) Competitor analysis
  4. D) Business and industry profile

Answer:  B

Diff: 1             Page Ref: 118

AACSB:  Analytic Skills

 

53) Proving that a profitable market exists involves:

  1. A) proving that customers in the marketplace need or want the good or service and are willing to pay for it.
  2. B) documenting claims about market size and growth rates with as much factual information as possible.
  3. C) making claims such as “This market is so big that if we get just 1 percent of it, we’ll be profitable within 6 months.”
  4. D) A and B only

Answer:  D

Diff: 2             Page Ref: 118

AACSB:  Analytic Skills

 

 

54) An explanation of how the product will be distributed is contained within the ________ section of the business plan.

  1. A) description of the product line
  2. B) marketing strategy
  3. C) competitive analysis
  4. D) business strategy

Answer:  B

Diff: 1             Page Ref: 118

AACSB:  Analytic Skills

 

55) When creating financial forecasts in a business plan for a proposed venture, an entrepreneur should:

  1. A) be sure that all forecasts are realistic.
  2. B) list all previous loans which are in default.
  3. C) avoid including a statement of the assumptions on which financial projections are based.
  4. D) present an overly optimistic view of what is ahead for the business.

Answer:  A

Diff: 2             Page Ref: 119, 121

AACSB:  Ethical Reasoning

 

56) The focus of the competitor analysis section of the business plan is on:

  1. A) demonstrating the existence of the market for your product.
  2. B) showing that your experienced management team is better than your competitors’.
  3. C) demonstrating your company’s advantage over competitors.
  4. D) describing your overall product line.

Answer:  C

Diff: 1             Page Ref: 119

AACSB:  Analytic Skills

57) The plan of operation of the company within the business plan should detail:

  1. A) the experience of the management team.
  2. B) the production process for the product being sold.
  3. C) plans for keeping the important officers in place with the company.
  4. D) the description of the management team.

Answer:  C

Diff: 2             Page Ref: 120

AACSB:  Analytic Skills

 

58) The organization chart is described in which section of the business plan?

  1. A) The plan of operation
  2. B) The resumes of the officers/owners
  3. C) Description of the management team
  4. D) The executive summary

Answer:  A

Diff: 2             Page Ref: 120

AACSB:  Communication

 

 

59) The form of ownership under which a company is organized appears in which section of the business plan?

  1. A) Marketing strategy
  2. B) Business strategy
  3. C) Plan of operation
  4. D) Mission statement

Answer:  C

Diff: 2             Page Ref: 121

AACSB:  Analytic Skills

 

60) The loan proposal section of a business plan should include all but which of the following?

  1. A) A general request for funds without stating a specific dollar amount
  2. B) A repayment schedule and exit strategy
  3. C) A timetable for implementing the plan
  4. D) The purpose of the financing

Answer:  A

Diff: 2             Page Ref: 121-122

AACSB:  Communication

 

61) Which of the following statements about the preparation of a business plan is/are not true?

  1. A) Grammatical and spelling errors in a business plan don’t really count since potential lenders and investors judge the quality of a plan by its content.
  2. B) The business plan should be “crisp,” long enough to say what it should but not so long that it is a chore to read.
  3. C) Always include cash flow projections for the venture, in addition to projected income statements and balance sheets.
  4. D) Always tell the truth.

Answer:  A

Diff: 1             Page Ref: 122

AACSB:  Communication

62) The criteria lenders and investors use to evaluate the credit worthiness of entrepreneurs that are seeking financingincluding capital, capacity, collateral, character, and conditionsare referred to as:

  1. A) components of the business plans.
  2. B) aspects of financial strategy.
  3. C) the five C’s of credit.
  4. D) interesting considerations.

Answer:  C

Diff: 1             Page Ref: 122-123

AACSB:  Analytic Skills

 

 

63) A synonym for capacity is:

  1. A) cash flow.
  2. B) equipment.
  3. C) investors.
  4. D) obligations.

Answer:  A

Diff: 1             Page Ref: 123

AACSB:  Analytic Skills

 

64) The most common reason cited by banks for rejecting small business loans is:

  1. A) poor credit history.
  2. B) undercapitalization and too much debt.
  3. C) lack of collateral.
  4. D) insufficient cash flow or poor profitability.

Answer:  B

Diff: 2             Page Ref: 123

AACSB:  Analytic Skills

 

65) Carly will be presenting her business plan to potential lenders and investors soon.  Which of the following is not one of the suggested helpful tips for presenting the business plan?

  1. A) She should demonstrate enthusiasm for the venture but avoid becoming overemotional about it.
  2. B) She should use visual aids to make it easier for people to follow her presentation.
  3. C) She should avoid getting caught up in too much detail in early meetings with potential lenders and investors.
  4. D) She should use a great deal of technological jargon to impress the audience with her knowledge.

Answer:  D

Diff: 2             Page Ref: 124-125

AACSB:  Communication

 

66) After presenting her business plan to a group of potential lenders and investors, an entrepreneur should:

  1. A) sit back and wait to hear from those who might be interested in the venture.
  2. B) conduct credit checks on all potential lenders and investors.
  3. C) take a proactive approach by following up with every potential lender and investor to whom she makes a presentation.
  4. D) None of the above

Answer:  C

Diff: 2             Page Ref: 125

AACSB:  Communication

67) A feasibility analysis is the process of determining whether an entrepreneur’s idea is a viable foundation for creating a successful business.

Answer:  TRUE

Diff: 1             Page Ref: 123

 

 

68) Porter’s five forces model only considers direct competitors within a single industry.

Answer:  FALSE

Diff: 2             Page Ref: 102

AACSB:  Analytic Skills

 

69) The five forces model would assess economies of scale factors in the “threat of new entrants” portion of the model.

Answer:  TRUE

Diff: 3             Page Ref: 103

AACSB:  Analytic Skills

 

70) Generally, an industry is more attractive when quality substitute products are not readily available, the prices of substitute products are higher, and buyers’ costs of switching products is high.

Answer:  TRUE

Diff: 3             Page Ref: 104

AACSB:  Analytic Skills

 

71) A product or service feasibility analysis determines the degree to which a product or service idea appeals to potential customers and identifies the necessary resources.

Answer:  TRUE

Diff: 2             Page Ref: 106

AACSB:  Analytic Skills

 

72) Primary research is information that has already been complied and is available for use, often at very reasonable costs or sometimes at no cost to the entrepreneur.

Answer:  FALSE

Diff: 1             Page Ref: 106

AACSB:  Analytic Skills

 

73) Capital requirements, estimate earnings, and return on investment are three aspects of the financial feasibility analysis.

Answer:  TRUE

Diff: 2             Page Ref: 109

AACSB:  Analytic Skills

 

74) A business plan is a written summary of an entrepreneur’s proposed venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities.

Answer:  TRUE

Diff: 1             Page Ref: 110

AACSB:  Communication

 

75) The primary purpose of building a business plan is to raise capital.

Answer:  FALSE

Diff: 2             Page Ref: 110

AACSB:  Analytic Skills

76) A well-prepared business plan forces an entrepreneur to assess the venture’s chances of success more objectively.

Answer:  TRUE

Diff: 1             Page Ref: 110

AACSB:  Analytic Skills

 

77) To get external financing, an entrepreneur’s business plan must pass the reality test, the competitive test, and the value test with potential lenders and investors.

Answer:  TRUE

Diff: 2             Page Ref: 110

AACSB:  Communication

 

78) The reality test that a business plan must pass in order to attract financing from lenders and investors involves proving that a market for the company’s product or service actually does exist, and that the company actually can build it for the cost estimates in the plan.

Answer:  TRUE

Diff: 1             Page Ref: 111

AACSB:  Analytic Skills

 

79) The competitive test that a business plan must pass in order to attract financing for lenders and investors involves proving to them that the venture offers a high probability of repayment or an attractive rate of return.

Answer:  FALSE

Diff: 3             Page Ref: 111

AACSB:  Analytic Skills

 

80) The value test that a business must pass in order to attract financing from lenders and investors involves proving to them that the venture offers a high probability of repayment or an attractive rate of return.

Answer:  TRUE

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

81) The data shows that writing a business plan increases the odds that a venture will successfully accomplish important tasksinitializing product development, obtaining inputs, starting marketing , talking to customers, and asking for external fundsas well as continue in business.

Answer:  TRUE

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

82) Although building a business plan does not guarantee an entrepreneur’s success, it does increase his or her chances of succeeding in business.

Answer:  TRUE

Diff: 1             Page Ref: 111

AACSB:  Analytic Skills

83) The “two-thirds rule” says that only two-thirds of the entrepreneurs with a sound new business venture will get financing, that they will get only two-thirds of what they need, and that it will take them two-thirds longer to get it than they anticipated.

Answer:  TRUE

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

84) An entrepreneur may find that the business plan indicated that the business is not viable.  This is another potential benefit of writing a business plan; this revelation occurred before the owner committed significant resources to the venture.

Answer:  TRUE

Diff: 2             Page Ref: 112

AACSB:  Analytic Skills

 

85) The real value in preparing a business plan is not so much in the plan itself as it is in the process the entrepreneur goes through to create the plan.

Answer:  TRUE

Diff: 2             Page Ref: 112

AACSB:  Analytic Skills

 

86) Potential lenders and investors believe that an entrepreneur who lacks the discipline to develop a good business plan likely lacks the discipline to run a business.

Answer:  TRUE

Diff: 1             Page Ref: 112

AACSB:  Analytic Skills

 

87) Because the entrepreneur is the driving force behind a business idea, he or she should also be the driving force behind the business plan.

Answer:  TRUE

Diff: 1             Page Ref: 112

AACSB:  Analytic Skills

 

88) Before presenting a business plan to potential lenders and investors, an entrepreneur must be well informed and well prepared.

Answer:  TRUE

Diff: 1             Page Ref: 112

AACSB:  Analytic Skills

 

89) A business plan should contain certain basic elements, but it should also be tailored to the individual company by emphasizing its particular personality and reflecting the entrepreneur’s excitement for the business opportunity.

Answer:  TRUE

Diff: 1             Page Ref: 112

AACSB:  Analytic Skills

 

 

90) The most effective business plans follow the “cookie cutter approach,” following the standard format most preferred by lenders and investors.

Answer:  FALSE

Diff: 2             Page Ref: 112

AACSB:  Analytic Skills

91) The ideal business plan should be at least 100 pages long to prove to potential lenders and investors that the entrepreneur has studied the business and the market opportunity sufficiently.

Answer:  FALSE

Diff: 2             Page Ref: 112

AACSB:  Communication

 

92) A table of contents that allows lenders to navigate a business plan easily is an important element of any business plan.

Answer:  TRUE

Diff: 1             Page Ref: 114

AACSB:  Communication

 

93) The executive summary serves as the thesis statement for the entire business plan.

Answer:  FALSE

Diff: 3             Page Ref: 114

AACSB:  Communication

 

94) The executive summary of a business plan should summarize all of the relevant points of the proposed venture and should be conciseno more than two pages.

Answer:  TRUE

Diff: 2             Page Ref: 114

AACSB:  Communication

 

95) The executive summary of a business plan should highlight significant financial and operational events.

Answer:  FALSE

Diff: 2             Page Ref: 114

AACSB:  Communication

 

96) The company’s mission statement expresses in words the entrepreneur’s vision for what her company is and what it is to become.

Answer:  TRUE

Diff: 1             Page Ref: 115

AACSB:  Communication

 

97) In the business and industry profile section of the business plan, the entrepreneur should provide information on the size of the market, growth trends, and the relative economic and competitive strength of the industry’s major players.

Answer:  TRUE

Diff: 2             Page Ref: 115

AACSB:  Communication

98) The business and industry profile section of the business plan should cover existing and anticipated profitability of firms in the targeted market segment and any significant entry or exit of firms.

Answer:  TRUE

Diff: 2             Page Ref: 115

AACSB:  Communication

99) In a business plan, both company goals and objectives should relate to the company’s mission.

Answer:  TRUE

Diff: 1             Page Ref: 116

AACSB:  Communication

 

100) Objectives are short-term, specific targets that the small company plans to accomplish.

Answer:  TRUE

Diff: 1             Page Ref: 116

AACSB:  Communication

 

101) To be meaningful, an objective must include a time frame for achievement.

Answer:  TRUE

Diff: 2             Page Ref: 116

AACSB:  Communication

 

102) The business strategy section of the business plan addresses the question of how the entrepreneur plans to achieve the mission, goals, and objectives he has established for his business venture.

Answer:  TRUE

Diff: 1             Page Ref: 116-117

AACSB:  Analytic Skills

 

103) An important theme of the business strategy section of the business plan is what makes the owner’s company original in the eyes of its target customers.

Answer:  TRUE

Diff: 2             Page Ref: 116

 

104) The safest strategy for an entrepreneur launching a new business to follow is a “me-too” strategycopying products, services, and the images of already successful businesses.

Answer:  FALSE

Diff: 2             Page Ref: 116

AACSB:  Analytic Skills

 

105) The section of the business plan that describes the company’s products or services should focus on how a business will transform the tangible features of its products or services into important but often intangible customer benefits.

Answer:  TRUE

Diff: 2             Page Ref: 117

AACSB:  Analytic Skills

106) A benefit is a descriptive fact about a product or service; a feature is what the customer gains from that product or service benefit.

Answer:  FALSE

Diff: 1             Page Ref: 117

AACSB:  Communication

 

107) When describing their products and services in their business plans, entrepreneurs must remember that customers buy the benefits from products and services, not the features.

Answer:  TRUE

Diff: 2             Page Ref: 117

AACSB:  Analytic Skills

108) An important goal of the “marketing strategy” section of the business plan is to prove that there is a real market for the proposed good or service.

Answer:  TRUE

Diff: 2             Page Ref: 117-118

AACSB:  Analytic Skills

 

109) Defining the company’s target market and its buying potential is one of the most important and most challenging parts of building a business plan.

Answer:  TRUE

Diff: 2             Page Ref: 117-118

AACSB:  Analytic Skills

 

110) Identifying a specific target market is not an essential part of creating a solid business plan for a small company.

Answer:  FALSE

Diff: 1             Page Ref: 118

AACSB:  Analytic Skills

 

111) The wise entrepreneur will indicate that there is no real competition for his new business venture, thereby increasing the likelihood that he will gain more interested investors.

Answer:  FALSE

Diff: 1             Page Ref: 118

AACSB:  Analytic Skills

 

112) A business plan that fails to assess a company’s competitors realistically makes the entrepreneur appear to be poorly prepared.

Answer:  TRUE

Diff: 1             Page Ref: 119

AACSB:  Analytic Skills

 

113) Because gathering information on competitors’ products or services, strategies, and market share is so difficult, most lenders and investors see the competitor analysis section of the business plan as optional.

Answer:  FALSE

Diff: 2             Page Ref: 119

AACSB:  Analytic Skills

114) The most important factor in the success of a business venture is the quality of its management, and financial officers and investors weigh heavily the ability and experience of the firm’s managers in their financing decisions.

Answer:  TRUE

Diff: 2             Page Ref: 120

AACSB:  Analytic Skills

 

115) The business plan should include the resumes of anyone with more than a 5 percent ownership interest in the company.

Answer:  FALSE

Diff: 2             Page Ref: 120

AACSB:  Communication

116) Lenders and investors prefer experienced managers when they consider financing a business venture.

Answer:  TRUE

Diff: 1             Page Ref: 120

AACSB:  Communication

 

117) The plan of operation section of the business plan should address how the business plans to retain key managers and employees.

Answer:  TRUE

Diff: 2             Page Ref: 120

AACSB:  Analytic Skills

 

118) The business plan should include an existing firm’s past three years of financial statements as well as its projected statements.

Answer:  TRUE

Diff: 2             Page Ref: 121

AACSB:  Analytic Skills

 

119) An entrepreneur should prepare a single set of “most likely” financial forecasts for one year into the future as part of the business plan.

Answer:  FALSE

Diff: 2             Page Ref: 121

AACSB:  Ethical Reasoning

 

120) Essential pieces of information for potential lenders and investors include the assumptions the entrepreneur uses to derive the financial forecasts and projections in the business plan.

Answer:  TRUE

Diff: 1             Page Ref: 121

AACSB:  Analytic Skills

 

121) Entrepreneurs should artificially inflate the amount of a loan request and expect the loan officer to “talk them down.”

Answer:  FALSE

Diff: 1             Page Ref: 121

AACSB:  Ethical Reasoning

122) A lender’s primary concern in granting a loan is reassurance that the applicant will repay it, whereas an investor’s primary concern is earning a satisfactory rate of return.

Answer:  TRUE

Diff: 2             Page Ref: 121-122

AACSB:  Communication

 

123) The loan proposal portion of the business plan should include a realistic timetable for repayment or for investors to exit.

Answer:  TRUE

Diff: 2             Page Ref: 122

AACSB:  Communication

 

124) The entrepreneur’s request for funds in the business plan should be specific and detailed.

Answer:  TRUE

Diff: 2             Page Ref: 122

AACSB:  Ethical Reasoning

125) Spelling and grammatical errors in a business plan don’t really matter; potential lenders and investors look past them at the content of the plan.

Answer:  FALSE

Diff: 1             Page Ref: 122

AACSB:  Communication

 

126) Potential lenders and investors expect entrepreneurs to exaggerate the truth in their business plans, so telling the truth in the plan is really not important.

Answer:  FALSE

Diff: 2             Page Ref: 122

AACSB:  Ethical Reasoning

 

127) The quality of the entrepreneur’s business plan determines the first impression potential lenders and investors have of the company.

Answer:  TRUE

Diff: 1             Page Ref: 121-122

AACSB:  Communication

 

128) The majority of loans banks make to small business startups are unsecured loans.

Answer:  FALSE

Diff: 2             Page Ref: 122-123

AACSB:  Analytic Skills

 

129) The most common reasons banks give for rejecting small business loan applications are undercapitalization and too much debt.

Answer:  TRUE

Diff: 2             Page Ref: 123

AACSB:  Analytic Skills

 

 

130) Cash flow projections are not an essential part of a business plan as long as the entrepreneur provides accurate forecasts of the venture’s profits.

Answer:  FALSE

Diff: 2             Page Ref: 123, 126

AACSB:  Communication

 

131) The most common reason banks give for rejecting small business loan applications is the entrepreneur’s poor credit history.

Answer:  FALSE

Diff: 2             Page Ref: 123

AACSB:  Analytic Skills

 

132) The “C” of the 5 C’s of Credit that is synonymous with cash flow is capital.

Answer:  FALSE

Diff: 2             Page Ref: 123

AACSB:  Analytic Skills

 

133) Most loans banks make to startup businesses are secured not by collateral but by the character of the entrepreneur.

Answer:  FALSE

Diff: 3             Page Ref: 123

AACSB:  Reflective Thinking

134) The entrepreneur’s “character” (even though it is an intangible factor) and the quality of the presentation are important factors in evaluating a loan proposal.

Answer:  TRUE

Diff: 2             Page Ref: 123

AACSB:  Ethical Reasoning

 

135) The higher a small business scores on the 5 C’s of credit, the greater its chances will be of receiving a loan.

Answer:  TRUE

Diff: 1             Page Ref: 123

AACSB:  Analytic Skills

 

136) After presenting her business plan to a group of potential lenders and investors, an entrepreneur should sit back and wait to hear from those who might be interested in the venture.

Answer:  FALSE

Diff: 2             Page Ref: 125

AACSB:  Communication

 

137) When presenting a business plan to a group of potential lenders and investors, an entrepreneur should cover every detail in the plan, striving to answer every question his audience might have.

Answer:  FALSE

Diff: 2             Page Ref: 125

AACSB:  Communication

 

138) To make a business plan more attractive, an entrepreneur should include a potential exit strategy as a way to “cash out” for investors.

Answer:  TRUE

Diff: 1             Page Ref: 126, Hands On

AACSB:  Communication

 

139) What are some of the most important questions a feasibility analysis answers and what model may be of value in this process?

Answer:  Questions the feasibility plan address include:

∙     How large is the industry?

∙     How fast is the industry growing?

∙     Is the industry as a whole profitable?

∙     Is the industry characterized by high profit margins or razor-thin margins?

∙     How essential are its products or services to customers?

∙     What trends are shaping the industry’s future?

∙     What threats does the industry face?

∙     What opportunities does the industry face?

∙     How crowded is the industry?

∙     How intense is the level of competition in the industry?

∙     Is the industry young, mature, or somewhere in between?

Porter’s five forces model assesses the power of potential entrants, suppliers, buyers, substitutes and the level of rivalry within an industry.  This model may be valuable to provide insight regarding potential future profitability within the industry.

Diff: 3             Page Ref: 101-104

AACSB:  Reflective Thinking

 

140) Explain at least two functions or purposes of preparing a business plan.

Answer:  There are a number of reasons an entrepreneur should develop a business plan.  First and most importantly, the business plan serves as a guide to company operations by charting its future course and devising a strategy for following it.  It plans a battery of tools to help the entrepreneur lead the company and it provides direction for managers and employees.  It gives everyone a target to shoot for and it provides a yardstick for measuring the actual performance against those targets.

A second function of the business plan is to attract lenders and investors.  A quality business plan will assure potential lenders and investors that the business venture will be able to repay loans and produce an attractive rate of return.  Building the business plan requires that the entrepreneur evaluate his or her business realistically and objectively.

Sometimes, the greatest service a business plan provides an entrepreneur is the realization that it just won’t work.  This benefits the entrepreneur if he or she is able to make this determination prior to committing extensive resources to the venture.  In other cases, it reveals important problems to overcome before launching the business.

The real value in preparing a business plan is not so much in the plan itself as it is in the process an entrepreneur goes through to create the plan.  What he or she learns about the company, its target market, its financial requirements, competition, and other factors can be essential to making the venture a success.  In other words, developing a business plan reduces the risk and uncertainty in launching a company by allowing the entrepreneur to make mistakes on paper rather than in reality and to learn to do things the right way.

Diff: 3             Page Ref: 109-110

AACSB:  Reflective Thinking

 

141) To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors.  List and briefly explain all three.

Answer:

∙    Reality TestYou must prove that a market for your product or service really does exist.  Focuses on industry attractiveness, market niches, potential customers, market size, degree of competition, and similar factors.  These factors point to the potential for a strong demand for the business idea.

 

∙     Competitive TestEvaluate your company’s relative position to its key competitors.  How do your company’s strengths and weaknesses compare to those of the competition?

 

∙     Value TestYou must prove to potential lenders and investors that your business offers a high probability of repayment or an attractive rate of return.

Diff: 2             Page Ref: 111

AACSB:  Analytic Skills

 

 

142) “Sometimes the greatest service a business plan provides an entrepreneur is the realization that the business venture just won’t succeed.” Explain this statement.

Answer:  The business plan is the entrepreneur’s best insurance against launching a business destined to fail or mismanaging a potentially successful business.  Creating a plan also forces him/her to consider both the positive and negative aspects of the business, and to subject these ideas to a reality test.  This process allows the entrepreneur to replace the “I thinks” with more “I knows.”  To expose flaws and make mistakes on paper is much cheaper than committing significant resources to a business. It reduces the risk and uncertainty in launching a business by teaching the entrepreneur to do it the right way.

Diff: 2             Page Ref: 112

AACSB:  Reflective Thinking

 

143) You have been asked to explain the basic elements of a sound business plan to your friend, who is considering beginning a new business.  What elements should you recommend he include in his business plan?

Answer:  Although a business plan should be tailored to fit company needs, it should include these basic components:

∙     Executive summaryconcise summary of all the relevant points of the business venture; brief synopsis of the entire plan; must catch the reader’s attention.

∙     Mission statementexpresses the vision for what the company is and what it is to become as broad expression of company’s purpose and direction.

∙     Company historyhighlights significant financial and operational events in the company’s life; describes formation, evolution, and vision for the future.

∙     Business and industry profileacquaints potential lenders and investors with the industry in which the company operates; includes summary of goals and objectives.

∙     Business strategyexplain how you can meet and beat the competition; addresses the question of how to accomplish your goals and objectives.

∙     Description of products/servicesdescribe product line, product’s position in the product life cycle, and any patents, trademarks, or copyrights; define features and benefits of products or services.

∙     Marketing strategyprove that there is a real market for the proposed good or service; describe target market and positioning, advertising, distribution, and pricing.

∙     Competitor analysiscompare your strengths and weaknesses with those of your competition, images in the marketplace, level of success, etc.

∙     Description of the management teamdescribe qualifications of business officers, key directors, and any person with at least 20 percent ownership in the company; lenders and investors prefer experienced managers when making funding decisions.

∙     Plan of operationconstruct organization chart; explain steps taken to encourage important officers to remain with the company.

∙     Forecasted or pro forma financial statementsinclude financial statements from the past  three years (if an existing business) and pro forma for the next year (existing or new), including statement of cash flows; should develop realistic forecasts and a statement of the assumptions on which the financial projections are based.

∙     Loan or investment proposalstate the purpose of the financing, the amount requested, and either the plans for repayment (lenders) or an attractive exit strategy (investors).

Diff: 3             Page Ref: 112-122

AACSB:  Reflective Thinking

 

144) Explain the concept of a company’s mission.  What are goals?  What are the objectives?  How are the three concepts related?

Answer:

∙     A mission statement expresses in words an entrepreneur’s vision of what the company is and what it become.  It is the broadest expression of the company’s purpose and defines the direction in which it will move.

∙     Goals are broad statements of what a company plans to achieve.  They guide its overall direction and define the basis of its business.

∙     Objectives are short-term, specific performance targets that are attainable, measurable, and controllable.

∙     Every objective should reflect some general business goal and include a technique for measuring progress towards its accomplishment.  To be meaningful, an objective must have a time frame for achievement.  Both goals and objectives should relate to the company’s mission statement.

Diff: 2             Page Ref: 116

AACSB:  Reflective Thinking

 

145) The marketing strategy section is a vital part of any business plan.  What issues should it address?

Answer:  The issues the marketing plan should address are the answers to these questions?

∙     Who are my target customers and what are their demographics?

∙     Where do they live, work, and shop?

∙     How many potential customers are in my trading area?

∙     Why do they buy and what needs/wants drive their purchase decisions?

∙     How can my business meet those needs/wants better than my competitors?  Knowing my customers needs, wants, and habits, what should be the basis for differentiating my business in their minds?

Diff: 2             Page Ref: 117-118

AACSB:  Analytic Skills

 

146) The financial plan within a business plan is of interest to potential lenders and investors.  Explain the contents of this section and describe what potential lenders and investors look for.

Answer:  For an existing business, lenders and investors use past financial statements to judge the health of the company and its ability to repay the loan and generate adequate returns.  Ideally these statements should be audited or at least reviewed by a certified public accountant.  Pro forma income statements, balance sheets and cash flow statements for the coming year and at least three more accounting periods should also be preparedcovering pessimistic, most likely and optimistic estimates.  A breakeven and ratio analysis should also be done.

 

It is also important to include a statement of assumptions on which these financial projections were based because potential lenders and investors will view them as being more credible than a single set of overly optimistic figures.  Lenders and investors also look for honest, realistic forecasts and compare them to industry standards.

Diff: 2             Page Ref: 121-122

AACSB:  Communication

 

147) What tips would you offer an entrepreneur who is scheduled to present her business plan to a group of potential lenders and investors in one week?

Answer:  As with all presentations, entrepreneurs should be informed and well prepared beforehand.  The following tips might also be helpful:

∙     Demonstrate enthusiasm, but don’t be overemotional.

∙     “Hook” investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them.

∙     Use visual aids.

∙     Hit the highlights; leave details to questions and future meetings.

∙     Avoid the use of technological terms.

∙     Close by reinforcing the nature of the opportunity and relating benefits to investors.

∙     Be prepared for questions.

∙     Follow up with every investor you make a presentation to.

Diff: 3             Page Ref: 124-125

AACSB:  Communication

 

148) When making a loan to a small business, bankers tend to look for the 5 Cs.  List and explain each of the 5 Cs of credit.

Answer:  Bankers score the small business in terms of the five Cs.  The greater the score, the higher probability that the small business will receive the loan.

∙     CapitalA small business must have a stable capital base before a bank will grant a loan.  The most common reasons that banks give for rejecting loans are undercapitalization or too much debt.  The bank expects the small business to have an equity base of investment by the owner(s) that will help support the venture during times of financial stress.

∙     CapacityThe bank must be convinced that the small business has sufficient cash flow to meet its regular financial obligations and to repay the bank loan.  The bank expects the applicant to pass the test for liquidity, especially for short-term loans.

∙     CollateralCollateral is the bank’s security for repayment of the loan.  If the company defaults on the loan, the bank has the right to sell the collateral and use the proceeds to satisfy the loan.  Banks view the owner’s willingness to pledge collateral (personal or business assets) as an indication of dedication to making the venture successful.

∙     CharacterThe loan officer’s evaluations of the owner’s character (honesty, competence, polish, determination, intelligence, and ability) play a critical role in the banker’s decision.  The applicant can possibly enhance the officer’s view of his character with a thorough business plan and polished presentation.

∙     ConditionsThe banks consider potential growth in the market, competition, location, form of ownership, loan purpose, and the state of the overall economy before making a decision on the loan.  The owner should provide relevant information pertaining to these factors in the business plan.

Diff: 3             Page Ref: 122-123

AACSB:  Analytic Skills

 

149) Select one of the following”business plan mistakes” and discuss three techniques that may help avoid this potentially fatal error.

  1. Failure to explain the business opportunity clearly
  2. Unrealistic projections
  3. Overly simplistic assumptions
  4. Weak competitor analysis
  5. Failure to describe the company’s competitive advantage
  6. A sloppy plan that contains errors
  7. Exaggerating the qualifications of the management team
  8. A plan that is incomplete

Answer:  Expect students to provide three tactics from the text to avoid making the selected error as described in the “Don’t Make These Business Plan Mistakes” table.

Diff: 3             Page Ref: 124, Table 4.2

AACSB:  Reflective Thinking


Mini-Case 4-1:The Need For A Plan

 

Twenty-three year-old Shirley Halperin had just been kicked off the staff of her college newspaper, when she launched Smug magazine with just $1,700 in personal savings, $7,000 in donations, and a $10,000 loan, co-signed by her father Eli Halperin who helped her get a line of credit.

 

The ten-issues-a-year publication is targeted at music fans in the 16-to-30-year-old age group with well-written stories “about musicians that matter plus bands you haven’t even heard of yet,” says Halperin. It covers the alternative-music scene between the musical meccas of New York City and Philadelphia. Her enthusiasm for her subject has spilled over to the writers, editors, designers and photographers who now total 30, and continue to contribute without pay. They donate their talents for such incentives as by-lines, photo credits, college internships, job experience, free tickets to concerts, free CDs, and other things. Halperin cuts costs whenever possible and her frugality enables her to keep start-up costs low she runs Smug out of her Gramercy Park apartment with two roommates.

 

Smug charges $1,000 per ad. Competitive publications like Village Voice, Spin, and the Aquarian Weekly charge between $7,000-$29,700 for a similar ad. Halperin says that her budget ads are designed specifically for smaller bands with a regional following that have not hit the big time yet. “It doesn’t make sense for baby bands to advertise in the bigger publications until awareness of them rises,” she says.

 

In less than 18 months, Smug’s circulation went from 5,000 to 20,000, its readership expanded to 60,000 and advertising revenues climbed from zero to $15,000 per month. After publishing its fourth issue, Smug beat out its larger, more established competitors to win a prestigious local music award. Readers rave about the quality of the magazine’s writing, its design and photography; however, Smug’s continued success is not guaranteed. Half of all magazines fail the first year, and those that don’t take five years to break-even. If Smug succeeds, it can look forward to attractive profit margins of between 15-30 percent.

 

Halperin is very good at knowing what music people are listening to and what people want to read about; however, she is quick to admit that finance is not one of her strong points. Another concern is cash flow; at the end of its first year, $7,500 of Smug’s and $70,000 in revenues were still in accounts receivables. Although she started Smug without a business plan, she now realizes she needs one to raise the $500,000 necessary to take the magazine “to the next level.” She needs the money to upgrade the newsprint to semi-glossy paper stock, and most importantly, to pay her staff. She wants the plan to reflect her business philosophy: “Every year circulation should go up, your pages should go up, and your ad revenues should go up.”

 

 

150) Write a memo to Shirley Halperin explaining what topics she should include in her business plan.

Answer:  In their memos, the students should somewhat incorporate the uniqueness of each business plan as well as the importance of Ms. Halperin’s personal input into the process. Suggested topics should include the following elements:

∙     Executive Summary

∙     Mission Statement

∙     Company History

∙     Business and Industry Profile

∙     Business Strategy

∙     Description of Products/Service

∙     Marketing Strategy

∙     Competitor Analysis

∙     Description of Management Team

∙     Plan of Operation

∙     Forecasted or Pro Forma Financial Statements

∙     Loan of Investment Proposal

Diff: 3             Page Ref: 112-122

AACSB:  Reflective Thinking

 

151) What advice would you offer Halperin when she begins to use her business plan to locate capital?

Answer:  The students should stress the importance of having the business plan as “perfect as possible” when she uses the business plan to obtain capital. It is also important that students understand the importance of a business plan that is aesthetically pleasing and free from errorsthe plan should have the look of a polished professional presentation parcel that details the company’s past, present, and future goals. The following guidelines should be recommended as Ms. Halperin tries to locate potential investors for her enterprise:

∙     Be enthusiastic, not emotional

∙     Gain investors attention up front

∙     Use creative visual aides

∙     Hit the highlights

∙     Don’t get too technical

∙     Close by reinforcing

∙     Be prepared for questions

∙     Follow up with each potential investor

 

In addition to the “showmanship” necessary for a good presentation, Ms. Halperin needs to have solid information concerning the 5 C’s of credit, as this will ultimately be used to judge her worthiness for the necessary loan.

Diff: 3             Page Ref: 121-122

AACSB:  Reflective Thinking

 

 

152) If Shirley Halperin approached you as a potential investor, what questions would you ask her? Explain. Would your answer change the content of the memo in question #1 above? If so, how?

Answer:  Several concerns should be addressed by the students. For example, how will the change from an all-volunteer staff with low advertising rates and minimal overhead transition smoothly to “the next level?” How is Ms. Halperin qualified to go to the “next level?” Why are accounts rewarded at $7,500?  How does this affect the magazine currently? Are Ms. Halperin’s growth projections feasible? If so, how?  Has she conducted any type of market research to support her beliefs? These questions should all be covered by the suggestions for topics in # 1.

 

Source:  Adapted from Alessandra Bianchi, “What’s Love Got to Do With It?” Inc., May 1996, pp. 77-85. Essentials of Entrepreneurship and Small Business Management 2nd Edition

Diff: 3             Page Ref: 121-122

AACSB:  Reflective Thinking

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