1. Entrepreneurship is the process of creating and managing a business to achieve desired objectives.

Transcription

1 Chapter 05 Small Business, Entrepreneurship, and Franchising / Questions 1. Entrepreneurship is the process of creating and managing a business to achieve desired objectives. 2. The entrepreneurship movement is declining because of technological advances. 3. One of the most significant drawbacks of small businesses is their inability to innovate and to bring significant benefits to customers. 4. The Small Business Administration (SBA) is an organization formed and managed by owners of small businesses. 5. Retailing attracts entrepreneurs because gaining experience and exposure in retailing is relatively easy. 6. Industries such as wholesaling, services, and manufacturing are unattractive to entrepreneurs because these fields tend to be relatively difficult to enter and require high initial financing. 7. Small firms may be able to avoid competition from larger firms by focusing on narrow market niches. 8. Small businesses often require more money to start and maintain than do large ones. Source: M Business 5 th edition 1

2 9. Small businesses have a high success rate. 10. The principal immediate threats to small and mid-sized businesses include rising inflation, energy and other supply shortages or cost escalations, and excessive household and/or corporate debt. 11. When businesses suffer from seasonal variations in sales, they are more prone to undercapitalization. 12. To support the growth of a small business, owners must be prepared to give up a certain amount of direct authority. 13. A good business plan should be able to limit the business's flexibility and decision making ability. 14. A business plan must be revised periodically to ensure that a firm's goals and strategies adapt to changes in the environment. 15. In debt financing, entrepreneurs reinvest profits into the business or simply do not draw a full salary. 16. Intrapreneurs are persons who agree to provide some funds for a new business in exchange for an ownership interest or stock. 17. Raising money through venture capitalists requires a small-business owner to share the profits of the business and sometimes control, as well with the investors. 18. Banks are the main suppliers of debt financing to small businesses. Source: M Business 5 th edition 2

3 19. A drawback in franchising is the need for franchisees to strictly adhere to standardized operations. 20. Industries such as travel, financial planning, and health care will lose their market potential as baby boomers age. 21. Working remotely is more acceptable to the baby boomers segment of population than the millennials. 22. In the recent years, free trade agreements and trade alliances are helping to create an environment in which small businesses have fewer regulatory and legal barriers. 23. Big businesses can be effectively made to act small by making their operating units function more like independent small businesses, each responsible for its profits, losses, and resources. 24. Franchisers are individuals in large firms who take responsibility for the development of innovations within the organizations. 25. Venture capitalists use company resources and time to develop a new product for the company that hires them. Multiple Choice Questions 26. is the process of creating and managing a business to achieve desired objectives. A. Entrepreneurship B. Bootstrapping C. Intrapreneuship D. Innovation E. Brainstorming Source: M Business 5 th edition 3

4 27. A is best described as any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people. A. publicly owned business B. limited liability company C. small business D. publicly traded company E. for-profit corporation 28. A small business is any independently owned business that employs not more than people. A. 100 B. 500 C. 300 D. 200 E Vernon runs Buzz, his own event management company, which frequently organizes large corporate events. Vernon has established a good reputation for organizing corporate events with a fair degree of professionalism at reasonable costs. Vernon works out of his old house with a staff of about 55 employees. Vernon's company is most likely to be categorized as a(n): A. multinational corporation. B. limited liability company. C. franchise. D. public sector holding. E. small business. 30. The Small Business Administration (SBA) is a(n): A. body established by the U.S. Chamber of Commerce to encourage the intrapreneurial spirit in small businesses. B. independent agency of the federal government that offers managerial and financial assistance to small businesses. C. independent agency created under the GATT to protect small businesses against competition from larger companies. D. division of the federal government that is responsible for ensuring that newly formed businesses adhere to the law. E. U.S. Congressional agency that regulates the issue of stocks by small businesses. Source: M Business 5 th edition 4

5 31. Which of the following is an advantage for small businesses that choose to enter the retailing industry? A. Retailing is relatively difficult field to gain entry. B. Retailing requires a large capital investment in the initial stages. C. Retailing allows small business to focus on specific groups of consumers. D. Retailing requires sophisticated machinery and technical expertise. E. Retailing suffers from heavy competition and losses only in the initial stages. 32. Which of the following reasons makes retailing an attractive industry for small businesses? A. Retailing eliminates the need for any entrepreneurial skills. B. Retailing offers high barriers to entry. C. Retailing eliminates the need to engage in active interactions with the final customers. D. Retailing requires low initial financing. E. Retailing limits a firm's need to focus on specific groups of consumers. 33. Which of the following best illustrates a small business operating in a retail industry as opposed to wholesaling its products? A. Janet bakes cakes and sells them to other restaurants and cafes in malls. B. BC Inc. manufactures stationery and sells it in bulk to book shops and supermarkets. C. Pink Cult, an apparel company, sells its merchandise through OMG!.com. D. Neon Love Inc. imports candles and directly sells them to customers through kiosks. E. Auto Line Inc. manufactures component parts of cars and sells them to automobile companies. 34. Many service providers are considered retailers because they: A. require a high initial start-up cost. B. provide their services directly to ultimate consumers. C. sell their services from a single store location. D. focus on large market segments and institutional buyers. E. employ only a small number of people. 35. Which of the following traits will help entrepreneurs succeed? A. Risk aversion B. Intolerance C. Frugality D. Impulsivity E. Neuroticism Source: M Business 5 th edition 5

6 36. One of the major reasons people want to own and operate their own business is to: A. avoid the risk of competition. B. be their own boss. C. avoid multi-tasking. D. reduce stress levels. E. avoid direct responsibility of the operations. 37. Which of the following is an advantage of a small business? A. Greater adaptability to changing market demands B. Highly trained and competent staff C. Low levels of stress in managing the business D. Diverse and large workforce E. High success rates 38. Red Carpet Inc. is a small apparel store started by an aspiring designer. The store needs to compete against larger, well-established multinational brands. Which of the following strategies will most help Red Carpet Inc. avoid competition from larger firms? A. Red Carpet Inc. should have multiple levels of management like the larger firms. B. Red Carpet Inc. should target large market segments that the competitors serve. C. Red Carpet Inc. should expand the scale of production to enjoy greater economies of scale. D. Red Carpet Inc. should start to work with customers only when the products are ready for sale. E. Red Carpet Inc. should focus on and target small market niches or product needs. 39. Small businesses usually have only one layer of management. Which of the following is an implication of this? A. Small businesses face a low risk of failure. B. Small businesses have great flexibility to adapt to changing market conditions. C. The decision-making process is lengthy in small businesses. D. Small businesses have better access to managerial experience and skills than larger firms. E. Small business owners have a limited amount of direct authority. Source: M Business 5 th edition 6

7 40. Which of the following is a disadvantage of small-business ownership? A. High cost of formation B. Bureaucratic decision-making process C. Ability to focus upon specific groups of customers D. Worries about employee problems or competition E. Limited scope for innovation 41. Which of the following is a reason behind the failure of small businesses? A. Overcapitalization B. Reputation C. Managerial experience D. Poor business concept E. High costs of start-up 42. Carol has recently opened a restaurant in her neighborhood. Which of the following is NOT likely to be a source of stress? A. Competition B. Reputation C. Rent increases D. Employee issues E. Changing market demand 43. is best described as the lack of funds to operate a business normally. A. Debt financing B. Trade credit C. Franchising D. Trade deficit E. Undercapitalization Source: M Business 5 th edition 7

8 44. Gerald started a business using the savings from his previous job. He planned to run his business on the revenue generated from sales. However, a few months later, Gerald found it difficult to pay his staff, rent, and other expenses. Seasonal sales and inability to secure sufficient credit from local banks made it difficult for Gerald to operate the business normally. Which of the following causes of small business failure does this scenario best illustrate? A. Undercapitalization B. Trade credit C. Economies of scale D. Debt financing E. Debt factoring 45. Which of the following is the shortest path to business failure? A. Overcapitalization B. Undercapitalization C. Rent increases D. Competition E. Changing market demand 46. The principal immediate threats to small and mid-sized businesses include: A. rapidly advancing technology. B. rising entrepreneurial spirit. C. reducing imports. D. escalating costs. E. increasing exports. 47. A business plan should do all of the following EXCEPT: A. provide the rationale for the business. B. include estimates of income and expenses. C. establish a strategy for acquiring sufficient funds. D. include an analysis of the competition. E. limit the business's flexibility and decision-making ability. Source: M Business 5 th edition 8

9 48. Arnold approached a bank to get a loan for a business he planned to launch later in that year. He explained his business idea and its capital requirements to the bank manager. The manager listened to the plan and asked Arnold to provide a formal document that included a rationale for the business, an explanation of how it will achieve its goals, an analysis of the competition, and estimates of income and expenses among other information. Which of the following documents does the bank expect from Arnold in this scenario? A. A business plan B. A cash flow statement C. A promissory note D. A balance sheet E. A marketing plan 49. In the process of starting a business, the step that immediately succeeds the development of a business plan involves: A. organizing resources like labor and supplies. B. developing some general business ideas. C. deciding an appropriate legal form of business ownership. D. promoting the business to the customers. E. filing for tax returns for the business with the Internal Revenue Service. 50. To make profits from a small business, the owner must first provide or obtain to start the business and keep it running smoothly. A. products B. employees C. profits D. supplies E. capital 51. Which of the following is NOT a source of equity financing? A. Reinvesting profits into the business B. Selling personal assets to raise funds C. Bringing in useful personal assets such as a computer into the business D. Securing long-term loans from a family member E. Selling stock in the business to family members or friends Source: M Business 5 th edition 9

10 52. Walter sold a piece of land he inherited from his grandparents and started a business with the proceeds. Which of the following sources has Walter used to raise funds for his business? A. Equity financing B. Debt financing C. Venture capital D. Initial public offering E. Angel Investment 53. Janice works in a factory that manufactures decorative accessories for office spaces, hotels, and designer homes. She wants to start her own business because she believes that the market for decorative products has a great growth potential. However, she does not want to depend on anyone else for the procuring the initial capital and would like to raise the amount herself. In this scenario, which of the following methods would Janice adopt to raise funds through equity financing? A. Janice would secure a mortgage from a family member or friend. B. Janice would secure a loan from the Small Business Administration (SBA). C. Janice would ask for a line of credit from her previous bank. D. Janice would invest her savings in the new business. E. Janice would ask suppliers for a longer trade credit. 54. Jacob and Harry are business partners in a company that manufactures portable solar panels. They initially started the business with their savings. However, now the company plans to expand its operations and the required amount of capital cannot be raised through savings or by reinvesting profits. Thus, the partners have decided to sell stock in their business to family members, friends, and employees. Which of the following sources of capital have Jacob and Harry planned to use for the expansion of their business? A. Debt financing B. Bootstrapping C. Equity financing D. Mortgaging E. Factoring 55. Persons or organizations that agree to provide some funds for a new business in exchange for ownership interest or stock are called. A. intrapreneurs B. category captains C. venture capitalists D. trade debtors E. franchisers Source: M Business 5 th edition 10

11 56. Securing a mortgage from a bank for a new business venture is an example of: A. equity financing. B. venture capitalism. C. debt financing. D. trade credits. E. collaterals. 57. When an entrepreneur takes out a loan from a bank, the bank will require him to put up, which is a financial interest in the property or fixtures of the business, to guarantee payment of the loan. A. collateral B. venture capital C. trade credit D. business plan E. cash flow statement 58. Lara, a single mother, borrowed some capital for her business from Women Progress Council (WPC) at an extremely low rate of interest. Which of the following forms of funding a new small business does this scenario best illustrate? A. Trade credit B. Equity financing C. Venture capital D. Debt financing E. Crowdsourcing 59. Andrew, a pharmacist, realized that he should stock extra supplies of a particular medicine to respond to an outbreak of a particular infection in the city. Lacking sufficient capital to purchase the extra inventory, he turned to his bank and asked to borrow a predetermined sum of money. Which of the following sources of funding does this scenario best illustrate? A. Trade credit B. Initial public offering C. Venture capital D. Equity financing E. Line of credit Source: M Business 5 th edition 11

12 60. A license to sell another's products or to use another's name in business, or both, is called a. A. franchise B. cartel C. collateral D. mortgage E. collusion 61. Since Eva Carl has decided to use her savings to purchase the rights to own and operate a McDonald's fast-food restaurant rather than starting her own restaurant, she is probably a(n). A. trade creditor B. franchisee C. franchiser D. intrapreneur E. venture capitalist 62. Nathan started the first outlet of Dynamix Gym in New York City in The business expanded over time, and Nathan became the owner of a chain of gyms in New York State. Though the business had potential to expand outside New York, Nathan did not want to take the risk or responsibility. Hence, he decided to sell the license to own and operate gyms in the name of Dynamix Gym to independent owners. In return, he charged them an initial fee and a small share in the monthly profits. In this scenario, Nathan is a(n). A. franchisee B. intrapreneur C. angel investor D. franchiser E. venture capitalist 63. Which of the following statements accurately brings out the difference between franchising and building an independent business from scratch? A. The time required to set up an independent business is much lower than obtaining a franchise. B. A franchise outlet often reaches the break-even point faster than an independent business would. C. A franchisee would experience more flexibility in decision making than the owner of an independent business. D. The quality of goods and services needs to be more standardized and uniform in independent business than in franchises. E. Access to managerial and financial assistance is more limited in franchises than in independent businesses. Source: M Business 5 th edition 12

13 64. Which of the following is an advantage that purchasers of a popular franchise experience? A. They get access to the already established brand name or brand equity. B. They have great flexibility to make decisions for their individual franchise outlets. C. They can enjoy their total profits without having to share anything with the franchisers. D. They can easily add or delete a good or service from the existing product line. E. They are free to vary their operational processes based on their needs and constraints. 65. One of the main drawbacks of franchising is that it requires the franchisee to: A. invest a lot of time and effort in setting up the business. B. take sole responsibility for all decisions in the business. C. share the profits of the business with the franchiser. D. build the brand appeal for the franchise outlet on his or her own. E. invest considerable capital in national and local advertising programs. 66. Paul has recently quit his job as an investment banker. He plans to open a restaurant. He has two options: he can either start his own new restaurant from scratch or purchase a franchise from an already established restaurant or fast food chain. His wife, Lisa, supports the former plan. Which of the following statements strengthens the argument in favor of Lisa's choice of opening a restaurant independently? A. It is easier and faster to build a business from scratch. B. It is easier to reach the break-even point through an independent business. C. It is more difficult to attract customers in a franchise business as the entrepreneur has to personally build the brand appeal. D. It is easier and more flexible to make and execute decisions in an independent business. E. It is easier to succeed in a business built from scratch as the products and the business format are already proven. 67. Millennials number around 75 million and represent a huge business opportunity in the United States. Which of the following is a defining feature of the millennials? A. Baby boomers above the age 50 B. First generation immigrants C. People born at the turn of the millennium between 1999 and 2001 D. People from immigrant communities who migrated to U.S. between 1946 and 1964 E. People born between 1977 and 1994 Source: M Business 5 th edition 13

14 68. Sally is a human resource manager at a company. A survey of the company's employees revealed that more than 80 percent of the employees belonged to the demographic segment Generation Y. In this scenario, which of the following HR strategies should Sally implement in order to best serve the needs of the employees? A. Sally should solely use financial rewards to motivate the employees to improve their productivity. B. Sally should keep the training sessions highly formal with no scope for entertainment. C. Sally should restrict the employees from using work from home or telecommuting options. D. Sally should avoid giving regular, direct feedback to the employees. E. Sally should use recognition and advancement as the driving forces to motivate employees. 69. Which of the following demographic segments should small retailers specializing in ethnic products and small service providers target? A. Immigrants B. Echo boomers C. Baby boomers D. Generation X E. Drivers 70. Which of the following demographic trends has made health care and financial planning industries attractive for small businesses in the United States? A. Decreasing population of millennials B. Increasing income among generation X C. Aging baby boomers who are wealthy D. Reducing entrepreneurial spirit among young generations E. Increasing imports into the economy 71. Which of the following is an implication of technological advances to small businesses? A. It fails to make any significant changes as small businesses cannot afford to use sophisticated technology in their operations. B. It reduces a small business's ability to adapt to changing trends and market demands. C. It increases the ratio of baby boomers as employees in small businesses. D. It provides new opportunities for small businesses to expand their operations abroad. E. It reduces a small company's ability to customize their services and products. Source: M Business 5 th edition 14

15 72. Norton is a human resource manager at a large multinational company. After a drastic drop in revenue, his company is thinking of ways to correct the situation. At a meeting with the top management, the CEO suggested that 20 percent of the employees should be eliminated. This move would help the company cut costs and continue functioning on the current projects. In this scenario, which of the following strategies is this MNC planning to use? A. Debt financing B. Intrapreneruship C. Crowdsourcing D. Franchising E. Downsizing 73. Downsizing is an effective way to: A. gain the advantages of small businesses. B. increase organizational tasks. C. reduce entrepreneurial spirit among employees. D. increase the management layers. E. gain employee trust. 74. Which of the following statements accurately describes intrapreneurs? A. Employees who become a part of a company's board of directors through internal promotions are referred to as intrapreneurs. B. Entrepreneurs who sell the rights to use their products to independent owners are intrapreneurs. C. Entrepreneurs who are involved in international business are referred to as intrapreneurs. D. Independent investors who help a company raise capital through internal financing are intrapreneurs. E. Individuals in large firms who take responsibility for the development of innovations within the organizations are intrapreneurs. 75. Which of the following is an ineffective practice in making big businesses act small? A. Encouraging a spirit of entrepreneurship within the organization B. Increasing the layers of management within the organization C. Downsizing to reduce work tasks D. Keeping the growth vision long term E. Focusing on current customers rather than looking for new customers Source: M Business 5 th edition 15

16 76. George is an employee at a company that provides information technology solutions to other firms. He has been developing a new smart phone application from the resources of the company. In this scenario, George best illustrates a(n). A. franchiser B. venture capitalist C. intrapreneur D. entrepreneur E. trade creditor Essay Questions 77. What is meant by a small business? What is the role of Small Business Administration (SBA) in managing small business? 78. How do small businesses contribute to the American economy? Source: M Business 5 th edition 16

17 79. Why are the retailing and wholesaling industries attractive for small businesses? 80. Why is the service industry suitable for small businesses? 81. How are small businesses more flexible than larger ones in adapting to changing market demands? 82. How do small firms gain by focusing on narrow market niches? Source: M Business 5 th edition 17

18 83. Why do small businesses have a high failure rate? 84. What is undercapitalization? How does it contribute to the failure of a small business? 85. What is a business plan and why is it important? 86. What is equity financing? Source: M Business 5 th edition 18

19 87. Kleen, is a revolutionary water purifying system with a built-in monitor that constantly updates the user with statistics on the quality of water. Akido Enterprises, a small company that designed the product, is now looking for sources of funding to develop this idea on a larger scale. The team that developed Kleen is sure that the product has a very good scope for use in institutions like schools and hospitals as well as for household use. The team that developed Kleen is looking for people who have the financial resources and believe in the market potential that this product has. Describe any one source of funding that would be appropriate for this purpose. 88. Describe debt financing. 89. Describe the terms "collateral" and "mortgage" in the context of debt financing. Source: M Business 5 th edition 19

20 90. Discuss trade credit and line of credit as sources of debt financing. 91. What is franchising? Discuss its advantages and disadvantages. 92. How does the Small Business Administration (SBA) help small businesses? 93. What demographic trends will have the most impact on small business in the future? Source: M Business 5 th edition 20

21 94. How have advances in technology opened up many new markets to small businesses? 95. How can big companies be made to act small? 96. Kiersey is one of the larger players in the market for electronic gadgets. Over the last three financial quarters, however, its market share has dwindled rapidly and the company is not able to cut costs or develop products that are very different from its previous offerings. The media reports are attributing this failure to Kiersey's lack of innovation. Suggest any two steps Kiersey can take to rectify the current situation. Source: M Business 5 th edition 21