Entrepreneurship: Successfully Launching New Ventures, 3e (Barringer/Ireland) Chapter 13 Preparing for and Evaluating the Challenges of Growth

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1 Entrepreneurship: Successfully Launching New Ventures, 3e (Barringer/Ireland) Chapter 13 Preparing for and Evaluating the Challenges of Growth 1) JGoods, the company profiled in the opening feature for Chapter 14, sells customized shoes and kits for customizing shoes. JGoods would like to sell its kits through boutiques and craft stores, but will have to convince the retailers to sign on. One thing JGoods has learned is that the trick to getting boutiques and retailers to sign on is to: A) prove the kits will sell B) package the kits attractively C) price the kits below the market price D) promote the kits aggressively E) cobrand the kits with proven product Diff: 2 Page Ref: 425 2) Jessica Martin owns an entertainment company which has increased both its profits and revenues over an extended period of time. Jessica's firm is experiencing: A) resolute growth B) unrelenting growth C) sustained growth D) unbroken growth E) moderate growth Diff: 1 Page Ref: 426 3) Only of the businesses that make Inc. magazine's list of the 500 fastest growing private firms in America repeats the following year. A) 1 in 20 B) 1 in 12 C) 1 in 5 D) 1 in 3 E) 50 percent Answer: D Diff: 3 Page Ref: 426 1

2 4) A recent study sponsored by the SBA Office of Advocacy found that only of all firms are "gazelles" or rapid growth firms at any given time. A) 1 percent B) 2 percent C) 3 percent D) 5 percent E) 10 percent Diff: 3 Page Ref: 426 5) According to the textbook, there are three are three important things that a business can do to prepare for growth: A) plan for growth, adopt a growth-oriented business model, and stay committed to a core strategy B) appreciate the nature of business growth, stay committed to a core strategy, and plan for growth C) develop a viral marketing campaign, stay committed to a core strategy, and adopt a growthoriented business model D) develop business partnerships, diversity beyond the company's core strategy, and appreciate the nature of business growth E) retain or hire one or more business growth consultants, diversify beyond the company's core strategy, and plan for growth Diff: 2 Page Ref: 427 6) According to the textbook, most entrepreneurial firms: A) are ambivalent about growth B) want to grow C) do not want to grow D) want to grow if the economy is strong but do not want to grow if the economy is weak E) want to grow if they are a service firm but do not want to grow if they are a manufacturing firm Diff: 2 Page Ref: 427 7) According to the textbook, the businesses that have the potential to grow the fastest over a sustained period of time are ones that: A) solve a significant problem or have a major impact on their customers' productivity or lives B) are cost leaders and are promote themselves aggressively C) have a major impact on their customers' lives and sell high quality products D) take advantage of environmental trends and are cost leaders E) solve a significant problem or sell high quality products Diff: 2 Page Ref: 427 2

3 8) According to the textbook, there are three issues about business growth that entrepreneurs should appreciate. These issues are: A) not all businesses have the potential to be aggressive growth firms, business success scales, and business growth is a top priority of most entrepreneurial firms B) business growth is a top priority of most entrepreneurial firms, a business can't grow too fast, and businesses that price their products aggressively grow the fastest C) a business's valuation increases with its growth, a business can grow too fast, and business growth is a top priority of most entrepreneurial firms D) the majority of businesses have the potential to be aggressive growth firms, a business can't grow too fast, and business success scales E) not all businesses have the potential to be aggressive growth firms, a business can grow too fast, and business success doesn't always scale Diff: 2 Page Ref: 427 9) Which of the following is not one of the 10 warning signs that a business is growing too fast? A) the business's accountants are starting to worry B) productivity is falling C) starts going unanswered D) borrowing money to pay for routine expenses E) comfortable profit margins Diff: 2 Page Ref: ) The What Went Wrong? feature in Chapter 13 focuses on Meetro, a location-aware instant messaging platform, that was launched on June 1, 2005, but eventually failed. The main lesson conveyed by the feature is that: A) businesses don't always scale B) it's difficult to achieve market leadership C) businesses that don't "plan" for growth are at a significant disadvantage D) a business can grow too fast E) it's difficult to capture economies of scale Diff: 2 Page Ref: 430 3

4 11) The rate at which a firm is growing on an annual basis is referred to as its: A) level of growth B) range of growth C) pace of growth D) iterations of growth E) sequence of growth 12) Which of the following options was not identified in the textbook as an appropriate reason for growth? A) need to accommodate the growth of key customers B) influence, power, and survivability C) economies of scale D) economies of scope E) maintain the appearance that the firm is successful 13) are(is) generated when increasing production lowers the average cost of each unit produced. A) Business scalability B) Economies of scale C) Reaching for scale D) Market leadership E) Economies of scope 14) Economies of scale occur when: A) increasing production lowers the average cost of each unit produced B) increasing production increases the average cost of each unit produced C) decreasing production lowers the average cost of each unit produced D) decreasing production increases the average cost of each unit E) increasing production increases the fixed cost of doing business 4

5 15) Andy Dungy owns a company that makes ipod and iphone accessories. He is trying to increase his sales, primarily because he knows that increasing production lowers the average cost of each unit produced. The reason for growth illustrated in this example is: A) economies of scope B) market leadership C) influence, power, and survivability D) need to accommodate the growth of key customers E) economies of scale 16) are costs that a company incurs whether it sells something or not. are the costs a company incurs as it generates sales. A) Preset costs, marginal costs B) Variable, fixed costs C) Set costs, marginal costs D) Fixed costs, variable costs E) Marginal costs, set costs Answer: D 17) costs are costs that a company incurs whether it sells something or not. A) Fixed B) Consistent C) Steady D) Variable E) Regular 18) costs are the costs a company incurs as it makes sales. A) Static B) Irregular C) Balanced D) Variable E) Flexible Answer: D 5

6 19) Jeremy Rhodes leases a manufacturing facility that produces computer keyboards. Jeremy tries to keep production high, because his lease payments are $6,200 a month, regardless of whether he produced one computer keyboard a month or 10,000. Jeremy's lease payment is a: A) variable cost B) secondary cost C) fixed cost D) marginal cost E) tangible cost 20) Tiffany Smith owns a barbeque restaurant. One expense that Tiffany watches closely is the cost of propane, which she uses to heat her ovens. The more barbeque food Tiffany sells, the more it cost her for propane on a monthly basis. For Tiffany, the cost of propane is a: A) variable cost B) secondary cost C) resultant cost D) fixed cost E) irregular cost 21) are similar to economies of scale, except the advantage comes through the scope (or range) of a firm's operations rather than from its scale of production. A) Economies of reach B) Economies of span C) Economies of capacity D) Economies of range E) Economies of scope 22) Market leadership occurs when: A) a firm is the number one or the number two firm in an industry or niche market in terms of net profits B) a firm is one of the top five firms in an industry or market niche in terms of sales volume C) a firm earns twice as much as its closest competitor D) a firm sells twice as much as its closest competitor E) a firm is the number one or the number two firm in an industry or niche market in terms of sales volume Diff: 2 Page Ref: 433 6

7 23) Some firms feel that they can better appeal to their customer if they can advertise that they are "the Number 1 firm" in their industry. This sentiment is motivated by the reason for growth labeled: A) economies of scope B) need to accommodate the growth of key customer C) economies of scale D) market leadership E) influence, power, and survivability Answer: D Diff: 2 Page Ref: ) Megan owns a company that makes specialized components for the auto industry. Her most important customer is a company that is growing at a rate of 25% per year. Megan is working hard to grow her firm, because she knows that unless her company continually grows it will not be able to keep pace with the growth of its most important customer. This examples illustrates the reason for growth referred to as: A) capturing economies of scope B) executing a scalable business model C) market leadership D) influence, power, and survivability E) need to accommodate the growth of key customer Diff: 2 Page Ref: ) The Savvy Entrepreneurial Firm feature in Chapter 13 focuses on Timbuk2, a company that makes urban shoulder bags. The lesson provided by the feature is: A) its better to have mostly variable costs rather than fixed costs B) its more important to bag the right customer rather than the biggest one C) market leadership is the key to a successful growth strategy D) its important to have a scalable business model E) continually growing profits is very challenging Diff: 2 Page Ref: 435 7

8 26) The majority of businesses go through a discernable set of stages of growth referred to as the: A) business rotation cycle B) business existence cycle C) organizational sequence D) business life cycle E) organizational life cycle Diff: 2 Page Ref: ) Which of the following is not one of the five stages in the organizational life cycle? A) maturity B) scale C) decline D) early growth E) introduction Diff: 2 Page Ref: ) The stage of the organizational life cycle is the start-up phase, where a business determines what its core strengths and capabilities are and starts selling its initial product or service. A) introduction B) launch C) ramp-up D) early growth E) continuous growth Diff: 2 Page Ref: 436 Topic: Growth-Related Firm Attributes 29) The main challenges for a business in the introduction stage of the organizational life cycle is to: A) beginning the process of transitioning the owner from a hands-on supervisor to a more managerial role and developing business partnerships B) developing business partnerships and making sure the initial product or service is right C) determining whether the owner of the business and the current management team is capable of taking the business further and developing systems and procedures D) developing systems and procedures and beginning the process of transitioning the owner from a hands-on supervisor to a more managerial role E) make sure the initial product or service is right and start laying the groundwork for building a larger organization Diff: 2 Page Ref: 436 Topic: Growth-Related Firm Attributes 8

9 30) For a business to be successful in the early growth stage of the organizational life cycle, two important things must happen: A) the founder or owner of the business must start transitioning from his or her role as the handson supervisor to a more managerial role and increased formalization must take place B) a decision must be made whether the owner-manager and the current management team is capable of taking the business further and the organization must start laying the groundwork for future growth C) increased formalization must take place and the business must achieve price-stability D) a decision must be made whether the owner-manager or the current management team is capable of taking the business further and business partnerships must be established E) the founder or owner of the business must start transitioning from his or her role as the handson supervisor to a more managerial role and the business must be cash flow positive Diff: 3 Page Ref: 436 Topic: Growth-Related Firm Attributes 31) According to the textbook, the toughest decisions regarding business growth are made in the stage of the organizational life cycle. A) introduction B) early growth C) continuous growth D) maturity E) decline Diff: 3 Page Ref: 436 Topic: Growth-Related Firm Attributes 32) According to the textbook, a well-managed business that finds its products and services are mature often: A) replaces its board of directors to breathe new life into the firm B) looks for licensing opportunities C) looks for partnering or acquisition opportunities to breathe new life into the firm D) looks for new managerial talent to breathe new life into the firm E) looks for international business opportunities Diff: 2 Page Ref: 438 Topic: Growth-Related Firm Attributes 9

10 33) According to the textbook, it is: A) not inevitable that a business enter the decline stage of the organizational life cycle B) inevitable that a business enter the decline stage of the organizational life cycle C) not inevitable that service firms enter the decline stage of the organizational life cycle but is inevitable for manufacturing firms D) not inevitable that manufacturing firms enter the decline stage of the organizational life cycle but is inevitable for service firms E) not inevitable that international firms enter the decline stage of the organizational life cycle but is inevitable for strictly domestic firms Diff: 2 Page Ref: 438 Topic: Growth-Related Firm Attributes 34) The author of the book titled "The Theory of the Growth of the Firm," which is referred to in Chapter 13, is: A) Gary Hammel B) Joseph Schumpeter C) Edith Penrose D) Michael Porter E) Tom Peters Diff: 3 Page Ref: ) According to Penrose, the set of opportunities a firm feels it is capable of pursuing is referred to as the: A) creative field of potential B) productive opportunity set C) prolific potential D) passionate opportunity set E) dynamic opportunity options Diff: 2 Page Ref: ) Maureen Kimble owns a firm that sells products to the auto, aerospace, and defense industries. Maureen is currently evaluating a set of opportunities that he feels his firm is capable of pursuing. According to the textbook, Maureen is evaluating his firm's: A) prolific potential B) dynamic opportunity options C) productive opportunity set D) passionate opportunity set E) creative field of potential Diff: 2 Page Ref:

11 37) According to Penrose, generate new market, product and service ideas, while administer the routine functions of the firm and facilitate the profitable execution of new opportunities. A) managerial services, entrepreneurial services B) administrative services, business services C) entrepreneurial services, managerial services D) business services, commercial services E) commercial services, administrative services Diff: 3 Page Ref: ) When a firm's managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the: A) commercial capacity problem B) entrepreneurial aptitude problem C) managerial capacity problem D) business capacity problem E) business aptitude problem Diff: 2 Page Ref: ) Emily Wills owns a commercial printing company. Emily has more business than she wants, in fact, she is presently turning away exciting new business opportunities because it is expensive to hire new employees, and she knows that if she did hire new employees it would take time for the new employees to be trained and to be socialized into the culture of her firm. Emily's inability to take advantage of the new business opportunities that are coming her way is due largely to the: A) business aptitude problem B) entrepreneurial aptitude problem C) commercial opportunity problem D) business capacity problem E) managerial capacity problem Diff: 2 Page Ref:

12 40) means that as the number of employees a firm need increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision. A) Difficult hazard B) Adverse hazard C) Adverse selection D) Moral selection E) Moral hazard Diff: 2 Page Ref: ) Kendell Adams owns a software development company. When he first launched his firm, he was carefully to hire employees who had the experience he was looking for, were good matches for the positions he had available, and could be properly supervised. As Kendell's firm has grown, and his need for employees has increased, he is finding that it is increasing difficult to find employees who have the qualifications he is looking for, are good matches for the positions he has available, and fit within the supervisory framework he has developed. Kendell is dealing with an issue referred to as: A) adverse hazard B) adverse selection C) complicated hazard D) ethical hazard E) moral selection Diff: 3 Page Ref: ) means that as the number of employees a firm needs increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision. A) Moral hazard B) Adverse selection C) Adverse hazard D) Complex hazard E) Complex selection Diff: 2 Page Ref:

13 43) means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours or may even try to avoid hard work. A) Difficult selection B) Adverse hazard C) Ethical selection D) Productivity hazard E) Moral hazard Diff: 2 Page Ref: ) According to the basic model of firm growth articulated in Chapter 13, the ability to increase managerial services to facilitate growth is not friction free but is constrained and limited. Which of the following selections is not one of the factors that constrains or limits a firm's ability to increase its managerial services? A) the time required to socialize new managers B) how motivated entrepreneurs and/or managers are to grow the firm C) adverse selection D) moral hazard E) benchmarking Diff: 3 Page Ref: ) Which of the following was not identified in the textbook as one of the day-to-day challenges involved with growing a firm? A) cash flow management B) channel conflict C) capital constraints D) quality control E) price stability Diff: 2 Page Ref:

14 46) Which of the following statement is not true regarding the day-to-day challenges of growing a firm? A) As a firm grows, it requires a decreasing amount of cash to service its customers. B) If firm growth comes at the expense of a competitor's market share, price competition can set in. C) Most businesses, regardless of their industry, need capital from time to time to invest in growth-enabling projects. D) Although most businesses are started fairly inexpensively, the need for capital is typically the most prevalent in the early growth and continuous stages of the organizational life cycle. E) One of the most difficult challenges that businesses encounter as they grow is maintaining high levels of quality and customer service. Diff: 2 Page Ref: 440 Topic: Growth-Related Firm Attributes 47) Terry Wells owns a growing company that makes innovative kitchen appliances. One thing that Terry has to continually work at is to keep enough cash on hand to make sure she has sufficient liquidity to meet her payroll and cover her other short-term obligations. The day-to-day challenge of firm growth this example is referring to is: A) quality control B) capital constraints C) price stability D) cash flow management E) personnel issues Answer: D Diff: 2 Page Ref: ) Betty Harrington owns a floor covering firm. Recently, her market research is telling her that she is taking business away from the large home improvement stores in her trade area. One thing that Betty is worried about is that the large stores might fight back by lowering their prices, which hurt everyone except the consumer. The day-to-day challenge of firm growth that this example is referring to is: A) quality control B) price stability C) capital constraints D) cash flow management E) benchmarking Diff: 2 Page Ref:

15 49) Kelly Andrews owns a company that makes office furniture. Recently, a favorable article was written about Kelly's company in a business magazine, and as a result, Kelly has seen a spike in his orders. Although Kelly is grateful for the additional orders he is worried about one thing. An increase in activity means that his firm must handle more service requests and paperwork and contend with more customers, stakeholders, and vendors. Kelly knows that if he doesn't handle this increased activity properly, the workmanship of his products could decline. The day-to-day challenge of firm growth that this example illustrates is: A) quality control B) price stability C) capital constraints D) benchmarking E) cash flow management Diff: 2 Page Ref: ) The Partnering for Success feature in Chapter 13 focuses on Zazzle and its partnership with MySpace, which will enable Zazzle to manage the MySpace stores of musicians who want to sell merchandise, such as customized t-shirts, through their online stores. The primary focus of the case is to illustrate: A) that companies can overcome the managerial capacity problem via partnerships B) that companies can overcome cash flow challenges via partnerships C) the benefits of growth D) the hazards of growth E) that companies can overcome price stability issues via partnerships Diff: 3 Page Ref: ) Sustained growth is defined as growth in both revenues and employees over an extended period of time. Diff: 1 Page Ref: ) Most entrepreneurial firms try to grow and see it as an important part of their ability to remain successful. Diff: 1 Page Ref: ) All businesses have the potential to be aggressive growth firms. Diff: 2 Page Ref:

16 54) Business success doesn't always scale. Diff: 2 Page Ref: ) The process of writing a business plan greatly assists in developing growth-related plans. Diff: 2 Page Ref: ) Economies of scope are generated when increasing production lowers the average cost of each unit produced. 57) Fixed costs are the costs a company incurs as it generates sales. 58) Market leadership occurs when a firm is one of the top ten firms in an industry or niche market in terms of sales volume. Diff: 2 Page Ref: ) Sometimes firms are compelled to grow to accommodate the growth of a key customer. Diff: 2 Page Ref: ) The majority of businesses go through a discernable set of stages referred to as the organizational life cycle. Diff: 2 Page Ref: ) The main challenges for a business in the early growth stage are to make sure the initial product or service is right and to start laying the groundwork for building a larger organization. Diff: 2 Page Ref:

17 62) A business's early growth stage is generally characterized by increasing sales and heightened complexity. Diff: 2 Page Ref: 436 Topic: Growth-Related Firm Attributes 63) As a business moves beyond its early growth stage and its pace of growth accelerates, the need for structure and formalization decreases. Diff: 2 Page Ref: ) According to Penrose, managerial services generate new market, product, and service ideas, while entrepreneurial services administer the routine functions of the firm and facilitate the proper execution of new opportunities. Diff: 2 Page Ref: ) According to Penrose, entrepreneurial services generate new market, product, and service ideas. Diff: 2 Page Ref: ) Adverse selection means that as the number of employees a firm needs increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision. Diff: 3 Page Ref: ) Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours or may even try to avoid hard work. Diff: 3 Page Ref: ) Growth usually decreases rather than increases the challenges involved with cash flow management. Diff: 3 Page Ref:

18 69) One of the most difficult challenges that businesses encounter as they grow is maintaining high levels of quality and customer service. Diff: 2 Page Ref: ) Most businesses need capital from time to time to invest in growth-enabling projects. Diff: 2 Page Ref: ) Do most firms want to grow or are they reluctant to grow? What are the advantages of growth? Answer: Most entrepreneurial firms want to grow. Especially in the short run, growth in sales revenue is an important indicator of an entrepreneurial venture's potential to survive today and be successful in the future. Diff: 1 Page Ref: ) According to Chapter 13, business success doesn't always scale. What is meant by this statement? Answer: Scaling a business means increasing its size and pace of activity. Unfortunately, the very thing that makes a business initially successful often makes it difficult to grow or scale. For example, businesses that are based on providing high levels of individualized service often don't grow or scale well. This is because it's hard to continue to offer individualized service as a business grows. There is also a category of businesses that sell high-end or specialty products that earn high margins. These businesses typically sell their products where customers prioritize quality over price. These businesses can grow but only at a measured pace. If they grow too quickly, they can lose the "exclusivity" they are trying to project or can damage their special appeal. For example, fashion clothing boutiques often limit the number of garments they sell in a certain size or color. Even though they know they could sell more of a particular tie or dress, they deliberately limit their sales so their customers don't see each other wearing identical items. Diff: 3 Page Ref: ) Define the term "market leadership." Why do firm work hard to obtain market leadership? Answer: Market leadership occurs when a firm is the number one or the number two firm in an industry or niche market in terms of sales volume. Many firms work hard to achieve market leadership, to realize economies of scale in production, and to be recognized as the brand leader. Being the market leader also permits a firm to use slogans such as "Number 1 Software Producer in America" in its promotions, helping a firm win customers and attract talented employees as well as business partners. Diff: 2 Page Ref:

19 74) What is the organizational life cycle and why is it important? Answer: The majority of businesses go through a discernable set of stages referred to as the organizational life cycle. The stages include introduction, early growth, continuous growth, maturity, and decline. Its important for business owners to be familiar with these stages, because each stage offers unique opportunities and challenges. By knowing the unique opportunities and challenges posed by each stage, a business owner can be prepared to respond appropriately. Diff: 2 Page Ref: ) What are the primary day-to-day challenges involved with growing a firm? Briefly describe each challenge. Answer: The primary day-to-day challenges involved with growing a firm are cash flow management, price stability, quality control, and capital constraints. In regard to cash flow management, as a firm grows, it requires an increasing amount of cash to service its customers. In addition, a firm must carefully manage its cash on hand to make sure it maintains sufficient liquidity to meet its payroll and cover its other short-term obligations. In regard to price stability, if a firm growth comes at the expense of a competitor's market share, a price war can result. In regard to quality control, as a firm handles the increase in activity that accompanies growth, unless it is careful, quality can suffer. Finally, in regard to capital constraints, growth often requires the expansion of a firm's facilities, which is difficult because purchasing or building facilities takes capital. Diff: 2 Page Ref: