Preview Extract
Chapter 13 Preparing for and Evaluating the Challenges of Growth
1) PurBlue Beverages, the company profiled in the opening feature for Chapter 13, sells bottled
water, under the GIVE brand. GIVE bottled water has not one but two unusual twists. First, 10
cents of every bottle sold is donated to charity. And second:
A) the bottles come in four colors (each color representing a charity), allowing the buyer to
choose which charity his or her donation would go to
B) the bottles come in four sizes, allowing the buyer to determine which size to buy
C) the bottles come in four shapes, each shape representing a different environmental cause
D) the bottles are biodegradable and break down within six months of being used
E) the bottles come with seven different labels, each label providing information about a local
charity
Answer: A
Rationale:
This answer is correct because it aligns with the concept of consumer choice in charitable giving,
which is a unique feature of the GIVE brand. Offering different colors for different charities
allows consumers to support causes they care about.
2) Barb Campbell owns an entertainment company which has increased both its profits and
revenues over an extended period of time. Barb's firm is experiencing:
A) resolute growth
B) unrelenting growth
C) sustained growth
D) unbroken growth
E) moderate growth
Answer: C
Rationale:
"Sustained growth" is the correct answer because it indicates a continuous increase in profits and
revenues over an extended period of time, which aligns with Barb Campbell's situation.
3) According to a study sponsored by the SBA Office of Advocacy, only ________ of all firms
are "gazelles" or rapid growth firms at any given time.
A) 3%
B) 7%
C) 12%
D) 19%
E) 27%
Answer: D
Rationale:
This answer is correct based on the definition of "gazelles" as rapid growth firms, which are a
relatively small percentage of all firms at any given time.
4) In regard to firm growth, evidence shows that:
A) relatively few firms generate sustained and profitable growth
B) the majority of firms generate sustained and profitable growth
C) an equal number of firms generate sustained and profitable growth than firms that don't
D) firms in the manufacturing sector are more likely to achieve sustained and profitable growth
than firms in the service sector
E) firms in the service sector are more likely to achieve sustained and profitable growth than
firms in the manufacturing sector
Answer: C
Rationale:
The correct answer is C because it reflects the reality that while some firms do achieve sustained
and profitable growth, many do not, resulting in an equal number of firms in each category.
5) In the context of firm growth, gazelles are:
A) firms that grow at a rate of 100% per year or more
B) firms that grow at a rate of 25% per year or more
C) rapid growth firms
D) slow growth firms
E) moderate growth firms
Answer: C
Rationale:
This answer is correct because "gazelles" are specifically defined as rapid growth firms,
regardless of the exact percentage of growth.
6) According to the textbook, there 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, diversify 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
Answer: B
Rationale:
This answer is correct because it highlights the importance of understanding business growth,
maintaining a core strategy, and planning for growth, which are key aspects of preparing for
growth.
7) 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
Answer: B
Rationale:
This answer is correct based on the general desire of entrepreneurial firms to grow, as stated in
the textbook.
8) 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 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
Answer: A
Rationale:
This answer is correct because it highlights the importance of businesses that address significant
customer needs or problems, which often leads to faster and sustained growth.
9) 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
Answer: E
Rationale:
This answer is correct because it highlights the limitations and challenges of aggressive growth,
as well as the fact that not all businesses are suited for rapid expansion.
10) Which of the following is not one of the 10 warning signs that a business is growing too fast?
A) those working with the business's financial structure are starting to worry
B) productivity is falling
C) e-mail starts going unanswered
D) borrowing money to pay for routine operating expenses
E) comfortable profit margins
Answer: E
Rationale:
This answer is correct because comfortable profit margins are not typically a warning sign of
growing too fast; instead, they may indicate a healthy business.
11) The Partnering for Success feature in Chapter 13 focuses on Threadless, the popular
community-centered T-shirt design site. According to the feature, at one point during its early
growth, Threadless almost collapsed under the weight of operational problems. Threadless
solved the problem by:
A) hiring professional managers
B) replacing the founder CEO with a seasoned CEO from an established company
C) hiring a consulting firm
D) selling a minority interest to a venture capital firm, which provided Threadless operational
assistance
E) merging with Zappos and folding its operations into Zappos' operations
Answer: D
Rationale:
This answer is correct because selling a minority interest to a venture capital firm would provide
Threadless with the necessary financial and operational assistance to overcome its operational
problems.
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) market leadership
E) maintain the appearance that the firm is successful
Answer: E
Rationale:
This answer is correct because maintaining the appearance that the firm is successful is not a
valid reason for growth according to the textbook.
13) The Savvy Entrepreneurial Firm feature in Chapter 13 focuses on Dogfish Head Brewery, a
microbrewery located in Milton, Delaware. During the first few years of the firm's existence, one
tactic the founder employed during the winter months, to gain the loyalty of local businesses and
their customers, was to:
A) distribute fliers via local businesses offering off-season discounts with coupons that could be
redeemed at the company's restaurant and brewery
B) offer free delivery from the company's brewery and restaurant
C) offer free tours of the company's brewery
D) offer 10% discounts to Delaware residents and 30% discounts to Milton residents
E) hold contests to name the company's different varieties of beer after local landmarks and
citizens
Answer: A
Rationale:
This answer is correct because offering off-season discounts with coupons that could be
redeemed at the company's restaurant and brewery is a tactic to gain loyalty and attract
customers during slow seasons.
14) ________ 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
Answer: B
Rationale:
This answer is correct because economies of scale refer to the cost advantages that a business can
achieve by increasing its scale of production, leading to lower average costs per unit.
15) 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
Answer: A
Rationale:
This answer is correct because economies of scale occur when increasing production lowers the
average cost of each unit produced.
16) Andy Dungy owns a company that makes Apple iPod, iPhone, and iPad 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
Answer: E
Rationale:
This answer is correct because the reason for growth in this example is to take advantage of
economies of scale, which result from increasing production.
17) ________ 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 costs, Fixed costs
C) Set costs, Marginal costs
D) Fixed costs, Variable costs
E) Marginal costs, Set costs
Answer: D
Rationale:
This answer is correct because fixed costs are costs that a company incurs whether it sells
something or not, while variable costs are the costs a company incurs as it generates sales.
18) ________ costs are costs that a company incurs whether it sells something or not.
A) Fixed
B) Consistent
C) Steady
D) Variable
E) Regular
Answer: A
Rationale:
This answer is correct because fixed costs are costs that remain constant regardless of the level of
sales or production.
19) ________ costs are the costs a company incurs as it makes sales.
A) Static
B) Irregular
C) Balanced
D) Variable
E) Flexible
Answer: D
Rationale:
This answer is correct because variable costs are costs that vary with the level of sales or
production.
20) 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 produces 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
Answer: C
Rationale:
This answer is correct because Jeremy's lease payment is a fixed cost, which remains constant
regardless of the level of production or sales.
21) Tiffany Smith owns a barbecue restaurant. One expense that Tiffany watches closely is the
cost of propane, which she uses to heat her ovens. The more barbecue food Tiffany sells, the
more it costs her for propane on a monthly basis. For Tiffany, the cost of propane is a(n):
A) variable cost
B) secondary cost
C) resultant cost
D) fixed cost
E) irregular cost
Answer: A
Rationale:
This answer is correct because the cost of propane varies with the level of barbecue food sold,
making it a variable cost.
22) ________ 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
Answer: E
Rationale:
This answer is correct because economies of scope refer to the advantages a firm gains through
the scope or range of its operations, such as offering a variety of products or services.
23) 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
Answer: E
Rationale:
This answer is correct because market leadership is typically defined by a firm being one of the
top firms in terms of sales volume in its industry or niche market.
24) Some firms feel that they can better appeal to their customers 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
Rationale:
This answer is correct because the desire to be perceived as the number one firm in an industry is
a motivation driven by the concept of market leadership.
25) Valarie 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. Valarie 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 example 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
Answer: E
Rationale:
This answer is correct because Valarie's motivation for growth is driven by the need to
accommodate the growth of her key customer.
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
Answer: E
Rationale:
This answer is correct because the organizational life cycle refers to the stages of growth and
development that most businesses go through.
27) 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
Answer: B
Rationale:
This answer is correct because "scale" is not typically considered one of the five stages in the
organizational life cycle.
28) The ________ stage of the organizational life cycle is the startup 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
Answer: A
Rationale:
This answer is correct because the introduction stage is the startup phase where a business
establishes its core strengths and begins selling its initial offerings.
29) The main challenges for a business in the introduction stage of the organizational life cycle
are:
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 are 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) making sure the initial product or service is right and starting to lay the groundwork for
building a larger organization
Answer: E
Rationale:
This answer is correct because the main challenges in the introduction stage include refining the
initial product or service and preparing for future growth.
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 are
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 are
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
Answer: A
Rationale:
This answer is correct because in the early growth stage, the founder's role shifts to a more
managerial one, and the organization becomes more formalized to support growth.
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
Answer: C
Rationale:
This answer is correct because the continuous growth stage is where businesses face the most
challenging decisions regarding their growth strategies and operations.
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
Answer: C
Rationale:
This answer is correct because mature businesses often seek new growth opportunities through
partnerships or acquisitions to revitalize their products and services.
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
Answer: A
Rationale:
This answer is correct because the decline stage of the organizational life cycle is not inevitable,
and some businesses can rejuvenate themselves to avoid decline.
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
Answer: C
Rationale:
This answer is correct because Edith Penrose is the author of The Theory of the Growth of the
Firm, which is a seminal work in the field of business growth.
35) 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
Answer: B
Rationale:
This answer is correct because Penrose defines the set of opportunities a firm feels it is capable
of pursuing as the productive opportunity set.
36) Maureen Kimble owns a firm that sells products to the auto, aerospace, and defense
industries. Maureen is currently evaluating a set of opportunities that she feels her firm is capable
of pursuing. According to the textbook, Maureen is evaluating her firm's:
A) prolific potential
B) dynamic opportunity options
C) productive opportunity set
D) passionate opportunity set
E) creative field of potential
Answer: C
Rationale:
This answer is correct because Maureen is evaluating her firm's productive opportunity set,
which includes the opportunities she feels her firm is capable of pursuing.
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
Answer: C
Rationale:
This answer is correct because Penrose distinguishes between entrepreneurial services, which
generate new ideas, and managerial services, which execute and profitably manage these ideas.
38) 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
Answer: C
Rationale:
This answer is correct because the bottleneck created by insufficient managerial resources is
known as the managerial capacity problem.
39) 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
Answer: E
Rationale:
This answer is correct because Emily's inability to take advantage of new business opportunities
due to the cost and time constraints of hiring and training new employees is a result of
insufficient managerial capacity.
40) ________ 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) Difficult hazard
B) Adverse hazard
C) Adverse selection
D) Moral selection
E) Moral hazard
Answer: C
Rationale:
This answer is correct because adverse selection refers to the difficulty firms face in finding and
managing the right employees as their workforce grows.
41) Kendell Adams owns a software development company. When he first launched his firm, he
was careful 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 increasingly 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
Answer: B
Rationale:
This answer is correct because Kendell is facing adverse selection, where it becomes
increasingly difficult to find the right employees as the firm grows.
42) ________ 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
Answer: B
Rationale:
This answer is correct because adverse selection refers to the difficulty firms face in finding and
managing the right employees as their workforce grows.
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
Answer: E
Rationale:
This answer is correct because moral hazard refers to the reduced motivation of new hires
compared to the original founders of a firm.
44) 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 constrain 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
Answer: E
Rationale:
This answer is correct because benchmarking is not a factor that directly constrains or limits a
firm's ability to increase its managerial services.
45) 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
Answer: B
Rationale:
This answer is correct because while channel conflict can be a challenge for growing firms, it
was not specifically identified in the textbook as one of the day-to-day challenges.
46) Which of the following statements 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.
Answer: A
Rationale:
This answer is correct because as a firm grows, it typically requires an increasing amount of cash
to service its customers, not a decreasing amount.
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
Rationale:
This answer is correct because Terry's challenge of keeping enough cash on hand to meet shortterm obligations is related to cash flow management, a key day-to-day challenge of growing
firms.
48) The What Went Wrong feature in Chapter 13 focuses on Wesabe, a Web-based company that
was launched in 2006 to help people manage their personal finances. According to Marc
Hedlund, one of Wesabe's cofounders, the company failed for two primary reasons. First, it
misunderstood its users. Second:
A) it didn't allow a partner to provide it with an essential service that it decided to build on its
own
B) it didn't achieve a large enough critical mass of users
C) it didn't implement a revenue model fast enough
D) it didn't utilize both internal and external growth strategies
E) it didn't hire an experienced CEO
Answer: A
Rationale:
This answer is correct because one of the primary reasons for Wesabe's failure, as stated by its
co-founder, was its decision to build an essential service on its own instead of allowing a partner
to provide it.
49) Betty Harrington owns a floor covering firm. 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
hurts 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
Answer: B
Rationale:
This answer is correct because Betty is concerned about maintaining price stability in the face of
potential price competition from larger competitors.
50) 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
Answer: A
Rationale:
This answer is correct because Kelly is concerned about maintaining the quality of his products
in the face of increased activity, which is a key day-to-day challenge of growing firms.
51) Sustained growth is defined as growth in both revenues and employees over an extended
period of time.
Answer: False
Rationale:
Sustained growth is typically defined as continuous growth in revenues and profits over an
extended period, but it doesn't necessarily require an increase in the number of employees. A
company can achieve sustained growth by improving efficiency and productivity without
necessarily hiring more employees.
52) Most entrepreneurial firms try to grow and see it as an important part of their ability to
remain successful.
Answer: True
Rationale:
This statement is true. Most entrepreneurial firms aim for growth because they see it as essential
for remaining competitive, attracting investment, and increasing their market share.
53) All businesses have the potential to be aggressive growth firms.
Answer: False
Rationale:
Not all businesses have the potential or desire to pursue aggressive growth. Some businesses
may prefer to remain small and focus on niche markets or lifestyle goals rather than aggressive
expansion.
54) Business success doesn't always scale.
Answer: True
Rationale:
While some businesses are able to maintain or even improve their success as they grow, others
may struggle to replicate their success on a larger scale. Factors such as increased competition,
operational complexities, and changes in market conditions can impact a business's ability to
scale successfully.
55) The process of writing a business plan greatly assists in developing growth-related plans.
Answer: True
Rationale:
Writing a business plan forces entrepreneurs to think critically about their business goals,
strategies, and potential challenges. This process can greatly assist in developing growth-related
plans by providing a clear roadmap for achieving expansion objectives.
56) Economies of scope are generated when increasing production lowers the average cost of
each unit produced.
Answer: False
Rationale:
Economies of scope occur when a company can produce a range of products more costeffectively than if it produced each product separately. It is different from economies of scale,
which refer to the cost advantages that businesses can achieve due to an increase in production.
57) Variable costs are the costs a company incurs as it generates sales.
Answer: True
Rationale:
Variable costs are expenses that vary in direct proportion to changes in a company's level of
production or sales. These costs include items such as raw materials, labor, and packaging.
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.
Answer: False
Rationale:
Market leadership occurs when a firm is the number one or number two firm in an industry or
niche market in terms of sales volume, profitability, or another key metric. Being in the top ten
does not necessarily indicate market leadership.
59) Sometimes firms are compelled to grow to accommodate the growth of a key customer.
Answer: True
Rationale:
Firms may need to grow to accommodate the demands of a key customer, especially if that
customer represents a significant portion of their business. Failure to grow could result in losing
the customer or being unable to meet their needs.
60) The majority of businesses go through a discernable set of stages referred to as the
organizational life cycle.
Answer: True
Rationale:
The organizational life cycle describes the stages of growth and development that businesses
typically go through, including introduction, growth, maturity, and decline. Most businesses
follow a similar pattern, although the specific stages and timelines may vary.
61) 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.
Answer: False
Rationale:
The main challenges in the early growth stage are to manage cash flow, ensure customer
satisfaction, and establish efficient operational processes. While refining the initial product or
service is important, it is not the main focus during this stage.
62) A business's early growth stage is generally characterized by increasing sales and heightened
complexity.
Answer: True
Rationale:
During the early growth stage, businesses typically experience increasing sales as they attract
more customers. The growth also brings added complexity in operations, management, and
resource allocation.
63) As a business moves beyond its early growth stage and its pace of growth accelerates, the
need for structure and formalization decreases.
Answer: False
Rationale:
As a business accelerates its growth, the need for structure and formalization typically increases
to ensure that the organization can effectively manage its expanding operations and maintain
efficiency.
64) 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.
Answer: False
Rationale:
According to Penrose, managerial services administer the routine functions of the firm, while
entrepreneurial services are responsible for generating new market, product, and service ideas
and facilitating their execution.
65) According to Penrose, entrepreneurial services generate new market, product, and service
ideas.
Answer: True
Rationale:
Penrose emphasized the role of entrepreneurial services in generating new ideas and
opportunities for the firm, which is essential for its growth and success.
66) 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.
Answer: True
Rationale:
Adverse selection refers to the difficulty of finding suitable employees as a firm grows, which
can arise due to increased competition for talent or challenges in matching employees to specific
roles.
67) 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.
Answer: True
Rationale:
Moral hazard refers to the risk that as a firm grows, new employees may not have the same level
of motivation or commitment as the original founders, potentially leading to issues such as
reduced effort or productivity.
68) Growth usually decreases rather than increases the challenges involved with cash flow
management.
Answer: False
Rationale:
Growth typically increases the challenges involved with cash flow management, as businesses
may need to invest more in inventory, infrastructure, and personnel to support their growth,
leading to increased cash outflows.
69) One of the most difficult challenges that businesses encounter as they grow is maintaining
high levels of quality and customer service.
Answer: True
Rationale:
As businesses grow, maintaining consistent quality and customer service can be challenging, as
the organization expands and faces increased demands on its resources and operations.
70) Most businesses need capital from time to time to invest in growth-enabling projects.
Answer: True
Rationale:
Capital is often required for businesses to invest in new equipment, technology, marketing, or
expansion into new markets, all of which can facilitate growth and enhance competitiveness.
71) 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.
72) 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.
73) Define the term "market leadership." Why do firms 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 the firm to win customers and attract talented employees,
as well as business partners.
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. It's 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.
75) 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's 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.
Test Bank for Entrepreneurship: Successfully Launching New Ventures
Bruce R. Barringer, R. Duane Ireland
9780132555524, 9780131393905, 9780134729534, 9780133797190
