CH-3-4 Designing a Competitive Business Model and Building a Solid Strategic Plan – Essentials of Entrepreneurship and Small Business Management : Exam Guide

This Document Contains Chapters 3 to 4 Chapter 3 Designing a Competitive Business Model and Building a Solid Strategic Plan 1) Which of the following is not one of the three components of intellectual capital? A) Human B) Structural C) Competitor D) Customer Answer: C 2) ________ involves developing a game plan to guide a company as it strives to accomplish its mission, goals, and objectives to keep it on its desired course. A) Competitive advantage B) Mission C) Strategic management D) Market segmentation Answer: C 3) The aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market, superior to its competition, is its: A) mission statement. B) competitive advantage. C) competitive profile. D) strategic plan. Answer: B 4) Which of the following was not identified as a way for the typical small business to establish a competitive advantage? A) Lowering prices B) Providing higher quality goods or services C) Improving customer service D) Doing whatever the company does for its customers better than its competitors Answer: A 5) ________ are a unique set of capabilities that a company develops in key operational areas-such as service, innovation, and others-that allow it to potentially vault past its competitors. A) Core competencies B) Opportunities C) Key success factors D) Mission statements Answer: A 6) The relationship between core competencies and competitive advantage is best described by which statement? A) Strengthening a company's competitive advantage strengthens its core competencies. B) A company's core competencies become the nucleus of its competitive advantage. C) As a company's core competencies become stronger, its competitive advantage becomes weaker. D) There is no relationship between core competencies and competitive advantage. Answer: B 7) The key to entrepreneurial success over time is to build a ________ competitive advantage. A) defensible B) sustainable C) coherent D) random Answer: B 8) A strategic plan serves as a blueprint to help a company to: A) match their company's strengths and weaknesses to the environment's opportunities and threats. B) accomplish its mission, goals, and objectives. C) identify a company's competitive advantage and set it apart from its competition with a unique position in the market. D) All of the above Answer: D 9) Which of the following is NOT a characteristic of the strategic management procedure for a small company? A) It should use a relatively short planning horizon-two years or less, typically. B) It should begin with an extensive objective-setting session. C) It should encourage the participation of employees and even outsiders to improve the reliability and creativity of the resulting plan. D) It should allow for flexibility and not be overly structured. Answer: B 10) A clearly defined vision helps a company in which of the following ways? A) Provides direction B) Determines decisions C) Motivates people D) All of the above Answer: D 11) A small company's mission statement: A) establishes its purpose in writing. B) gives the business and everyone in it a sense of direction. C) defines what the company is, why it exists, and its reason for being. D) All of the above Answer: D 12) When developing a company's mission statement, an entrepreneur should remember to: A) write the statement alone without anyone else's interference. B) omit statements about her values because they may turn some stakeholders off. C) keep it short and simple. D) All of the above Answer: C 13) Strengths and weaknesses are ________ to the organization. A) internal factors B) external factors C) internal and/or external factors D) factors not belonging Answer: A 14) ________ are positive internal factors that contribute toward accomplishing the company's mission, goals, and objectives, while ________ are negative internal factors that inhibit the accomplishment of a firm's mission, goals, and objectives. A) Strengths; weaknesses B) Weaknesses; strengths C) Opportunities; threats D) Threats; opportunities Answer: A 15) Kevin Abt noticed that people were cooking meals in their homes less often but wanted to avoid the hassle of going out to eat. They wanted to "eat in" without cooking. Abt launched a company, Takeout Taxi, that delivers restaurant-prepared food to his customers' homes and businesses. Takeout Taxi is the result of a(n): A) strength. B) weakness. C) opportunity. D) threat. Answer: C 16) Maria Sanchez is the owner of the Main Street Café and a new restaurant opens a few blocks away. From Maria's perspective, this new restaurant constitutes a(n): A) strength. B) weakness. C) threat. D) opportunity. Answer: C 17) Every business is characterized by a set of controllable variables that determines the relative success (or lack of it) of market participants called: A) distinctive competencies. B) key success factors. C) opportunities and threats. D) competitive edge. Answer: B 18) Gathering competitive intelligence, such as "dumpster diving" in a competitors trash, may raise questions regarding: A) the integrity of the data. B) the competitive profile matrix. C) a cost benefit analysis. D) ethical standards. Answer: D 19) Your ________ competitors offer the same products and services, and customers often compare prices, features, and deals from these competitors as they shop. A) significant B) direct C) indirect D) All of the above Answer: B 20) An ________ competitor offers the same or similar products of services only in a small number of areas, and their target customers seldom overlap yours. A) indirect competitor B) direct C) parallel D) divergent Answer: A 21) Which of the following is true about the information-gathering process in competitive analysis? A) It is an expensive process which only large companies can afford. B) It can be relatively inexpensive and easy for the small business owner to conduct. C) It is a process closely regulated by various federal laws which prohibit doing things like purchasing competitive products and analyzing them. D) It is a process that requires expert help and is relatively expensive. Answer: B 22) Which of the following is an effective method of collecting information about competitors? A) Ask customers and suppliers what competitors are doing. B) Talk to employees, especially sales representatives and purchasing agents, about competitors. C) Attend trade shows and collect competitors' sales literature. D) All of the above Answer: D 23) Which of the following is not a recommended method of collecting competitive intelligence? A) Attend trade shows and collect competitors' sales literature. B) Buy competitors' products or services and assess their quality and features, benchmarking their products and services against yours. C) Pay competitors' employees to become informants about their companies' strategies, markets, and trade secrets. D) Watch for employment ads from competitors to determine the types of workers they are hiring. Answer: C For the question(s) below, consider the following competitive profile matrix: 24) Which of the following statements is true? A) Overall, Competitor 2 is the strongest of these three companies. B) Your company's most serious weakness is its poor quality. C) Your company's most vulnerable point against these two competitors is in the area of on-time delivery. D) The most important of the key success factors is location. Answer: C 25) Which company has the strongest competitive position? A) Your company B) Competitor 1 C) Competitor 2 D) Impossible to tell from the information given Answer: A 26) Which of the following statements is true? A) Overall, Competitor 2 is the strongest of these three companies. B) Your company's most serious weakness is its poor quality. C) Your company's most vulnerable point against these two competitors is in the area of on-time delivery. D) The most important of the key success factors is location. Answer: C 27) Which company has the worst location? A) Your company B) Competitor 1 C) Competitor 2 D) Impossible to tell from the information given Answer: B 28) In terms of quality, which company has the weakest competitive position? A) Your company B) Competitor 1 C) Competitor 2 D) Impossible to tell from the information given Answer: C 29) Which key success factor does the entrepreneur who built this table believe is most important? A) Quality B) Service and on-time delivery C) Convenience D) Location Answer: A 30) A competitive profile matrix: A) identifies a firm's core competencies. B) permits the small business owner to divide a mass market into smaller, more manageable segments. C) allows the small business owner to evaluate her firm against competitors on the key success factors for the industry. D) creates a road map of action for the entrepreneur in order to fulfill her company's mission, goals, and objectives. Answer: C 31) ________ are the broad, long-range attributes the small business seeks to accomplish; ________ are the more specific targets for performance. A) Goals; objectives B) Goals; strategies C) Objectives; goals D) Strategies; goals Answer: A 32) Which of the following is not a characteristic of a well-written objective? A) Realistic, yet challenging B) Measurable C) General D) Timely Answer: C 33) The focal point of any company's strategy, whatever it may be, should be: A) its product or service. B) its competition. C) its customers. D) its strengths and weaknesses. Answer: C 34) A ________ is a road map of the tactics and actions an entrepreneur draws up to fulfill the company's mission, goals, and objectives. A) mission B) strategy C) competitive edge D) core competency Answer: B 35) ________ spell(s) out the "ends" an organization is to achieve; ________ define(s) the "means" for achieving the ends. A) Mission, goals, and objectives; strategy B) Key success factors; strategy C) Strategy; mission, goals, and objectives D) Strategy; vision Answer: A 36) The relationship between a company's mission, goals, and objectives and its strategy is best described by which of the following statements? A) Developing a company's strategy lays the groundwork for creating its mission, goals, and objectives. B) The mission, goals, and objectives spell out the ends the company wants to achieve, and the strategy defines the means for reaching them. C) Although managers must change a company's mission, goals, and objectives as competitive conditions change, they should avoid adjusting the company's strategy to prevent the company from losing its focus and momentum. D) There is no real link between a company's mission, goals, and objectives and its strategy. Answer: B 37) A strategy should: A) be comprehensive and well integrated. B) focus on establishing for the firm the key success factors in the industry. C) identify how the firm will accomplish its mission, goals, and objectives. D) All of the above Answer: D 38) A cost-leadership strategy: A) enables companies to concentrate on a niche within the overall market. B) is built on differences among market segments. C) works best when buyers' primary purchase criterion is price. D) All of the above Answer: C 39) A cost-leadership strategy works well when: A) buyers are sensitive to price changes. B) competing firms sell the same commodity products. C) a company can reap savings from economies of scale. D) All of the above Answer: D 40) Small firms pursuing a cost-leadership strategy have an advantage in reaching customers whose primary purchase criterion is: A) quality. B) constant innovation. C) price. D) customer service. Answer: C 41) Skatell's, a small jewelry store with three locations, designs and manufactures much of its own jewelry while its competitors (many of them large department stores) sell standard, "off-the-shelf" jewelry. As a result, Skatell's has developed a loyal customer base of people who seek unique pieces of jewelry. Skatell's reputation for selling unique and custom-designed jewelry allows them to benefit from a: A) cost-leadership strategy. B) differentiation strategy. C) focus strategy. D) competitive strategy. Answer: A 42) Cost-leadership may have which of the following inherent dangers? A) What is chosen to distinguish the product does not boost its performance. B) An over-focus on the physical characteristics of the product C) The identified niche is not large enough to be profitable. D) An overemphasis on costs to the elimination of other strategies Answer: D 43) A differentiation strategy: A) seeks to build customer loyalty by positioning goods or services in a unique fashion. B) is built on a company's core competence. C) must create the perception of value in the customer's eyes. D) All of the above Answer: D 44) A small company following a ________ strategy seeks to build customer loyalty by positioning its goods and services in a unique fashion. A) differentiation B) cost-leadership C) focus D) niche Answer: A 45) A company that offers superior product quality, extra customer service, and fast delivery times is pursuing a: A) cost-leadership strategy. B) differentiation strategy. C) concentration strategy. D) strategic alliance. Answer: B 46) Which of the following is a danger in choosing a differentiation strategy? A) Focusing only on physical characteristics of a product or service and ignoring important psychological factors, such as status, prestige, image, and customer service B) Choosing a market that is not large enough to be profitable C) Misunderstanding the firm's true cost drivers D) All of the above Answer: A 47) The principle behind a ________ strategy is to select one or more market segments, identify customers' special needs, and approach them with a good or service designed to excel in meeting these needs. A) cost-leadership B) differentiation C) focus D) concentration Answer: C 48) Rather than attempting to serve the total market, the small firm pursuing a ________ strategy specializes in serving a specific target segment. A) cost-leadership B) differentiation C) focus D) head-to-head Answer: C 49) Shere Vincente operates a travel service that specializes in arranging trips for women, giving special attention to their needs and preferences, from security and comfort to activities and events designed to appeal to her target customers. Vincente is pursuing a ________ strategy. A) cost-leadership B) differentiation C) focus D) positioning Answer: C 50) Small companies must develop strategies that exploit all of the competitive advantages of their size by: A) responding quickly to customers' needs. B) remaining flexible and willing to change. C) constantly innovating. D) All of the above Answer: D 51) In order for the control process to work, the business owner must: A) make as few changes and modifications in the operational plans as possible. B) concentrate on competitive information. C) identify and track key performance indicators. D) maintain control and delegate as little authority and responsibility as possible. Answer: C 52) Which of the following is NOT one of the four important perspectives a balanced scorecard should look at a business from? A) Competitor perspective B) Internal business perspective C) Innovation and learning perspective D) Financial perspective Answer: A 53) The balanced scorecard ideally looks at a business from four important perspectives relating to: A) low-cost, differentiation, focus, and initiative. B) customers, buyers, suppliers, and substitute products. C) customers, internal factors, capital, and human resources. D) customers, internal factors, innovation, and finances. Answer: D 54) With the growth of the Internet, cloud computing, globalization, and increased competition, the business environment has become more turbulent and challenging. Answer: True 55) One of the biggest changes entrepreneurs face is the shift in the economy from a base of financial to intellectual capital. Answer: True 56) The three components of intellectual capital are human, structural, and customer. Answer: True 57) Narrower product lines, smaller customer bases, and more limited geographic areas give small companies a natural advantage over large businesses when preparing a strategic plan. Answer: True 58) The most effective way for a small business to establish a competitive advantage is by offering lower prices. Answer: False 59) Small companies' core competencies are often the result of benefits such as agility, speed, closeness to customers, superior service, and innovative ability-all of which are size advantages that allow them to do things that their larger competitors cannot. Answer: True 60) Large companies have a natural advantage over small firms when it comes to preparing a strategic plan. Answer: False 61) Although developing a strategic plan is important for large companies, it is not essential to managing a small company successfully because of its limited resources. Answer: False 62) The ideal strategic planning process for a small company should start with setting objectives. Answer: False 63) The ideal strategic planning procedure for a small company should be formal and highly structured. Answer: False 64) The most effective way to communicate the values of a company to everyone it touches is to formulate an effective mission statement. Answer: True 65) The mission statement addresses the first question of any business venture: "What business am I in?" Answer: True 66) A company's mission statement defines what it stands for, why it exists, and its reason for being. Answer: True 67) As business and competitive conditions change, so should a small company's mission statement. Answer: True 68) A company's mission statement should be lengthy and use fancy jargon to impress outsiders. Answer: False 69) Conducting a SWOT analysis for her own business and for her key competitors allows an entrepreneur to gain a competitive edge by matching her company's strengths against her competitors' weaknesses. Answer: True 70) Strengths are positive internal factors that contribute towards accomplishing the company's mission, goals, and objectives. Answer: True 71) Weaknesses are negative external forces that inhibit the firm's ability to achieve its mission, goals, and objectives. Answer: False 72) After a company's strengths and weaknesses are assessed, the strategic planning process should identify opportunities and threats facing the company and should isolate the key factors for success in business. Answer: True 73) Threats are negative external forces that inhibit a company's ability to achieve its mission, goals, and objectives. Answer: True 74) "Big box retailers" present an opportunity for many small business owners. Answer: False 75) To be effective, the small business owner should limit strategic analysis to only the two or three most significant opportunities facing the firm. Answer: True 76) A firm's strategy must focus on establishing for the firm the key success factors the entrepreneur has identified for the industry. Answer: True 77) A small business owner can collect a great deal of information about competitors through a number of low-cost competitive intelligence methods. Answer: True 78) Experts estimate that 70 to 90 percent of the competitive information a company needs already resides with employees who collect it in their daily dealings with suppliers, customers, and other industry contacts. Answer: True 79) A competitor analysis should include an analysis of direct competitors as well as significant and indirect competitors. Answer: True 80) Significant competitors are those that offer the same products and services your company offers, and customers often compare prices, features, and deals from these competitors as they shop. Answer: False 81) Conducting successful competitive intelligence on rivals' strategies and actions may include researching their Web sites, buying their products to assess their quality, and watching for employment ads to determine the type of employees they are hiring. Answer: True 82) Performing competitive intelligence on rivals' strategies and actions does not mean that entrepreneurs must engage in unethical or illegal espionage activities. Answer: True 83) It is unwise for entrepreneurs to monitor competitors' strategies and actions because such activities require them to engage in illegal or unethical behavior. Answer: False 84) One of the goals of competitive analysis is to improve a firm's reaction time to competitor's actions. Answer: True 85) A competitive profile matrix analyzes how well a company and its rivals match the key success factors in the industry. Answer: True 86) Goals are the broad, long-range attributes that a business seeks to accomplish; objectives are more specific targets of performance. Answer: True 87) Before an entrepreneur can build a successful strategy, she must establish a clear mission, goals, and objectives in order to have appropriate targets at which to aim her strategy. Answer: True 88) Goals and objectives provide targets to aim for and a basis for evaluating a company's performance. Answer: True 89) "Improving the company's cash flow" is a good example of an effective objective. Answer: False 90) A company's strategy spells out the ends the business wants to achieve, and its mission, goals, and objectives define the means for reaching them. Answer: False 91) Setting seemingly impossible objectives, those outside of the likely reach of employees, helps managers to create and maintain a high motivation level. Answer: False 92) "Increasing our market share from 8 percent to 10 percent by the end of the current fiscal year" is a good example of an effective objective. Answer: True 93) Objectives should be as general as possible to permit flexibility in the business. Answer: False 94) The strategic planning process works best when employees are actively involved with managers in setting company goals and objectives. Answer: True 95) A strategy is a road map of action for fulfilling a firm's mission, goals, and objectives. Answer: True 96) A company pursuing a cost-leadership strategy strives to be the lowest-cost producer relative to its competitors in the industry. Answer: True 97) A danger of cost-leadership is that a company may misunderstand what processes actually drive its true costs. Answer: True 98) Small firms pursuing a cost-leadership strategy have an advantage in reaching customers whose primary purchase criterion is high quality. Answer: False 99) The best way to build a cost-leadership competitive advantage is to focus entirely on manufacturing costs. Answer: False 100) One key to building a successful differentiation strategy is to be better than competitors at some characteristic that customers value. Answer: True 101) To be successful, a differentiation strategy must create the perception of value in the customer's eyes. Answer: True 102) The key to a successful differentiation strategy is to build it on a core competency, something the company is uniquely good at doing in comparison to its competitors. Answer: True 103) A differentiation strategy frequently allows the company the opportunity to charge a higher price for its products or services. Answer: True 104) One danger in choosing a differentiation strategy is trying to differentiate based on something that the customer does not perceive as valuable. Answer: True 105) A small business following a focus strategy attempts to serve its narrow target markets more effectively and efficiently than competitors trying to appeal to the broad market. Answer: True 106) A focus strategy recognizes that not all markets are homogeneous. Answer: True 107) Focus strategies build on differences among market segments. Answer: True 108) The secret to good control is identifying and tracking key performance indicators. Answer: True 109) To evaluate the effectiveness of their strategies, some companies are developing balanced scorecards, a set of measurements unique to a company that includes both financial and operational measures and gives managers a quick, comprehensive picture of the company's total performance. Answer: True 110) When creating a balanced scorecard for his or her company, an entrepreneur should establish goals for each critical indicator of company performance and create meaningful measures for each one. Answer: True 111) The focal point of the entire strategic plan and the competitive strategy chosen should be the customer. Answer: True 112) A balanced scorecard looks at a business from four important perspectives: competitor, internal, innovation and learning, and financial. Answer: False 113) Ideally, strategic planning is not an outcome but an ongoing process. Answer: True 114) What advice would you offer an entrepreneur on how to create a mission statement for his or her company? Answer: Tips for writing a powerful mission statement include: • Keep it short • Keep it simple • Get everyone in the company involved • Keep it current • Reflect your values and beliefs • Reflect concern for future • Keep tone positive and upbeat; use it to lay ethical foundation for company • Look at other companies' mission statements; make sure it is appropriate for company culture • Use it 115) Define each of the following terms and give an example of each: strengths, weaknesses, opportunities, and threats. Answer: Strengths are positive internal factors that a company can use to accomplish its mission, goals, and objectives Examples: • special skills or knowledge • positive public image • experienced sales force Weaknesses are negative internal factors that inhibit the accomplishment of a company's mission, goals, and objectives Examples: • lack of capital • shortage of skilled labor • inferior location Opportunities are positive external options that a firm can exploit to accomplish its mission, goals, and objectives Examples: • proprietary technology • emergence of potentially new target market(s) • lower interest rates Threats are negative external forces that inhibit a company's ability to achieve its mission, goals, and objectives Examples: • new competitors • adverse legislation • economic recession 116) Assume that you are a consultant to a small independent hardware store in a town where a retail giant such as Wal-Mart, Kmart, or Target is about to open. The large retailer sells many of the same items the small hardware store sells, but at lower prices. What advice would you offer the owner concerning the hardware store's strategy? Explain. Answer: To compete successfully against a larger competitor, the small business owner must develop a true competitive advantage and utilize those core competencies that set the small business apart from the giant conglomerates like Wal-Mart. Through the strategic management process, a concise plan could be developed. The typical small business has fewer product lines, a better-defined customer base, and a specific geographical area. Valuable information can be obtained through close customer contacts and a more flexible approach to meeting customer needs. 117) What is strategic management? What role does a strategic plan play in a small company? Answer: Strategic management involves developing a game plan to guide a company as it strives to accomplish its vision, mission, goals, and objectives and to keep it from straying off its desired course. The strategic management process provides owners a blueprint for matching their companies' strengths and weaknesses to the opportunities and threats in the environment. 118) Assume you own a small print shop. Who are your competitors and why is it important for you to monitor your competitors' activities? Describe at least five techniques you might use to monitor competitors' strategies and actions ethically and inexpensively. Answer: A recent survey identified the greatest small business challenge as competition. Other studies suggest that monitoring rivals' movements through competitive intelligence programs is vital to strategic activity and survival. Specific techniques you might use include: • Reading industry trade publications • Asking customers and suppliers • Regularly debrief employees • Attending trade shows • Monitor social media and online activity • Conduct patent searches • Check EPA reports • Learn about the kinds and amounts of equipment and raw materials that competitors are importing • Buying competitors' products (benchmarking) • Obtaining credit reports • Review SEC reports • Buying competitors' products (benchmarking) • Investigate UCC reports • Checking library resources • Visit competitors's Web sites periodically • Visiting competing businesses • Don't resort to unethical or illegal practices 119) Assume you own a small shoe store. Discuss the three different types of competition you might face and give examples of each. Answer: Direct competitors offer the same products and services, and customers often compare prices, features, and deals from these competitors as they shop. Other shoe stores would be direct competitors. Significant competitors offer some of the same products and services. Although their product or service lines may be somewhat different, there is competition with them in several key areas. Department stores and athletic stores would be examples of significant competitors. Indirect competitors offer the same or similar products or services only in a small number of areas, but their target customers seldom overlap yours. Discount stores and thrift stores may be examples of indirect competitors. 120) What is strategy? Describe the three basic strategies small companies can choose from: cost-leadership, differentiation, and focus. Explain the conditions under which each works, its benefits, and its pitfalls. Answer: Strategy is a road map of the actions an entrepreneur draws up to a company's mission, goals, and objectives. This master plan covers all of the major organizational parts and ties them together. Cost-leadership: Strives to be the lowest-cost producer. Best When: Primary purchase criterion is price, and the power to set industry's floor price and economies of scale are available. Disadvantage: If cost drivers are unknown or other strategies are overlooked. Differentiation: Seeks to build customer loyalty by positioning its product/service in a unique or different fashion. Best When: Differentiation is in the form of a "true benefit" to the customer. Disadvantage: Trying to differentiate based on something that does not boost performance or lower cost. Focus: Select one or more customer(s)/market(s) to create a niche. Best When: Creating real value for customer by differentiation or low cost in a narrow target segment. Disadvantages: Includes not being able to capture enough of a market share to be profitable. 121) Assume you own a small camera shop that sells and repairs cameras and equipment. Discuss some of the methods you might select to allow you to successfully compete against the many large retailers that are nearby. Answer: In most cases, small business owners will not be able to select a cost-leadership strategy to meet the larger competitors who have a size advantage over them. Therefore, this small business owner will probably have a greater chance of success utilizing a focus and/or differentiation strategy. One option is to use a focus strategy by concentrating on a specific market segment, identifying those consumers' special needs, wants, and interests, and approaching them with a mix of product offerings that excel in meeting those needs, wants, and interests. Another choice may be to use a differentiation strategy that would seek to build customer loyalty by positioning his goods and services in a unique or different way than the competition. For example, the camera shop may offer superior customer service, special product features, complete product lines, instantaneous parts availability, absolute product reliability, supreme product quality, and extensive product knowledge. They might also offer on-site repair of camera equipment. Mini-Case 3-1: Finding a Competitive Advantage Copreneurs Ed and Yolanda recently opened a vintage used car lot called Cherry Lane. They sell antique and collectible cars on consignment for the owners at a fee of 30 percent of the selling price. The price is further reduced by 10 percent if a particular car is not sold within the first 30 days. One of the first customers convinced Yolanda that this was the only fair thing to do, and in an effort to provide something for "the cost conscious buyer," she provided what she thought was excellent customer service and implemented the idea. Ed and Yolanda feel Cherry Lane has an ideal location. It is located adjacent to the city's baseball stadium, alongside the freeway in the center of all the other car dealerships. Although Cherry Lane has significant foot traffic, most people never make offers to buy. In an effort to increase sales, Ed and Yolanda are working on a new marketing strategy that they believe should be quite different from the "shotgun" approach they had been using over the last few months. 122) What is a competitive advantage? Does Cherry Lane have one? If so, what is it? Answer: A competitive advantage is an aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market. No business can be everything to everyone. Developing a strategic plan allows the small business to differentiate itself from other companies-a common pitfall for many small firms. Cherry Lane has an advantage over regular car dealerships because they are well suited to concentrate on the collectible car enthusiast niche in their marketplace. 123) As Ed and Yolanda begin the strategic planning process, what steps should they take? Answer: The entrepreneurs should follow these nine steps: Step 1: Develop a clear vision and translate it into a meaningful mission statement. Step 2: Assess the company's strengths and weaknesses. Step 3: Scan the environment for significant opportunities and threats facing the business. Step 4: Identify the key factors for success in the business. Step 5: Analyze the competition. Step 6: Create company goals and objectives. Step 7: Formulate strategic options and select the appropriate strategies. Step 8: Translate strategic plans into action plans. Step 9: Establish accurate controls. The strategic planning process does not end with these ten steps; rather, it is an ongoing process that an entrepreneur will repeat. 124) Considering the three basic small business strategies identified in your textbook, which one would work best for Cherry Lane? Why might that strategy be successful? Answer: A cost-leadership strategy would not complement the higher price image that these collectible cars usually have. Some students may identify the appropriate strategy as differentiation; however, the other car dealerships are not direct competitors, nor is their market the same. The focus strategy could be used to successfully position Cherry Lane with its ability to meet the needs of a special customer base-collectible car buffs. Rather than attempting to serve the total market, the focusing firm specializes in serving a specific target segment or niche. Lowering prices with this special target market is not as important as creating the perception of value in the customers' eyes. Chapter 4 Conducting a Feasibility Analysis and Crafting a Winning Business Plan 1) The process of determining whether an entrepreneur's idea is a viable foundation for creating a successful business is known as a: A) business plan. B) strategic analysis. C) industry analysis. D) feasibility analysis. Answer: D 2) Porter's five forces model assesses industry attractiveness by surveying these five factors: A) potential entrants, suppliers, buyers, substitutes, and rivalry among existing firms. B) potential entrants, suppliers, buyers, similar products, and rivalry among existing firms. C) potential entrants, suppliers, raw materials, substitutes, and rivalry among existing firms. D) potential entrants, competitors, buyers, substitutes, and rivalry among existing firms. Answer: A 3) The strongest of the five forces in most industries is: A) rivalry among companies competing in the industry. B) bargaining power of buyers. C) threat of new entrants to the industry. D) threat of substitute products or services. Answer: A 4) Switching costs, the number of buyers, and if the items represent a relatively small portion of the cost of finished products are key considerations regarding the: A) threat of new entrants to the industry. B) rivalry among companies competing in the industry. C) bargaining power of suppliers. D) bargaining power of buyers. Answer: D 5) Low capital requirements, cost advantages that are not related to company size, and the lack of brand loyalty are considerations regarding the: A) threat of new entrants to the industry. B) threat of substitute products. C) bargaining power of buyers. D) rivalry among companies competing in the industry. Answer: A 6) Products or services that may be sought as alternative solutions-such as purchasing tax planning software rather than paying a CPA to assist with preparing your taxes-are referred to as: A) buyers products. B) rivalry products. C) substitute products. D) competitive alternatives. Answer: C 7) The force from the five forces model that considers economies of scale, initial capital requirements, cost advantages relevant to company size, and lack of brand loyalty is the: A) bargaining power of suppliers. B) threat of new entrants. C) threat of substitute products or services. D) rivalry among companies competing. Answer: B 8) The primary purpose of the five forces matrix is to: A) assign values to each of the five elements. B) provide a graphic. C) list the five forces in rank order. D) assess the five forces as compared to a standard value. Answer: A 9) The process in which entrepreneurs test their business models on a small scale before committing serious resources to launch a business that might not work is known as: A) business modeling. B) business prototyping. C) business planning. D) product or service feasibility analysis. Answer: B 10) An analysis that determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service is referred to as: A) product or service feasibility analysis. B) business prototyping. C) business plan analysis. D) financial feasibility analysis. Answer: A 11) Conducting ________ research involves collecting data firsthand and analyzing it while ________ research involves gathering data that has already been complied and is available. A) primary; secondary B) secondary; primary C) primary; industry D) product; secondary Answer: A 12) One form of primary research is: A) to review published articles. B) Internet research. C) library research. D) a focus group. Answer: D 13) The financial feasibility analysis takes these aspects into consideration: A) capital requirements, human resources, and return on investment. B) capital requirements, estimated earnings, and return on investment. C) capital requirements, estimated earnings, and return on sales. D) capital requirements, estimated earnings, and return on owner's equity. Answer: B 14) The final aspect of the financial feasibility analysis combines the estimated earnings and the capital requirements to determine the: A) estimated earnings. B) total capital requirements. C) net profit. D) rate of return on the capital invested. Answer: D 15) The primary purpose of a business plan is to: A) attract lenders and investors. B) enable an entrepreneur to take her company public. C) guide a company by charting its future course and devising a strategy for success. D) meet SEC and other legal requirements designed to protect lenders and investors. Answer: C 16) A business plan is a written summary of: A) an entrepreneur's proposed business venture. B) a business venture's operational, financial, and marketing details. C) the skills and abilities of a business venture's managers. D) All of the above Answer: D 17) A business plan: A) is a valuable managerial tool that helps an entrepreneur focus on developing a course for the business in the future. B) is a valuable tool for convincing lenders or investors to put money into the business. C) forces an entrepreneur to think a business idea through, considering both its positive and its negative aspects. D) All of the above Answer: D 18) A solid business plan: A) forces potential entrepreneurs to look at their business idea in the harsh light of reality. B) requires a potential entrepreneur to assess the venture's chances of success more objectively. C) helps prove to outsiders, such as potential lenders and investors, that a business idea can be successful. D) All of the above Answer: D 19) The second essential purpose for creating a business plan is: A) to guide the operation of the company by charting its future course and devising a strategy for following it. B) to attract lenders and investors. C) to file with the SEC before a public stock offering. D) to attract potential managers and employees to run the new venture. Answer: B 20) The three "tests" associated with a business plan are: A) reality, competitive, and value. B) competitive, profitability, and value. C) value, reality, and profitability. D) reality, value and litmus. Answer: A 21) The ________ test that a business plan must pass in order to attract financing from lenders and investors involves proving that a market for the company's product or service actually does exist and that the company actually can build it for the cost estimates included in the plan. A) reality B) competitive C) value D) profitability Answer: A 22) The reality test that a business plan must pass in order to attract financing from lenders and investors involves proving: A) that the company can gain a competitive advantage over its key competitors. B) that the business venture will provide lenders and investors a high probability of repayment or an attractive rate of return. C) that a market for the company's product or service actually does exist and that the company can actually build it for the cost estimates included in the plan. D) that the industry in which the business will compete is growing faster than the overall economy and has room for more competitors. Answer: C 23) The competitive test that a business plan must pass in order to attract financing from lenders and investors involves proving: A) that the company can gain a competitive advantage over its key competitors. B) that the business venture will provide lenders and investors a high probability of repayment or an attractive rate of return. C) that a market for the company's product or service actually does exist and that the company can actually build it for the cost estimates included in the plan. D) that the industry in which the business will compete is growing faster than the overall economy and has room for more competitors. Answer: A 24) The value test that a business plan must pass in order to attract financing from lenders and investors involves proving: A) that the company can gain a competitive advantage over its key competitors. B) that the business venture will provide lenders and investors a high probability of repayment or an attractive rate of return. C) that a market for the company's product or service actually does exist and that the company can actually build it for the cost estimates included in the plan. D) that the industry in which the business will compete is growing faster than the overall economy and has room for more competitors. Answer: B 25) Potential investors tend to believe that if an entrepreneur cannot develop a good plan, the entrepreneur: A) is probably the action-oriented sort of person-they need running a business. B) needs to hire a consultant to write the plan for him. C) probably lacks the discipline to run a business. D) is just like the majority of entrepreneurs and will probably do quite well. Answer: C 26) Which of the following statements is not true according to the "two-thirds rule"? A) Only two-thirds of entrepreneurs with a sound and viable business venture will find financial backing. B) Entrepreneurs who do get financing for their business will get only two-thirds of the capital they initially requested. C) Entrepreneurs who do get financing for their businesses will find that it takes them two-thirds longer to get it than they anticipated. D) Only two-thirds of entrepreneurs will take the time to prepare a business plan. Answer: D 27) Before putting their money into a business idea, potential lenders and investors: A) look for entrepreneurs who have evaluated the risk in the business venture realistically and have a strategy for addressing it. B) want proof that the business will become profitable. C) want proof that the business will produce a reasonable return on their investment. D) All of the above Answer: D 28) ________ is an entrepreneur's best insurance against launching a business destined to fail or mismanaging a potentially successful company. A) Bankrolling the business with plenty of startup capital B) Creating a solid business plan C) Spending lots of money on marketing and advertising D) Hiring a team of accountants and attorneys as advisors Answer: B 29) Which of the following is true regarding the process of building a business plan? A) It allows an entrepreneur to replace "I think" with "I know" and to make mistakes on paper, which is cheaper than making them in reality. B) It reduces the risk and uncertainty of launching a company by "teaching" the entrepreneur more about the industry, the market and the proposed venture. C) It requires an entrepreneur to subject the business idea to a more objective and critical evaluation. D) All of the above Answer: D 30) Which of the following is true about the preparation of a business plan? A) The format should follow a "cookie-cutter" approach to ensure uniformity and consistency with others and to promote ease of understanding. B) The elements of the plan may be standard, but the content should reflect the unique aspects of the business and the excitement of the entrepreneur. C) The plan should cover every standard element in great detail and be at least 100 pages long to prove to potential lenders and investors that the entrepreneur has studied the business and the market opportunity. D) The entrepreneur should avoid seeking the advice of professionals, such as accountants, business professors, and attorneys. Answer: B 31) Ideally, a business plan should range from ________ pages in length. A) 10 to 20 B) 20 to 40 C) 40 to 75 D) 75 to 100 Answer: B 32) The ________ is also known as the "elevator pitch" and is written last, but is included as the first part of the business plan; it should summarize all the relevant points in about two pages. A) loan proposal B) business history C) business profile D) executive summary Answer: D 33) The executive summary section of the business plan: A) should be a concise summary of the business venture. B) should be no more than two pages long. C) must capture the reader's attention and entice her to read the rest of the plan. D) All of the above Answer: D 34) The executive summary section of the business plan: A) is the last section of the plan, but should be the first part written. B) should be no more than 8 or 10 pages long. C) should summarize the essence of the plan in a capsulated form and should capture the reader's attention. D) All of the above Answer: C 35) The ________ serves as the "thesis statement" for the entire business plan and is the broadest expression of a company's purpose and defines the direction in which it will move. A) executive summary B) mission statement C) company history D) marketing strategy Answer: B 36) The company history section of the business plan typically includes: A) significant financial and operational events. B) highlights of the key goals and objectives the company has accomplished in the past. C) a brief description of when and how the company was formed and how it has evolved over time. D) All of the above Answer: D 37) The ________ highlights significant financial and operational events in the company's life and should concentrate on the company's accomplishments. A) executive summary B) company history C) business and industry profile D) marketing strategy Answer: B 38) Issues such as market size, growth trends, ease of market entry and exit, the presence of cyclical or seasonal sales trends, and the competitive dynamics of an industry appear in the ________ section of the business plan. A) executive summary B) company history C) business and industry profile D) marketing strategy Answer: C 39) The ________ acquaints lenders and investors with the nature of the business and the general goals and objectives of the company. A) executive summary B) company history C) business and industry profile D) marketing strategy Answer: C 40) ________ are broad, long-range statements of what a company plans to achieve in the future that guide its overall direction and addresses the question, "Why am I in business?" A) Goals B) Strategies C) Objectives D) Key performance factors Answer: A 41) ________ are short-term, specific targets which are attainable, measurable, and controllable. A) Objectives B) Policies C) Goals D) Standard operating procedures Answer: A 42) The section that describes "how to get there" and describes a competitive edge that sets the business apart is referred to as the: A) business strategy. B) executive summary. C) industry profile. D) vision statement. Answer: A 43) In the business strategy section of the business plan, the entrepreneur should explain to investors: A) significant financial and operational events in the life of the company. B) how she intends to accomplish the company's goals and objectives. C) the nature and characteristics of the target market. D) All of the above Answer: B 44) Which of the following would be included in the description of the product or service section of the business plan? A) The position of the product in the product life cycle B) A summary of any patents, copyrights, or trademarks protecting the product or service C) A description of the features and the benefits customers get by purchasing the company's products or services D) All of the above Answer: D 45) A ________ is a descriptive fact about a product or service; a ________ is what the customer gains from that characteristic. A) feature; benefit B) feature; trait C) benefit; feature D) benefit; trait Answer: A 46) What is the lesson to be learned about writing a business plan from Leo Burnett's statement, "Don't tell people how good you make the goods; tell them how good your goods make them?" A) The plan should emphasize the features of the company's products and services rather than their benefits. B) The plan should describe how the business will transform tangible product or service features into important, but often intangible, customer benefits. C) The plan should recognize that advertising is a waste of money for startup companies. D) The plan should focus on developing sales in a niche rather than across an entire industry. Answer: B Refer to the following information to answer the question(s) below: Describing her company's revolutionary design for a bottle cap, Kyoto says, "It has a special locking mechanism that you know is engaged when a red panel is showing through this little window on top of the cap. If you want to keep unauthorized hands-for instance, those of children-from opening the bottle, you engage the locking mechanism. Unlike other childproof caps, however, this design does not frustrate adults who might have arthritis and elderly people whose grip may not be as strong as it once was. "Removing the cap from the bottle in no time with just a few turns, Kyoto says, "They can open the cap quite easily by disengaging the locking mechanism this way... see? You get the safety of a childproof cap without the problems most adults have getting them off!" 47) The special locking mechanism on Kyoto's new cap is a ________ of the product. A) feature B) unique selling proposition C) benefit D) All of the above Answer: A 48) The fact that with Kyoto's new cap "you get the safety of a childproof cap without the problems most adults have getting them off" is a ________ of the product. A) feature B) trait C) benefit D) attribute Answer: C 49) Which of the following would be considered a benefit of Kyoto's new cap? A) The special locking mechanism B) The red panel showing through the little window on top of the cap signaling that the locking mechanism is engaged C) The fact that you get the safety of a childproof cap without the problems most adults have getting them off D) All of the above Answer: C 50) Which of the following questions will probably not be addressed in the marketing strategy section of the business plan? A) Who are my target customers, what are their characteristics, and how many are in my company's trading area? B) What, why, and when do my target customers buy? C) What exit policy do I have in place for my investors? D) How should I seek to position my company in its market(s)? Answer: C 51) When formulating a marketing strategy, small companies usually are most successful when they: A) try to be "everything to everybody." B) focus on a particular market niche where they can excel at meeting customers' needs and wants. C) compete with their larger rivals on the basis on price. D) discover what the market leader is doing and pursue a "me-too" strategy that imitates the leader. Answer: B 52) Defining the company's target market, its characteristics, and its potential is part of which element of the business plan? A) Description of the product or service B) Marketing strategy C) Competitor analysis D) Business and industry profile Answer: B 53) Proving that a profitable market exists involves: A) proving that customers in the marketplace need or want the good or service and are willing to pay for it. B) documenting claims about market size and growth rates with as much factual information as possible. C) making claims such as "This market is so big that if we get just 1 percent of it, we'll be profitable within 6 months." D) A and B only Answer: D 54) An explanation of how the product will be distributed is contained within the ________ section of the business plan. A) description of the product line B) marketing strategy C) competitive analysis D) business strategy Answer: B 55) When creating financial forecasts in a business plan for a proposed venture, an entrepreneur should: A) be sure that all forecasts are realistic. B) list all previous loans which are in default. C) avoid including a statement of the assumptions on which financial projections are based. D) present an overly optimistic view of what is ahead for the business. Answer: A 56) The focus of the competitor analysis section of the business plan is on: A) demonstrating the existence of the market for your product. B) showing that your experienced management team is better than your competitors'. C) demonstrating your company's advantage over competitors. D) describing your overall product line. Answer: C 57) The plan of operation of the company within the business plan should detail: A) the experience of the management team. B) the production process for the product being sold. C) plans for keeping the important officers in place with the company. D) the description of the management team. Answer: C 58) The organization chart is described in which section of the business plan? A) The plan of operation B) The resumes of the officers/owners C) Description of the management team D) The executive summary Answer: A 59) The form of ownership under which a company is organized appears in which section of the business plan? A) Marketing strategy B) Business strategy C) Plan of operation D) Mission statement Answer: C 60) The loan proposal section of a business plan should include all but which of the following? A) A general request for funds without stating a specific dollar amount B) A repayment schedule and exit strategy C) A timetable for implementing the plan D) The purpose of the financing Answer: A 61) Which of the following statements about the preparation of a business plan is/are not true? A) Grammatical and spelling errors in a business plan don't really count since potential lenders and investors judge the quality of a plan by its content. B) The business plan should be "crisp," long enough to say what it should but not so long that it is a chore to read. C) Always include cash flow projections for the venture, in addition to projected income statements and balance sheets. D) Always tell the truth. Answer: A 62) The criteria lenders and investors use to evaluate the credit worthiness of entrepreneurs that are seeking financing-including capital, capacity, collateral, character, and conditions-are referred to as: A) components of the business plans. B) aspects of financial strategy. C) the five C's of credit. D) interesting considerations. Answer: C 63) A synonym for capacity is: A) cash flow. B) equipment. C) investors. D) obligations. Answer: A 64) The most common reason cited by banks for rejecting small business loans is: A) poor credit history. B) undercapitalization and too much debt. C) lack of collateral. D) insufficient cash flow or poor profitability. Answer: B 65) Carly will be presenting her business plan to potential lenders and investors soon. Which of the following is not one of the suggested helpful tips for presenting the business plan? A) She should demonstrate enthusiasm for the venture but avoid becoming overemotional about it. B) She should use visual aids to make it easier for people to follow her presentation. C) She should avoid getting caught up in too much detail in early meetings with potential lenders and investors. D) She should use a great deal of technological jargon to impress the audience with her knowledge. Answer: D 66) After presenting her business plan to a group of potential lenders and investors, an entrepreneur should: A) sit back and wait to hear from those who might be interested in the venture. B) conduct credit checks on all potential lenders and investors. C) take a proactive approach by following up with every potential lender and investor to whom she makes a presentation. D) None of the above Answer: C 67) A feasibility analysis is the process of determining whether an entrepreneur's idea is a viable foundation for creating a successful business. Answer: True 68) Porter's five forces model only considers direct competitors within a single industry. Answer: False 69) The five forces model would assess economies of scale factors in the "threat of new entrants" portion of the model. Answer: True 70) Generally, an industry is more attractive when quality substitute products are not readily available, the prices of substitute products are higher, and buyers' costs of switching products is high. Answer: True 71) The strongest of the five forces in most industries is the rivalry that exists among the businesses competing in a particular market. Answer: True 72) New entrants to an industry can erode existing companies' market share and profits. Answer: True 73) A product or service feasibility analysis determines the degree to which a product or service idea appeals to potential customers and identifies the necessary resources. Answer: True 74) Primary research is information that has already been complied and is available for use, often at very reasonable costs or sometimes at no cost to the entrepreneur. Answer: False 75) Capital requirements, estimate earnings, and return on investment are three aspects of the financial feasibility analysis. Answer: True 76) A business plan is a written summary of an entrepreneur's proposed venture, its operational and financial details, its marketing opportunities and strategy, and its managers' skills and abilities. Answer: True 77) The primary purpose of building a business plan is to raise capital. Answer: False 78) A well-prepared business plan forces an entrepreneur to assess the venture's chances of success more objectively. Answer: True 79) To get external financing, an entrepreneur's business plan must pass the reality test, the competitive test, and the value test with potential lenders and investors. Answer: True 80) The reality test that a business plan must pass in order to attract financing from lenders and investors involves proving that a market for the company's product or service actually does exist, and that the company actually can build it for the cost estimates in the plan. Answer: True 81) The competitive test that a business plan must pass in order to attract financing for lenders and investors involves proving to them that the venture offers a high probability of repayment or an attractive rate of return. Answer: False 82) The value test that a business must pass in order to attract financing from lenders and investors involves proving to them that the venture offers a high probability of repayment or an attractive rate of return. Answer: True 83) The data shows that writing a business plan increases the odds that a venture will successfully accomplish important tasks-initializing product development, obtaining inputs, starting marketing, talking to customers, and asking for external funds-as well as continue in business. Answer: True 84) Although building a business plan does not guarantee an entrepreneur's success, it does increase his or her chances of succeeding in business. Answer: True 85) The "two-thirds rule" says that only two-thirds of the entrepreneurs with a sound new business venture will get financing, that they will get only two-thirds of what they need, and that it will take them two-thirds longer to get it than they anticipated. Answer: True 86) An entrepreneur may find that the business plan indicates that the business concept is not viable. This is another potential benefit of writing a business plan; this revelation occurred before the owner committed significant resources -time and money - to the venture. Answer: True 87) The real value in preparing a business plan is not so much in the plan itself as it is in the process the entrepreneur goes through to create the plan. Answer: True 88) Potential lenders and investors believe that an entrepreneur who lacks the discipline to develop a good business plan likely lacks the discipline to run a business. Answer: True 89) Because the entrepreneur is the driving force behind a business idea, he or she should also be the driving force behind the business plan. Answer: True 90) Before presenting a business plan to potential lenders and investors, an entrepreneur must be well informed and well prepared. Answer: True 91) A business plan should contain certain basic elements, but it should also be tailored to the individual company by emphasizing its particular personality and reflecting the entrepreneur's excitement for the business opportunity. Answer: True 92) The most effective business plans follow the "cookie cutter approach," following the standard format most preferred by lenders and investors. Answer: False 93) The ideal business plan should be at least 100 pages long to prove to potential lenders and investors that the entrepreneur has studied the business and the market opportunity sufficiently. Answer: False 94) A table of contents that allows lenders to navigate a business plan easily is an important element of any business plan. Answer: True 95) The executive summary serves as the thesis statement for the entire business plan. Answer: False 96) The executive summary of a business plan should summarize all of the relevant points of the proposed venture and should be concise-no more than two pages. Answer: True 97) The executive summary of a business plan should highlight significant financial and operational events. Answer: False 98) The company's mission statement expresses in words the entrepreneur's vision for what her company is and what it is to become. Answer: True 99) In the business and industry profile section of the business plan, the entrepreneur should provide information on the size of the market, growth trends, and the relative economic and competitive strength of the industry's major players. Answer: True 100) The business and industry profile section of the business plan should cover existing and anticipated profitability of firms in the targeted market segment and any significant entry or exit of firms. Answer: True 101) In a business plan, both company goals and objectives should relate to the company's mission. Answer: True 102) Objectives are short-term, specific targets that the small company plans to accomplish. Answer: True 103) To be meaningful, an objective must include a time frame for achievement. Answer: True 104) The business strategy section of the business plan addresses the question of how the entrepreneur plans to achieve the mission, goals, and objectives he has established for his business venture. Answer: True 105) An important theme of the business strategy section of the business plan is what makes the owner's company original in the eyes of its target customers. Answer: True 106) The safest strategy for an entrepreneur launching a new business to follow is a "me-too" strategy-copying products, services, and the images of already successful businesses. Answer: False 107) The section of the business plan that describes the company's products or services should focus on how a business will transform the tangible features of its products or services into important, but often intangible, customer benefits. Answer: True 108) A benefit is a descriptive fact about a product or service; a feature is what the customer gains from that product or service benefit. Answer: False 109) When describing their products and services in their business plans, entrepreneurs must remember that customers buy the benefits from products and services, not the features. Answer: True 110) An important goal of the "marketing strategy" section of the business plan is to prove that there is a real market for the proposed good or service. Answer: True 111) Defining the company's target market and its buying potential is one of the most important and most challenging parts of building a business plan. Answer: True 112) Identifying a specific target market is not an essential part of creating a solid business plan for a small company. Answer: False 113) The wise entrepreneur will indicate that there is no real competition for his new business venture, thereby increasing the likelihood that he will gain more interested investors. Answer: False 114) A business plan that fails to assess a company's competitors realistically makes the entrepreneur appear to be poorly prepared. Answer: True 115) Because gathering information on competitors' products or services, strategies, and market share is so difficult, most lenders and investors see the competitor analysis section of the business plan as optional. Answer: False 116) The most important factor in the success of a business venture is the quality of its management, and financial officers and investors weigh heavily the ability and experience of the firm's managers in their financing decisions. Answer: True 117) The business plan should include the resumes of anyone with more than a 20 percent ownership interest in the company. Answer: True 118) Lenders and investors prefer experienced managers when they consider financing a business venture. Answer: True 119) The plan of operation section of the business plan should address how the business plans to retain key managers and employees. Answer: True 120) The business plan should include an existing firm's past three years of financial statements as well as its projected statements. Answer: True 121) An entrepreneur should prepare a single set of "most likely" financial forecasts for one year into the future as part of the business plan. Answer: False 122) Essential pieces of information for potential lenders and investors include the assumptions the entrepreneur uses to derive the financial forecasts and projections in the business plan. Answer: True 123) Entrepreneurs should artificially inflate the amount of a loan request and expect the loan officer to "talk them down." Answer: False 124) After presenting the business plan to a group of potential lenders and investors, an entrepreneur should sit back and wait to hear from those who might be interested in the venture. Answer: False 125) A lender's primary concern in granting a loan is reassurance that the applicant will repay it, whereas an investor's primary concern is earning a satisfactory rate of return. Answer: True 126) The loan proposal portion of the business plan should include a realistic timetable for repayment or for investors to exit. Answer: True 127) The entrepreneur's request for funds in the business plan should be specific and detailed. Answer: True 128) Spelling and grammatical errors in a business plan don't really matter; potential lenders and investors look past them at the content of the plan. Answer: False 129) Potential lenders and investors expect entrepreneurs to exaggerate the truth in their business plans, so telling the truth in the plan is really not important. Answer: False 130) The quality of the entrepreneur's business plan determines the first impression potential lenders and investors have of the company. Answer: True 131) The majority of loans banks make to small business startups are unsecured loans. Answer: False 132) The most common reasons banks give for rejecting small business loan applications are undercapitalization and too much debt. Answer: True 133) Cash flow projections are not an essential part of a business plan as long as the entrepreneur provides accurate forecasts of the venture's profits. Answer: False 134) The most common reason banks give for rejecting small business loan applications is the entrepreneur's poor credit history. Answer: False 135) The "C" of the 5 C's of Credit that is synonymous with cash flow is capital. Answer: False 136) Most loans banks make to startup businesses are secured not by collateral but by the character of the entrepreneur. Answer: False 137) The entrepreneur's "character" (even though it is an intangible factor) and the quality of the presentation are important factors in evaluating a loan proposal. Answer: True 138) The higher a small business scores on the 5 C's of credit, the greater its chances will be of receiving a loan. Answer: True 139) When presenting a business plan to a group of potential lenders and investors, an entrepreneur should cover every detail in the plan, striving to answer every question his audience might have. Answer: False 140) To make a business plan more attractive, an entrepreneur should include a potential exit strategy as a way to "cash out" for investors. Answer: True 141) What are some of the most important questions a feasibility analysis answers and what model may be of value in this process? Answer: Questions the feasibility plan addresses include: • How large is the industry? • How fast is the industry growing? • Is the industry as a whole profitable? • Is the industry characterized by high profit margins or razor-thin margins? • How essential are its products or services to customers? • What trends are shaping the industry's future? • What threats does the industry face? • What opportunities does the industry face? • How crowded is the industry? • How intense is the level of competition in the industry? • Is the industry young, mature, or somewhere in between? Porter's five forces model assesses the power of potential entrants, suppliers, buyers, substitutes and the level of rivalry within an industry. This model may be valuable to provide insight regarding potential future profitability within the industry. 142) Explain at least two functions or purposes of preparing a business plan. Answer: There are a number of reasons an entrepreneur should develop a business plan. First and most importantly, the business plan serves as a guide to company operations by charting its future course and devising a strategy for following it. It plans a battery of tools to help the entrepreneur lead the company and it provides direction for managers and employees. It gives everyone a target to shoot for and it provides a yardstick for measuring the actual performance against those targets. A second function of the business plan is to attract lenders and investors. A quality business plan will assure potential lenders and investors that the business venture will be able to repay loans and produce an attractive rate of return. Building the business plan requires that the entrepreneur evaluate his or her business realistically and objectively. Sometimes, the greatest service a business plan provides an entrepreneur is the realization that it just won't work. This benefits the entrepreneur if he or she is able to make this determination prior to committing extensive resources to the venture. In other cases, it reveals important problems to overcome before launching the business. The real value in preparing a business plan is not so much in the plan itself as it is in the process an entrepreneur goes through to create the plan. What he or she learns about the company, its target market, its financial requirements, competition, and other factors can be essential to making the venture a success. In other words, developing a business plan reduces the risk and uncertainty in launching a company by allowing the entrepreneur to make mistakes on paper rather than in reality and to learn to do things the right way. 143) To get external financing, an entrepreneur's plan must pass three tests with potential lenders and investors. List and briefly explain all three. Answer: • Reality Test-You must prove that a market for your product or service really does exist. Focuses on industry attractiveness, market niches, potential customers, market size, degree of competition, and similar factors. These factors point to the potential for a strong demand for the business idea. • Competitive Test-Evaluate your company's relative position to its key competitors. How do your company's strengths and weaknesses compare to those of the competition? • Value Test-You must prove to potential lenders and investors that your business offers a high probability of repayment or an attractive rate of return. 144) "Sometimes the greatest service a business plan provides an entrepreneur is the realization that the business venture just won't succeed." Explain this statement. Answer: The business plan is the entrepreneur's best insurance against launching a business destined to fail or mismanaging a potentially successful business. Creating a plan also forces him/her to consider both the positive and negative aspects of the business, and to subject these ideas to a reality test. This process allows the entrepreneur to replace the "I thinks" with more "I knows." To expose flaws and make mistakes on paper is much cheaper than commiting significant resources to a business. It reduces the risk and uncertainty in launching a business by teaching the entrepreneur to do it the right way. 145) You have been asked to explain the basic elements of a sound business plan to your friend, who is considering beginning a new business. What elements should you recommend he include in his business plan? Answer: Although a business plan should be tailored to fit company needs, it should include these basic components: • Executive summary-Concise summary of all the relevant points of the business venture; brief synopsis of the entire plan; must catch the reader's attention. • Vision and mission statement-Expresses the vision for what the company is and what it is to become as a broad expression of company's purpose and direction. • Company history-Highlights significant financial and operational events in the company's life; describes formation, evolution, and vision for the future. • Business and industry profile-Acquaints potential lenders and investors with the industry in which the company operates; includes summary of goals and objectives. • Goals and Objectives-Stating general business goals to more specific objectives with specific performance targets that are attainable, measurable, and controllable. • Business strategy-Explain how you can meet and beat the competition; addresses the question of how to accomplish your goals and objectives. • Description of products/services-Describe product line, product's position in the product life cycle, and any patents, trademarks, or copyrights; define features and benefits of products or services. • Marketing strategy-Prove that there is a real market for the proposed good or service; describe target market and positioning, advertising, distribution, and pricing. • Documenting market claims-Providing facts regarding the sales potential of a product or service. • Showing customer interest-Demonstrating that a significant number of target customers need or want a company's good or service and are willing to pay for it. • Competitor analysis-Compare your strengths and weaknesses with those of your competition, images in the marketplace, level of success, etc. • Description of the management team-Describe qualifications of business officers, key directors, and any person with at least 20 percent ownership in the company; lenders and investors prefer experienced managers when making funding decisions. • Plan of operation-Construct organization chart; explain steps taken to encourage important officers to remain with the company. • Pro forma (projected) financial statements-Include financial statements from the past three years (if an existing business) and pro forma for the next year (existing or new), including statement of cash flows; should develop realistic forecasts and a statement of the assumptions on which the financial projections are based. • Loan or investment proposal-State the purpose of the financing, the amount requested, and either the plans for repayment (lenders) or an attractive exit strategy (investors). 146) Explain the concept of a company's mission. What are goals? What are the objectives? How are the three concepts related? Answer: • A mission statement expresses, in words, an entrepreneur's vision of what the company is and what it may become. It is the broadest expression of the company's purpose and defines the direction in which it will move. • Goals are broad statements of what a company plans to achieve. They guide its overall direction and define the basis of its business. • Objectives are short-term, specific performance targets that are attainable, measurable, and controllable. • Every objective should reflect some general business goal and include a technique for measuring progress towards its accomplishment. To be meaningful, an objective must have a time frame for achievement. Both goals and objectives should relate to the company's mission statement. 147) The marketing strategy section is a vital part of any business plan. What issues should it address? Answer: The issues the marketing plan should address are the answers to these questions? • Who are my target customers and what are their demographics? • Where do they live, work, and shop? • How many potential customers are in my trading area? • Why do they buy and what needs/wants drive their purchase decisions? • How can my business meet those needs/wants better than my competitors? Knowing my customers needs, wants, and habits, what should be the basis for differentiating my business in their minds? 148) The financial plan within a business plan is of interest to potential lenders and investors. Explain the contents of this section and describe what potential lenders and investors look for. Answer: For an existing business, lenders and investors use past financial statements to judge the health of the company and its ability to repay the loan and generate adequate returns. Ideally these statements should be audited, or at least reviewed, by a certified public accountant. Pro forma income statements, balance sheets and cash flow statements for the coming year and at least three more accounting periods should also be prepared-covering pessimistic, most likely and optimistic estimates. A breakeven and ratio analysis should also be done. It is also important to include a statement of assumptions on which these financial projections were based because potential lenders and investors will view them as being more credible than a single set of overly optimistic figures. Lenders and investors also look for honest, realistic forecasts and compare them to industry standards. 149) When making a loan to a small business, bankers tend to look for the 5 Cs. List and explain each of the 5 Cs of credit. Answer: Bankers score the small business in terms of the five Cs. The greater the score, the higher probability that the small business will receive the loan. • Capital-A small business must have a stable capital base before a bank will grant a loan. The most common reasons that banks give for rejecting loans are undercapitalization or too much debt. The bank expects the small business to have an equity base of investment by the owner(s) that will help support the venture during times of financial stress. • Capacity-The bank must be convinced that the small business has sufficient cash flow to meet its regular financial obligations and to repay the bank loan. The bank expects the applicant to pass the test for liquidity, especially for short-term loans. • Collateral-Collateral is the bank's security for repayment of the loan. If the company defaults on the loan, the bank has the right to sell the collateral and use the proceeds to satisfy the loan. Banks view the owner's willingness to pledge collateral (personal or business assets) as an indication of dedication to making the venture successful. • Character-The loan officer's evaluations of the owner's character (honesty, competence, polish, determination, intelligence, and ability) play a critical role in the banker's decision. The applicant can possibly enhance the officer's view of his character with a thorough business plan and polished presentation. • Conditions-The banks consider potential growth in the market, competition, location, form of ownership, loan purpose, and the state of the overall economy before making a decision on the loan. The owner should provide relevant information pertaining to these factors in the business plan. 150) What tips would you offer an entrepreneur who is scheduled to present her business plan to a group of potential lenders and investors in one week? Answer: As with all presentations, entrepreneurs should be informed and well prepared beforehand. The following tips might also be helpful: • Demonstrate enthusiasm, but don't be overemotional. • "Hook" investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them. • Use visual aids. • Hit the highlights; leave details to questions and future meetings. • Avoid the use of technological terms. • Close by reinforcing the nature of the opportunity and relating benefits to investors. • Be prepared for questions. • Follow up with every investor you make a presentation to. 151) Select one of the following "business plan mistakes" and discuss three techniques that may help avoid this potentially fatal error. 1. Failure to explain the business opportunity clearly 2. Trying to be everything to everybody 3. Falling into the trap of capturing one percent of the market 4. Unrealistic projections 5. Forgetting the importance of cash flow 6. Overly simplistic assumptions 7. Weak competitor analysis 8. Failure to describe the company's competitive advantage 9. Counting on a low-price strategy for success 10. A sloppy plan that contains errors 11. Exaggerating the qualifications of the management team 12. A plan that is incomplete Answer: Expect students to provide three tactics from the text to avoid making the selected error as described in the "Don't Make These Business Plan Mistakes" table. Let's consider the mistake of "underestimating the competition." Three techniques to avoid this are: conducting thorough market research to understand competitors, performing a SWOT analysis to identify strengths and weaknesses relative to competitors, and continuously monitoring the competitive landscape to adapt strategies as needed. Mini-Case 4-1: The Need For A Plan Twenty-three year-old Shirley Halperin had just been kicked off the staff of her college newspaper, when she launched Smug magazine with just $1,700 in personal savings, $7,000 in donations, and a $10,000 loan, co-signed by her father Eli Halperin who helped her get a line of credit. The ten-issues-a-year publication is targeted at music fans in the 16-to-30-year-old age group with well-written stories "about musicians that matter plus bands you haven't even heard of yet," says Halperin. It covers the alternative-music scene between the musical meccas of New York City and Philadelphia. Her enthusiasm for her subject has spilled over to the writers, editors, designers and photographers who now total 30, and continue to contribute without pay. They donate their talents for such incentives as by-lines, photo credits, college internships, job experience, free tickets to concerts, free CDs, and other things. Halperin cuts costs whenever possible and her frugality enables her to keep start-up costs low. She runs Smug out of her Gramercy Park apartment with two roommates. Smug charges $1,000 per ad. Competitive publications like Village Voice, Spin, and the Aquarian Weekly charge between $7,000-$29,700 for a similar ad. Halperin says that her budget ads are designed specifically for smaller bands with a regional following that have not hit the big time yet. "It doesn't make sense for baby bands to advertise in the bigger publications until awareness of them rises," she says. In less than 18 months, Smug's circulation went from 5,000 to 20,000, its readership expanded to 60,000 and advertising revenues climbed from zero to $15,000 per month. After publishing its fourth issue, Smug beat out its larger, more established competitors to win a prestigious local music award. Readers rave about the quality of the magazine's writing, its design and photography; however, Smug's continued success is not guaranteed. Half of all magazines fail the first year, and those that don't take five years to break-even. If Smug succeeds, it can look forward to attractive profit margins of between 15-30 percent. Halperin is very good at knowing what music people are listening to and what people want to read about; however, she is quick to admit that finance is not one of her strong points. Another concern is cash flow; at the end of its first year, $7,500 of Smug's and $70,000 in revenues were still in accounts receivables. Although she started Smug without a business plan, she now realizes she needs one to raise the $500,000 necessary to take the magazine "to the next level." She needs the money to upgrade the newsprint to semi-glossy paper stock, and most importantly, to pay her staff. She wants the plan to reflect her business philosophy: "Every year circulation should go up, your pages should go up, and your ad revenues should go up." 152) Write a memo to Shirley Halperin explaining what topics she should include in her business plan. Answer: In their memos, the students should somewhat incorporate the uniqueness of each business plan as well as the importance of Ms. Halperin's personal input into the process. Suggested topics should include the following elements: • Executive summary-Concise summary of all the relevant points of the business venture; brief synopsis of the entire plan; must catch the reader's attention. • Vision and mission statement-Expresses the vision for what the company is and what it is to become as a broad expression of company's purpose and direction. • Company history-Highlights significant financial and operational events in the company's life; describes formation, evolution, and vision for the future. • Business and industry profile-Acquaints potential lenders and investors with the industry in which the company operates; includes summary of goals and objectives. • Goals and Objectives-Stating general business goals to more specific objectives with specific performance targets that are attainable, measurable, and controllable. • Business strategy-Explain how you can meet and beat the competition; addresses the question of how to accomplish your goals and objectives. • Description of products/services-Describe product line, product's position in the product life cycle, and any patents, trademarks, or copyrights; define features and benefits of products or services. • Marketing strategy-Prove that there is a real market for the proposed good or service; describe target market and positioning, advertising, distribution, and pricing. • Documenting market claims-Providing facts regarding the sales potential of a product or service. • Showing customer interest-Demonstrating that a significant number of target customers need or want a company's good or service and are willing to pay for it. • Competitor analysis-Compare your strengths and weaknesses with those of your competition, images in the marketplace, level of success, etc. • Description of the management team-Describe qualifications of business officers, key directors, and any person with at least 20 percent ownership in the company; lenders and investors prefer experienced managers when making funding decisions. • Plan of operation-Construct organization chart; explain steps taken to encourage important officers to remain with the company. • Pro forma(projected) financial statements-Include financial statements from the past three years (if an existing business) and pro forma for the next year (existing or new), including statement of cash flows; should develop realistic forecasts and a statement of the assumptions on which the financial projections are based. • Loan or investment proposal-State the purpose of the financing, the amount requested, and either the plans for repayment (lenders) or an attractive exit strategy (investors). 153) What advice would you offer Halperin when she begins to use her business plan to locate capital? Answer: The students should stress the importance of having the business plan as "perfect as possible" when she uses the business plan to obtain capital. It is also important that students understand the importance of a business plan that is aesthetically pleasing and free from errors-the plan should have the look of a polished professional presentation parcel that details the company's past, present, and future goals. The following guidelines should be recommended as Ms. Halperin tries to locate potential investors for her enterprise: • Be enthusiastic, not emotional • Know your audience • "Hook" investors quickly and gain their attention up front describing the benefit they will realize • Hit the highlights • Keep your presentation simple • Don't get too technical • Use visual aids • Close by reinforcing • Be prepared for questions • Follow up with each potential investor after the presentation In addition to the "showmanship" necessary for a good presentation, Ms. Halperin needs to have solid information concerning the 5 C's of credit, as this will ultimately be used to judge her worthiness for the necessary loan. I would advise Halperin to ensure her business plan is clear, detailed, and realistic. Highlighting the potential for strong returns and having a solid financial projection can attract investors. Additionally, she should be prepared to answer tough questions and demonstrate a thorough understanding of her market and competition. Finally, networking and building relationships with potential investors can be crucial for securing capital. Test Bank for Essentials of Entrepreneurship and Small Business Management Norman M. Scarborough 9780132666794, 9780273787129, 9780134741086, 9780136109594, 9780133930382