SUMMARY CHAPTERS OF ESSENTIALS OF
ENTREPRENEURSHIP
Chapter 1
1. Define the role of the entrepreneur in business in the United States and around the world. Entrepreneurship is
thriving in the United States, but the current wave of entrepreneurship is not limited to the United States; many
nations across the globe are seeing similar growth in their small business sectors. A variety of competitive, economic,
and demographic shifts have created a world in which “small is beautiful.” Capitalist societies depend on
entrepreneurs to provide the drive and risk taking necessary for the system to supply people with the goods and
services they need.
2. Describe the entrepreneurial profile. Entrepreneurs have some common characteristics, including a desire for
responsibility, a preference for moderate risk, confidence in their ability to succeed, desire for immediate feedback,
a high energy level, a future orientation, skill at organizing, and a value of achievement over money. In a phrase, they
are tenacious high achievers.
3A. Describe the benefits of entrepreneurship. Driven by these personal characteristics, entrepreneurs establish
and manage small businesses to gain control over their lives, make a difference in the world, CHAPTER 1 • THE
FOUNDATIONS OF ENTREPRENEURSHIP 57 become self-fulfilled, reap unlimited profits, contribute to society, and do
what they enjoy doing.
3B. Describe the drawbacks of entrepreneurship. Entrepreneurs also face certain disadvantages, including
uncertainty of income, the risk of losing their investments (and more), long hours and hard work, a lower quality of
life until the business gets established, high stress levels, and complete decision-making responsibility.
4. Explain the forces that are driving the growth of entrepreneurship. Several factors are driving the boom in
entrepreneurship, including the portrayal of entrepreneurs as heroes, better entrepreneurial education, economic
and demographic factors, a shift to a service economy, technological advances, more independent lifestyles, and
increased international opportunities.
5. Explain the cultural diversity of entrepreneurship. Several groups are leading the nation’s drive toward
entrepreneurship: young people, women, minorities, immigrants, part-timers, home-based business owners, family
business owners, copreneurs, corporate castoffs, corporate dropouts, social entrepreneurs, and retired baby
boomers.
6. Describe the important role that small businesses play in our nation’s economy. The small business sector’s
contributions are many. They make up 99.7 percent of all businesses, employ 49.2 percent of the private sector
workforce, have created nearly two-thirds of the net new jobs in the economy, produce 46 percent of the country’s
private GDP, and account for 47 percent of all business sales.
7. Put failure into the proper perspective. Entrepreneurs recognize that failure is a natural part of the creative
process. Successful entrepreneurs have the attitude that failures are simply stepping-stones along the path to
success, and they refuse to be paralyzed by a fear of failure.
8. Explain how an entrepreneur can avoid becoming another failure statistic. Entrepreneurs can employ several
general tactics to avoid these pitfalls. They should know their businesses in depth, prepare a solid business plan,
manage financial resources effectively, understand financial statements, learn to manage people, set their
businesses apart from the competition, and maintain a positive attitude.
Chapter 3
1. Explain the differences among creativity, innovation, and entrepreneurship. ● The entrepreneur’s “secret” for
creating value in the marketplace is applying creativity and innovation to solve problems and to exploit opportunities
people face every day. Creativity is the ability to develop new ideas and to discover new ways of looking at problems
and opportunities. Innovation is the ability to apply creative solutions to those problems and opportunities to
enhance or to enrich people’s lives. Entrepreneurship is the result of a disciplined, systematic process of applying
creativity and innovation to needs and opportunities in the marketplace.
2. Describe why creativity and innovation are such an integral part of entrepreneurship. ● Entrepreneurs must
always be on guard against paradigms—preconceived ideas of what the world is, what it should be like, and how it
should operate— because they are logjams to creativity. Successful entrepreneurs often go beyond conventional
wisdom as they ask, “Why not?” ● Success—even survival—in this fiercely competitive, global environment requires
entrepreneurs to tap their creativity (and that of their employees) constantly.
3. Understand how the two hemispheres of the human brain function and what role they play in creativity. ● For
years, people assumed that creativity was an inherent trait. Today, however, we know better. Research shows that
almost anyone can learn to be creative. The left hemisphere of the brain controls language, logic, and symbols,
processing information in a step-by-step fashion. The right hemisphere handles emotional, intuitive, and spatial
functions, processing information intuitively. The right side of the brain is the source of creativity and innovation.
People can learn to control which side of the brain is dominant in a given situation.
4. Explain the 10 “mental locks” that limit individual creativity. The number of potential barriers to creativity is
limitless, but entrepreneurs commonly face 10 “mental locks” on creativity: Searching for the one “right” answer,
focusing on “being logical,” blindly following the rules, constantly being practical, viewing play as frivolous, becoming
overly specialized, avoiding ambiguity, fearing looking foolish, fearing mistakes and failure, and believing that “I’m
not creative.”
5. Understand how entrepreneurs can enhance the creativity of their employees as well as their own creativity. ●
Entrepreneurs can stimulate creativity in their companies by expecting creativity, expecting and tolerating failure,
encouraging curiosity, viewing problems as challenges, providing creativity training, providing support, rewarding
creativity, and modeling creativity. ● Entrepreneurs can enhance their own creativity by using the following
techniques: allowing themselves to be creative, giving their minds fresh input every day, keeping a journal handy to
record their thoughts and ideas, reading books on stimulating creativity or taking a class on creativity, and taking
some time off to relax.
6. Describe the steps in the creative process. ● The creative process consists of seven steps: Step 1, preparation,
involves getting the mind ready for creative thinking; step 2, investigation, requires the individual to develop a solid
understanding of the problem or decision; step 3, transformation, involves viewing the similarities and the
differences among the information collected; step 4, incubation, allows the subconscious mind to reflect on the
information collected; step 5, illumination, occurs at some point during the incubation stage when a spontaneous
breakthrough causes “the light bulb to go on”; step 6, verification, involves validating the idea as accurate and
useful; and step 7, implementation, involves transforming the idea into a business reality.
7. Discuss techniques for improving the creative process. ● Five techniques are especially useful for improving the
creative process: ● Brainstorming is a process in which a small group of people interact with very little structure with
the goal of producing a large quantity of novel and imaginative ideas. ● Mind mapping is a graphical technique that
encourages thinking on both sides of the brain, visually displays the various relationships among ideas, and improves
the ability to view a problem from many sides. ● Force-field analysis allows entrepreneurs to weigh both the
advantages and the disadvantages of a particular decision and work to maximize the variables that support it and
minimize those that work against it. ● TRIZ is a systematic approach designed to help solve any technical problem,
whatever its source. Unlike brainstorming and mind mapping, which are right-brain activities, TRIZ is a left-brain,
scientific, step-by-step process that is based on the study of hundreds of the most innovative patents across the
globe. ● Rapid prototyping is based on the premise that transforming an idea into an actual model will point out
flaws in the original idea and will lead to improvements in its design.
8. Describe the protection of intellectual property through patents, trademarks, and copyrights. ● A patent is a
grant from the federal government that gives an inventor exclusive rights to an invention for 20 years. ● A trademark
is any distinctive word, symbol, or trade dress that a company uses to identify its product and to distinguish it from
other goods. It serves as a company’s “signature” in the marketplace. ● A copyright protects original works of
authorship. It covers only the form in which an idea is expressed and not the idea itself and lasts for 70 years beyond
the creator’s death.
Chapter 4
1. Describe the process of conducting an idea assessment. ● An idea sketch pad is a tool that helps entrepreneurs
assess ideas. The idea sketch pad has five parameters: Customers. Start with a group of customers who have a clear
need that is not being addressed. Offering. Describe your idea for a product or service to offer the customers. Value
proposition. Explain why your product or service will be important to customers. Core competencies. Determine if
your offering has any technologies or unique features that will help differentiate it from competitors? People.
Identify the key people on the team who will launch this business.
2. Explain the elements of a feasibility analysis. ● Determine how attractive an industry is overall as a “home” for a
new business. ● Evaluate possible niches a small business can occupy profitably.
3. Describe the six forces in the macro environment of an industry. ● Sociocultural trends can lead to dramatic
changes, creating whole new industries and fundamentally transforming existing industries. ● Technological
breakthroughs lead to the development of new products and entirely new industries. ● Changing demographics
create opportunities for entrepreneurs. ● Economic trends, both positive and negative, create opportunities. ●
Political and legal change, such as new laws and regulations, create opportunities for entrepreneurs. ● Global trends
that open global markets allow businesses to seek customers and suppliers from all corners of the world and can
help in even the smallest business.
4. Understand how Porter’s Five Forces Model assesses the competitive environment. ● Entrepreneurs should
assess five forces that shape the competitive environment for every business: The rivalry among competing firms
The bargaining power of suppliers The bargaining power of buyers The threat of new entrants The threat of
substitute products or services
5. Describe the various methods of conducting primary and secondary market research. ● Primary research tools
include customer surveys, focus groups, building prototypes, conducting in-home trials, and “windshield” research
(driving around and observing the competition). ● Secondary research gathers existing data from trade associations
and business directories, industry databases, demographic data, census data, forecasts compiled by government
agencies, market research reports, articles in magazines and journals, local data, and the Internet.
6. Understand the four major elements of a financial feasibility analysis. ● Capital requirements. Start-up
companies often need capital to purchase equipment, buildings, technology, and other tangible assets and to hire
and train employees, promote their products and services, and establish a presence in the market. ● Estimated
earnings. In addition to producing an estimate of the start-up company’s capital requirements, an entrepreneur
should forecast the earning potential of the proposed business. ● Time out of cash. To estimate time out of cash,
take the negative cash flow from the business each month and divide by how much available cash is left in the
business. This gives the number of months the business can survive at its current rate of negative cash flow. ●
Return on investment. A venture must produce an attractive rate of return relative to the level of risk it requires.
This risk–return tradeoff means that the higher the level of risk a prospective business involves, the higher the rate
of return it must provide to the entrepreneur and investors.
7. Describe the process of assessing entrepreneur feasibility. ● Many new businesses require that an entrepreneur
possess a certain set of knowledge, experiences, and skills to have a chance of being successful. ● Entrepreneurial
readiness also involves issues such as temperament and work ethic.
8. Describe the nine elements of a business model. ● Customer segments. A good business model always starts with
the customer. The entrepreneur’s first step is to identify a segment of customers who have a clearly defined need. ●
Value proposition. The value proposition is the collection of products and/or services the business will offer to meet
customers’ needs. ● Customer relationships. Not every business provides the same type and same level of customer
service. ● Channels. Channels refer to both communication channels (promotion) and distribution channels (product
placement). Communication channels define how the customers seek out information about this type of product.
The distribution channel defines the most effective way to get products to the customers for this type of business.
● Key activities. The goal is to build a basic checklist of what needs to be done to open the business and what
activities are necessary to ensure its long-term success. Key resources. This will serve as an initial checklist to ensure
that all key resources have been identified that will support a successful launch and sustain the business as it grows.
● Key partners. This segment of the business model includes important suppliers, outsourcing partners, investors,
industry partners, advisers, and all other external businesses or entities that are critical to make the business model
work. ● Revenue streams. How will the value proposition generate revenue? ● Cost structure. The key activities, key
resources, and key partners components of the plan help identify the basic types of costs and give some estimate of
their scope.
Chapter 5
1. Explain the benefits of an effective business plan. ● A business plan, which builds off of information from the
feasibility analysis and business model, serves two essential functions. First and more important, it guides the
company’s operations by charting its future course and devising a strategy for following it. The second function of
the business plan is to attract lenders and investors. Applying for loans or attempting to attract investors without a
solid business plan rarely attracts needed capital. Rather, the best way to secure the necessary capital is to prepare a
sound business plan. ● An effective business plan should pass these three tests: ● Reality test. The external
component of the reality test revolves around proving that a market for the product or service really does exist. The
internal component of the reality test focuses on the product or service itself. ● Competitive test. The external part
of the competitive test evaluates the company’s relative position to its key competitors. The internal competitive
test focuses on the management team’s ability to create a company that will gain an edge over existing rivals. ●
Value test. To convince lenders and investors to put their money into the venture, a business plan must prove to
them that it offers a high probability of repayment or an attractive rate of return.
2. Describe the elements of a solid business plan. ● Although a business plan should be unique and tailor-made to
suit the particular needs of a small company, it should cover these basic elements: executive summary, mission
statement, company history, business and industry profile, description of the company’s business strategy, profile of
its products or services, statement explaining its marketing strategy, competitor analysis, owners’ and officers’
résumés, plan of operation, financial data, and loan or investment proposal.
3. Explain the “five Cs of credit” and why they are important to potential lenders and investors reviewing business
plans. ● Small business owners need to be aware of the criteria bankers use in evaluating the creditworthiness of
loan applicants, known as the five Cs of credit: capital, capacity, collateral, character, and conditions. ● Capital—
Lenders expect small businesses to have an equity base of investment by the owner(s) that will help support the
venture during times of financial strain. ● Capacity—A synonym for capacity is cash flow. The bank must be
convinced of the firm’s ability to meet its regular financial obligations and to repay the bank loan, and that takes
cash. ● Collateral—Collateral includes any assets the owner pledges to the bank as security for repayment of the
loan. ● Character—Before approving a loan to a small business, the banker must be satisfied with the owner’s
character. ● Conditions—The conditions–interest rates, the health of the nation’s economy, industry growth rates,
etc.—surrounding a loan request also affect the owner’s chance of receiving funds.
4. Understand the keys to making an effective business plan presentation. ● Entrepreneurs who are informed and
prepared when requesting a loan or investment favorably impress lenders and investors. ● Tips include:
Demonstrate enthusiasm about the venture, 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 of your venture; don’t get caught up in too much detail in early meetings with lenders and investors; avoid
the use of technological terms that will likely be above most of the audience; rehearse your presentation before
giving it; close by reinforcing the nature of the opportunity; and be prepared for questions.
5. Understand the importance of strategic management to a small business. ● Companies without clear strategies
may achieve some success in the short run, but as soon as a competitive threat arises, they often fail.
6. Explain why and how a small business must create a competitive advantage in the market. ● The goal of
developing a strategic plan is to create for the small company a competitive advantage— the combination of factors
that sets the small business apart from its competitors and gives it a unique position in the market. ● Every small
firm must establish a plan for creating a unique image in the minds of its potential customers. ● A company builds a
competitive edge on its core competencies, which are a unique set of capabilities that a company develops in key
operational areas, such as quality, service, innovation, team building, flexibility, responsiveness, and others, that
allow it to vault past competitors. They are what the company does best and are the focal point of the strategy. This
step must identify target market segments and determine how to position the firm in those markets. ●
Entrepreneurs must identify some way to differentiate their companies from competitors.
7. Develop a strategic plan for a business using the nine steps in the strategic management process. ● Small
businesses need a strategic planning process designed to suit their particular needs. It should be relatively short, be
informal and not structured, encourage the participation of employees, and not begin with extensive objective
setting. ● Linking the purposeful action of strategic planning to an entrepreneur’s little ideas can produce results
that shape the future. Step 1. Develop a clear vision and translate it into a meaningful mission statement. Highly
successful entrepreneurs communicate their vision to those around them. The firm’s mission statement answers the
first question of any venture: What business am I in? The mission statement sets the tone for the entire company.
Step 2. Assess the company’s strengths and weaknesses. Strengths are positive internal factors; weaknesses are
negative internal factors. Step 3. Scan the environment for significant opportunities and threats facing the business.
Opportunities are positive external options; threats are negative external forces. Step 4. Identify the key factors for
success in the business. In every business, key factors determine the success of the firms in it, so they must be an
integral part of a company’s strategy. KSFs are relationships between a controllable variable and a critical factor
influencing the firm’s ability to compete in the market. Step 5. Analyze the competition. Business owners should
know their competitors almost as well as they know their own. A competitive profile matrix is a helpful tool for
analyzing competitors’ strengths and weaknesses. Step 6. Create company goals and objectives. Goals are the broad,
long-range attributes that the firm seeks to accomplish. Objectives are quantifiable and more precise; they should be
specific, measurable, assignable, realistic, timely, and written down. The process works best when managers and
employees are actively involved. Step 7. Formulate strategic options and select the appropriate strategies. A strategy
is the game plan the firm plans to use to achieve its objectives and mission. It must center on establishing for the
firm the KSFs identified earlier. Step 8. Translate strategic plans into action plans. No strategic plan is complete until
the owner puts it into action. Step 9. Establish accurate controls. Actual performance rarely, if ever, matches plans
exactly. Operating data from the business assembled into a comprehensive scorecard serves as an important
guidepost for determining how effective a company’s strategy is. This information is especially helpful when plotting
future strategies. ● The strategic planning process does not end with these nine steps; rather, it is an ongoing
process that an entrepreneur will repeat. ● The three basic strategies a business can pursue are low cost,
differentiation, and focus. ● Controls are essential for the effective implementation of a strategic plan. A balanced
scorecard is a set of measurements unique to a company that includes both financial and operational measures and
gives managers a quick yet comprehensive picture of the company’s total performance.
Chapter 6
1. Explain the advantages and disadvantages
of a sole proprietorship and a partnership.
● A sole proprietorship is a business owned and managed
by one individual and is the most popular form
of ownership.
● Sole proprietorships offer these advantages: They
are simple to create, they are the least costly form to
begin, the owner has total decision-making authority,
there are no special legal restrictions, and they
are easy to discontinue.
● Sole proprietorships also suffer from these
disadvantages: unlimited personal liability of the owner,
limited managerial skills and capabilities, limited
access to capital, and lack of continuity.
● A partnership is an association of two or more
people who co-own a business for the purpose of
making a profit. Partnerships offer these advantages:
ease of establishing, complementary skills
of partners, division of profits, larger pool of
capital available, ability to attract limited partners,
little government regulation, flexibility, and tax
advantages.
● Partnerships suffer from these disadvantages:
unlimited liability of at least one partner, difficulty
in disposing of partnership, lack of continuity,
potential for personality and authority conflicts, and
partners bound by the law of agency.
2. Describe the similarities and differences of the
C corporation and the S corporation.
● Both C corporations and S corporations are separate
legal entities. To form a corporation, an entrepreneur
must file the articles of incorporation with the
state in which the company will incorporate.
● Both types of corporations offer these advantages:
limited liability of stockholders, ability to attract
capital, ability to continue indefinitely, and transferable
ownership.
● C corporations suffer from these disadvantages:
double taxation, potential for diminished managerial
incentives, legal requirements and regulatory red
tape, and potential loss of control by the founder(s).
● S corporations are pass-through entities and do not
have taxation of profits at the corporate level.
3. Understand the characteristics of the limited
liability company.
● An LLC is not a corporation but offers the advantage
of limited liability to its owners.
● An LLC is a cross between a partnership and a
corporation yet operates without the restrictions
imposed on an S corporation. To create an LLC, an
entrepreneur must file the articles of organization
with the secretary of state and create an operating agreement.
4. Explain the process of creating a legal entity
for a business.
● C corporations, S corporations, and LLCs can be
costly and time consuming to establish and to maintain.
● Many entrepreneurs hire attorneys to handle the
process, but in most states entrepreneurs can complete
all of the required forms, most of which are online,
themselves.
5. Understand the advantages and disadvantages
of buying an existing business.
● The advantages of buying an existing business
include the following: a successful business may
continue to be successful, the business may already
have the best location, employees and suppliers are
already established, equipment is installed and its
productive capacity known, inventory is in place
and trade credit established, the owner hits the
ground running, the buyer can use the expertise
of the previous owner, and the business may be a
bargain.
● The disadvantages of buying an existing business
include the following: an existing business may
be for sale because it is deteriorating, the previous
owner may have created ill will, employees
inherited with the business may not be suitable,
its location may have become unsuitable, equipment
and facilities may be obsolete, change and
innovation are hard to implement, inventory may
be outdated, accounts receivable may be worth
less than face value, and the business may be
overpriced.
6. Define the steps involved in the right way
to buy a business.
● Buying a business can be a treacherous experience
unless the buyer is well prepared.
● The right way to buy a business is to analyze your
skills, abilities, and interests to determine the ideal
business for you; prepare a list of potential candidates,
including those that might be in the “hidden
market”; investigate and rank candidate businesses
and evaluate the best one; explore financing options
before you actually need the money; and ensure a
smooth transition.
7. Understand how the negotiation process
works and identify the factors that affect it.
● The first rule of negotiating is to never confuse
price with value.
● In a business sale, the party who is the better
negotiator usually comes out on top. Before beginning
negotiations, a buyer should identify the factors that
are affecting the negotiations and then develop a
negotiating strategy.
● The best deals are the result of a cooperative
relationship between the parties based on trust.
Chapter 7
1. Describe the three types of franchising:
trade name, product distribution, and pure.
3. Explain the laws covering franchise
purchases.
● Trade-name franchising involves a franchisee
purchasing the right to become affiliated with a
franchisor’s trade name without distributing its
products exclusively.
● Product distribution franchising involves licensing
a franchisee to sell products or services under the
franchisor’s brand name through a selective, limited
distribution network.
● Pure franchising involves a selling a franchisee a
complete business format.
The FTC requires all franchisors to disclose detailed
information on their operations in a Franchise
Disclosure
Document at the first personal meeting or at
least 14 days before a franchise contract is signed
or before any money is paid. The FTC rule covers
all franchisors. The FDD requires franchisors to
provide information on 23 topics in their disclosure
statements. The FDD is an extremely helpful tool for
prospective franchisees.
2A. Explain the benefits of buying a franchis e.
The following steps will help you make the right
franchise choice: evaluate yourself, research your
market, consider your franchise options, get a copy
of the franchisor’s FDD, talk to existing franchisees,
ask the franchisor some tough questions, and make
your choice.
● Franchises offer many benefits: management
training and support, brand-name appeal,
standardized quality of goods and services, national
advertising programs, financial assistance,
proven products and business formats, centralized
buying power, territorial protection, and a greater
chance of success.
2B. Explain the drawbacks of buying a franchise.
● Franchising
also suffers from certain drawbacks:
franchise fees and profit sharing, strict adherence
to standardized operations, restrictions on purchasing,
limited product lines, unsatisfactory training
programs, market saturation, and less freedom.
4. Discuss the right way to buy a franchise.
5. Outline the major trends shaping
franchising.
Key trends shaping franchising today include the
changing face of franchisees; international franchise
opportunities; smaller, non-traditional locations;
conversion franchising; multiple-unit franchising;
master franchising; and cobranding (or combination
franchising).
Chapter 8
1. Describe the principles of building a bootstrap
marketing plan, and explain the benefits of
preparing one.
A major part of the entrepreneur’s business plan is the
marketing plan, which focuses on a company’s target
customers and how best to satisfy their needs and
wants. A solid marketing plan should do the following:
 Determine customer needs and wants
through market research.
 Pinpoint the specific target markets
the company will serve.
 Analyze the firm’s competitive advantages
and build a bootstrap marketing strategy
around them.
2. Explain how small businesses can pinpoint
their target markets.
Sound market research helps the owner pinpoint his or
her target market. The most successful businesses have
well-defined portraits of the customers they are seeking
to attract
3. Discuss the role of market research in building
a bootstrap marketing plan and outline the
market research process.
4. Describe how a small business can build a
competitive edge in the marketplace using
bootstrap marketing strategies.
When plotting a marketing strategy, owners must strive
to achieve a competitive advantage—some way to
make their companies different from and better than
the competition. Successful small businesses rely on
14 sources to develop a competitive edge:
 Find a niche and fill it.
 Use the power of publicity.
 Don’t just sell—entertain.
 Strive to be unique.
 Build a community with customers.
 Connect with the customer on an emotional
level.
 Create an identity for your business through
branding.
 Embrace social marketing.
 Be dedicated to service and customer
satisfaction.
 Retain existing customers.
 Be devoted to quality.
 Pay attention to convenience.
 Concentrate on innovation.
 Emphasize speed.
Market research is the vehicle for gathering the information
that serves as the foundation of the marketing
plan. Good research does not have to be complex and
expensive to be useful.
 Defining the objective: “What do you want
to know?”
 Collecting the data from either primary or secondary sources.
 Analyzing and interpreting the data.
 Drawing conclusions and acting on them.
Chapter 9
E-commerce is creating a new economy, one that is
connecting producers, sellers, and customers via
technology in ways that have never been possible before.
In this fast-paced world of e-commerce, size no longer
matters as much as speed and flexibility do. The
Internet is creating a new industrial order, and
companies that fail to adapt to it will soon become extinct.
1. Understand the factors an entrepreneur should
consider before launching into e-commerce.
Before launching an e-commerce effort, business owners
should consider the following important issues:
● How a company exploits the Web’s interconnectivity
and the opportunities it creates to transform
relationships with its suppliers and vendors, its
customers, and other external stakeholders is crucial
to its success.
● Web success requires a company to develop a plan
for integrating the Web into its overall strategy. The
plan should address issues such as site design and
maintenance, brand development and management,
marketing and promotional strategies, sales, and
customer service.
● Developing deep, lasting relationships with
customers
takes on even greater importance on the Web.
Attracting customers on the Web costs money,
and companies must be able to retain their online
customers to make their Web sites profitable.
● Creating a meaningful presence on the Web requires
an ongoing investment of resources—time, money,
energy, and talent. Establishing an attractive Web
site brimming with catchy photographs of products
is only the beginning.
● Measuring the success of its Web-based sales effort
is essential to remaining relevant to customers
whose tastes, needs, and preferences are always
changing.
2. Explain the 10 myths of e-commerce and how
to avoid falling victim to them.
Myth 1. If I launch a site, customers will flock to it.
Myth 2. Online customers are easy to please.
Myth 3. Making money on the Web is easy.
Myth 4. Privacy is not an important issue on the Web.
Myth 5. “Strategy? I don’t need a strategy to sell on the
Web! Just give me a Web site, and the rest will take
care of itself.”
Myth 6. The most important part of any e-commerce
effort is technology.
Myth 7. Customer service is not as important online as
it is in a traditional retail store.
Myth 8. Flashy Web sites are better than
simple ones.
Myth 9. It’s what’s up front that counts.
Myth 10. It’s too late to get into e-commerce.
3. Explain the basic strategies entrepreneurs
should follow to achieve success in their e-commerce
efforts.
Following are some guidelines for building a successful
Web strategy for a small e-company:
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Focus on a niche in the market.
Develop a community of online customers.
Attract visitors by giving away “freebies.”
Make creative use of e-mail but avoid becoming a
“spammer.”
Make sure that your Web site says “credibility.”
Make the most of the Web’s global reach.
Promote your Web site online and offline.
Use social media tools to attract and retain
customers.
Develop an effective search engine optimization
strategy.
4. Learn the techniques of designing a killer
Web site.
There is no surefire formula for stopping Web shoppers
in their tracks, but the following suggestions will help:
 Understand your target customer.
 Give customers want they want.
 Select a domain name that is consistent with the
image you want to create for your company and
register it.
 Make your Web site easy to navigate.
 Offer suggestions for related products.
 Add wish list capability.
 Create a gift idea center.
 Provide customer ratings and reviews.
 Use online videos.
 Establish the appropriate call to action on each
page.
 Build loyalty by giving online customers a reason
to return to your Web site.
 Establish hyperlinks with other businesses,
preferably those selling products or services that
complement yours.
 Include an e-mail option and a telephone number in
your site.
 Give shoppers the ability to track their orders
online.
 Offer Web shoppers a special all their own.
 Follow a simple design for your Web page.
 Create a fast, simple checkout process.
 Provide customers multiple payment options.
 Assure customers that their online transactions are
secure.
 Establish reasonable shipping and handling
charges and post them up front.
 Confirm transactions.
 Keep your site updated.
 Test your site often.
 Rely on analytics to improve your site.
 Consider hiring a professional to design your site.
5. Explain how companies track the results from
their Web sites.
One option for tracking Web activity is through loganalysis
software. Server logs record every page,
graphic, audio clip, or photograph that visitors to a site
access, and log-analysis software analyzes these logs
and generates reports describing how visitors behave
when they get to a site. Key metrics for measuring the
effectiveness of a site’s performance include cost per
acquisition, bounce rate, cart abandonment rate, and
conversion rate.
6. Describe how e-businesses ensure the privacy
and security of the information they collect
and store from the Web.
To make sure they are using the information they
collect from visitors to their Web sites legally and ethically,
companies should take the following steps:
● Take an inventory of the customer data collected.
● Develop a company privacy policy for the information
collected.
● Post the company’s privacy policy prominently on
the Web site and follow it.
To ensure the security of the information they collect
and store from Web transactions, companies should
rely on virus and intrusion detection software and firewalls
to ward off attacks from hackers.
Chapter 10
1. Discuss the relationships among pricing,
image, competition, and value.
● Pricing decisions cut across every aspect of a small
company, influencing everything from its marketing
and sales efforts to its operations and strategy.
A company’s pricing strategy is a major determinant
of its image in the marketplace, is influenced by the
pricing strategies of its competitors, and is an important
element in the value that customers perceive
its products or services provide.
● Ultimately, the “right” price for a product or service
depends on one factor: the value it provides for a
customer.
For most shoppers, three reference points define
a fair price: the price they have paid for the product or
service in the past, the prices competitors charge for
the same or similar product or service, and the costs a
company incurs to provide the product or service.
2. Describe effective pricing techniques for
introducing new products or services and for
existing ones.
● Pricing a new product is often difficult for
business owners, but it should accomplish three
objectives: getting the product accepted, maintaining
market share as the competition grows, and earning a
profit.
Generally, three major pricing strategies are used to
introduce new products into the market: penetration,
skimming, and life cycle.
● Pricing techniques for existing products and
services include odd pricing, price lining, dynamic
pricing, leader pricing, geographic pricing, discounts,
multiple unit pricing, bundling, optional product
pricing, captive product pricing, by-product pricing,
suggested retail pricing, and follow-the-leader pricing.
3. Explain the pricing methods and strategies for
retailers, manufacturers, and service firms.
● Pricing for the retailer means pricing to move
merchandise.
Markup is the difference between the cost
of a product or service and its selling price. Most
retailers compute their markup as a percentage of
retail price.
● A manufacturer’s pricing decision depends on
the
support of accurate cost accounting records. The
most common technique is cost-plus pricing, in
which the manufacturer charges a price that covers
the cost of producing a product plus a reasonable
profit. Every manufacturer should calculate a
product’s break-even price, the price that produces
neither a profit nor a loss.
● Service firms often suffer from the effects of
vague,
unfounded pricing procedures and frequently charge
the going rate without any idea of their costs. A
service firm must set a price on the basis of the cost
of materials used, labour involved, overhead, and a
profit. The proper price reflects the total cost of
providing
a unit of service.
4. Describe the impact of credit on pricing.
● Offering consumer credit enhances a small
company’s
reputation and increases the probability, speed,
and magnitude of customers’ purchases. Small
firms offer three types of consumer credit: credit
cards, installment credit, and trade credit (charge
accounts).
Chapter 11
1. Describe how to prepare the basic financial
statements and use them to manage a small
business.
● Entrepreneurs rely on three basic financial statements
to understand the financial conditions of their
companies:
1. The balance sheet—Built on the accounting
equation: Assets = Liabilities = Owner’s equity,
it provides an estimate of the company’s value on
a particular date.
2. The income statement—This statement
compares the firm’s revenues to its expenses to
determine its net income (or loss). It provides
information about the company’s bottom line.
3. The statement of cash flows—This statement
shows the change in the company’s working
capital over the accounting period by listing the
sources and the uses of funds.
2. Create projected (pro forma) financial statements.
● Projected financial statements are a basic component
of a sound financial plan. They help the manager
plot the company’s financial future by setting operating
objectives and by analyzing the reasons for variations
from targeted results. In addition, the small
business in search of start-up funds will need these
pro forma statements to present to prospective lenders
and investors. They also assist in determining the
amount of cash, inventory, fixtures, and other assets
the business will need to begin operation.
3. Understand the basic financial statements
through ratio analysis.
● The 12 key ratios described in this chapter are
divided into four major categories: liquidity ratios,
which show the small firm’s ability to meet its
current obligations; leverage ratios, which tell how
much of the company’s financing is provided by
owners and how much by creditors; operating
ratios, which show how effectively the firm uses its
resources; and profitability ratios, which disclose
the company’s profitability.
● Many agencies and organizations regularly publish
such statistics. If there is a discrepancy between the
small firm’s ratios and those of the typical business,
the owner should investigate the reason for the difference.
A below-average ratio does not necessarily
mean that the business is in trouble.
4. Explain how to interpret financial ratios.
● To benefit from ratio analysis, the small
company should compare its ratios to those of
other companies in the same line of business and
look for trends
over time.
● When business owners detect deviations in
their companies’ ratios from industry standards,
they should determine the cause of the
deviations. In
some cases, such deviations are the result of
sound business decisions; in other instances,
however, ratios that are out of the normal range
for a particular type of business are indicators of
what could become serious problems for a
company.
5. Conduct a break-even analysis for a small
company.
● Business owners should know their firm’s
breakeven point, the level of operations at which
total revenues equal total costs; it is the point at
which companies neither earn a profit nor incur
a loss Although just a simple screening device,
breakeven analysis is a useful planning and
decision-making tool.
Chapter 12
1. Explain the importance of cash management
to a small company’s success.
● Cash is the most important but least productive asset
the small business has. An entrepreneur must maintain
enough cash to meet the company’s normal requirements
(plus a reserve for emergencies) without retaining
excessively large, unproductive cash balances.
● Without adequate cash, a small business will fail.
2. Differentiate between cash and profits.
● Cash and profits are not the same. More businesses
fail for lack of cash than for lack of profits.
● Profits, the difference between total revenue and total
expenses, are an accounting concept. Cash flow represents
the flow of actual cash (the only thing businesses
can use to pay bills) through a business in a continuous
cycle. A business can be earning a profit and be
forced out of business because it runs out of cash.
3. Understand the five steps in creating a cash
budget.
● The cash budgeting procedure outlined in this chapter
tracks the flow of cash through the business and
enables the owner to project cash surpluses and cash
deficits at specific intervals.
● The five steps in creating a cash budget are as
follows: determining a minimum cash balance, forecasting
sales, forecasting cash receipts, forecasting
cash disbursements, and determining the end-of month
cash balance.
4. Describe fundamental principles involved
in managing the “big three” of cash
management: accounts receivable, accounts
payable, and inventory.
● Controlling accounts receivable requires business
owners to establish clear, firm credit and collection
policies and to screen customers before granting
them credit. Sending invoices promptly and acting
on past-due accounts quickly also improve cash
flow. The goal is to collect cash from receivables as
quickly as possible.
● When managing accounts payable, a manager’s
goal is to stretch out payables as long as possible
without damaging the company’s credit rating.
Other techniques include verifying invoices
before paying them, taking advantage of cash
discounts, and negotiating the best possible credit
terms.
● Inventory frequently causes cash headaches for
small business managers. Excess inventory earns
a zero rate of return and ties up a company’s
cash unnecessarily. Owners must watch for stale
merchandise.
5. Explain the techniques for avoiding a cash
crunch in a small company.
● Key strategies include: trimming overhead costs
by bartering; leasing assets rather than buying
them; avoiding nonessential outlays; buying used
equipment; hiring part-time employees; negotiating
fixed payments to coincide with a company’s
cash flow cycle; implementing an internal control
system boost a firm’s cash flow position; developing
a system to battle check fraud; selling gift
cards; using zero-based budgeting; being on the
lookout for shoplifting and employee theft; building
a cash cushion; and keeping the business plan
current.
● In addition, investing surplus cash maximizes
the firm’s earning power. The primary criteria
for investing surplus cash are security and
liquidity.
Chapter 13
1. Describe the differences between equity
capital and debt capital.
Capital is any form of wealth employed to produce
more wealth. Entrepreneurs have access to two different
types of capital:
● Equity financing represents the personal investment
of the owner (or owners), and it offers the advantage
of not having to be repaid with interest.
● Debt capital is the financing a small business owner
has borrowed and must repay with interest. It does
not require entrepreneurs to give up ownership in
their companies.
2. Discuss the various sources of equity capital
available to entrepreneurs.
● The most common source of financing a business is
the owner’s personal savings. After emptying their
own pockets, the next place entrepreneurs turn for
capital is family members and friends. Crowdfunding
taps the power of social networking and allows
entrepreneurs to post their elevator pitches and proposed
investment terms on crowd-funding Web sites
and raise money to fund their ventures from ordinary
people who invest as little as $100. Angels are
private investors who not only invest their money in
small companies but also offer valuable advice and
counsel to them. Some business owners have success
financing their companies by taking on limited
partners as investors or by forming an alliance with
a corporation, often a customer or a supplier. Venture
capital companies are for-profit, professional
investors looking for fast-growing companies in
“hot” industries. When screening prospects, venture
capital firms look for competent management, a
competitive edge, a growth industry, and important
intangibles that will make a business successful.
Some owners choose to attract capital by taking
their companies public, which requires registering
the public offering with the SEC.
3. Describe the process of “going public.”
● Going public involves (1) choosing the underwriter,
(2) negotiating a letter of intent, (3) preparing the
registration statement, (4) filing with the SEC, and
(5) meeting state requirements.
4. Describe the various sources of debt capital.
● Commercial banks offer the greatest variety of
loans, although they are conservative lenders. Typical
short-term bank loans include commercial loans,
lines of credit, discounting accounts receivable, inventory
financing, and floor planning.
● Trade credit is used extensively by small businesses
as a source of financing. Vendors and suppliers
commonly finance sales to businesses for 30, 60, or
even 90 days.
● Equipment suppliers offer small businesses
financing similar to trade credit but with slightly
different terms.
● Commercial finance companies offer many of
the same types of loans that banks do, but they
are more risk oriented in their lending practices.
They emphasize accounts-receivable financing and
inventory loans.
● Savings-and-loan associations specialize in loans to
purchase real property—commercial and industrial
mortgages—for up to 30 years.
● Stock brokerage houses offer loans to prospective
entrepreneurs at lower interest rates than banks
because they have high-quality, liquid collateral—
stocks and bonds in the borrower’s portfolio.
● Small Business Investment Companies are privately
owned companies licensed and regulated by the
SBA that qualify for SBA loans to be invested in or
loaned to small businesses.
● Small Business Lending Companies make only
intermediate- and long-term loans that are guaranteed
by the SBA.
Chapter 14
1. Explain the stages in the location decision:
choosing the region, the state, the city, and
the final site.
● The location decision is one of the most important
decisions an entrepreneur will make given its
long-term effects on the company. An entrepreneur
should look at the choice as a series of increasingly
narrow decisions: Which region of the country?
Which state? Which city? Which site? Choosing the
right location requires an entrepreneur to evaluate
potential sites with his or her target customers in
mind. Demographic statistics are available from a
wide variety of sources, but government agencies
such as the Census Bureau have a wealth of detailed
data that can guide an entrepreneur in his or her
location decision.
2. Describe the location criteria for retail
and service businesses.
● For retailers, the location decision is especially
crucial. Retailers must consider the size of the trade
area, the compatibility of surrounding businesses,
the degree of competition, the suitability of the
surrounding transportation network, physical and
psychological barriers, volume of customer traffic,
adequacy of parking spots, a site’s reputation, and
the site’s visibility.
3. Outline the location options for retail and
service businesses: central business districts,
neighbourhoods, shopping centres and malls,
near competitors, shared spaces, inside large
retail stores, non-traditional locations, at home,
and on the road.
● Retail and service businesses have nine basic
location options: central business districts; neighbourhoods;
shopping centres and malls; near competitors;
shared spaces; inside large retail stores;
non-traditional locations, such as museums, sports
arenas, and college campuses; at home; and on the
road.
manufacture, or package them; and then ship the
finished product while either reducing or eliminating
tariffs and duties.
● Business incubators are locations that offer flexible,
low-cost rental space to their tenants as well
as business and consulting services. Their goal is
to nurture small companies until they are ready
to “graduate” into the business community. Many
government agencies and universities sponsor incubator
locations.
5. Describe the criteria used to analyze the
layout and design considerations of a building,
including the Americans with Disabilities Act.
● When evaluating the suitability of a particular
building,
an entrepreneur should consider several factors:
size (Is it large enough to accommodate the business
with some room for growth?), construction
and external appearance (Is the building structurally
sound, and does it create the right impression for the
business?), entrances (Are they inviting?), legal issues
(Does the building comply with the Americans
with Disabilities Act? If not, how much will it cost to
bring it up to standard?), signs (Are they legible, well
located, and easy to see?), interior (Does the interior
design contribute to our ability to make sales? Is it
ergonomically designed?), and lights and fixtures (Is
the lighting adequate for the tasks workers will be
performing? What is the estimated cost of lighting?).
6. Explain the principles of effective layouts
for retailers, service businesses, and
manufacturers.
● Layout for retail stores and service businesses
depends on the owner’s understanding of his or her
customers’ buying habits. Some areas of a retail
store generate more sales per square foot and therefore
are more valuable.
● The goal of a manufacturer’s layout is to create a
smooth, efficient work flow. Three basic options
exist: product layout, process layout, and fixed
position layout. Two key considerations are worker
productivity and materials handling costs.
4. Explain the site selection process for
manufacturers.
● A manufacturer’s location decision is strongly
influenced by local zoning ordinances. Some areas offer
industrial parks designed specifically to attract manufacturers.
Two crucial factors for most manufacturers
are the reliability (and the cost of transporting)
raw materials and the quality and quantity of available
labor.
● A foreign trade zone is a specially designated area
in or near a U.S. customs port of entry that allows
resident companies to import materials and components
from foreign countries; assemble, process,