Question 2

  1. Identify the main advantages and disadvantages of going public.

    A. Advantages – ability to obtain equity capital, enhanced ability to borrow, enhanced ability to raise equity, liquidity and valuation, prestige, personal wealth.
    B. Disadvantages – Increased risk of liability, expense, regulation of corporate governance policies and procedures, disclosure of information, pressures to maintain growth pattern, loss of control.

6.25 points

Question 3

  1. Discuss the major factors that should be considered in setting a product/service price.

    A. Costs – One of the important initial considerations in any pricing decision is to ascertain the costs directly related to the product or service (material and labor costs or cost of product from producer). Whether a manufacturer, retailer, or service venture, the entrepreneur would need to ascertain the approximate costs for overhead (some examples would be utilities, rent, promotion, insurance, and salaries).
    B. Margins or Markups – In many industries the retailers of the products use a standard markup to price goods in their stores. Given that the retailer maintains costs equivalent to the industry standards, this markup would be expected to cover overhead costs and some profit. Standard markups can be ascertained from trade publications or by asking suppliers. A lower markup and hence lower profit can be accepted by the entrepreneur and is a strategy used to increase demand in the short term (market penetration strategy) but could influence the competition to also lower its price, thus eventually reducing the profit margins for everyone.
    C. Competition – When products cannot be easily differentiated, the entrepreneur is forced to charge the same price as the competition. A higher price may also be supported by market research data. Innovations such as technology products or new drug products may warrant a higher price or skimming strategy for the new venture to recover some of its high development costs. In a non-differentiated product market, marketing research may reveal that consumers are willing to pay more if you offer service benefits such as free home delivery, guarantees on the life of the item, or free long-term repair. Although these services would increase the costs to the entrepreneur, they would establish a distinctive image for the product in a non-differentiated product category, allowing a higher price and, potentially, a higher-quality image than that of the competition.
 
 
 

6.25 points

Question 4

  1. Discuss the three types of market development strategies and give examples of each.

    A. New geographical market – This simply refers to selling the existing product in new locations. For example, a firm selling its products in Singapore could start selling its products in Malaysia, Thailand, and Indonesia. This has the potential of increasing sales by offering products to customers who have not previously had the chance to purchase them. The entrepreneur must be aware of possible regional differences in customer preferences, language, and legal requirements that may necessitate a slight change in the product (or packaging).
    B. New demographic market – Demographics are used to characterize (potential) customers based upon their income; where they live; their education, age, and sex; and so on. For an entrepreneur that is currently selling the firm’s existing product to a specific demographic group, the business could grow by offering the same product to a different demographic group. For example, a studio currently produces and sells computer games (specializing in games on baseball and soccer) to males between the ages of 13 and 17. However, there is an opportunity for this company to expand its sales by also targeting males between the ages of 24 and 32 who are university educated, have high disposable incomes, and would likely enjoy the escapism of these computer game products.
    C. New product use – An entrepreneurial firm might find out that people use its product in a way that was not intended or expected. This new knowledge of product use provides insight into how the product may be valuable to new groups of buyers. For example, when I moved from Australia to Chicago, I bought a baseball bat. I did not use the bat to play baseball; rather I kept it beside my bed for security against anyone who might break into my apartment. Another example is four-wheel-drive vehicles. The original producers of this product thought that it would be used primarily for off-road recreational driving but found that the vehicle was also popular among housewives because it was big enough to take the children to school and carry all their bags and sporting equipment. Knowledge of this new use allowed the producers to modify their product slightly to better satisfy customers who use the product in this way. An advantage from using a market development strategy is that it capitalizes on existing knowledge and expertise in a particular technology and production process.

    Note: Textbook examples are listed for instructor’s use, others could be given and can be evaluated on an individual basis by the instructor.

6.25 points

 

Question 6

  1. Define and explain the principles of desire, effectiveness and analysis as they relate to time management.

    A. Desire – requires that the entrepreneur recognize that he or she is a time waster, that time is an important resource, and that there is a need to change personal attitudes and habits regarding the allocation of time. Therefore, effective time management depends on the entrepreneur’s willpower, self-discipline, and motivation to optimize his or her time.
    B. Effectiveness – requires the entrepreneur to focus on the most important issues, even when under pressure. Whenever possible, an entrepreneur should try to complete each task in a single session, which requires that enough time be set aside to accomplish that task. This eliminates time wasted in catching up to where one left off. Although quality is of course important, perfectionism is not and often leads only to procrastination. The entrepreneur must not spend excessive time on trying to make a small improvement in one area when time would be better spent in another area.
    C. Analysis – provides information to the entrepreneur about how time is currently being allocated, which will also highlight inefficient or inappropriate investments of time. The entrepreneur should track his or her time over a two week period, using a time sheet with 15-minute intervals, and then analyze how time has been spent, where time has been wasted, and how these “time traps” can be avoided in the future (using the other principles). For example, the entrepreneur should not “reinvent the wheel” in solving similar problems; rather, standardized forms and procedures should be developed for all recurring events and operations.

Question 8

  1. Define the contribution margin and its importance.

Question 9

  1. List the critical factors that an effective succession plan needs to consider.

    A. The role of the owner in the transition stage: Will he or she continue to work full time? Part time? Or will the owner retire?
    B. Family dynamics: Are some family members unable to work together?
    C. Income for working family members and shareholders.
    D. The current business environment during the transition.
    E. Treatment of loyal employees.
    F. Tax consequences.
 

6.25 points

Question 10

  1. Identify and describe the three major risk reduction strategies.

    A. Narrow scope – A narrow-scope strategy offers a small product range to a small number of customer groups to satisfy a particular need. The narrow scope can reduce the risk that the firm will face competition with larger, more established firms in a number of ways. A narrow-scope strategy focuses the firm on producing customized products, localized business operations, and high levels of product quality. By focusing on a specific group of customers, the entrepreneur can build up specialized expertise and knowledge that provide an advantage over companies that are competing more broadly. The high end of the market typically represents a highly profitable niche.
    B. Broad scope – broad-scope strategy can be thought of as taking a “portfolio” approach to dealing with uncertainties about the attractiveness of different market segments. By offering a range of products across many different market segments, the entrepreneur can gain an understanding of the whole market by determining which products are the most profitable. Unsuccessful products (and market segments) can then be dropped and resources concentrated on those product markets that show the greatest promise. In essence, the entrepreneur can cope with market uncertainty by using a broad-scope strategy to learn about the market through a process of trial and error.
    C. Imitation strategies – Imitation is another strategy for minimizing the risk of downside loss associated with new entry. Imitation involves copying the practices of other firms, whether those other firms are in the industry being entered or from related industries. Entrepreneurs may simply find it easier to imitate the practices of a successful firm than to go through the process of a systematic and expensive search that still requires a decision based on imperfect information. In essence, imitation represents a substitute for individual learning. Imitating some of the practices of established successful firms can help the entrepreneur develop the skills necessary to be successful in the industry, rather than attempting to work out which skills are required and develop these skills from scratch. Imitation also provides organizational legitimacy. If the entrepreneur acts like a well established firm, it is likely to be perceived by customers as well established. Imitation is a means of gaining status and prestige. Customers feel more comfortable doing business with firms that they perceive to be established and prestigious.

6.25 points

Question 11

  1. Explain the advantages and disadvantages of an ESOP.

    A. Advantages

    1. It offers a unique incentive to employees that can enhance their motivation to put in extra time or effort. Employees recognize that they are working for themselves and hence will focus their efforts on innovations that contribute to the long-term success of the venture.
    2. It provides a mechanism to pay back those employees who have been loyal to the venture, particularly during more difficult times.
    3. It allows the transfer of the business under a carefully planned written agreement.
    4. The company can reap the advantage of deducting the contributions to the ESOP or any dividends paid on the stock.

    B. Disadvantages

    1. Complex to establish.
    2. It requires a complete valuation of the venture to establish the amount of the ESOP package.
    3. It raises issues such as taxes, payout ratios, amount of equity to be transferred per year, and the amount actually invested by the employees.
    4. The agreement also must specify if the employees can buy or sell additional shares of stock once the plan has been completed.

6.25 points

Question 12

  1. Explain the advantages and disadvantages of an ESOP.

    A. Advantages

    1. It offers a unique incentive to employees that can enhance their motivation to put in extra time or effort. Employees recognize that they are working for themselves and hence will focus their efforts on innovations that contribute to the long-term success of the venture.
    2. It provides a mechanism to pay back those employees who have been loyal to the venture, particularly during more difficult times.
    3. It allows the transfer of the business under a carefully planned written agreement.
    4. The company can reap the advantage of deducting the contributions to the ESOP or any dividends paid on the stock.

    B. Disadvantages

    1. Complex to establish.
    2. It requires a complete valuation of the venture to establish the amount of the ESOP package.
    3. It raises issues such as taxes, payout ratios, amount of equity to be transferred per year, and the amount actually invested by the employees.
    4. The agreement also must specify if the employees can buy or sell additional shares of stock once the plan has been completed.

Question 13

  1. Explain the 4 types of entrepreneurs and firm growth.

Question 14

  1. Identify and define the three major types of bankruptcy.

Question 15

  1. What are some of the warning signs of bankruptcy?

Question 16

  1. Discuss the informal risk-capital market and key characteristics of business angels.

    Key points:
    Most misunderstood
    Largest pool of capital
    Business angels:
    Are well educated
    Invest close to home
    Tend to invest in areas they have experience in and take a more active role than VCs
    Have a long investment horizon