BUSN 6 6th Edition Kelly

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Chapter Seven
Small Businesses and Entrepreneurship: Economic Rocket Fuel

Review Questions

1. Review the benefits an entrepreneur might seek in starting a new business. Which
benefits are most appealing to you? Why?

The key benefits that entrepreneurs might seek in launching a new business are greater
financial success, independence, flexibility, and challenge (although a smaller segment of
entrepreneurs—at least in the U.S.—simply seek survival in the face of few other
alternatives). Student answers will vary in terms of which benefits are most appealing,
but most younger students seem to cite greater financial success, while older students
often gravitate more towards flexibility.

BUSPROG: Analytic
Bloom’s: Knowledge and Comprehension
Topic: Launching a New Venture: What’s in It for Me?
Difficulty Level: Easy
Learning Objective: 7-1

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End-of-Chapter Solutions / Chapter 7

2. Do you recognize any of the entrepreneurial personality characteristics in yourselves?

Which ones? Do you think it’s possible for a person to develop the characteristics that he
or she lacks? Why or why not?

Answers will clearly vary regarding which entrepreneurial characteristics students

recognize in themselves. While their answers will also vary regarding whether a person
can develop these characteristics, a number of experts believe that—to a significant
extent—this is indeed possible.

BUSPROG: Analytic
Bloom’s: Knowledge and Analysis
Topic: The Entrepreneur: A Distinctive Profile
Difficulty Level: Easy
Learning Objective: 7-2

3. What role does failure sometimes play in entrepreneurial success? What can an
entrepreneur gain from failure?

Failure can play a key role in entrepreneurial success by providing valuable lessons
about what not to do and by spurring creativity in the effort to recover. Experience with
failure can also strengthen other key entrepreneurial characteristics such as self
reliance. Increasingly, the stigma of failure has diminished with recognition that people
who have experienced failure may be more likely to eventually succeed because they are
willing to take risks. Some students may point out that business icons such as Walt Disney
and Steve Jobs experienced dramatic failure at various junctures in their careers, but
were clearly successful overall.

BUSPROG: Analytic
Bloom’s: Comprehension
Topic Entrepreneurial Characteristics
Difficulty Level: Easy
Learning Objective: 7-2

4. How could you convince family and friends to support your new business launch? What
kind of assurances would they need? What could you do to keep the funding
relationships professional? If you were to launch a new business would you start from
scratch, buy an established independent business, or buy a franchise? Why or why not?

Students will have different ideas on how to approach this, but the possibilities include
developing a strong business plan, sharing research results, offering to share profits, and
establishing a cutoff point for discontinuing the business if profits don’t materialize. Most
experts recommend keeping funding relationships professional by documenting the
agreements in detail and sticking to the terms. As students explore how they will launch
a new business, their answers should include insights about how their own character
compares to the approach they favor or reject. For instance, students with a high

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 End-of-Chapter Solutions / Chapter 7

tolerance for risk might be more interested in starting from scratch than in buying a
franchise.

BUSPROG: Analytic
Bloom’s: Comprehension
Topic Funding Options for Small Businesses
Difficulty Level: Easy
Learning Objective: 7-3

5. Beyond personal resources, what are other funding options for small businesses? Why
don’t more entrepreneurs tap into these resources?

Other funding options for entrepreneurs include loans, angel investors, and venture
capital firms. But many entrepreneurs—especially at the initial launch of their
business—find trouble tapping into these resources since they lack the track record that
many lenders or investors require. In some cases the Small Business Administration can
help firms jump this hurdle by partially guaranteeing loans from commercial lenders.
The SBA also has a microloan program that can help start-up businesses through
community nonprofit organizations.

BUSPROG: Analytic
Bloom’s: Comprehension
Topic Funding Options for Small Businesses
Difficulty Level: Easy
Learning Objective: 7-3
6. Compare the opportunities and threats that small businesses face. Which opportunities are
most compelling? Which threats are most intimidating? Why?
Opportunities:
• Market niches: Because of their size, many small firms are uniquely positioned to
exploit small but profitable corners of the market
• Personal customer service: With a small customer base, small firms can develop
much more personal relationships with individual customers.
• Lower overhead costs: With entrepreneurs wearing so many hats, many small
firms have lower overhead costs.
• Technology: The Internet has played a powerful role in opening new
opportunities for small businesses.

Threats:
• High risk of failure: Starting a new business involves a lot of risk, especially in
the first five years.
• Lack of knowledge and experience: Entrepreneurs often have in-depth knowledge
in a specific areas, but lack expertise in running a business.
• Too little money: Lack of sufficient start-up money is a major issue for most new
firms.
• Bigger regulatory burden: Complying with federal regulations can be an
overwhelming challenge for small firms.

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End-of-Chapter Solutions / Chapter 7

• Higher health insurance costs: The costs for small health plans are much higher,
making it tough to offer the coverage that top employees expect.

Student answers will differ regarding which opportunities are most compelling, but many
seem to cite technology. And most students find too little money to be the most daunting
threat.

BUSPROG: Analytic
Bloom’s: Comprehension and Analysis
Topic: Opportunities and Threats for Small Business: A Two-Sided Coin
Difficulty Level: Moderate
Learning Objective: 7-4

7. Review the definition of niche marketer, and cite three examples of niche marketers.
How has technology affected niche marketing?

A niche marketer is a firm that targets a sparsely occupied space in the market.
Examples include Anything Left Handed (products for left-handed people), Kool Dog
Kafe (gourmet dog treats), and Scrappin’ Twins (scrapbooking products for mothers of
twins and triplets). Students will most likely cite niche marketers that are local to your
campus. Technology—particularly the Internet—has played a powerful role in supporting
niche marketers by expanding their reach. Scrappin’ Twins, for instance, may not have
gotten off the ground with only its local market of mothers of twins and triplets with an
intense interest in scrapbooking. But nationwide—worldwide—there’s a big enough
market to support a small business.
BUSPROG: Analytic
Bloom’s: Comprehension
Topic: Small Business Opportunities
Difficulty Level: Moderate
Learning Objective: 7-4

8. If you were to launch a new business, would you start from scratch, buy an established
independent business, or buy a franchise? Why?

Student responses to this will vary, but most students seem to prefer the idea of starting
from scratch, despite the higher risk—creating their own concept seems to hold
enormous appeal. A frequent exception is the children of parents who own franchises.
Having seen the profit potential of franchises first hand, they often gravitate in that
direction.

BUSPROG: Analytic
Bloom’s: Comprehension
Topic: Launch Options: Reviewing the Pros and Cons
Difficulty Level: Easy
Learning Objective: 7-5

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 End-of-Chapter Solutions / Chapter 7

9. What are the key contributions of small business to the U.S. economy? Rank the benefits
in terms of importance, and provide the reasons for your ranking.

Key contributions:
• Creating new jobs: Small businesses with employees generate about 70% of the
new jobs in today’s economy.
• Fueling innovation: Small businesses develop innovations at about twice the rate
of their large business counterparts.
• Vitalizing inner cities: Small businesses comprise more than 99% of inner city
establishments, providing a springboard for development.

Student opinions will differ about which contribution is most important, although most
seem to rank new jobs at the top.

BUSPROG: Analytic
Bloom’s: Comprehension and Evaluation
Topic: Small Business and the Economy: An Outsized Impact
Difficulty Level: Moderate
Learning Objective: 7-6

10. What factors account for the dramatic differences in entrepreneurship rates around the
world? Do you think entrepreneurship will continue to grow worldwide? Why or why
not?

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End-of-Chapter Solutions / Chapter 7

Factors that account for much of the differences in entrepreneurship rates:

• Per capita income: In very low income countries the entrepreneurship rate is
high because many people have no other option.
• Opportunity costs: Entrepreneurship rates tend to be lower in countries where
employment protection and unemployment insurance is strong.
• Cultural/political environment: Extensive regulation can be a barrier to
entrepreneurship, while government and cultural support can be a boon.

Many experts believe that entrepreneurship rates will continue to grow worldwide given
the growth of market economies and free trade, the dramatic, high-profile successes of
entrepreneurs in the last couple of decades, and the growing worldwide Internet
penetration rate.

BUSPROG: Analytic
Bloom’s: Comprehension and Evaluation
Topic: Entrepreneurship Around the World
Difficulty Level: Moderate
Learning Objective: 7-6

Application Questions

1. A huge number of successful businesses—such as Apple, The Cheesecake Factory, and

eBay—were built around the personal passions of their founders. Consider your own
personal passions. What do you love to do? What are you great at doing? Can you shape
any of your interests into a business opportunity? Why or why not? Be sure to think big.
For instance, if you love hanging out with friends and listening to music, a club
promotion business might make sense for you. Write a one–two page paper outlining the
specific steps you need to take over the next few years to make your “dream business”
real?

Answers will clearly vary depending on student interests, but responses should include a
close tie between personal passions and business opportunities. Possibilities for how to
make the business actually happen include doing research, developing a business plan,
seeking an internship or job opportunity in the field, and networking with as many
possible contacts as possible.

BUSPROG: Analytic and Communication

Bloom’s: Comprehension and Evaluation
Topic: Launching a New Venture: What’s in It for Me?
Difficulty Level: Challenging
Learning Objective: 7-1

2. Identify a person in your neighborhood who started a business from scratch, a person
who bought an existing business, and a person who bought a franchise (your local
chamber of commerce can probably help you identify candidates). Interview each of the

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 End-of-Chapter Solutions / Chapter 7

entrepreneurs to learn more about their experiences. What were the pros and cons of each
approach? Would they use the same approach if they could do it over again? Why or why
not? What are their long term goals? How did the actual experiences of the entrepreneurs
you interviewed compare to the material in the book? Did you hear anything surprising?

Responses will vary significantly, but students will likely find a strong correlation
between the actual experiences of each type of business owner and the issues outlined in
the chapter.

BUSPROG: Analytic and Communication

Bloom’s: Comprehension
Topic: Small Business and Entrepreneurship: Economic Rocket Fuel
Difficulty Level: Challenging
Learning Objectives: 7-1 through 6

3. The Global Entrepreneurship Monitor (GEM) suggests that only a small percentage of
entrepreneurs launch “high expectation” businesses—firms that they anticipate will hire
20 or more employees in the next five years. In fact, a 2005 study suggests that just 9.8%
of the world's entrepreneurs expect to create almost 75% of the jobs generated by new
business ventures. Read the summary report on the Internet at the GEM website
(http://www.gemconsortium.org/). Given that “high expectation” entrepreneurs can have
a far-reaching impact on job creation and innovation, how can governments around the
world encourage more “high expectation” entrepreneurship? Consider the impact of
taxes, regulations, and government assistance.

Responses will vary, but answers should reflect an understanding that lower taxes, fewer
and less complex regulations, and more government assistance would probably lead to
more “high expectation” entrepreneurship. Other factors could include more
communication about the successes of entrepreneurs and the importance of innovation to
the overall culture.

BUSPROG: Analytic
Bloom’s: Analysis
Topic: Small Business and Entrepreneurship: Economic Rocket Fuel
Difficulty Level: Challenging
Learning Objectives: 7-1 through 6

4. In many developing countries, the majority of citizens make their living through
microenterprises—informal, tiny businesses that barely yield enough to survive. Without
financial services, most of these entrepreneurs find growth simply impossible. The
Foundation for International Community Assistance (FINCA), a nonprofit established in
1984, stepped into the gap by providing micro-loans ($50–$500) to the poorest of the
poor entrepreneurs, through village banks that are administered by the people they serve.
The FINCA program has been amazingly successful at breaking the vicious cycle of
poverty for its clients. Check out their story on the Web at www.villagebanking.com.

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End-of-Chapter Solutions / Chapter 7

Why has the FINCA approach worked so well? Do you think it would work in poor
communities in the United States? Why or why not?

Students will have different ideas about why microloan programs are effective, but most
will probably cite the need for even just a small financial boost to break through poverty,
the importance of community and local leadership, and the value of empowering women.
Students will also have different opinions about whether a similar program would work
in the U.S., but they should certainly consider the difference in the cost of living.

BUSPROG: Analytic
Bloom’s: Comprehension and Evaluation
Topic: Entrepreneurship Around the World
Difficulty Level: Challenging
Learning Objective: 7-6

5. The Small Business Administration (SBA) maintains a rich, vibrant website, and supports
a number of high impact programs to support small business growth. In fact, every state
has at least one local SBA office. Log onto the SBA website at www.sba.gov, and spend
a few moments browsing. Be sure to check out the sections on business opportunities and
training. Then find the page for the SBA office nearest your school. How would this
information be helpful for local small businesses? If you started a business, would you
personally be likely to use any of the SBA resources? If so, which ones? Why do you
think the government spends so much money supporting small business growth by
providing this array of resources?

Here, too, responses will vary, especially with regard to how the SBA resources would be
helpful. Answers might include loans, consulting, training, networking, and information
about issues from how to write a business plan to how to comply with federal regulations.
The government spends so much money supporting small business growth in order to
increase the level of competition in our economy, which ultimately increases the standard
of living by generating more choices, better quality, and better prices.

BUSPROG: Analytic
Bloom’s: Comprehension
Topic: Small Business and the Economy: An Outsized Impact
Difficulty Level: Moderate
Learning Objective: 7-6

Team Project

Making Lemonade from Lemons

Take a moment to write down 3 to 5 things that you find frustrating about daily life on a fairly
regular basis (e.g., “It takes forever to find a parking spot on campus,” “I hate waiting online at

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 End-of-Chapter Solutions / Chapter 7

the post office,” “My roommate borrows my favorite jeans way too often.”). Be honest . . . and
use real problems.

Then break into groups of 3 to 5 students, and exchange papers. Take about 3 minutes to choose
one problem on the list that you received, and to develop a product or service idea that could
solve that problem. Then, together with your team, review each person’s idea and choose the one
with the most potential. Working together take twenty minutes to further develop the idea into a
business concept. Create a logo and a slogan for your business, and present your idea to the class,
along with the problem that your business will solve. After you’ve heard the ideas from each
team, vote with your classmates for the best new business idea.

The responses to this challenge will clearly vary, but typically are quite creative.

BUSPROG: Analytic
Bloom’s: Synthesis
Topic: Small Business and Entrepreneurship: Economic Rocket Fuel
Difficulty Level: Moderate
Learning Objectives: 7-1 through 6

Case Connections

A Taxing Issue

In early summer 2011, the nation faced the prospect of default and Republicans and Democrats
tried to find ways to reduce deficit spending or risk a credit downgrade. One idea was to end tax
breaks for those who earn more than $250,000 per year: “the rich” (according to President
Obama and other key Democrats), or “job creators” (according to John Boehner and other key
Republicans and Tea Party activists). At a time of protracted economic stagnation, this issue
inflamed passions across the political spectrum. The key arguments:

In favor of taxing “the rich”

• The existing tax rate is well below historic norms and the country simply cannot afford
tax breaks for those who have benefited most from our business-friendly economic
system; in the interest of shared sacrifice, tax breaks for the wealthiest must be slashed to
overcome this crisis.
• Hiring would not be affected, since most business owners would only add new workers if
they would benefit financially on a net basis, including tax payments; so if the demand is
there, the jobs will be there, regardless.
• Many economists and bipartisan commissions agree that there is no way to close the
deficit without some “revenue enhancements” (i.e., tax increases). Given the soaring
federal debt, we as a society must seek every possible source of additional revenue.

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End-of-Chapter Solutions / Chapter 7

Against taxing “job creators”

• If we improve economic growth, rather than increasing taxes, the revenues will come.
• Raising taxes on job creators is the worst way to close the deficit, since it will inhibit new
hiring; some small business owners may even be forced to layoff workers, adding to the
deficit yet further.
• The tax would be creating a disincentive for growth, without much corresponding gain,
since the American Enterprise Institute claims that the additional revenue would produce
only "a rounding error compared to the deficits in the president's budget.”
• As chapter 7 explains, small businesses create more than 2/3 of the new jobs in our
economy – so we should make it as easy as possible, rather than throwing up roadblocks.

You Decide

• Do you think it makes sense to increases taxes on those who earn more than $250,000?
Please defend your answer.

Student opinions on this issue will differ, but their answers should show awareness of the
need to raise revenue and the importance of small business in building and maintaining a
thriving economy.

BUSPROG: Analytic
Bloom’s: Application
Topic: Small Business and Entrepreneurship: Economic Rocket Fuel
Difficulty Level: Challenging
Learning Objectives: 7-1 through 6

• Is it fair to have different tax rates for different income groups?

There has been heated debate on this issue in our country for the past several decades.
Students should be able to outline the key arguments to support their position. Against
progressive taxes: 1) It is not fair or right to take more money from those who have
earned more, 2) Heavier taxes on the rich may mean less job creation and spending in
the U.S. which will be worse for society overall, 3) Everyone should be taxed equally. In
favor of progressive taxes: 1) We have a stronger social fabric when everyone has the
same proportional stake in the well-being of our society, 2) The rich “owe” more to the
system because they typically got rich in part due to the education and infrastructure
system that were paid for by taxes, as well as the “blood and treasure” spent by past
generations to earn our position in the world, and 3) the rich hold more sway in the
political system and thus should contribute more.

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 End-of-Chapter Solutions / Chapter 7

BUSPROG: Analytic
Bloom’s: Application
Topic: Small Business and Entrepreneurship: Economic Rocket Fuel
Difficulty Level: Challenging
Learning Objectives: 7-1 through 6

• If you owned a small business, such as a night club, what financial factors would
influence your hiring?

Most students will reference the profitability of the business and the prospects of future
profitability. Some may reference the tax implications, but if they do, they should be sure
to distinguish between business and personal tax rates based on learning from chapter 6
(i.e. some small businesses are not sole proprietorships).

BUSPROG: Analytic
Bloom’s: Application
Topic: Finding the Money: Funding Options for Small Businesses
Difficulty Level: Challenging
Learning Objectives: 7-3

Sources: What Were They Thinking? By Elizabeth Drew, August 18, 2011, The New York Review of
Books website, http://www.nybooks.com/articles/archives/2011/aug/18/what-were-they-
thinking/?page=3, accessed September 5, 2011; Warren Buffett pushes higher tax rates, but some doubt
those would be right or beneficial by Laura Green, August 21, 2011, The Palm Beach Post website,
http://www.palmbeachpost.com/money/warren-buffett-pushes-higher-tax-rates-but-some-
1771404.html?cxntcid=breaking_news, accessed September 5, 2011

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