M Business 5th Edition Ferrell Solutions Manual 1

Ferrell / Hirt / Ferrell:
Instructor’s Manual - Chapter 5

Business
M Business 5th Edition Ferrell

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Chapter 5: Small Business, Entrepreneurship,

and Franchising
Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s
highlights. Follow-up via the Connect exercises is then encouraged to provide a holistic understanding of the
chapter.
CHAPTER FORECAST
This chapter surveys the world of entrepreneurship and small business. First we define entrepreneurship and
small business and examine the role of small business in the American economy. Then we explore the
advantages and disadvantages of small-business ownership and analyze why small businesses succeed or fail.
Next, we discuss how an entrepreneur goes about starting a business and the challenges facing small
businesses today. Finally, we look at entrepreneurship in larger organizations.
LEARNING OBJECTIVES
LO 5-1 Define entrepreneurship and small business.

LO 5-2 Investigate the importance of small business in the U.S. economy and why certain fields attract
small business.
LO 5-3 Specify the advantages of small-business ownership.
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Business
LO 5-4 Summarize the disadvantages of small-business ownership, and analyze why many small
businesses fail.
LO 5-5 Describe how you go about starting a small business and what resources are needed.
LO 5-6 Evaluate the demographic, technological, and economic trends that are affecting the future of
small business.
LO 5-7 Explain why many large businesses are trying to “think small.”
LEARN THE TERMS
business plan (p. 156) franchiser (p. 159) Small Business

Administration (SBA) (p. 147)
entrepreneurship (p. 146) intrapreneurs (p. 164)
undercapitalization (p. 155)
franchise (p. 159) small business (p. 147)
venture capitalists (p. 158)
franchisee (p. 159)
Business
KEY TERMS AND DEFINITIONS
business plan A precise statement of the rationale for a business and a step-by-
step explanation of how it will achieve its goals.
entrepreneurship The process of creating and managing a business to achieve desired

objectives.
franchise A license to sell another’s products or to use another’s name in

business, or both.
franchisee The purchaser of a franchise.
franchiser The company that sells a franchise.
intrapreneurs Individuals in large firms who take responsibility for the

development of innovations within the organizations.
small business Any independently owned and operated business that is not
dominant in its competitive area and does not employ more than
500 people.
Small Business An independent agency of the federal government that offers

Administration (SBA) managerial and financial assistance to small businesses.
undercapitalization The lack of funds to operate a business normally.
venture capitalists Persons or organizations that agree to provide some funds for a new
business in exchange for an ownership interest or stock.
Business
CONTENT OUTLINE
The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS
learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with
LECTURE NOTES to drive home teaching points. There is also a reminder on when CONNECT activities can be
used. This is created so that you can facilitate in-class or online discussion effectively.
LO 5-1 Define entrepreneurship and small business. Key Terms:
• Introduction • Entrepreneurship
• The Nature of Entrepreneurship • Small business
o What is a Small Business? • Small Business
o The Role of Small Business in the American Administration (SBA)
Economy
PowerPoint Slides Lecture Outline and Notes:
PPT 5.4 I. The Nature of Entrepreneurship and Small Business

A. Entrepreneurship is the process of creating and managing a business to
achieve desired objectives. The entrepreneurship movement has been
accelerating.
1. Some entrepreneurs who start small businesses have the ability to see
emerging trends; in response, they create a company to provide a
product that meets customer needs.
2. Technology once available only to the largest firms can now be
obtained by small business.
3. Companies such as Procter & Gamble, McDonald’s, and Dell
PPT 5.5 Computers all started out as small businesses. Now they have become
major global corporations. Many of the entrepreneurs that founded
these businesses, such as Steve Jobs (Apple), Michael Dell (Dell
Computers), Larry Page and Sergey Brin (Google), and Bill Gates
(Microsoft) are recognized as some of the greatest entrepreneurs.
(Table 5.1)
PPT 5.6 B. What Is a Small Business?
1. The textbook’s definition of small business is any independently
owned and operated business that is not dominant in its competitive
area and employs fewer than 500 people. (Table 5.3)
2. This is similar to the definition used by the Small Business
Administration (SBA), an independent agency of the federal
government that offers managerial and financial assistance to small
businesses.
Business
PPT 5.7 C. The Role of Small Business in the American Economy (Table 5.2)
1. Small businesses are vital to the soundness of the American
economy.
2. Over ninety-nine percent of all U.S. firms are classified as small
PPT 5.8
businesses, and they employ 50 percent of private workers.
3. They represent 98 percent of all U.S. exporters of goods and
contribute 33 percent of the value of these exports.
4. Small businesses fuel job creation and innovation and provide
significant opportunities for minorities and women to succeed in
business.
5. Small businesses generate 63 percent of net new jobs.
a. Many new jobs are also created by big-company/small-company
alliances.
PPT 5.9 6. Women-owned businesses are responsible for more than 7.7 million
American jobs and contribute $1.3 trillion to the national economy.
Women own more than 8 million businesses nationwide.
7. Minority-owned businesses have been growing faster than other
classifiable firms as well, representing 21.3 percent of all small
businesses. The number of minority-owned businesses is increasing at
a rate of 30 percent.
8. 99.7 percent of all businesses employ fewer than 500 people.
Businesses employing 19 or fewer people account for 89.8 percent of
all businesses.
PPT 5.10 9. Small businesses contribute highly to innovation and bring significant
changes and benefits to customers. For instance, the airplane, audio
tape recorder, fiber-optic examining equipment, the heart valve,
optical scanner, personal computer, soft contact lenses, the Internet,
and even the zipper were innovations by small businesses.
PPT 5.11 a. Founder and CEO of the small firm UniKey, Phil Dumas, invented a
new way for consumers to keep their doors locked
b. Invented Kevo, a motorized deadbolt that links to users’ iPhones
(with just a touch of a finger, consumers can lock and unlock their
doors from remote locations)
c. UniKey distributes products in major retailers such as Lowe’s and
Home Depot
d. Just one example of a small company with the ability to innovate
and contribute to the benefit of customers
Business
LO 5-2 Investigate the importance of small business in the U.S. economy Key Terms:
and why certain fields attract small business.
• Industries That Attract Small Business
PPT 5.12 D. Industries That Attract Small Business

1. Small businesses are found in every industry, but some areas are
especially attractive because they are relatively easy to enter, require
low initial financing, and/or offer relatively easy ways to target a
specific group of customers.
PPT 5.13 2. Retailing and Wholesaling
a. A retailer acquires goods from producers or wholesalers and sells
them to consumers. Retailing is attractive to small-business
owners because it is easy to gain experience and exposure in the
field and the financial cost of opening a retail store is relatively
low.
b. Wholesalers supply products to industrial, retail, and institutional
users for resale or for use in making other products. Small
businesses are successful in wholesaling activities because they
are close to final customers and know how to keep them satisfied.
3. Services
a. Service providers work for others but do not actually produce
tangible goods.
b. The service sector accounts for 80 percent of U.S. jobs.
c. Many service providers are also retailers because they provide
their services to ultimate consumers.
PPT 5.14
4. Manufacturing
a. Small businesses can often customize products to meet specific
customer needs and wants.
b. The Malcolm Baldrige Award recognizes achievements in quality
and performance in businesses of all sizes
5. High Technology businesses depend heavily on advanced scientific and
engineering knowledge.
a. In general, high-technology businesses require greater capital and
have higher initial startup costs than do other small businesses.
b. 37 percent of high-tech jobs are in small business
Business
PPT 5.17 E. Successful Traits of Young Entrepreneurs (Table 5.4)

1. Intuitive
2. Productive
4. Resourceful
5. Charismatic
7. Innovative
8. Risk-taker
9. Persistent
10. Friendly
LO 5-3 Specify the advantages of small-business ownership. Key Terms:
• Advantages of Small-Business Ownership

o Independence
o Costs
o Flexibility
o Focus
o Reputation
PPT 5.16 II. Advantages of Small-Business Ownership

PPT 5.18 A. Independence
1. Independence and the opportunity to better themselves are leading
reasons why entrepreneurs go into business for themselves.
2. Freedom to work where and when they want is desired by many
small-business entrepreneurs.
PPT 5.19
B. Small businesses usually require less money to start and maintain than
large ones.
PPT 5.20 C. Flexibility
1. Small businesses have the flexibility to adapt to changing market
demands.
2. With only one layer of management, decisions can be made quickly.
D. Small firms can focus their efforts on a precisely defined market niche—a
specific group of customers—to address a need that other companies
have not addressed.
E. Many small firms can develop reputations for quality and service,
demonstrating a commitment to customer satisfaction.
Business
LO 5-4 Summarize the disadvantages of small-business ownership, and Key Terms:

analyze why many small businesses fail.
• Undercapitalization
• Disadvantages of Small-Business Ownership
o High Stress Level
o High Failure Rate
PPT 5.22 III. Disadvantages of Small-Business Ownership

A. High Stress Level
1. Worries about the business, competition, or changing market demand
cause stress.
2. Long work days are the norm.
B. High Failure Rate (Table 5.5)
PPT 5.23
1. There is no guarantee of small business success.
2. Half of all small businesses fail within five years.
3. Small businesses fail for many reasons.
a. Poor business management causes many failures.
b. Other causes include burdens imposed by government regulation,
insufficient funds during slow sales periods, and competition from
others.
4. The shortest path to failure in business is undercapitalization—
lacking sufficient funds needed to operate the business normally.
5. Poor management is the cause of many business failures: Just because
an entrepreneur has a brilliant vision for a small business does not
mean he or she has the knowledge or experience to manage a growing
business effectively.
a. Expanding a hobby into a business may work if a genuine market
niche exists, but all too often people start such a business
without identifying a real need for the goods or services.
6. Growth requires specialized management skills that the owner may
not have nor have the time to acquire.
a. Growth often requires the owner to give up a certain amount of
direct authority, and it can be hard for someone who has called
all the shots to give up control.
Business
LO 5-5 Describe how you go about starting a small business and what Key Terms:
resources are needed.
• Business plan
• Starting a Small Business • Venture capitalists
o The Business Plan • Franchise
o Forms of Business Ownership
• Franchiser
o Financial Resources
• Franchisee
o Approaches to Starting a Small Business
o Help for Small-Business Managers
PPT 5.24 IV. Starting a Small Business
A. Creating a small business involves starting out with a concept or idea.
Then it involves creating a business plan. After, the entrepreneur must
devise a strategy to guide planning and development.
B. The Business Plan
PPT 5.25
1. A business plan is a precise statement of the rationale for the business
and a step-by-step explanation of how it will achieve its goals.
connect 2. It should include an explanation of the business, an analysis of the
competition, estimates of income and expenses, a strategy for
Need help acquiring sufficient funds to keep the business going, and other
understanding How information.
an Entrepreneur Can
Secure Financing for 3. The business plan should act as a guide and reference document.
Small Business? Visit 4. It should be revised periodically to ensure that the firm’s goals and
your Connect ebook strategies can adapt to changes in the environment.
video tab for a brief
animated 5. Business plans also allow companies to assess market potential,
explanation. determine price and manufacturing requirements, and refine product
selection.
C. Forms of Business Ownership
PPT 5.26
1. After developing a business plan, the entrepreneur has to decide on
an appropriate legal form of business ownership, such as a sole
proprietorship, partnership, or corporation.
PPT 5.27 D. Financial Resources

1. To make money from a small business, the owner must provide or
obtain money (capital) to start the business and to keep it running
smoothly. Financing options include loans, stocks, or equity financing.
Business
PPT 5.28 2. Equity Financing

a. Equity financing occurs when the owner uses real personal assets
rather than borrowing funds from outside sources to get started
in a new business.
b. Small businesses can also obtain equity financing by finding
investors for their operations.
1) They may sell stock in the business to family members,
friends, employees, or other investors.
PPT 5.29 2) Venture capitalists are persons or organizations that agree to
provide some funds for a new business in exchange for an
ownership interest or stock.
3) This form of equity financing requires that the small business
owner share the profits or the control of the business.
3. Debt Financing
PPT 5.32
a. Banks are the main suppliers of external debt financing to small
businesses.
b. The Small Business Administration offers financial assistance to
qualifying businesses.
c. Small business owners can look to family and friends as sources
for loans of long-term funds or other assets, such as computers or
automobiles that are exchanged for an ownership interest in a
business.
PPT 5.33 d. The amount a financial institution is willing to loan depends on its
assessment of the venture’s likelihood of success and of the
entrepreneur’s ability to repay the loan.
1) The owner is often required to put up collateral—a financial
interest in the property or fixtures of the business—to
guarantee payment of the debt.
2) The small business owner may also have to offer some
personal property as collateral, such as a home, in which case
the loan is called a mortgage.
e. Financial institutions can also grant a small business a line of
credit—an agreement by which a financial institution promises to
lend a business a predetermined sum on demand.
PPT 5.34 f. Small businesses may also obtain funding from their suppliers in
the form of trade credit; suppliers allow the business to take
possession of the needed goods and services and pay for them at
a later date or in installments.
g. Occasionally, small businesses engage in bartering, trading their
own products for the goods and services offered by other
businesses.
h. Some community groups, state, and local agencies sponsor loans,
especially to minority businesspeople or for development in
certain areas.
Business
PPT 5.35 E. Approaches to Starting a Small Business

1. Starting from Scratch Versus Buying an Existing Business
a. Buying an already existing business has the advantage of providing
a network of existing customers and suppliers.
b. However, the entrepreneur must deal with the problems the
business already has.
PPT 5.36 2. Franchising
a. A license to sell another’s products or to use another’s name in
business, or both, is a franchise.
1) The company that sells a franchise is the franchiser.
2) The purchaser of a franchise is called a franchisee.
b. The franchisee acquires the rights to a name, logo, methods of
operation, national advertising, products, and other elements
associated with the franchiser’s business in return for a financial
commitment and the agreement to conduct business in
accordance to the franchiser’s standard of operations.
c. The initial fee to join a franchise varies greatly. In addition,
franchisees buy equipment, pay for training, and obtain a
mortgage or lease. The franchisee also pays the franchiser a
monthly or annual fee based on the percentage of sales or profits.
d. Dunkin’ Donuts, Subway, and Jiffy Lube are examples of
franchises. (Table 5.6)
e. Advantages of franchising
PPT 5.37 1) Franchising allows a franchisee the opportunity to set up a
small business relatively quickly, and a franchise outlet often
reaches the breakeven point faster than an independent
business would because of its association with an established
brand.
2) Management training and support
3) Brand-name appeal
4) Standardized quality of goods and services
5) National and local advertising programs
6) Financial assistance
7) Proven products and business formats
8) Centralized buying power
9) Site selection and territorial protection
10) Greater chance for success
Business
PPT 5.38 f. Disadvantages of franchising

1) Franchise fees and profit sharing with the franchiser
2) Strict adherence to standardized operations
3) Restrictions on purchasing
4) Limited product line
5) Possible market saturation
6) Less freedom in business decisions
g. The practice of franchising first began in the United States in the
19th century when Singer used it to sell sewing machines. The
concept of franchising grew especially rapidly during the 1960s,
when it expanded to diverse industries.
PPT 5.41 F. Help for Small Business Managers
1. Many organizations exist to help small businesses
a. Small Business Administration
1) Small Business Development Centers
2) Service Corps of Retired Executives
3) Active Corps of Executives
4) Small Business Institutes
b. College courses and seminars
c. Chambers of Commerce and U.S. Department of Commerce
d. National publications such as Inc. and Entrepreneur, as well as
weekly business journals/newspapers.
e. Advice and help from other small businesses
f. Networking
1) Networking—building relationships and sharing information
with colleagues—is vital for any businessperson.
LO 5-6 Evaluate the demographic, technological, and economic trends that Key Terms:
are affecting the future of small business.
• The Future of Small Business

o Demographic Trends
o Technological and Economic Trends
Business
PPT 5.42 V. The Future for Small Business

A. Demographic Trends
1. The baby boom generation (those born between 1946 and 1964) is
wealthy and aging, but not actively pursued by most small businesses.
2. Another market with huge potential for small business is the echo
boomers (those born between 1977 and 1994; also called Millennials
or Generation Y), who shop frequently and spend lavishly. Millennials
PPT 5.43 number about 75 million.
3. The growing number of immigrants living in the United States
represents another potential market for small business. Immigrants
represent about 16 percent of the population.
PPT 5.44 B. Technological and Economic Trends
1. Technological advances have opened many new markets to small
business.
a. Jack Dorsey founded the idea for Twitter on a sketchpad. He says
the idea was based on how dispatched vehicles, such as cabs,
communicate with one another. Via radio, they are constantly
squawking to each other about where they are and what they are
doing.
2. Small businesses can react quickly to changes in the economy.
3. Economic turbulence provides opportunities and threats
4. Changes in communication and technology can allow small companies
to customize their services quickly for international customers.
Deregulation of the energy market and interest in alternative fuels
and in fuel conservation has spawned many small businesses.
C. Top cities to start a small business (Table 5.7)
LO 5-7 Explain why many large businesses are trying to “think small”. Key Terms:
o Making Big Businesses Act “Small” • Intrapreneurs
Business
PPT 5.46 VI. Making Big Businesses Act “Small”

A. The success and competitiveness of small businesses have led many large
corporations to take a closer look at what makes their smaller rivals tick.
B. Many large corporations are focusing on downsizing. This process involves
the reduction of management layers, corporate staff, and work tasks in
order to make the firm more flexible, resourceful, and innovative like a
smaller business.
C. Many companies are trying to instill a spirit of entrepreneurship. In major
corporations, intrapreneurs, like entrepreneurs, are employees who take
responsibility for the development of innovations of any kind within the
large organization.
Business
BOXED TEXT DISCUSSION QUESTIONS
ENTER THE WORLD OF BUSINESS—Chobani Yogurt Fights for Dominance in the Yogurt Market
Hamdi Ulukaya, the founder of Chobani Yogurt, made it into the billion-dollar venture it is now. At one time,
Greek yogurt accounted for less than 1 percent of the yogurt market in the United States; it now makes up
50 percent. With the help of a Small Business Administration loan, Ulukaya purchased a small yogurt plant
Kraft was selling. Ulukaya does not outsource but maintains control of the entire manufacturing process.
Under his leadership, the company has become a challenger to the top yogurt makers in the industry in only
a matter of years. In fall 2013 the company had to recall its yogurt after reports that mold growing in the
yogurt made consumers sick. Chobani is facing increased competition from more established rivals such as
Danone’s Oikos brand and Yoplait Greek.
1. What are some likely reasons that Chobani Yogurt has become such a success?
The owner does not outsource but maintains control of the entire manufacturing process. Hamdi
Ulukaya is considered a strong and respected leader. Greek yogurt has recently become very popular and
accounts for 50% of the yogurt market in the United States.
2. Describe some of the challenges that Chobani is facing.
The company had to recall its yogurt after reports that mold growing in the yogurt made consumers sick.
Whole Foods decided to drop Chobani from its shelves. Finally, Chobani is facing increased competition
from more established rivals such as Danone’s Oikos brand and Yoplait Greek.
3. Why is it such an issue when a major retailer drops a product from its shelves?
Chobani needs visibility for consumers to select it for purchase. When the brand is removed from a major
retailer it hurts the brand image and also puts it out-of-sight-out-of-mind for the consumer.
CONSIDER ETHICS AND SOCIAL RESPONSIBILITY—The Difference between Successful Entrepreneurs and
Fraudsters
There are surprising similarities in the characteristics of famous entrepreneurs and fraudsters. Fraudsters
tend to be intelligent, creative, persuasive, and seemingly confident—all characteristics of many successful
entrepreneurs. Successful entrepreneurs and fraudsters often display what has been termed “fearless
dominance” demonstrating boldness, grace under pressure, charisma, and intelligence. What keeps
entrepreneurs from becoming fraudsters? One trait is empathy. Another major characteristic is the ability to
bounce back from failure.
Business
1. What characteristics do fraudsters and successful entrepreneurs share?
Fraudsters tend to be intelligent, creative, persuasive, and seemingly confident—all characteristics of

many successful entrepreneurs. Successful entrepreneurs and fraudsters often display what has been
termed “fearless dominance” demonstrating boldness, grace under pressure, charisma, and intelligence.
2. What are some major differences in the personalities of fraudsters and successful entrepreneurs?
One difference is empathy; being able to sympathize and care about others’ well-being. Another
difference is the ability to bounce back from failure.
3. Why is a lack of empathy fairly common among fraudsters?
Fraudsters take advantage and manipulate others. If they have empathy, then they would be able to
sympathize and care about others’ well-being making it difficult to also commit fraud.
GOING GREEN—ReFleece: A Simple but Sustainable Product
Sam Palmer and Jennifer Feller took a risk with their idea for a sustainable iPad case. They refinanced their
home and took out a home equity loan for $150,000 to found ReFleece in 2012, a business that uses up-
cycled fleece as material for tablet cases. Up-cycling refers to reusing material without compromising its
quality. The only new materials on these tablet cases are thread, snaps, and elastic. The entrepreneurs have
been praised for their ability to create a useful product from old materials as well as for their commitment
toward social responsibility.
1. Why do you think a simple concept such as a tablet case made from up-cycled material became
successful?
This product appeals to eco-conscious consumers concerned about organizations social responsibility. By
reusing materials without compromising the products quality, green consumers may be more likely to
purchase the item and even pay a higher price for the product. Also, the owners are equipped with
design experience so that the products are stylish.
2. How were the ReFleece founders able to fund their start-up company? What risks did they accept to
make their idea into a reality?
They refinanced their home and took out a home equity loan for $150,000 to found ReFleece. A risk of
this action is if the company fails then their home could be lost as well.
Business
3. How has the partnership with Patagonia likely affected ReFleece’s sales?
The ReFleece products appeal to consumers concerned with social responsibility, the same as Patagonia.
Customers in Patagonia could be drawn to the ReFleece products since they appeal to eco-conscious
consumers.
SUPPLEMENTAL LECTURE
When Expansion Can Lead to Failure
The textbook points out that one of the problems with small businesses is the inability to cope with growth.
The following lecture describes a small business expansion that is typical of the experience of other firms.
Matt Morgan was the manager of a variety store that was part of a large national chain. The variety store
was located in a small town of 10,000 in southern Florida. The small town was growing rapidly because
tourists from the North had discovered the town’s beautiful beach on the Atlantic.
Matt had arrived in town at the start of a slow-building boom and reasoned that now was an opportune time
for him to go into business for himself. He left his job with the variety-store chain. Locating an empty store
space next to the variety store, Matt and his wife Nettie converted the area into an orange juice and hot dog
stand with a long counter and high bar stools. Fresh-squeezed orange juice on hot Florida days seemed to hit
the spot with locals and tourists alike. Matt put in a few tables and expanded the menu by adding some
beverages, hamburgers, and soft ice cream.
Because Matt and Nettie had engaging personalities and tried to know most of their regular customers by
name, their business blossomed. A very small breakfast menu was offered, and the business—called the
Orange Connection—was a financial bonanza for Matt and Nettie.
Matt opened up at 6:00 a.m. for breakfast. Many people on their way to work in the growing town stopped
by for coffee, juice, and a danish. Some retired people also stopped by for a plate of bacon and eggs. By 9:00
a.m., shoppers and tourists stopped by seeking nothing more than a cold drink. Around 10:30 each morning,
the Orange Connection was jammed, with all seats taken and numerous people standing at the counter
waiting to be served.
At 11:00, Nettie would join Matt in serving quick, short-order lunches. Even though many of the orders were
to go, there was always a seating shortage for lunch, but crowds kept coming back.
In the afternoon, another wave of customers would come seeking just a cool drink. The evening hours saw a
slight increase in orders of hot dogs and hamburgers. Business dropped off by 7:00 p.m., and Matt would
close the Orange Connection at 7:30 p.m. The Orange Connection was closed on Sunday.
Business
The town’s response to the Orange Connection had been overwhelming. The Orange Connection was
frequently overflowing, and some customers had to be turned away. Matt and Nettie began to think about
expanding to a larger facility. After a year of doing some simple surveying and talking with everyone who
would discuss the matter, the Morgans decided to knock out their south wall and develop a restaurant with
three times the space of the original Orange Connection. During the renovation and construction, crowds
continued at their normal peak level.
Finally, the new Orange Connection opened as a swanky restaurant with a staff of skilled chefs and a
complete menu. In the original facility, lunch consisted of a hamburger, sack of potato chips, orange juice,
and a frozen custard cone. In the new expanded facility, lunch consisted of a meal such as fried chicken,
mashed potatoes, green beans, tossed salad, chilled fruit sections, rolls and butter, iced tea, and apple pie a
la mode. With this new facility, Matt realized he would have to stay open until 11:00 p.m. and serve three
complete meals from a varied menu. Although the staff was larger, Matt and Nettie still worked long hours
and were there to greet their many friends and customers.
The only problem was that the friends and customers weren’t there for the Morgans to greet. Crowds at the
Orange Connection dropped off, and the evening meal was a strangely silent time. Matt devised all kinds of
promotional gimmicks to lure the crowds back, but nothing seemed to work. Apparently, expanding the
Orange Connection was not a success.
Eventually, the Morgans sold what remained of their business and moved to California. They never really
understood why the new Orange Connection was not a success. The Morgans and some business friends had
to conclude that whatever magic there was in the original Orange Connection did not carry over to the large
restaurant. In his later years, Matt Morgan was heard to say, “I guess I should never have knocked out that
wall. Our little orange juice stand had a certain personality all its own. That mystique died when we opened
the restaurant.”
1. Why do you think the new expanded restaurant did not succeed?
Consumers probably valued the original Orange Connection because it contained more of a family,
homey feel to it. It was unlike other restaurants around the area in its simplicity and convenience, and its
uniqueness probably contributed to its demand. The fact that the Morgans knew everyone by name
made the customers feel special. The new restaurant may have alienated many of the loyal customers,
who probably felt that their needs would not be met to the same extent. The newer restaurant, despite
the Morgans’ efforts, probably would not possess the same homey personality as the original. Customers
probably felt that they would be forgotten. Additionally, perhaps customers interpreted the expansion as
a way to increase the Morgans’ profits at the expense of customer service and relationships.
Business
2. What could the Morgans have done differently in their planning?
The Morgans should have performed more market research to determine why customers valued their
restaurant so. What were their opinions concerning expansion? Would they be in favor of a bigger
restaurant, and if not, what were the reasons? If the Morgans could have anticipated and understood
their customers’ objections to a larger, fancier restaurant, then they could have worked to reassure their
customers that the new restaurant would not lose the personality that made the original Orange
Connection so beloved. A market analysis was completely lacking, which they should have used to help
formulate a business plan for the new restaurant.
CONTROVERSIAL ISSUE
Are Small Businesses Dependent on the Presence of the Owner?
Many small businesses begin as one-person operations. Most small business owners put in extremely long
hours and seldom take vacations. Although such firms later employ other workers, the management style
and personality of the owner seem to be necessary to the survival of the firm. Here are some examples.
Ted and Ralph formed a partnership to operate a service station in a large midwestern city. Both were on the
premises from 7 a.m. until closing at 8 p.m. Both were skilled at greeting the public, and they made many
friends as business boomed. Although they maintained ownership of the station, Ted and Ralph began to
spend time away from work, leaving capable subordinates in charge. But the firm just wasn’t the same
without Ted and Ralph on hand, and business dropped. Ted and Ralph realized that to keep the station highly
successful, they both had to be on the premises.
For many years, Mabel and Theo Harker operated Harker’s Cafe in a large city in the Southwest. Theo was
the chief cook, and Mabel waited on customers who sat at the counter. Although they hired several other
cooks and waitresses, Mabel and Theo were the stable core of the business. The two worked long hours, and
business seemed to go more smoothly when the owners were there. Realizing how important they were
personally to the success of the cafe, the Harkers never took a vacation and never left the cafe in the hands
of the hired staff. Instead, in late summer and around Christmas, the Harkers closed down the entire cafe for
a week at a time. Customers agreed that the place would not be Harker’s Cafe without Mabel and Theo.
Business
1. Why does it seem to be necessary for the owner(s) to be on the premises all the time?
Customers likely begin to associate the owners with the business, particularly if it’s a small business. A
business is more than just a place to buy merchandise; it also consists of the personalities of the workers
and the relationships formed between employees, or in this case, the owners and the customers.
Customer relationships are especially important in small businesses to attract customers away from
larger competition. Since the owners are the first people customers come into contact with, they likely
form important relationships with the owners that contribute to their later patronage of the business;
thus, the absence of the owners takes away from those core relationships. Additionally, customers trust
that the owners have better expertise and know-how of the business than subordinates do.
2. Can there be personality cults in small businesses? Is it possible for customers to create a personality
cult around the owners of a business?
As the above examples illustrate, it does seem like customers can create personality cults around the
owners of a business. Business owners are often “people” persons and are very enthusiastic and
knowledgeable about their products. It is possible for customers to blend the owners’ personalities with
the business so that they become almost inseparable.
3. How might the owner go about reducing customers’ dependency upon the presence and/or
personality of the owner and leading customers to depend more on the business itself?
Students’ answers will vary.
SO YOU WANT TO BE AN ENTREPRENEUR OR

A SMALL BUSINESS OWNER
What is one of the most common reasons people become entrepreneurs?
Independence is one of the main reasons why people turn to entrepreneurship. People who do not do well in
an office setting and who prefer to set their own hours and have more freedom tend to prefer
entrepreneurship.
Business
CHECK YOUR PROGRESS
1. Why are small businesses so important to the U.S. economy?
More than 99 percent of all U.S. firms are classified as small businesses. Small businesses are fueling job
creation and innovation.
Business
2. Which fields tend to attract entrepreneurs the most? Why?
The fields of retailing, services, and high technology tend to attract small businesses because these fields
(except for high technology) are relatively inexpensive to enter. They generally do not require a large
initial investment or a lot of experience.
3. What are the advantages of starting a small business? The disadvantages?
Advantages of small business ownership include independence and flexibility in terms of the location and
opening hours of the business. Additional advantages include lower costs, flexibility to adapt to changing
market conditions, focus on a limited market niche, and reputation. Among the disadvantages of small
businesses are the high stress level and the high failure rate.
4. What are the principal reasons for the high failure rate among small businesses?
The main reasons for the high rate of failure among small businesses are undercapitalization, inability to
cope with growth, poor business management, over optimism, burdens imposed by government
regulation, insufficient reserves to withstand slow sales, and vulnerability to competition.
5. What decisions must an entrepreneur make when starting a small business?
When starting a small business, an entrepreneur must first conceive a business plan. He or she must then
select a specific form of business ownership and secure sufficient financial resources.
6. What types of financing do small entrepreneurs typically use? What are some of the pros and cons of
each?
Few small-business owners have the funds necessary to start a business. Small-business owners can
obtain financing from friends and family. However, the relationship may suffer if the business fails. Small
businesses may seek financing from banks or other financial institutions. A bank may require collateral or
a mortgage, and the bank can repossess the property if the business fails to repay the loan.
A financial institution may grant a line of credit, an agreement by which the financial institution promises
to lend the business a predetermined sum of money on demand.
Other sources of financing include local and state agencies, the Small Business Administration, and
venture capitalists.
Business
7. List the types of management and financial assistance that the Small Business Administration offers.
• counseling for firms in difficulty
• consulting on operations improvements
• training for owners/managers and employees
• business clinics
• advice from SCORE and ACE
• loan programs
8. Describe the franchising relationship.
Franchisees purchase a franchise for a fee, plus start-up costs. Franchisees may also pay a fee, based on a
percentage of sales, for advertising and promotion.
9. What demographic, technological, and economic trends are influencing the future of small businesses?
Aging baby boomers, echo boomers, and an increasing number of immigrants living in the United States
represent potentially huge markets for small businesses. Technological advances have opened many new
markets to small businesses. Small businesses can adapt to changing trends faster than large
corporations.
10. Why do large corporations want to become more like small businesses?
The continuous success of small businesses, their capacity to innovate, their flexibility, and their ability to
adapt quickly to market changes are some of the reasons why large corporations want to become more
like small businesses.
GET INVOLVED
1. Interview a local small-business owner. Why did he or she start the business? What factors have led to
the business’s success? What problems has the owner experienced? What advice would he or she offer
a potential entrepreneur?
Students’ answers will vary depending upon the business they chose.
Business
2. Using business journals, find an example of a company that is trying to emulate the factors that make
small businesses flexible and more responsive. Describe and evaluate the company’s activities. Have
they been successful? Why or why not?
Students’ answers will vary depending upon the business they choose.
3. Using the business plan outline in Appendix B, create a business plan for a business idea that you have.
(A man named Frederick Smith once did a similar project for a business class at Yale. His paper became
the basis for the business he later founded: Federal Express!)
Students’ answers will vary depending upon their business idea.
BUILD YOUR SKILLS
The Build Your Skills exercise allows students to measure their Creativity Quotient, which comes from
exercising your right brain hemisphere. Students might find this interesting in determining their own
creativity and relating this to their possible success in entrepreneurship.
Michelangelo, the great Renaissance artist and creative genius, best known for his Sistine Chapel ceiling
frescoes and his colossal 18-foot marble sculpture of David, is supposed to have said that he didn’t create his
sculptures. He only uncovered what was already there. And that’s exactly what creativity is—uncovering
what’s already there.
Here are some additional ideas for giving your students some help in developing their creativity skills:
1. Between now and the next class session, ask students to select three items from the list of mental
aerobic exercises presented below.
2. At the next class session, have them report in one of the following formats the results of your creativity
conditioning.
a. Write a 2-3 paragraph paper for your instructor where you highlight some positive/negative results
of your “mental workouts.”
b. Take a few minutes at the beginning of class and ask several students to describe the results of these
mental conditioning exercises.
c. Break into groups of 3-4 students and share some outcomes of your participation in this exercise.
Business
Mental Aerobic Exercises
• If you’re right-handed, try using your left hand to do things. If you’re left-handed, switch to your right for
a while.
• Do a jigsaw or crossword puzzle.
• Try a new way of expressing your creativity (cook something you’ve never made before, paint a picture,
write a poem, throw a party that has an interesting theme).
• Guess at measurements rather than using a ruler, tape measure, or measuring cup. Then measure and
see how close you were.
• Watch three-quarters of a movie on video, stop the tape, and think of your own ending.
• Stretch your thinking beyond what might be your typical approach to solving problems. See if you can
solve one of these brain teasers (answers provided below):
1. Arrange the letters below into one word:
NEW DOOR
2. Change the Roman numeral that represents the number 9 (IX) into a 6 by using only one line.
3. Determine in what order the numbers below are arranged:
8, 5, 4, 9, 1, 7, 6, 3, 2, 0
• Go to the library and look up an article or find a biography about a famous creative person (Thomas
Edison, Walt Disney, Steven Spielberg, etc.) and spend 20 minutes skimming the book or reading the
article, looking for insights into the creative process. For example, Thomas Edison is considered to be the
most prolific inventor the world has ever seen. Among his inventions are the incandescent light bulb, the
phonograph, and the motion picture projector. One quotation attributed to Edison is “[Creative] genius is
99% perspiration and 1% inspiration.”
• Go to a day-care center and spend a half hour observing 2-, 3-, and 4-year-olds at play. Jot down any
“creative” things you observe the children doing. (“Tests show that a child’s creativity plummets 90
percent between ages 5 and 7. By the age of 40, most adults are about 2 percent as creative as they were
at 5.”1)
Business
•
Answers to brain teasers: (If no one gets the answer for any of these brain teasers, you may want to give the
hint provided in parentheses before giving the answer.)
1. ONE WORD (HINT: Are you taking the instructions very literally?)
2. SIX (HINT: The instructions did not say it had to be a Roman numeral six)
3. Alphabetically (HINT: Is there another way to think of these numbers besides as figures?)
¹Emily T. Smith, “Are You Creative?” Business Week, September 30, 1985, p. 81.
BUILD YOUR BUSINESS PLAN
Small Business, Entrepreneurship and Franchising
Intuitively, students turn to the Internet for their information first. While this is a good idea, you
don’t want them to neglect what resources are available to them locally. The Chamber of
Commerce, Economic Development Authority, and City Planning Office are all possible sources for
information on the community. Perhaps you might want to invite a local employee of one of these
organizations to class as a guest lecturer.
Students need to understand the demographics and needs of their community. On a macro level,
ask them about the economic forecast for their area. Have them determine the level (number and
quality) of new businesses entering the area.
S E E F O R Y O U R S E L F V I D E O C A S E:
S O N I C—A S U C C E S S F U L F R A N C H I S E W I T H A N O L D-F A S H I O N E D
D R I V E-I N E X P E R I E N C E
Case Overview
Sonic, the largest drive-in fast food chain in the United States, offers customers a dose of nostalgia with its
1950s-style curbside speakers and carhop service. It was started as a sole proprietorship, then became a
partnership, and today is a successful franchise. Sonic franchisees have the benefit of getting a business that
already has a national reputation and a national advertising campaign. They also get training and support
from the franchisor. However, franchisees must work hard to make their restaurants a success. Franchisees
must build their locations, purchase equipment, hire excellent employees, make certain the products live up
to Sonic’s reputation, maintain a clean, inviting facility, and much more. Franchisees also have rules to follow.
In the case of Sonic, franchisees must pay royalty fees, have excellent financial credentials, have prior
restaurant/entrepreneurial experience, and be operationally able to open two or more drive-ins. Despite
Business
these costs, successful Sonic franchises have been able to capitalize on the Sonic business model and brand
equity.
1. What is Sonic’s competitive advantage over other fast food franchises?
Sonic supplies a healthy dose of nostalgia that is lacking at other fast food chains. With its retro styling
and carhop service, Sonic satisfies those who miss old-fashioned drive up restaurant chains.
2. What are the advantages of becoming a Sonic franchisee?
Being a franchise owner, you receive the benefit of a national reputation and advertising campaigns. The
franchisor also gives franchisees training and support to help them run their business.
3. What are the disadvantages of buying into the Sonic franchise?
Like with any business, franchisees must work hard to make their businesses successful. It can also be
difficult to follow the franchisor’s rules and standards—which are imperative in achieving a uniform
brand image around the nation and the world. The standards are also generally high for franchisees.
They must have good finances, prior experience, and they must be able to pay royalty fees (which can cut
into profits) to the franchisor.
TEAM EXERCISE
Have students explore successful global franchises. They should go to the companies’ websites and find the
requirements for applying for three franchises. The chapter provides examples of successful franchises.
Students should ask themselves: What do the companies provide, and what is expected to be provided by
the franchisor? They will compare and contrast each group’s findings for the franchises researched. For
example, at Subway, the franchisee is responsible for the initial franchise fee, finding locations, leasehold
improvements and equipment, hiring employees and operating restaurants, and paying an 8 percent royalty
to the company and a fee into the advertising fund. The company provides access to formulas and
operational systems, store design and equipment ordering guidance, a training program, an operations
manual, a representative on-site during opening, periodic evaluations and ongoing support, and informative
publications.
TERM PAPER OR PROJECT TOPICS
These topics may be assigned as individual or collaborative projects:
1. The Small Business Administration: Past and Present

2. A Study of a Successful Franchiser
3. Why Women Entrepreneurs Are Attracted to Small Business
Business
GUEST SPEAKER SUGGESTIONS
1. A representative of the Small Business Administration, the Small Business Development Centers, or
Small Business Institutes to speak about the functions of the organization.
2. A small-business owner to speak about start-up, management, advantages, and disadvantages of

going into business for himself or herself.
3. A local franchisee to speak about the start-up, operation, advantages, and disadvantages of
obtaining a franchise.
TEACHING SUGGESTIONS
1. Vary the sequence of classes for the sake of variety.
2. For a writing exercise, begin by asking students to write for approximately five minutes on the topic of:
What Are the Advantages of Franchises for the Small-Business Owner?
(Stop students at the end of the allotted time. Now have students give their writing to a student
sitting next to them; have them compare answers. Do they agree? Talk about answers in class.)
3. Give a lecture in class. Depending on time, the instructor may wish to use the “Supplemental Lecture”
and/or the “Controversial Issue.” Both present situations regarding small business problems.
4. Go over the practice quiz provided. Discuss answers in class.
5. Again, depending on time available, instructors may wish to review the additional boxed material by
using the discussion questions provided in this Instructor’s Manual.
6. Spend a short amount of time by going over the answers to the questions for the video case. Students
should have read these cases, and they should have either written the answers or have considered the
answers. Call upon volunteers for answers.

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Instructor’s Manual - Chapter 5

M Business 5th Edition Ferrell

Solution Manual: https://testbankpack.com/p/solution-manual-for-m-

Test Bank: https://testbankpack.com/p/test-bank-for-m-business-5th-

Chapter 5: Small Business, Entrepreneurship,

LO 5-1 Define entrepreneurship and small business.

LEARN THE TERMS

business plan (p. 156) franchiser (p. 159) Small Business

KEY TERMS AND DEFINITIONS

entrepreneurship The process of creating and managing a business to achieve desired

franchise A license to sell another’s products or to use another’s name in

franchisee The purchaser of a franchise.

franchiser The company that sells a franchise.

intrapreneurs Individuals in large firms who take responsibility for the

Small Business An independent agency of the federal government that offers

undercapitalization The lack of funds to operate a business normally.

LO 5-1 Define entrepreneurship and small business. Key Terms:

PPT 5.4 I. The Nature of Entrepreneurship and Small Business

• Industries That Attract Small Business

PPT 5.12 D. Industries That Attract Small Business

PPT 5.17 E. Successful Traits of Young Entrepreneurs (Table 5.4)

• Advantages of Small-Business Ownership

PPT 5.16 II. Advantages of Small-Business Ownership

LO 5-4 Summarize the disadvantages of small-business ownership, and Key Terms:

PPT 5.22 III. Disadvantages of Small-Business Ownership

PPT 5.27 D. Financial Resources

PPT 5.28 2. Equity Financing

PPT 5.35 E. Approaches to Starting a Small Business

PPT 5.38 f. Disadvantages of franchising

• The Future of Small Business

PPT 5.42 V. The Future for Small Business

o Making Big Businesses Act “Small” • Intrapreneurs

PPT 5.46 VI. Making Big Businesses Act “Small”

BOXED TEXT DISCUSSION QUESTIONS

2. Describe some of the challenges that Chobani is facing.

1. What characteristics do fraudsters and successful entrepreneurs share?

Fraudsters tend to be intelligent, creative, persuasive, and seemingly confident—all characteristics of

3. Why is a lack of empathy fairly common among fraudsters?

GOING GREEN—ReFleece: A Simple but Sustainable Product

When Expansion Can Lead to Failure

2. What could the Morgans have done differently in their planning?

Are Small Businesses Dependent on the Presence of the Owner?

Students’ answers will vary.

SO YOU WANT TO BE AN ENTREPRENEUR OR

What is one of the most common reasons people become entrepreneurs?

CHECK YOUR PROGRESS

1. Why are small businesses so important to the U.S. economy?

2. Which fields tend to attract entrepreneurs the most? Why?

3. What are the advantages of starting a small business? The disadvantages?

5. What decisions must an entrepreneur make when starting a small business?

• counseling for firms in difficulty

• consulting on operations improvements

• training for owners/managers and employees

• advice from SCORE and ACE

8. Describe the franchising relationship.

Students’ answers will vary depending upon their business idea.

BUILD YOUR SKILLS

Mental Aerobic Exercises

• Do a jigsaw or crossword puzzle.

1. Arrange the letters below into one word:

3. Determine in what order the numbers below are arranged:

BUILD YOUR BUSINESS PLAN