Solution Manual for Fundamentals of Management,

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Solution Manual for Fundamentals of Management, 8th Edition

CHAPTER 5
Entrepreneurship and New Venture Management

CHAPTER SUMMARY
Chapter 5 deals with entrepreneurship and new venture formation. Planning and decision making are
essential ingredients in the success of any new and growing venture. Moreover, entrepreneurship ideas
and processes can also contribute directly to effective planning and decision making.

LEARNING OUTCOMES
After studying this chapter, students should be able to:
1. Discuss the nature of entrepreneurship.
2. Describe the role of entrepreneurship in society.
3. Understand the major issues involved in choosing strategies for small firms and the role of
international management in entrepreneurship.
4. Discuss the structural challenges unique to entrepreneurial firms.
5. Understand the determinants of the performance of small firms.
He is not even Greek! The opening vignette features the story of Turkey-born, U.S. immigrant who
launched Chobani (Turkish for shepherd), the enormously successful Greek yogurt brand. Hamdi Ulukaya
set up shop in an old Kraft Foods yogurt plant in upstate New York and launched his highly successful
product. The case details his journey from idea to launch.
Management Update: Chobani Yogurt received some unexpected publicity during the Sochi winter
Olympics in February 2014. Apparently Chobani was the yogurt of choice for the U.S. Olympians, but
Russia refused to allow the yogurt to be imported because of a trade issue. In the end, Chobani earned
praise for donating the earmarked yogurt to food banks. http://www.politico.com/story/2014/02/chobani-
yogurt-sochi-olympics-103489.html, accessed May 23, 2014.

LECTURE OUTLINE
I. The Nature of Entrepreneurship
A. Entrepreneurship is the process of planning, organizing, and assuming the risk of a business
venture. An entrepreneur is someone who engages in entrepreneurship.
B. A small business is one that is privately owned by an individual or small group of individuals
and has sales and assets that are not large enough to influence its environment.
Teaching Tip: Point out to your students a sample of small businesses around campus—convenience
stores; dry cleaners; local restaurants, bars, and ice cream shops; clothing shops; tattoo parlors; and so
forth.

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II. The Role of Entrepreneurship in Society
Entrepreneurs and small businesses play three important roles in U.S. society. They create jobs,
foster innovation, and contribute to the success of large businesses.
A. Job Creation
1. Small businesses create many new jobs in the United States.
2. Large businesses also create many new jobs, but these are offset by the jobs that are
eliminated by the large businesses.
3. The best predictor of job creation is not company size, but its entrepreneurial nature.
Thus, Walmart, which is expanding rapidly, is the largest creator of new jobs in the
United States today.
Teaching Tip: Note the trends in women-owned small businesses, which are fewer in number than those
owned by men but are growing at a faster rate.

Discussion Starter: Ask if any of your students ever took a job with a new firm just as it was starting out.
Ask them to recount their experiences.
B. Innovation
1. Small businesses create many new innovative products and services. Examples include
the personal computer, air conditioning, and the instant photograph.
2. Despite the common misconception, most new businesses are not engaged in high-tech
industries, but are innovative in a wide variety of fields.
C. Importance to Big Business
Big businesses buy more of their inputs from small businesses than from other large
businesses.
Discussion Starter: The role of small business seems to have escalated in recent years. Many of the
thousands of U.S. workers and managers who were displaced by downsizing and layoffs in the late 1980s
and early 1990s launched new enterprises. Though many failed, others succeeded and have continued to
thrive.
III. Strategy for Entrepreneurial Organizations
A. Choosing an Industry
It is important that an entrepreneur preparing to launch a new business carefully select an
appropriate industry. Industries that require relatively little start-up resources and that can
operate efficiently on a small scale are the most promising for entrepreneurs.
1. The service industry is good for small firms because it often requires few resources.
Teaching Tip: Point out the large number of small service and retail businesses that probably exist
around your campus. Also note the paucity of small manufacturers that are near campus (assuming, of
course, that this is an accurate statement for your campus).
2. The retailing industry is a good choice because small businesses are able to focus on
serving a select group of customers, such as college students. Also, the retailer may be
part of a larger chain, operating as a franchise.
3. In construction, small firms may be ideal for concentrating on a particular construction
trade, such as finish carpentry. Many construction projects are small, local jobs that lend
themselves to small business.
4. Finance and insurance are more challenging, but small businesses may be affiliates of
larger, national firms. Small banks can focus on the needs of select customer groups.
5. Wholesaling may be difficult due to the larger scale that is required, but again,
concentration on a select group or limited region is ideal for small businesses.
Teaching Tip: Point out to students how the increased personal and business use of the Internet has
helped small business. For an investment of just a few thousand dollars, a small business can reach
customers and suppliers nationwide.
6. Smaller, local transportation markets such as city taxi services or charter airlines may be
effectively served by small business.
7. Due primarily to disadvantageous economies of scale, small businesses historically have
not performed as well in manufacturing. Yet the growing role of computers and other
technology in the creation of new products and product ideas may make manufacturing
more attractive for small businesses.
Discussion Starter: The agricultural segment of the U.S. economy is in a state of transition. Small family
farms are being taken over by giant agribusiness enterprises. Ask students to speculate on the future of
agriculture. What are the economic implications of the disappearance of small, family-owned farms?

Global Connection: Another hurdle faced by small agricultural business is trade barriers. For example,
U.S. rice farmers continue to be frustrated by barriers imposed by Japan, one of the largest rice-
consuming countries in the world. As rice farming in Japan is very expensive, U.S. farmers believe they
could provide competitive products at low prices in Japan if only there were fewer barriers.
B. Emphasizing Distinctive Competencies
New businesses increase their chances of success if they can identify and emphasize their
distinctive competencies.
1. One competency of small business is identifying niches in established markets, markets
in which several large firms compete according to well-established criteria. A particular
niche (a segment of a market not currently being exploited) may not be adequately
served by the big businesses that dominate established markets.
2. Small businesses also have the capability to identify new markets, either by transferring
products to a new geographic market or creating new products that invent an entire
industry.
3. Small firms can be more flexible than larger ones, enabling them to obtain first-mover
advantages that come from being the first to exploit an opportunity before any other firm
does.
Extra Example: Dell Computer has thrived as a result of its first-mover advantages. Dell was the first
computer company to sell high-quality computers through direct marketing—selling over the telephone
and shipping directly to consumers. While other firms, including Hewlett-Packard, have imitated this
approach, Dell, until recently, was able to maintain its leading role in this segment of the industry because
of its “head start.”
C. Writing a Business Plan
1. Another key ingredient to entrepreneurial success is the preparation of a strong business
plan, a document that summarizes the business strategy and structure.
Teaching Tip: See if you can locate a copy of a real business plan to show your students. Such a plan
might be available from a recently opened new business, the local Chamber of Commerce, or a local SBA
office.
2. Business plans should answer the questions: What are the entrepreneur’s goals and
objectives? What strategies will the entrepreneur use to obtain these goals and
objectives? How will the entrepreneur implement these strategies?
3. Business plans should also include the entrepreneur’s qualifications for this particular
business, his or her sales and other forecasts, and information about financial planning.
Group Exercise: Have small groups of students sketch the basic assumptions they would need to
consider if they were going to start a specific type of new business.
D. Entrepreneurship and International Management
Big business is traditionally associated with international expansion, but many smaller
companies are moving into foreign countries. The risks are high, but so are the potential
rewards. Technology, especially the Internet, has proven to be very helpful to small,
international businesses.
IV. Structure of Entrepreneurial Organizations
A. Starting the New Business
The entrepreneur must commit to business ownership and then choose an industry and market.
1. Buying an existing business allows the entrepreneur to examine its past history and thus
to better understand what he or she is getting into.
2. Starting from scratch allows the entrepreneur to avoid inheriting the mistakes of the past
owner and the excitement level in a new business is usually high. This strategy usually
carries a higher risk because there is no proven market, skills, and so on.
Teaching Tip: Gather some examples of local firms that have been started from scratch and examples in
which a business has been sold to a new owner. Point these examples out to your students.
B. Financing the New Business
1. Personal resources are the savings of the entrepreneur and his or her friends and family.
2. Strategic alliances with established firms are becoming more common, as the traditional
markets for many large businesses become saturated.
3. Lenders, often banks, are cautious about loaning money for new businesses, especially to
inexperienced entrepreneurs.
4. Venture capital companies often require partial ownership of the new firm in exchange
for their financing.
5. Small-business investment companies, or SBICs, are companies that borrow money from
the SBA and lend it to entrepreneurs.
6. SBA financial programs offer a variety of loan and grant programs, most of which have
relatively low limits. The SBA also provides bank loan guarantees in some cases.
C. Sources of Management Advice
Entrepreneurs have numerous sources that they can turn to for help in launching and running
their new businesses, including advisory boards, management consultants, the Small Business
Administration (SBA), and networking.
Teaching Tip: Arrange for a local speaker from the SBA, SCORE, or another such program visit the
class for a few minutes and discuss various new business assistance programs.
D. Franchising
A franchising agreement is a contract between an entrepreneur (the franchisee) and a parent
company (the franchiser). The franchisee pays the franchiser a fee for the use of its name,
trademarks, formulas, design, and so forth. The franchiser provides management and
marketing expertise, a national image, and in some cases financing. Franchising potentially
reduces the entrepreneur’s risks, but it also provides less control and profit potential, and it
usually involves a substantial start-up cost.
Teaching Tip: Point out some local businesses, especially near campus, that are franchised.
V. The Performance of Entrepreneurial Organizations
A. Trends in Small Business Start-ups
 1. The emergence of e-commerce creates new opportunities for new types of businesses, as
well as reduces costs for traditional businesses.
2. Individuals with experience in large businesses often “cross over” to small business, as
they have skills that are applicable in any firm.
3. Entrepreneurship creates opportunities for women and minorities to reach higher
achievement and be more independent. Minority-owned and woman-owned small
businesses are growing at a faster rate than businesses owned by white males.
4. Recent studies show that 40 percent of all new businesses will survive at least six years.
In the 1960s and 1970s, the comparable rate was much lower.
B. Reasons for Failure
1. Incompetent or inexperienced managers may not have the basic business skills needed to
successfully found a new venture.
2. If the entrepreneur is unable or unwilling to make the required commitment of time and
effort, then a new venture may fail through neglect.
3. Weak control systems fail to signal impending problems, and serious consequences can
result.
4. Insufficient capital is the reason for many new business failures and can exacerbate the
other problems noted above.
C. Reasons for Success
1. Hard work, drive, and dedication on the part of the entrepreneur are all critical to
success. Long hours and independent work are also required.
Teaching Tip: Emphasize that not everyone is cut out to be an entrepreneur. Indeed, many people who
try it end up going back to work for someone else.
2. Careful analysis of market demand for products or services provided is imperative if a
business is to succeed.
3. Managerial competence on the part of the entrepreneur is crucial.
4. Luck plays at least a small part in every successful business.
Extra Example: Another example of luck occurred for a small electronics firm struggling to develop
musical applications for its technology. After the world-famous performer Michael Jackson heard about it
and used it in some of his recordings, the firm took off and quickly obtained considerable new business.

END-OF-CHAPTER

Questions for Review

1. Describe the similarities and differences between entrepreneurial firms and large firms in terms of
their job creation and innovation.
Since 1990, entrepreneurial firms and large firms have both added new jobs to the economy. Large
firms have eliminated jobs, but at the same time, they have acted as entrepreneurs in moving into
new products and markets, creating new jobs. Both entrepreneurial and large firms are innovative
and have developed new products.
2. What characteristics make an industry attractive to entrepreneurs? Based on these characteristics,
which industries are most attractive to entrepreneurs?
Many entrepreneurs are starting their businesses with limited resources, and therefore, attractive
industries are those in which a small start-up investment is sufficient. Another attractive
characteristic is an industry in which a few large firms dominate, because that typically creates
market niches that entrepreneurs can successfully fill. Yet another attractive quality is the low
economies of scale, highly specialized skills, and customization required by some crafts and trades.
These trades are often uneconomical for large firms, but can be profitable for small ones. Thus,
services, retailing, and construction are popular choices for entrepreneurs, while manufacturing
tends to be dominated by large firms.
3. Describe recent trends in new business start-ups.
The Internet aids small businesses in reaching a wider market inexpensively, as well as creating
opportunities for new types of firms, such as Web design firms or app development firms. Workers
opting to leave their jobs at large firms for self-employment is another important trend, as is
increased entrepreneurial opportunities for women and minorities. Small business failure rates have
been declining recently, encouraging entrepreneurship.
4. What are the different sources of advice for entrepreneurs? What type of information would an
entrepreneur be likely to get from each source? What are the drawbacks or limitations for each
source?
Entrepreneurs may get advice from advisory boards, management consultants, the SBA, and
networking with peers. Advice can cover a variety of topics, from marketing to financing to human
resources. The advice obtained from advisory boards is only as good as the members of the board.
The same holds true for management consultants, who also may charge high fees. The SBA
provides advice for free, but again, quality varies depending on the expertise of the volunteer
advisors. Networking can be one of the most effective sources of advice because the advice is
practical and relevant.
5. What are the basic reasons small businesses succeed, and what are the basic reasons they fail?
One common reason for new business success is a combination of hard work, drive, and dedication
on the part of the entrepreneur. Market demand, managerial competence, and luck are also
important. Reasons for failure include inexperienced or incompetent management, lack of
dedication, weak control systems, and insufficient capitalization.

Questions for Analysis

1. Entrepreneurs and small businesses play a variety of important roles in society. If these roles are so
important, do you think that the government should do more to encourage the development of small
business? Why or why not?
This is an opinion question, with no absolutely right or wrong answer. Instead, the quality of an
answer depends on how well it is justified. At present, the government already has numerous
programs in place to help new businesses. This chapter, for example, noted such programs as the
SBA and SCORE. In addition, most state and local governments also have new business
development programs. The real issue, then, is whether current programs are sufficient or if more
are needed.
2. Consider the four major reasons for new business failure. What actions can entrepreneurs take to
minimize or avoid each cause of failure?
 Incompetence or inexperience can be counteracted by business training and education, as well as by
experience working in that type of business. Neglect can be avoided by a more serious time
commitment. Weak control systems are avoidable if owners pay closer attention to potential and
developing problems. Insufficient capital or overly optimistic financial projections can be solved if
entrepreneurs work with experts to determine a realistic budget and to obtain the necessary funds in
advance.
3. The U.S. automotive industry is well established, with several large and many small competitors.
Describe the unexploited niches in the U.S. auto industry and tell how entrepreneurs could offer
products that fill those niches.
Students’ answers will vary. They might point out that there are few automobiles for very modest
prices, such as the $10,000 range. They might also note the sameness of the sedans, SUVs, and
trucks that most Americans buy. There might be an opportunity for a completely different type of
vehicle, or for the revival of old favorites, such as the station wagon.
4. List five entrepreneur-owned businesses in your community. In which industry does each business
compete? Based on the industry, how do you rate each business’s long-term chances for success?
Explain your answers.
Students will choose different companies, of course. They should correctly identify the industry. It
is possible that they will identify a variety of success factors such as economies of scale and the
existence of unfilled market niches.
5. Using the information about managing a small business presented in this chapter, analyze whether
you would like to work in a small business—either as an employee or as a founder. Given your
personality, background, and experience, does working in or starting a new business appeal to you?
What are the reasons for your opinion?
This makes an excellent outside-of-class assignment. There will likely be a wide variety of answers.
(For a more detailed look at this question, see the Diagnostic Skills and the Interpersonal Skills
exercises for this chapter. They are especially useful for students who are interested in exploring an
entrepreneurial career.)

Building Effective Diagnostic Skills Exercise

a. Purpose
This exercise asks students to increase their diagnostic skills by investigating the personal
characteristics that increase the chances of entrepreneurship.
b. Format
This exercise is designed to be completed by individual students outside of class. A classroom
discussion of the follow-up questions could be held and would require about 10 minutes.
c. Follow-up
(1) Choose one of the categories of individuals and explain why this this type of person
might be more likely to become a business owner. (Note to the instructor: Categories
include having a family member who is an entrepreneur; being an immigrant or child of
an immigrant; being a parent; being Jewish or Protestant; holding a professional degree;
or experiencing a recent life-changing event.)
Individuals who are related to an entrepreneur have different perceptions and values
related to entrepreneurship, as well as a trusted source of advice on starting a business.
Immigrants tend to become entrepreneurs because they are excluded from many
traditional occupations by lack of formal education and job experience, or by language,
 racial, or cultural barriers. Parents choose entrepreneurship in order to give themselves a
flexible schedule. The reasons for the impact of religion on entrepreneurship (in which
Catholics are the least likely to choose self-employment) are not clear, although the fact
that Jews are discriminated against in many societies may provide a partial explanation.
Professionals, such as dentists and lawyers, become entrepreneurs if they choose to go
into private practice. Life-changing events cause radical adjustments in many areas of
life, and one frequent change is a switch to self-employment.
(2) Being sure to choose a category other than the one that you discussed for question 1,
select one of these categories that applies to you. In your opinion, does that factor make it
more likely that you’ll become an entrepreneur? Why or why not? If none of the
categories above is true of yourself, tell whether that fact itself makes it less likely that
you’ll become an entrepreneur.
Clearly, students’ answers will vary. The students should elaborate on the reasons behind
their opinions.

Building Effective Conceptual Skills

a. Purpose
This exercise encourages students to think through the factors that lead to small business
success and to apply those ideas to their situation.
b. Format
The conceptual skills exercise is a two-step activity with Step 1 done individually and Step 2
in groups. The entire exercise will take about 20 minutes.
c. Follow-up
Follow-Up
(1) Form a small group of four or five classmates and discuss your respective lists. Look for instances
of in which the same type of business appears either on (1) both of your lists or (2) one of your
lists and one of a classmate’s lists. Also look for cases in which the same business appears on one
or more than one list with either similar or dissimilar prospects for success.
Differences in students’ interests and knowledge of local market conditions will lead to
different answers to this question.
(2) At this point, how important do you regard personal interest as a factor in small-business
success?
Students might point out that without personal interest, entrepreneurs are unlikely to invest the
significant amount of time and energy that a small business requires. However, personal
interest alone isn’t enough to create a viable enterprise.
(3) How important do you regard market potential as a factor in small-business success?
Market potential is critical to small business success. Without it, even the most dedicated
entrepreneur will not succeed. However, personal interest creates energy and enthusiasm,
which is also a necessary component of success. Students will probably agree that both
personal interest and market potential are absolutely vital.
Skills Self-Assessment Instrument
An Entrepreneurial Quiz
a. Purpose
This assessment is designed to measure the students’ readiness to start their own businesses
based on their own self-reported perceptions.
b. Format
Students should respond individually and privately to the items in this self-assessment,
although class or small-group discussion should follow to expand upon the points illustrated in
the assessment.
c. Interpretation
Student responses fall into three columns. If a student’s responses tend to fall in the first
column, he or she is probably ready to start a business. If the marks tend to fall in the first two
columns, the student may not be ready to go it alone and should seek a partner who has
strengths in those areas where the student is weak. If most of the marks fall into the third
column, the student is likely to prefer working for others rather than being self-employed.

Experiential Exercise
Negotiating a Franchise Agreement
a. Purpose
This exercise expands students’ understanding of the importance of negotiation skills for
franchisees and franchisers.
b. Format
Individual students perform the first two steps, and the last step is done in small groups. Class
discussion should be used for the follow-up questions.
c. Follow-up
(1) Did doing both step 1 and step 2 in advance help or hinder your negotiations?
Students’ answers will vary, but you can point out to students that successful
negotiations are most likely when both parties understand their own position, as well as
the position of the other party.
(2) Can a franchising agreement be so one-sided as to damage the interests of both parties?
How so?
When one party in a negotiation imposes that party’s will on the other party, the result is
likely to be dissatisfaction for both parties. For example, consider what would happen in
this negotiation situation if the franchiser (the restaurant owner) negotiated terms that
would ensure that most of the ventures’ profits would return to the franchiser, leaving the
franchisee with little profit. In the short run, such an arrangement would seem to benefit
the franchiser, while it would clearly not be advantageous for the franchisee. However, in
the long run, even the franchiser would suffer, because the franchisee could become
unhappy, make a lot of complaints, try to turn other franchisees against the franchiser,
perform substandard work and damage the franchiser’s reputation, and eventually leave
 the franchise agreement, requiring the franchiser to expend time and money in finding
another franchisee.

MANAGEMENT AT WORK
THE CREATIVE IMPRINT OF BIGFOOT
Michael Gleissner is your typical serial entrepreneur. After making his money by founding and eventually
a couple of e-commerce businesses, the Germany-born Gleissner bought Bigfoot Entertainment and is in
the process of turning the company into a major player in the global independent films business. This
vignette describes how Gleissner launched Bigfoot and expanded it to various aspects of filmmaking.
Management Update: According to Wikipedia, Michael Gleissner calls himself a(n) “entrepreneur, film
producer, director, screenwriter, actor, photographer, and musician.” Interestingly, on Bigfoot’s website,
Gleissner’s name is not found in a list of the firm’s top eight executives. This leaves us to believe that
Gleissner’s approach is to launch an entrepreneurial venture and leave its management in the hands of
others.
1. In what ways is Bigfoot innovative? In what ways does it deal with big business? In what industries
does it operate?
Prior to Bigfoot’s entry, independent filmmaking was a disorganized and fragmented business.
Bigfoot was innovative in that it sought to capitalize on the opportunity to support independent
filmmaking and profit from it. While it is an entrepreneurial venture, Bigfoot deals with big business
when it involves itself in various activities related to filmmaking. For example, it likely dealt with
big business to build its studio in the Philippines, as well as in investing in Carmike Cinemas in the
U.S. At the end of the case, it is clear that Bigfoot operates in more than the film industry. It is in
education (through its film school), property development, and other related areas.
2. What niches does Bigfoot serve in established markets? What new markets does it target? Can you
think of any other niches or new markets that it should consider in the future?
Bigfoot competes in the independent film niche of the motion picture industry. It targets those
markets that are supportive of small, independent films as opposed to studio-produced big
blockbusters. Given that the Internet-based entertainment segment is growing rapidly via streaming,
perhaps Bigfoot can enter the made-for-Internet movie business.
3. Does Bigfoot have any first-mover advantages? If so, what are these advantages, and how important
do you think they are now and will be in the future?
Bigfoot was the first-mover in independent filmmaking in that it was the first to bring order to a
haphazard segment of the motion picture business. It likely allowed Bigfoot to establish
relationships with independent filmmakers and film festivals that is likely to help it in the long run.
Most importantly, being a first mover helped Bigfoot establish its credibility in the business.
4. In what ways does Bigfoot rely on distinctive competencies? In what ways is experience in
international management among these competencies? In what ways do you expect this particular
competency to become even more important in the future?
It is clear that Michael Gleissner views the filmmaking business in international terms. In addition,
he views the business as an integrated whole starting with the script all the way to exhibiting the
film in theatres. This view of the business is Bigfoot’s distinctive competency and allowed the
company to become a low cost player. Given the escalating costs of movie making, it is likely that
this distinctive competency become even more important in the future.
Solution Manual for Fundamentals of Management, 8th Edition

YOU MAKE THE CALL

1. What ingredients (no pun intended!) led Hamdi Ulukaya’s success with Chobani?
Ulukaya’s motivation came from his displeasure at the yogurt made the non-Greek way. To him,
these yogurts tasted weak and watery. He argued that if he didn’t like the yogurts sold in American
grocery stores, there was every likelihood that others would too. He saw an opportunity and
capitalized on it. Of course, luck played a part because it so happened that a yogurt plant was for
sale. Finally, using a combination of personal savings (from a prior business) and a timely loan from
the SBA, he had the financial ingredients to launch his business.
2. What are the distinctive competencies illustrated by Ulukaya?
Growing up in a dairy farm in Turkey, chances are Ulukaya was very familiar with milk and milk
processing. He also had with him his mother’s recipe for Greek yogurt. He probably identified a
niche area (Greek yogurt) in an established market and was able to move fairly quickly to capitalize
on the opportunity.
3. Comment on the role that globalization has played in Chobani’s success.
Students have to understand that Ulukaya came over to the U.S. from Turkey to study English. He
probably sensed that there were people who because of exposure to Europe had tasted European-
style yogurt. He, thus, saw an opportunity and an unserved market that happened to come by
because of globalization.
4. If Ulukaya were to ask you what strategy he should adopt going forward, what advice would you
give him?
At the end of the case, it is clear that Dannon and Yoplait pose a threat because they have entered
the Greek yogurt market. These are companies with much more resources than Chobani. Chobani
was a first mover but it has to cement its first mover advantage by establishing its brand name and
distinctiveness.

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