Entrepreneurial Small Business 5th Edition Katz Test Bank

Entrepreneurial Small Business 5th Edition Katz Test Bank
Entrepreneurial Small Business 5th Edition Katz Test

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Chapter 07
Small Business Strategies: Imitation with a Twist
True / False Questions
1. Strategy is the idea and actions that explain how a firm will make its profits.
True False
2. Small businesses typically use the strategy of innovativeness rather than imitativeness.
True False
3. The first step of the strategic planning process for small businesses is considering your customers and
the benefits you want to offer them.
True False
4. There are two major classification systems that code industries: NAICS and SIC.
True False
5. Your magic number is the number of customers you can comfortably provide with your product or
service.
True False
6. The new NAICS covers more industries than the SIC.
True False
7. Imitation minus one degree of similarity is the business equivalent of an innovative strategy.
True False
8. Incremental innovation is also called a blue ocean strategy.
True False
9. Market scale refers to the geography of the target market.
True False
7-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10. A niche market is a narrowly defined segment of the population that is likely to share interests or
concerns.
True False
11. Cost benefits include scale and scope savings.
True False
12. Generally, benefits do not influence a firm's strategy process.
True False
13. Shake-out is a type of life cycle growth stage marked by a very rapid increase in sales in a relatively
short time.
True False
14. Eventually, mature industries begin a decline stage. Some industries face death, while others find new
life in a process called retrenchment.
True False
15. Funds left over after deducting the cost of goods sold are referred to as the net profit.
True False
16. Differentiation strategies target a niche segment of the market.
True False
17. The supra-strategies are designed to work when there are very few small business in an industry, along
with many larger firms.
True False
18. Second sourcing provides customers with greater certainty of supplies or services.
True False
19. Tactical actions are competitive responses with low resource requirements.
True False
20. The major ways you cope with competitive pressures is by undertaking some combination of strategic
actions and tactical actions.
True False
7-2
Multiple Choice Questions
21. _____ is the idea and actions that explain how a firm will make its profits.
A. Strategy
B. Objective
C. Mission
D. Goal
22. Most small businesses are more _____ than _____.
A. cost-directed; profit-directed
B. imitative; innovative
C. profit-directed; cost-directed
D. innovative; imitative
23. The first step of the strategic planning process for a small business is:
A. performing a SWOT analysis.

B. reviewing and confirming the goals that define the firm.
C. mapping the prospective customers.
D. studying the dynamics and trends of the industry.
24. Which of the following is the second step of a small business' strategic planning process?
A. Reviewing and confirming the goals that define the firm

B. Knowing the magic number
C. Studying the dynamics and trends of the industry
D. Considering the customers and the benefits to offer them
25. Industry analysis is defined as the technique used to:
A. determine the magic number in a particular industry.

B. determine the extent to which a product is similar to another product.
C. study the dynamics and trends of an industry.
D. study the effects of low cost on an industry.
7-3
26. The fourth step of a small business' strategic planning process involves:
A. considering the customers and the benefits to offer them.

B. refining the firm's capabilities in order to maintain a competitive advantage.
C. determining the best strategic direction and strategy for the firm.
27. For a small business that is just starting out, all strategy starts with _________.
A. the product or service

B. the owner
C. the competition
D. the customers
28. Which of the following is the advantage of knowing the magic number?
A. It helps in evaluating if the proposed business can deliver the desired return.
B. It helps in retaining customers.
C. It seeks out customers who are already being serviced by another firm.
D. It helps in making incremental product improvements.
29. As a new entrepreneur, Anthony's magic number for 2013 is $42,000. If the current tax rate for his
business is 30 percent, calculate the amount that Anthony's firm would need to sell for him to get his
magic number.
A. $50,000
B. $50,495
C. $60,000
D. $60,854
30. _____ is the general name for the line of product or service being sold, or the firms in that line of
business.
A. Industry
B. Market
C. Scope
D. Niche group
7-4
31. Which of the following are the two major classification systems that code industries?
A. NAICS and SIC

B. SCALE and SCOPE
C. SWOT and VRIO
D. OLC and SWOT
32. Standard industrial classification system (SIC) codes have _____ digits.
A. four
B. six
C. seven
D. nine
33. Which of the following statements concerning choosing an industry is not correct?
A. Picking the right industry is key to the success of your small business.
B. Insurance firms and health-related firms do well in bad times and good historically.
C. Industry is vitally important to your core strategy decisions.
D. There are industries that are more profitable than others.
34. In an imitative strategy, an entrepreneur:
A. creates a new product or service which has no competitors.

B. considers prospective customers before creating a product or service.
C. seeks to do something that is very different from what others are doing.
D. does more or less what others are already doing.
35. Which of the following is an advantage of using an imitative strategy?
A. It allows entrepreneurs to do something that is very different from what others are doing.
B. It allows business owners to buy existing technologies.
C. It allows entrepreneurs to fit their businesses to their own ideas and preferences.
D. It allows business owners to create unique settings.
36. Imitation minus one degree of similarity:
A. would be the business equivalent of cloning.

B. is equivalent to the blue ocean strategy.
C. leads to pure innovation.
D. helps in the creation of a unique setting.
7-5
37. Which of the following statements is not true of degree of similarity?
A. Most firms use imitation plus or minus one degree of similarity.

B. Imitation minus one degree of similarity is called incremental innovation.
C. Imitation minus one degree of similarity is the business equivalent of cloning.
D. Imitation plus one degree of similarity is called incremental innovation.
38. An imitative business that competes locally with others in the same industry is referred to as _____.
A. incremental competition
B. niche business
C. linear competition
D. parallel competition
39. Imitation plus one degree of similarity results in:
A. patterning a business on existing firms.

B. creating previously unseen products or services.
C. creating products or services that have no competitors.
D. characterizing a business based on the returns it offers.
40. An overall strategic approach in which a firm patterns itself on other firms, with the exception of one
or two key areas is referred to as _____.
A. pure innovation
B. niche strategy
C. incremental innovation
D. blue ocean strategy
41. Amy plans to open a laundromat with a gym. She got the idea from the laundromat with a bar and game
rooms, which she visits regularly. She wants to test her idea by starting out in a small space with the
focus on the laundromat and a small space allocated for gym equipments. Amy's idea is an example of
_____.
A. a blue ocean strategy

B. a pure innovation
C. an altruistic approach
D. an incremental innovation
7-6
42. Which of the following is true of a blue ocean strategy?
A. It results in a new product or service.

B. It is the business equivalent of cloning.
C. It involves patterning a business on existing firms.
D. It matches the precision of copying as seen in franchising.
43. A(n) _____ is the business term for the population of customers for a business owner's products or
services.
A. market
B. industry
C. strategy
D. SIC
44. _____ refers to the size of the market, whereas _____ refers to the geographic range covered by the
market.
A. Scope; scale
B. Mass; niche
C. Scale; scope
D. Niche; mass
45. A customer group that involves large portions of the population is referred to as a _____.
A. niche market
B. secondary market
C. local market
D. mass market
46. A _____ is a narrowly defined segment of the population that is likely to share interests or concerns.
A. niche market
B. mass market
C. primary market
D. parallel market
7-7
47. Which of the following is true of niche markets?
A. They are broad markets.

B. They target all the customers in the entire market.
C. They are specific and narrow.
D. They involve large portions of the population.
48. Market scope is important because:
A. it helps business owners in determining the size of the target market.

B. it helps business owners to decide where to focus their sales and advertising efforts.
C. it helps business owners in designing a product.
D. it helps business owners in calculating their magic number.
49. In the goal step of the strategic planning process, the key is to:
A. focus on the kind of customers the business wants to deal with.

B. bring together the decisions that underlie the business plan.
C. offer state-of-the-art or leading-edge technology.
D. build a brand reputation through the products or services.
50. Which of the following types of customers are likely to generate more potential customers than any
other type?
A. Loyal customers
B. Local customers
C. Passionate customers
D. Corporate customers
51. A _____ displays characteristics related to the nature of a product or service itself.
A. value benefit
B. cost benefit
C. scale saving
D. cause and effect diagram
7-8
52. Value benefits are important because:
A. they lead to scope savings.

B. they lead to higher prices.
C. they result in scale savings.
D. they lead to reduced costs.
53. Which of the following is an advantage of picking customer-desired benefits that a business owner's
competitors do not offer?
A. They results in lower pricing.

B. They help business owners to set realistic goals.
C. They help a business owner in identifying the magic number.
D. They make the firm stand out from the competition.
54. A perceptual map is:
A. a chart that maps changes in competitors, sales and profits in an industry over time.
B. a graphic display which positions products according to their scores on important strategic
dimensions.
C. a chart that indicates the changes in the magic number of a business owner.
D. a graphic display which indicates the various stages of the lifecycle of a product.
55. Which of the following is a value benefit?
A. Scale savings
B. Cost savings
C. Learning
D. Technology
56. _____ is a value benefit that can come from the products or services that a business owner offers, or
from his or her firm's reputation.
A. Brand
B. Scale savings
C. Learning
D. Scope savings
7-9
57. Which of the following types of value benefits is most likely to be offered by a product if it helps the
community, a group, the environment, or the world?
A. Scope savings
B. Personalization
C. Altruism
D. Scale savings
58. Which of the following is a cost benefit?
A. Brand
B. Altruism
C. Personalization
D. Organizational practice
59. _______ are characteristics of a product or service that the target customer would consider worthwhile,
such as low cost or high quality.
A. Cost benefits
B. Value benefits
C. Benefits
D. Value propositions
60. As a firm gets more experience, it can often work with fewer mistakes and greater efficiencies, thereby
lowering costs. This leads to the cost benefit of _____.
A. personalization
B. scope savings
C. learning
D. altruism
61. Changes in competitors, sales and profits in an industry over time are referred to as:
A. industry dynamics.
B. retrenchment.
C. shake-out.
D. transformational competency.
7-10
62. The life cycle stage in which a product or service is being invented is known as the _____.
A. growth stage
B. boom
C. introduction stage
D. shake-out
63. Which of the following is true of the introduction stage of a product?
A. Sales are almost always high.

B. Most customers are unaware of the offerings.
C. Firms begin to compete on features and prices.
D. Some products turn out to be extremely popular.
64. Which of the following statements about industry, industry dynamics, and industry lifecycle is true?
A. Industry refers not only to your product or service, but also to all your competitors selling that
product or service.
B. The fortunes of industries do not move in predictable ways.
C. Small firms avoid entering "hot" industries.
D. If the industry is not growing there is no way to be successful as a start-up.
65. A type of life cycle growth stage marked by a very rapid increase in sales in a relatively short time is
called the _____.
A. maturity stage
B. retrenchment
C. shake-out
D. boom
66. Which of the following is characteristic of the boom stage in the life cycle of a product?
A. Most customers are unaware of the offerings.

B. Many firms close down.
D. Established firms must find new approaches to improve the business.
7-11
67. In which of the following stages is there an explosion of choices in terms of products and services?
A. Introduction stage
B. Growth stage
C. Maturity stage
D. Decline stage
68. _____ is a type of life cycle stage following a boom in which there is a rapid decrease in the number of
firms in an industry.
A. Shake-out
B. Growth stage
C. Maturity stage
D. Retrenchment
69. In an industry life cycle, the shake-out phase ends when:
A. the firms introduce new products or services.

B. the competition between firms increases.
C. the rapid die-off of firms stops.
D. the growth phase begins.
70. The _____ is marked by a stabilization of demand, with firms in the industry moving to stabilize or
improve profits through cost strategies.
A. decline stage
B. maturity stage
C. growth stage
D. retrenchment stage
71. Retrenchment is:
A. the third life cycle stage.

B. a stage marked by a stabilization of demand.
C. a type of life cycle stage following a boom in which there is a rapid decrease in the number of firms.
D. an organizational life cycle stage in which established firms must find new approaches to improve
the business.
7-12
72. A research process that provides the entrepreneur with key information about other firms in the same
line of business as his or her, the current situation and trends is known as:
A. SWOT analysis.
B. VRIO analysis.
C. value chain analysis.
D. industry analysis.
73. Gross profit is defined as:
A. what is left after deducting the cost of goods sold.

B. what is left after deducting the operating expenses of the business.
C. the amount of money the owner takes out of the firm annually.
D. the profit earned by a company when its product is in the maturity stage of the product life cycle.
74. _____ is the amount of money left after deducting the operating expenses of the business.
A. Gross profit
B. Net profit
C. Profit after taxes
D. Generic profit
75. _____ are classic strategies for businesses of all types and they include differentiation, cost, and focus.
A. Personalization strategies
B. Altruistic strategies
C. Retrenchment strategies
D. Generic strategies
76. Which of the following statements concerning cost strategies is not true?
A. Cost strategies are aimed at a small niche market.

B. Small businesses in a variety of industries make use of cost strategies.
C. In a cost strategy, you try to show how your firm offers a combination of cost benefits that appeal
to the customer.
D. A cost strategy comes when a small business can pursue a very low cost operation.
7-13
77. Which of the following is true of a differentiation strategy?
A. It requires a firm to offer a combination of cost benefits that appeals to the customers.
B. It is generally pursued by all small businesses.
C. It is aimed at mass markets.
D. It is used by businesses that pursue a very low cost operation.
78. Which of the following is a generic strategy that targets a portion of the market, called a segment or
niche?
A. Focus strategy
B. Differentiation strategy
C. Cost strategy
D. Value strategy
79. According to Shepherd, Shanley, and Porter, which of the following is a small business supra-strategy?
A. Altruism
B. Single-mindedness
C. Scope savings
D. Technology
80. An opportunity that makes it possible for a new business to gain a foothold in a market is referred to
as a(n) _____.
A. parallel competition
B. incremental innovation
C. differentiation strategy
D. entry wedge
81. Which of the following statements is true regarding the entry wedge of supply shortage?
A. It occurs when a new product is in demand.

B. It takes place in a stable market that doesn't change rapidly.
C. It takes place in a long-term market.
D. It occurs when certain physical resources are unutilized.
7-14
82. When looking at the typical start-up strategy of a classic innovator, which of the following statements
is not true?
A. Their market scope is a niche market.

B. Industry attractiveness is moderate to high.
C. They may use an elite supra-strategy.
D. Innovation only happens during the introduction phase of the life cycle.
83. Which of the following is true of the entry wedge of second sourcing?
A. It occurs when business firms leave a market.

B. It occurs because many big businesses have policies that provide for set-asides for purchases from
small businesses.
C. It offers the advantage of being globally based.
D. It provides a competitive pressure to ensure that suppliers keep providing the best service and
prices.
84. Which of the following statements about Michael Porter's Five-Forces Model of Industry Competition is
not true?
A. Substitutes and alternatives are indirect competition.

B. There are five sets of sources of competition.
C. Rivals are direct competition.
D. New entrants are an industry source of competition.
85. In the context of entry wedges, _____ occurs because government agencies, government-sponsored
commercial contracts, and many big businesses have policies that provide for quotas for buying from
small businesses.
A. second sourcing
B. favored purchasing
C. market relinquishment
D. customer contracting
86. Michael Porter identifies five different threats of competition for any business. Which of the following
choices is not one of Michael Porter's five threats?
A. Rivals
B. Suppliers
C. Substitutes
D. Investors
7-15
87. _____ is the particular way a firm implements customer benefits that keeps the firm ahead of other firms
in the market.
A. Industry analysis
B. Competitive advantage
C. Resource distribution
D. Market relinquishment
88. Which of the following is a strategic action?
A. Price cutting
B. Product enhancements
C. New product introductions
D. Increased marketing efforts
89. Which of the following is a tactical action?
A. New distribution channels

B. Mergers
D. Entering new markets
90. _____ is a strategic action.
A. Increasing marketing efforts

B. Using new distribution channels
C. Acquiring a competitor
D. Increasing prices
Essay Questions
7-16
91. What are the four key decisions that entrepreneurs need to make to build the strategy for their firms?
92. Differentiate between incremental innovation and pure innovation.
93. What are the two market decisions that entrepreneurs need to make early in the process of going into
business?
94. Differentiate between value and cost benefits. Provide examples for each type of benefit.
7-17
95. Briefly describe the industry life cycle.
96. What is meant by industry analysis? How does industry analysis help an individual in the strategy
process?
97. Name and briefly describe the different types of generic strategies.
98. Briefly describe Michael Porter's Five-Forces Model of industry competition. Why is it important to pay
attention to these five forces of competition?
7-18
99. What is an entry wedge? Explain any five of the entry wedges.
100. Differentiate between strategic actions and tactical actions.
7-19
Chapter 07 Small Business Strategies: Imitation with a Twist Answer Key
True / False Questions
1. Strategy is the idea and actions that explain how a firm will make its profits.
TRUE
Strategy is the idea and actions that explain how a firm will make its profit.
AACSB: Analytical Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 07-01 Describe the decisions needed as a foundation for strategic planning.
Level of Difficulty: 1 Easy
Topic: Strategy in the Small Business
2. Small businesses typically use the strategy of innovativeness rather than imitativeness.
FALSE
Strategy in small business is special because most small businesses are more imitative than
innovative.

Blooms: Remember
3. The first step of the strategic planning process for small businesses is considering your customers
and the benefits you want to offer them.
FALSE
The first step of the strategic planning process for small businesses involves reviewing and
confirming the goals that define entrepreneurs' firms and knowing their magic number.

Blooms: Remember
7-20
4. There are two major classification systems that code industries: NAICS and SIC.
TRUE
There are two major classification systems that code industries: the new NAICS (North American
Industry Classification System) and the SIC (Standard Industrial Classification system).

Blooms: Remember
Topic: Product/Service Idea and Industry
5. Your magic number is the number of customers you can comfortably provide with your product or
service.
FALSE
Your magic number is the post-tax income you personally seek from the business.

Blooms: Remember
Topic: Owner Rewards
6. The new NAICS covers more industries than the SIC.
TRUE
There are two major classification systems that code industries, the new NAICS and the SIC.
NAICS covers more industries and more of the newer types of industries.

Blooms: Remember
Learning Objective: 07-02 Identify the forms for imitative and innovative businesses.
7. Imitation minus one degree of similarity is the business equivalent of an innovative strategy.
FALSE
In practice, most firms use imitation plus or minus one degree of similarity. Imitation minus one
degree of similarity would be the business equivalent of cloning.
7-21
Blooms: Understand
Level of Difficulty: 2 Medium
Topic: Imitation and Innovation
8. Incremental innovation is also called a blue ocean strategy.
FALSE
Pure innovation, not incremental innovation, is also called a blue ocean strategy.

Blooms: Understand
9. Market scale refers to the geography of the target market.
FALSE
Market scale is a characteristic of a market that describes the size of the market—a mass market
or a niche market. Market scope refers to the geography of the target market.

Blooms: Remember
Topic: To Whom Will You Sell?
10. A niche market is a narrowly defined segment of the population that is likely to share interests or
concerns.
TRUE
A niche market is a narrowly defined segment of the population that is likely to share interests or
concerns.

Blooms: Remember
7-22
11. Cost benefits include scale and scope savings.
TRUE
Cost benefits refer to the ways by which a firm can keep costs low for the customer. These include
scale and scope savings.

Blooms: Remember
Learning Objective: 07-03 Articulate the benefits that win over customers.
Topic: Value and Cost Benefits
12. Generally, benefits do not influence a firm's strategy process.
FALSE
Benefits drive a firm's offering to its customers and influence every part of the strategy process.

Blooms: Remember
13. Shake-out is a type of life cycle growth stage marked by a very rapid increase in sales in a
relatively short time.
FALSE
A shake-out is a type of life cycle stage following a boom in which there is a rapid decrease in the
number of firms in an industry.

Blooms: Remember
Learning Objective: 07-04 Assess how industry changes can affect strategy.
Topic: Industry Dynamics and Analysis: The Third Step of Strategic Planning
7-23
14. Eventually, mature industries begin a decline stage. Some industries face death, while others find
new life in a process called retrenchment.
TRUE
True, some companies find new life in a process called retrenchment, finding new approaches to
improve the business and its chances for survival.

Blooms: Remember
15. Funds left over after deducting the cost of goods sold are referred to as the net profit.
FALSE
Net profit is what is left after deducting the operating expenses of the business.

Blooms: Remember
Topic: Tool: Industry Analysis
16. Differentiation strategies target a niche segment of the market.
FALSE
Differentiation strategies are aimed at mass markets—situations in which nearly everyone might buy
a product or service.

Blooms: Remember
Learning Objective: 07-05 Explain the major strategies of business-differentiation; cost; and focus.
Topic: Strategy Selection: The Fourth Step in Strategic Planning
7-24
17. The supra-strategies are designed to work when there are very few small business in an industry,
along with many larger firms.
FALSE
The supra-strategies are all designed to work where there are many small businesses in an industry,
along with a few larger firms.

Blooms: Remember
18. Second sourcing provides customers with greater certainty of supplies or services.
TRUE
Second sourcing provides the customer with greater certainty of supplies or services, and at its
best provides a competitive pressure to keep both suppliers providing the best service and prices.

Blooms: Remember
19. Tactical actions are competitive responses with low resource requirements.
TRUE
Tactical actions are competitive responses with low resource requirements.

Blooms: Remember
Learning Objective: 07-06 Determine how to sustain competitive advantage through attracting customers and discouraging
competition.
Topic: Post Start-Up Tactics
7-25
20. The major ways you cope with competitive pressures is by undertaking some combination of
strategic actions and tactical actions.
TRUE
In order to keep or establish a competitive advantage you use strategic and tactical actions.

Blooms: Understand
competition.
Multiple Choice Questions
21. _____ is the idea and actions that explain how a firm will make its profits.
A. Strategy
B. Objective
C. Mission
D. Goal
Strategy is the idea and actions that explain how a firm will make its profit. Strategy defines how a
business operates.

Blooms: Remember
7-26
22. Most small businesses are more _____ than _____.
A. cost-directed; profit-directed
B. imitative; innovative
C. profit-directed; cost-directed
D. innovative; imitative
Strategy in small business is special because most small businesses are more imitative than
innovative.

Blooms: Remember
23. The first step of the strategic planning process for a small business is:
A. performing a SWOT analysis.

B. reviewing and confirming the goals that define the firm.
C. mapping the prospective customers.
The first step of the strategic planning process involves reviewing and confirming the goals that
define the firm and knowing the magic number.

Blooms: Remember
24. Which of the following is the second step of a small business' strategic planning process?
A. Reviewing and confirming the goals that define the firm

B. Knowing the magic number
C. Studying the dynamics and trends of the industry
D. Considering the customers and the benefits to offer them
The second step of a small business' strategic planning process is considering the customers and
the benefits to offer them and plotting these out in a procedure called perceptual mapping.

7-27
Blooms: Understand
25. Industry analysis is defined as the technique used to:
A. determine the magic number in a particular industry.

B. determine the extent to which a product is similar to another product.
C. study the dynamics and trends of an industry.
D. study the effects of low cost on an industry.
Industry analysis is the technique used to study the dynamics and trends of the industry.

Blooms: Remember
26. The fourth step of a small business' strategic planning process involves:
A. considering the customers and the benefits to offer them.

B. refining the firm's capabilities in order to maintain a competitive advantage.
C. determining the best strategic direction and strategy for the firm.
The fourth step of the strategic planning process involves building on the prior three steps to
determine the best strategic direction and strategy for the firm.

Blooms: Understand
7-28
27. For a small business that is just starting out, all strategy starts with _________.
A. the product or service

B. the owner
C. the competition
D. the customers
For a small business that is just starting out, all strategy starts with the owner. As owner, what do
you want out of your business?

Blooms: Remember
28. Which of the following is the advantage of knowing the magic number?
A. It helps in evaluating if the proposed business can deliver the desired return.
B. It helps in retaining customers.
C. It seeks out customers who are already being serviced by another firm.
D. It helps in making incremental product improvements.
Knowing the magic number from the start, entrepreneurs are better able to evaluate if their
proposed business can deliver on that very basic need that everyone reports needing.

Blooms: Understand
7-29
29. As a new entrepreneur, Anthony's magic number for 2013 is $42,000. If the current tax rate for his
business is 30 percent, calculate the amount that Anthony's firm would need to sell for him to get
his magic number.
A. $50,000
B. $50,495
C. $60,000
D. $60,854
The formula to calculate the pretax income is as follows:

Pretax income = (The desired post-tax income)/(1 - Tax percentage rate)

Blooms: Apply
Level of Difficulty: 3 Hard
30. _____ is the general name for the line of product or service being sold, or the firms in that line of
business.
A. Industry
B. Market
C. Scope
D. Niche group
Industry is the general name for the line of product or service being sold, or the firms in that line of
business.

Blooms: Remember
7-30
31. Which of the following are the two major classification systems that code industries?
A. NAICS and SIC

B. SCALE and SCOPE
C. SWOT and VRIO
D. OLC and SWOT
There are two major classification systems that code industries: the new NAICS (North American
Industry Classification System) and the better-known Standard Industrial Classification system, or
SIC.

Blooms: Remember
32. Standard industrial classification system (SIC) codes have _____ digits.
A. four
B. six
C. seven
D. nine
Standard industrial classification system (SIC) codes have four digits.

Blooms: Remember
33. Which of the following statements concerning choosing an industry is not correct?
A. Picking the right industry is key to the success of your small business.
B. Insurance firms and health-related firms do well in bad times and good historically.
C. Industry is vitally important to your core strategy decisions.
D. There are industries that are more profitable than others.
Industries which do well in good times and poor historically include financial firms tied to banking,
health-related firms, insurance firms, and business consulting.

7-31
Blooms: Remember
34. In an imitative strategy, an entrepreneur:
A. creates a new product or service which has no competitors.

B. considers prospective customers before creating a product or service.
C. seeks to do something that is very different from what others are doing.
D. does more or less what others are already doing.
An imitative strategy is an overall strategic approach in which the entrepreneur does more or less
what others are already doing.

Blooms: Understand
35. Which of the following is an advantage of using an imitative strategy?
A. It allows entrepreneurs to do something that is very different from what others are doing.
B. It allows business owners to buy existing technologies.
C. It allows entrepreneurs to fit their businesses to their own ideas and preferences.
D. It allows business owners to create unique settings.
Using an imitative strategy allows business owners to benefit from being able to buy existing
technologies.

Blooms: Understand
7-32
36. Imitation minus one degree of similarity:
A. would be the business equivalent of cloning.

B. is equivalent to the blue ocean strategy.
C. leads to pure innovation.
D. helps in the creation of a unique setting.
In practice, most firms use imitation plus or minus one degree of similarity. Imitation minus one
degree of similarity would be the business equivalent of cloning.

Blooms: Remember
37. Which of the following statements is not true of degree of similarity?
A. Most firms use imitation plus or minus one degree of similarity.

B. Imitation minus one degree of similarity is called incremental innovation.
C. Imitation minus one degree of similarity is the business equivalent of cloning.
D. Imitation plus one degree of similarity is called incremental innovation.
Imitation minus one degree of similarity is not called incremental innovation, it is the business
equivalent of cloning.

Blooms: Understand
38. An imitative business that competes locally with others in the same industry is referred to as _____.
A. incremental competition
B. niche business
C. linear competition
D. parallel competition
An imitative business that competes locally with others in the same industry is referred to as
parallel competition.

7-33
Blooms: Remember
39. Imitation plus one degree of similarity results in:
A. patterning a business on existing firms.

B. creating previously unseen products or services.
C. creating products or services that have no competitors.
D. characterizing a business based on the returns it offers.
Imitation plus one degree of similarity is where entrepreneurs look at existing businesses and
pattern themselves after them, with the exception of one or two key areas in which they seek to do
things in a new, and hopefully better, way.

Blooms: Understand
40. An overall strategic approach in which a firm patterns itself on other firms, with the exception of
one or two key areas is referred to as _____.
A. pure innovation
B. niche strategy
C. incremental innovation
D. blue ocean strategy
An overall strategic approach in which a firm patterns itself on other firms, with the exception of
one or two key areas is referred to as incremental innovation.

Blooms: Remember
7-34
41. Amy plans to open a laundromat with a gym. She got the idea from the laundromat with a bar and
game rooms, which she visits regularly. She wants to test her idea by starting out in a small space
with the focus on the laundromat and a small space allocated for gym equipments. Amy's idea is an
example of _____.
A. a blue ocean strategy

B. a pure innovation
C. an altruistic approach
D. an incremental innovation
An overall strategic approach in which a firm patterns itself on other firms, with the exception of
one or two key areas is referred to as incremental innovation.

Blooms: Apply
Level of Difficulty: 3 Hard
42. Which of the following is true of a blue ocean strategy?
A. It results in a new product or service.

B. It is the business equivalent of cloning.
C. It involves patterning a business on existing firms.
D. It matches the precision of copying as seen in franchising.
Pure innovation, also called a blue ocean strategy, results in a new product or service. These
situations are rare.

Blooms: Understand
7-35
43. A(n) _____ is the business term for the population of customers for a business owner's products or
services.
A. market
B. industry
C. strategy
D. SIC
A market is the business term for the population of customers for a product or service. If
entrepreneurs know their market inside and out, they are likely to know much of the key information
for how to be successful in their line of business.

Blooms: Remember
44. _____ refers to the size of the market, whereas _____ refers to the geographic range covered by the
market.
A. Scope; scale
B. Mass; niche
C. Scale; scope
D. Niche; mass
The scale of the market is the size of the market—whether business owners plan to aim for a mass
market or a niche market. The scope of the market defines the geographic range covered by the
market—from local to global.

Blooms: Remember
7-36
45. A customer group that involves large portions of the population is referred to as a _____.
A. niche market
B. secondary market
C. local market
D. mass market
A mass market is a market that involves large portions of the population—all men, all women, all
teens, all elderly, all families, all manufacturers, all restaurants. Mass markets are broad, and a
mass-market approach targets the entire market.

Blooms: Remember
46. A _____ is a narrowly defined segment of the population that is likely to share interests or concerns.
A. niche market
B. mass market
C. primary market
D. parallel market
Niche markets are specific and narrow, and in a niche market approach, entrepreneurs try to target
only customers in the niche.

Blooms: Remember
7-37
47. Which of the following is true of niche markets?
A. They are broad markets.

B. They target all the customers in the entire market.
C. They are specific and narrow.
D. They involve large portions of the population.
Niche markets are specific and narrow, and in a niche market approach, business owners try to
target only customers in the niche.

Blooms: Understand
48. Market scope is important because:
A. it helps business owners in determining the size of the target market.

B. it helps business owners to decide where to focus their sales and advertising efforts.
C. it helps business owners in designing a product.
D. it helps business owners in calculating their magic number.
Market scope is important because knowing the market scope helps business owners decide where
to focus their sales and advertising efforts.

Blooms: Understand
49. In the goal step of the strategic planning process, the key is to:
A. focus on the kind of customers the business wants to deal with.

B. bring together the decisions that underlie the business plan.
C. offer state-of-the-art or leading-edge technology.
D. build a brand reputation through the products or services.
In the goal step, the key is to bring together the decisions that underlie the business the
entrepreneur hopes to own.

7-38
Blooms: Understand
50. Which of the following types of customers are likely to generate more potential customers than any
other type?
A. Loyal customers
B. Local customers
C. Passionate customers
D. Corporate customers
Passionate customers are people who are not just loyal but are likely to rave about a business.
They are likely to generate more potential customers than any other type.

Blooms: Remember
Topic: Customers and Benefits: The Second Step of Strategic Planning
51. A _____ displays characteristics related to the nature of a product or service itself.
A. value benefit
B. cost benefit
C. scale saving
D. cause and effect diagram
A value benefit displays characteristics related to the nature of the product or service itself. Things
like quality, fashion, and reputation are elements that give a product or service value in the eyes of
the customer.

Blooms: Remember
7-39
52. Value benefits are important because:
A. they lead to scope savings.

B. they lead to higher prices.
C. they result in scale savings.
D. they lead to reduced costs.
Value benefits are important because they are almost always what lead to higher prices and higher
profits.

Blooms: Understand
53. Which of the following is an advantage of picking customer-desired benefits that a business owner's
competitors do not offer?
A. They results in lower pricing.

B. They help business owners to set realistic goals.
C. They help a business owner in identifying the magic number.
D. They make the firm stand out from the competition.
Picking benefits customers find attractive makes a business owner's firm attractive to them. Picking
customer-desired benefits a business owner's competitors do not offer is a powerful way to make
the firm stand out from the competition.

Blooms: Understand
7-40
54. A perceptual map is:
A. a chart that maps changes in competitors, sales and profits in an industry over time.
B. a graphic display which positions products according to their scores on important strategic
dimensions.
C. a chart that indicates the changes in the magic number of a business owner.
D. a graphic display which indicates the various stages of the lifecycle of a product.
A perceptual map is a graphic display which positions products, services, brands, or companies
according to their scores on important strategic dimensions.

Blooms: Understand
55. Which of the following is a value benefit?
A. Scale savings
B. Cost savings
C. Learning
D. Technology
Technology is a value benefit. Firms can offer state-of-the-art or leading-edge technology,

technology that others do not have, or technology that automates or simplifies tasks or that meets
industry standards.

Blooms: Remember
7-41
56. _____ is a value benefit that can come from the products or services that a business owner offers, or
from his or her firm's reputation.
A. Brand
B. Scale savings
C. Learning
D. Scope savings
Brand/reputation is a value benefit that can come from the products or services that a business
owner offers, or from his or her firm's reputation.

Blooms: Remember
57. Which of the following types of value benefits is most likely to be offered by a product if it helps the
community, a group, the environment, or the world?
A. Scope savings
B. Personalization
C. Altruism
D. Scale savings
If a product helps the community, a group, the environment, or the world, it offers customers the
value benefit of altruism.

Blooms: Remember
7-42
58. Which of the following is a cost benefit?
A. Brand
B. Altruism
C. Personalization
D. Organizational practice
Cost benefits include lower costs, scale savings, scope savings, learning, and organizational
practices.

Blooms: Remember
59. _______ are characteristics of a product or service that the target customer would consider
worthwhile, such as low cost or high quality.
A. Cost benefits
B. Value benefits
C. Benefits
D. Value propositions
Benefits are characteristics of a product or service that the target customer would consider
worthwhile, such as low cost or high quality.

Blooms: Remember
7-43
60. As a firm gets more experience, it can often work with fewer mistakes and greater efficiencies,
thereby lowering costs. This leads to the cost benefit of _____.
A. personalization
B. scope savings
C. learning
D. altruism
Learning is a cost benefit that a firm receives as it gets more experience; it can often work with
fewer mistakes and greater efficiencies, thereby lowering costs.

Blooms: Remember
61. Changes in competitors, sales and profits in an industry over time are referred to as:
A. industry dynamics.
B. retrenchment.
C. shake-out.
D. transformational competency.
Changes in competitors, sales and profits in an industry over time is referred to as industry
dynamics.

Blooms: Remember
7-44
62. The life cycle stage in which a product or service is being invented is known as the _____.
A. growth stage
B. boom
C. introduction stage
D. shake-out
Introduction stage is the life cycle stage in which the product or service is being invented and
initially developed.

Blooms: Remember
63. Which of the following is true of the introduction stage of a product?
A. Sales are almost always high.

B. Most customers are unaware of the offerings.
D. Some products turn out to be extremely popular.
Most industries' introduction stage starts with only a few firms. Sales are probably small, and most
customers are largely unaware of the offering.

Blooms: Understand
7-45
64. Which of the following statements about industry, industry dynamics, and industry lifecycle is true?
A. Industry refers not only to your product or service, but also to all your competitors selling that
product or service.
B. The fortunes of industries do not move in predictable ways.
C. Small firms avoid entering "hot" industries.
D. If the industry is not growing there is no way to be successful as a start-up.
Industry refers not only to your product or service, but also to all the firms also selling that product
or service, in other words, your competitors.

Blooms: Understand
65. A type of life cycle growth stage marked by a very rapid increase in sales in a relatively short time
is called the _____.
A. maturity stage
B. retrenchment
C. shake-out
D. boom
Boom is a type of life cycle growth stage marked by a very rapid increase in sales in a relatively
short time.

Blooms: Remember
7-46
66. Which of the following is characteristic of the boom stage in the life cycle of a product?
A. Most customers are unaware of the offerings.

B. Many firms close down.
D. Established firms must find new approaches to improve the business.
During the growth stage, firms begin to compete on features and price, and there may seem to be
an explosion.

Blooms: Understand
67. In which of the following stages is there an explosion of choices in terms of products and services?
A. Introduction stage
B. Growth stage
C. Maturity stage
D. Decline stage
In the growth stage, there is often a stage called boom in which firms begin to compete on features
and price, and there may seem to be an explosion of choices.

Blooms: Remember
7-47
68. _____ is a type of life cycle stage following a boom in which there is a rapid decrease in the number of
firms in an industry.
A. Shake-out
B. Growth stage
C. Maturity stage
D. Retrenchment
Shake-out is a type of life cycle stage following a boom in which there is a rapid decrease in the
number of firms in an industry.

Blooms: Remember
69. In an industry life cycle, the shake-out phase ends when:
A. the firms introduce new products or services.

B. the competition between firms increases.
C. the rapid die-off of firms stops.
D. the growth phase begins.
In the shake-out stage, many of the firms close down. This phase ends as the rapid die-off of firms
stops.

Blooms: Understand
7-48
70. The _____ is marked by a stabilization of demand, with firms in the industry moving to stabilize or
improve profits through cost strategies.
A. decline stage
B. maturity stage
C. growth stage
D. retrenchment stage
The maturity stage is the third life cycle stage, marked by a stabilization of demand, with firms in
the industry moving to stabilize or improve profits through cost strategies.

Blooms: Remember
71. Retrenchment is:
A. the third life cycle stage.

B. a stage marked by a stabilization of demand.
C. a type of life cycle stage following a boom in which there is a rapid decrease in the number of
firms.
D. an organizational life cycle stage in which established firms must find new approaches to
improve the business.
Retrenchment is an organizational life cycle stage in which established firms must find new
approaches to improve the business and its chances for survival.

Blooms: Understand
7-49
72. A research process that provides the entrepreneur with key information about other firms in the
same line of business as his or her, the current situation and trends is known as:
A. SWOT analysis.
B. VRIO analysis.
C. value chain analysis.
D. industry analysis.
Industry analysis (IA) is a research process that provides the entrepreneur with key information
about the industry, such as its current situation and trends.

Blooms: Remember
73. Gross profit is defined as:
A. what is left after deducting the cost of goods sold.

B. what is left after deducting the operating expenses of the business.
C. the amount of money the owner takes out of the firm annually.
D. the profit earned by a company when its product is in the maturity stage of the product life
cycle.
Gross profit is what is left after deducting the cost of goods sold.

Blooms: Remember
74. _____ is the amount of money left after deducting the operating expenses of the business.
A. Gross profit
B. Net profit
C. Profit after taxes
D. Generic profit
Net profit is what is left after deducting the operating expenses of the business.

7-50
Blooms: Remember
75. _____ are classic strategies for businesses of all types and they include differentiation, cost, and
focus.
A. Personalization strategies
B. Altruistic strategies
C. Retrenchment strategies
D. Generic strategies
There are three classic strategies for businesses of all types—differentiation, cost, and focus.
Because they are so widely applicable, they are called generic strategies.

Blooms: Remember
76. Which of the following statements concerning cost strategies is not true?
A. Cost strategies are aimed at a small niche market.

B. Small businesses in a variety of industries make use of cost strategies.
C. In a cost strategy, you try to show how your firm offers a combination of cost benefits that
appeal to the customer.
D. A cost strategy comes when a small business can pursue a very low cost operation.
Cost strategies are aimed at mass markets, not niche markets.

Blooms: Understand
7-51
77. Which of the following is true of a differentiation strategy?
A. It requires a firm to offer a combination of cost benefits that appeals to the customers.
B. It is generally pursued by all small businesses.
C. It is aimed at mass markets.
D. It is used by businesses that pursue a very low cost operation.
Differentiation strategies are aimed at mass markets—situations in which nearly everyone might buy
a product or service.

Blooms: Understand
78. Which of the following is a generic strategy that targets a portion of the market, called a segment or
niche?
A. Focus strategy
B. Differentiation strategy
C. Cost strategy
D. Value strategy
Focus strategies target a portion of the market, called a segment or niche.

Blooms: Remember
7-52
79. According to Shepherd, Shanley, and Porter, which of the following is a small business supra-
strategy?
A. Altruism
B. Single-mindedness
C. Scope savings
D. Technology
Single-mindedness is a supra-strategy. It refers to developing and demonstrating exceptional

expertise in one product or service (vs. competitors with broad approaches or product lines).

Blooms: Remember
80. An opportunity that makes it possible for a new business to gain a foothold in a market is referred
to as a(n) _____.
A. parallel competition
B. incremental innovation
C. differentiation strategy
D. entry wedge
Entry wedge is an opportunity that makes it possible for a new business to gain a foothold in a
market.

Blooms: Remember
7-53
81. Which of the following statements is true regarding the entry wedge of supply shortage?
A. It occurs when a new product is in demand.

B. It takes place in a stable market that doesn't change rapidly.
C. It takes place in a long-term market.
D. It occurs when certain physical resources are unutilized.
Supply shortages occur when a new product is in demand. The target audience is leading-edge
buyers who are willing to pay a premium to be the first to have the product. This is a short-term
market and one that changes rapidly. The key benefits are delivery, shopping ease, and style.

Blooms: Understand
82. When looking at the typical start-up strategy of a classic innovator, which of the following
statements is not true?
A. Their market scope is a niche market.

B. Industry attractiveness is moderate to high.
C. They may use an elite supra-strategy.
D. Innovation only happens during the introduction phase of the life cycle.
Innovation could happen during the introduction, growth, or retrenchment phases.

Blooms: Remember
7-54
83. Which of the following is true of the entry wedge of second sourcing?
A. It occurs when business firms leave a market.

B. It occurs because many big businesses have policies that provide for set-asides for purchases
from small businesses.
C. It offers the advantage of being globally based.
D. It provides a competitive pressure to ensure that suppliers keep providing the best service and
prices.
Second sourcing provides the customer with greater certainty of supplies or services, and at its
best provides a competitive pressure to keep both suppliers providing the best service and prices.

Blooms: Understand
84. Which of the following statements about Michael Porter's Five-Forces Model of Industry
Competition is not true?
A. Substitutes and alternatives are indirect competition.

B. There are five sets of sources of competition.
C. Rivals are direct competition.
D. New entrants are an industry source of competition.
There are five different threats of competition but only two sets of sources. One set of sources
come from the supply chain and the other set of sources come from within your industry.

Blooms: Understand
competition.
7-55
85. In the context of entry wedges, _____ occurs because government agencies, government-sponsored
commercial contracts, and many big businesses have policies that provide for quotas for buying
from small businesses.
A. second sourcing
B. favored purchasing
C. market relinquishment
D. customer contracting
Favored purchasing occurs because government agencies, government-sponsored commercial

contracts, and many big businesses have policies that provide for set-asides or quotas for
purchases from small businesses.

Blooms: Remember
86. Michael Porter identifies five different threats of competition for any business. Which of the
following choices is not one of Michael Porter's five threats?
A. Rivals
B. Suppliers
C. Substitutes
D. Investors
Investors is not one of Michel Porter's five threats.

Blooms: Remember
competition.
7-56
87. _____ is the particular way a firm implements customer benefits that keeps the firm ahead of other
firms in the market.
A. Industry analysis
B. Competitive advantage
C. Resource distribution
D. Market relinquishment
Competitive advantage is the particular way a firm implements customer benefits that keeps the
firm ahead of other firms in the market. Competitive advantage is a firm's edge in meeting and
beating the competition.

Blooms: Remember
competition.
88. Which of the following is a strategic action?
A. Price cutting
B. Product enhancements
D. Increased marketing efforts
New product introduction is a strategic action.

Blooms: Remember
competition.
7-57
89. Which of the following is a tactical action?
A. New distribution channels

B. Mergers
D. Entering new markets
Developing a new distribution channel is a tactical action.

Blooms: Remember
competition.
90. _____ is a strategic action.
A. Increasing marketing efforts

B. Using new distribution channels
C. Acquiring a competitor
D. Increasing prices
Acquiring a competitor is a strategic action.

Blooms: Remember
competition.
Essay Questions
7-58
91. What are the four key decisions that entrepreneurs need to make to build the strategy for their
firms?
Strategy builds on four key decisions entrepreneurs make about their firms. These may be made
formally or informally in their opportunity analysis or feasibility analysis. These decisions are:
1. The major goals they set for their firms.

2. The types of customers they seek and what benefits they plan to offer them.
3. The stage and trend of their chosen industry.
4. The specific generic and supra strategies they choose to pursue.

AACSB: Communication
Blooms: Remember
92. Differentiate between incremental innovation and pure innovation.
In practice, most firms use imitation plus or minus one degree of similarity. Imitation plus one
degree of similarity is where entrepreneurs look at existing businesses and pattern themselves after
them, with the exception of one or two key areas in which they seek to do things in a new, and
hopefully better, way. This is called incremental innovation.
Pure innovation is the process of creating new products or services, which results in a previously
unseen product or service. These situations are rare. Typically with a new product or service,
entrepreneurs also have a unique setting.

Blooms: Understand
7-59
93. What are the two market decisions that entrepreneurs need to make early in the process of going
into business?
There are two market decisions entrepreneurs need to make early in the process of going into
business. One of these is the scale of the market, which is the size of the market—whether they
plan to aim for a mass market or a niche market. The other is the scope of the market, which
defines the geographic range covered by the market—from local to global.
Scale of the market: Mass market - A mass market is a market that involves large portions of the
population—all men, all women, all teens, all elderly, all families, all manufacturers, all restaurants.
Mass markets are broad, and a mass-market approach targets the entire market.
Niche market - A niche market is a narrowly defined segment of the population that is likely to
share interests or concerns—25-34 year-old women, families with twins, Boy Scouts, Italian
restaurants, manufacturers in a city. Niche markets are specific and narrow, and in a niche market
approach, entrepreneurs try to target only customers in the niche.
Most industries have both mass and niche markets.
Scope of the market: Local to Global - Market scope is related to market scale. Market scope
refers to the geography of a target market. It can be local (like a neighborhood or a city), regional
(e.g., a metropolitan area or a state), national, international (usually meaning two to a few countries),
or global (meaning everywhere).
Market scope is important for two reasons. First, knowing the market scope helps entrepreneurs
decide where to focus their sales and advertising efforts. The second benefit is that knowing the
target market gives them a way to determine which potential competitors they need to worry about
most, namely those also in their market scope.

Blooms: Understand
7-60
94. Differentiate between value and cost benefits. Provide examples for each type of benefit.
Benefits are usually characterized as value benefits or cost benefits. A value benefit displays
characteristics related to the nature of the product or service itself. Things like quality, fashion, and
reputation are elements that give a product or service value in the eyes of the customer.
Examples of value benefits are as follows:
Quality: Offering a quality level others do not. It can be the highest quality, just enough quality to
meet the basic need, or a bit more quality than is typical for the price. Offering guarantees and
warranties also reflects quality benefits.
Style: Items that are beautiful, fashionable, popular, or otherwise aesthetically pleasing.
Personalization: This can come in building custom products or services, or personalizing the
customer experience.
Place: Being conveniently local is one example. Being willing to sell and deliver where others do not
is another.
While value benefits refer to what the customer senses in the product or service, cost benefits
refer to the ways by which a firm can keep costs low for the customer. These include scale and
scope savings. It is often important for customers to know one of these cost benefit reasons why a
product or service has a low price so that they do not erroneously conclude that the firm has cut
price by cutting quality.
Examples of cost benefit are as follows:
Scale savings: Buying in volume usually produces savings, so some firms buy in bulk and sell or
repackage in smaller amounts, passing along some of the cost savings.
Scope savings: A multifunction printer has a broad scope—it combines a printer, a scanner, and a
fax machine into one box. This is because they can share parts, and this sharing results in lower
costs.
Learning: As a firm gets more experience, it can often work with fewer mistakes and greater
efficiencies, thereby lowering costs.
Organizational practices: Possibly a small business has automated or professionalized or mastered a
product or service to the extent it can do it more cheaply than others.

Blooms: Understand
7-61
95. Briefly describe the industry life cycle.
Industries go through different stages in their life cycle. Most industries' introduction stage starts
with only a few firms. These firms elected to be innovative in their approach, making a new product
or offering a new service. The number of firms typically grows slowly at first. Sales are probably
small, and most customers are largely unaware of the offering. When enough customers have bought
the product so that it begins to draw the attention of the general public, there are two possibilities
for the growth stage. Most products and services tend to grow at a regular rate, one at which the
growth in the number of firms more or less meets customer demand. However, some products or
services turn out to be extremely popular and grow very rapidly. In these cases, the original firms
are unable to keep up with consumer demand. Other firms jump in to take advantage of the growth;
this stage is often called the boom. Firms begin to compete on features and price, and there may
seem to be an explosion of choices. Eventually, all such booms come to an end, and there is a stage
called the shake-out in which many of the firms close down. This phase ends as the rapid die-off of
firms stops.
The industry eventually reaches a relatively stable number of firms, with minor variations and a slow
drop in numbers. This is called the maturity stage. Eventually mature industries begin a decline
stage. Some industries face death, while others find new life in a process called retrenchment.

Blooms: Understand
7-62
96. What is meant by industry analysis? How does industry analysis help an individual in the strategy
process?
Industry analysis (IA) is a research process that provides the entrepreneur with key information
about the industry, such as its current situation and trends. Most entrepreneurs initially do an IA to
find out what the profits are in an industry in order to better estimate possible financial returns.
Taking this one step further, finding out how those profits are generated often makes the difference
between success and failure. Armed with this information, the entrepreneur can tell if the industry
is growing, stable, or in decline and what the degree of competition is.
The basics of industry analysis (IA) consist of knowing seven pieces of information: SIC/NAICS
number and description (online), industry size over time (online), profitability, how profits are made
(interview or articles), target market competitor concentration (directory checking), analysis, and
sources.
Armed with the information from the industry analysis, entrepreneurs are in a better position to
decide if the industry meets their needs for income (which comes from profits and operating
revenues), financial growth (depending on the trend of the industry as a whole), and competitive
challenge (depending on the number and concentration of competitors). It can also help them
determine if they have or can get the expertise needed to run a profitable business (comparing how
profits are made to how they would run their business if they started now).

Blooms: Understand
7-63
97. Name and briefly describe the different types of generic strategies.
There are three classic strategies for businesses of all types—differentiation, cost, and focus.
Because they are so widely applicable, they are called generic strategies. Differentiation strategies
are aimed at mass markets—situations in which nearly everyone might buy a product or service.
With this strategy, entrepreneurs try to show how their firms offer some combination of value
benefits that is different from and better for the customer than those offered by competitors.
Relatively few small businesses use differentiation strategies, because it is hard for small
businesses to have the resources to pursue mass markets. It happens most often when a small
business offers a mass-market product or service locally.
Cost strategies are also aimed at mass markets. In a cost strategy, entrepreneurs try to show how
their firms offer a combination of cost benefits that appeal to the customer. Small businesses in a
variety of industries make use of mass-market cost strategies. Typically, this comes when the small
business can pursue a very low cost operation.
Focus strategies target a portion of the market, called a segment or niche.
Small businesses often use aspects of differentiation or cost approaches that are reformulated for
the niche market. They identify a focus or combination strategy by figuring out what benefits the
market most wants. This can be done by asking customers outright, through surveys, or by looking
at what is working among the competitors locally or in more advanced markets.

Blooms: Understand
98. Briefly describe Michael Porter's Five-Forces Model of industry competition. Why is it important to
pay attention to these five forces of competition?
Michael Porter identifies five different threats of competition for any business. There are two
sources of competition: supply chain, and from within the industry. Sources from the supply chain
include suppliers and buyers. The industry sources of competition come from existing competitors
(rivals), other start-ups like your business, and the alternatives and substitutes your customers
have been using instead of your product so far. Rivals, or your competitors are direct competition,
substitutes and alternatives are indirect competition. These five - rivals, entrants, substitutes,
suppliers, and customers - are aspects of your industry which can change your profitability and give
an edge to any of the many types of competitors you face.

Blooms: Understand
competition.
7-64
99. What is an entry wedge? Explain any five of the entry wedges.
Entry wedge is an opportunity that makes it possible for a new business to gain a foothold in a
market. Common entry wedges are as follows:
Supply shortages: Supply shortages occur when a new product is in demand. The target audience is
leading-edge buyers who are willing to pay a premium to be the first to have the product. This is a
short-term market and one that changes rapidly. The key benefits are delivery, shopping ease, and
style.
Unutilized resources: Unutilized resources can be a physical resource like gravel in a farm field or
even entire inner cities. It can also be a human resource. The key benefits are lower costs, scale
savings, or organizational practices.
Customer contracting: Customer contracting occurs when a customer, most often a business, is
willing to sign a contract with a small business to ensure a product or service. Because big
businesses frequently downsize, they have ongoing needs to outsource work. Former employees are
often the preferred source for independent subcontractors.
Second sourcing: Second sourcing seeks out customers who are already being serviced by another
firm. The strategy is to offer customers a second place to obtain goods or services. Often the
advantage the small business offers is being locally based. Second sourcing provides the customer
with greater certainty of supplies or services, and at its best provides a competitive pressure to
keep both suppliers providing the best service and prices. Like customer contracting, the key
benefits are quality, delivery, technology, shopping ease, brand/reputation, and assurance.
Market relinquishment: Market relinquishment occurs when business firms leave a market. Key
benefits are place, shopping ease, quality, delivery, and service.

Blooms: Understand
100. Differentiate between strategic actions and tactical actions.
Strategic actions are competitive responses requiring a major commitment of resources. Examples
of strategic actions are: entering new markets, new product introductions, changing production
capacity, and mergers or alliances.
Tactical actions are competitive responses with low resource requirements. Examples of tactical
actions are: price cutting (or increases), product or service enhancements, increased marketing
efforts, and new distribution channels.

Blooms: Understand
competition.
7-65
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Small Business Strategies: Imitation with a Twist

True / False Questions

6. The new NAICS covers more industries than the SIC.

8. Incremental innovation is also called a blue ocean strategy.

9. Market scale refers to the geography of the target market.

11. Cost benefits include scale and scope savings.

12. Generally, benefits do not influence a firm's strategy process.

16. Differentiation strategies target a niche segment of the market.

22. Most small businesses are more _____ than _____.

A. performing a SWOT analysis.

A. Reviewing and confirming the goals that define the firm

25. Industry analysis is defined as the technique used to:

A. determine the magic number in a particular industry.

A. considering the customers and the benefits to offer them.

A. the product or service

A. NAICS and SIC

34. In an imitative strategy, an entrepreneur:

A. creates a new product or service which has no competitors.

35. Which of the following is an advantage of using an imitative strategy?

36. Imitation minus one degree of similarity:

A. would be the business equivalent of cloning.

A. Most firms use imitation plus or minus one degree of similarity.

39. Imitation plus one degree of similarity results in:

A. patterning a business on existing firms.

A. a blue ocean strategy

A. It results in a new product or service.

A. They are broad markets.

48. Market scope is important because:

A. it helps business owners in determining the size of the target market.

A. focus on the kind of customers the business wants to deal with.

A. they lead to scope savings.

A. They results in lower pricing.

54. A perceptual map is:

55. Which of the following is a value benefit?

58. Which of the following is a cost benefit?

63. Which of the following is true of the introduction stage of a product?

A. Sales are almost always high.

A. Most customers are unaware of the offerings.

69. In an industry life cycle, the shake-out phase ends when:

A. the firms introduce new products or services.

71. Retrenchment is:

A. the third life cycle stage.

73. Gross profit is defined as:

A. what is left after deducting the cost of goods sold.

A. Cost strategies are aimed at a small niche market.

A. It occurs when a new product is in demand.

A. Their market scope is a niche market.

A. It occurs when business firms leave a market.

A. Substitutes and alternatives are indirect competition.

88. Which of the following is a strategic action?

89. Which of the following is a tactical action?

A. New distribution channels

90. _____ is a strategic action.

A. Increasing marketing efforts

92. Differentiate between incremental innovation and pure innovation.

100. Differentiate between strategic actions and tactical actions.

True / False Questions

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

22. Most small businesses are more _ than _.