Entrepreneurship Starting and Operating A Small Business, 5th edition Steve Mariotti Solution Manual

Entrepreneurship: Starting and Operating a Small Business, Instructor’s Resource Manual 5e

By Caroline Glackin

Entrepreneurship: Starting and Operating a Small Business

Fifth Edition

Steve Mariotti Caroline Glackin

To the Instructor Entrepreneurship: Starting and Operating a Small Business, Fifth Edition, is the latest in a series of entrepreneurship textbooks written by Steve Mariotti, the founder of the Network for Teaching Entrepreneurship (NFTE), and professor and entrepreneur Caroline Glackin. This textbook is an extension of the programs developed by Steve Mariotti under the auspices of NFTE. Since 1987, NFTE has reached more than 500,000 students and professionals and certified thousands of instructors globally to implement its innovative entrepreneurship programs. NFTE is widely viewed as a world leader in promoting entrepreneurial literacy and has a proven track record of helping students start a variety of successful business ventures.

Business students, as well as those from other disciplines, can benefit from Entrepreneurship. For the former, it recasts their prior learning from a typically corporate context and focuses it on small and entrepreneurial enterprises. For students in such fields as hospitality, the arts, engineering, and fashion merchandising, the text introduces key business concepts in the context of a broad range of careers. Cases from hospitality, technology, retail, manufacturing, distribution, real estate, finance, and not-for-profit organizations present a wealth of insights and learning opportunities. Most importantly, Entrepreneurship is a balanced mix of the academic and applied components of entrepreneurship education. Students are introduced to the theories, methods, and requisite knowledge and skills for entrepreneurs and are immediately provided practical examples and discussion opportunities. Using the Application Exercises and Exploring Online features, they are encouraged to take this new knowledge and apply it to their own lives, so that the course materials are reinforced and internalized.

This textbook combines Steve Mariotti’s experience as an entrepreneur with relevant academic theory and practice, supported by a rich variety of examples and stories that include the experiences of NFTE program graduates who have started their own businesses. Caroline Glackin brings years of experience in the university classroom, as a lender to small and microbusinesses, and as an entrepreneur and small business owner. Together, they have produced a text that is practical, useful, and academically solid.

This book encourages college students to think through every step of creating their own enterprise while learning economic, financial, and business concepts. Upon completion of this course, students will be able to:  Create and test a Business Model using the Customer Discovery process.  Write and present a professional business plan. Create income, balance sheet, and cash flow statements. Use financial ratios to evaluate business performance. Analyze markets and create effective marketing plans. Use sources of capital. Invest earnings. Develop harvesting and exit strategies.

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The Mariotti/Glackin Learning System 1. Beginning of chapter: Learning Objectives Quotation Entrepreneurial Vignette 2. Included in the chapter: Step into the Shoes of the Experts BizFacts Entrepreneurial Wisdom Global Impact 3. End of chapter: Chapter Summary Key Terms Entrepreneurship Portfolio —Critical Thinking Exercises —Key Concept Questions —Application Exercises —Exploring Your Community and Exploring Online __Canvas Connections —BizBuilder Business Plan Questions —Short Case Study/Case Study Analysis —Long Case Study/Case Study Analysis 4. Unit cases

Contents of the Manual This Instructor’s Manual provides the instructor with a summary of each chapter, as well as answers to all chapter exercises, case study analyses, and lists of additional print and Internet resources.

Chapter Overview: A brief synopsis of the chapter Chapter Objectives: Matching the text Lecture Outlines: Outlines and teaching notes, including class discussion and activity ideas, for each chapter topic are provided.

Outside the Classroom: Chapters include listings for additional websites, media (magazines, etc.), and organizations (e.g., Small Business Administration) that are relevant to the chapter material and help to expand the learning experience beyond the classroom.

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UNIT 1: ENTREPRENEURIAL PATHWAYS Chapter 1 Entrepreneurs and Entrepreneurship Chapter 1 Contents Understanding Entrepreneurs and Entrepreneurship 3* What Is an Entrepreneur? 3The Free-Enterprise System 5 Voluntary Exchange 5 Benefits and Challenges of Free Enterprise 5 What Is a Small Business? 6 Definitions of Success – Monetary and Other 6 Taking the Long View 7 Benefits and Costs of Becoming an Entrepreneur 8 Potential Benefits of Entrepreneurship 8 Potential Costs of Entrepreneurship 10 Cost/Benefit Analysis 11 Opportunity Cost 11 Seeking Advice and Information to Succeed 12 Entrepreneurial Options 14 The Many Faces of Entrepreneurship 16 How Do Entrepreneurs Find Opportunities to Start New Businesses? 17 Entrepreneurs Creatively Exploit Changes in Our World 18 Where Others See Problems, Entrepreneurs Recognize Opportunities 18 Train Your Mind to Recognize Business Opportunities 19 Entrepreneurs Use Their Imaginations 19 An Idea Is Not Necessarily an Opportunity 19 Opportunity Is Situational 20 The Five Roots of Opportunity in the Marketplace 21 Paths to Enterprise Ownership 22 Secure Franchise Rights 22 Buy an Existing Business 22 License Technology 23 Making the Business Work Personally and Professionally 23 A Business Must Make a Profit to Stay in Business 23 Profit Is the Sign That the Entrepreneur Is Adding Value 24 Profit Results from the Entrepreneur’s Choices 24 The Team Approach 24 Developing Skills for Your Career 25 *Note: page numbers reference the textbook

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Chapter 1 Overview This chapter is an introduction to the concept of entrepreneurship. Entrepreneurship is defined and the various advantages and disadvantages of conducting business as an entrepreneur are introduced. Some of the decisions that an entrepreneur faces are presented.

Chapter 1 Objectives Learning Objective 1.1: Summarize what entrepreneurship is and what entrepreneurs do.

Learning Objective 1.2: Examine how free-enterprise economies work and how entrepreneurs fit into them.

Learning Objective 1.3: Describe small business.

Learning Objective 1.4: Understand the costs and benefits of entrepreneurship.

Learning Objective 1.5: Recognize the various entrepreneurial options.

Learning Objective 1.6: Identify and evaluate opportunities to start your own business.

Learning Objective 1.7: Distinguish between ideas and opportunities.

Learning Objective 1.8: Explore the multiple paths to entrepreneurship.

Learning Objective 1.9: Explain success signals for entrepreneurs.

Learning Objective 1.10: Develop skills for a future career – employment or entrepreneurship.

Chapter 1 Outline 1. Summarize what entrepreneurship is and what entrepreneurs do. a. Entrepreneurs start their own businesses and work for themselves. b. Entrepreneurs recognize and create opportunities to start businesses that other people may not have noticed. c. Entrepreneurs shift economic resources from an area of lower productivity into an area of higher productivity and greater yield. By doing this, they add value to scarce resources.

2. Examine how free-enterprise economies work and how entrepreneurs fit into them. a. The free-enterprise system is based on voluntary exchange. Voluntary exchange is a trade between two parties who agree to trade money for a product or service. Both parties agree to the trade because each benefit from the exchange. b. The free-enterprise system encourages entrepreneurs who use resources efficiently to satisfy consumer needs by rewarding them with profit.

3. Describe small business a. A small business is generally defined by the U.S. Small Business Administration’s Office of Advocacy as having fewer than 500 employees and selling less than $5 million worth of products or services annually 4. Understand the costs and benefits of entrepreneurship a. Benefits i.

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Control over time .

ii.

Fulfillment

iii.

Independence/autonomy

iv.

Creation/ownership

v.

Financial reward/control over compensation

vi.

Control over working conditions

vii.

Self esteem

viii.

Contribution to society

b. Costs i.

Business failure

ii.

Obstacles

iii.

Loneliness/isolation

iv.

Financial insecurity

v.

Long hours/hard work

vi.

Strain on personal relationships

5. Recognize the various entrepreneurial options a. Social entrepreneurship b. Green entrepreneurship c. Microenterprise d. Mainstream small firms e. Unicorns f. Corporate entrepreneurship 6. Identify and evaluate opportunities to start your own business. a. The five roots of opportunity are i.

problems that your business can solve;

ii.

changes in laws, situations, or trends;

iii.

inventions of totally new products or services;

iv.

competition (if you can find a way to beat the competition on price, location, quality, reputation, reliability, or speed, you can create a successful business with an existing product or service); and

v.

technological advances (scientists may invent new technology, but entrepreneurs figure out how to sell it).

7. Distinguish between ideas and opportunities a. Ideas are not necessarily opportunities b. Opportunity is situational 1-3 | P a g e

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c. Five roots of opportunity i.

Problems your business can solve

ii.

Changes in laws, situations, or trends

iii.

Inventions of new products or services

iv.

Competitive advantages of importance to customers

v.

Technological advances that entrepreneurs take from the laboratory to the marketplace

8. Explore the multiple paths to entrepreneurship. a. Start your own business b. Buy an existing business c. Secure a franchise or license d. License technology 9. Explain success signals for entrepreneurs. a. Profit is the sign that an entrepreneur has added value to the scarce resources he or she is using. b. Not making a profit is a sign that the entrepreneur is not using resources well and is not adding value to them.

10. Develop skills for a future career - employment or entrepreneurship. a. Written and oral communications b. Critical thinking and problem solving c. Teamwork and collaboration d. Leadership e. Creativity and discovery f. Ethics g. Information technology skills h. Information literacy

Chapter 1 Teaching Notes Class Discussion Ideas: 1.

Write on the board or pose aloud the following: What are three things you think others would say that you can “do” particularly well?

2.

Ask the students to visualize: What kind of life do I want? How can I make my community a better place?

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3.

Write on the board or project the following quote and ask the students to rewrite or explain it in their own words and/or give an example of it: “The people who get on in this world are those who get out and look for the circumstances they want and, if they can’t find them, make them.”

4.

Inform the students that “entrepreneur” is not a social or financial category but a state of mind that focuses on seeking out opportunities, taking action, and finding ways to solve other people’s problems in a profitable way. Ask students to think about and name entrepreneurs they know, such as small businesspeople in the neighborhood. Can they think of ways these local entrepreneurs saw problems as opportunities and solved those problems in a profitable way? Can students think of a time when they were entrepreneurial in this way?

5.

Elicit from students several meanings of the word free. Stress that, in the case of the term “free enterprise,” it means that anyone may start, own, or sell a business (“enterprise”); may sell goods and services for whatever price they can get for them; and may spend their money and invest their assets as they choose. Invite students to share opinions about a free-enterprise economy, both the advantages (such as freedom to succeed, reward for initiative, no interference from others) and disadvantages (such as financial risk and personal responsibility).

6.

Ask students for their definitions of opportunity. How is an opportunity different from a problem? (An opportunity is viewed more positively than a problem and considered a situation an individual can do something about. Opportunity is more a matter of attitude toward potential problems than the scenario itself.)

7.

Ask what opportunities an employee generally has. (Examples: training, promotions, raises—but all decided by someone else.) Ask what opportunities an entrepreneur has.

(Examples: growing the business, learning skills, meeting new people, creating wealth based on his/her own and/or the market’s goals and needs.) Ask what an employee owns in his/her job. Ask what an entrepreneur owns.

8.

Summarize the differences between ownership, as it implies that something belongs to you, and tenancy, which implies you can use something belonging to others with their permission. Use examples to make this difference more concrete. Create a two-column chart on the board comparing different aspects of home ownership vs. renting, and business ownership vs. employment. Emphasize the point that ownership often means that you delay rewards until some point in the future (e.g., you don’t get paid for your efforts right away, the way you do with employment) but that the rewards are often bigger (e.g., you get the company’s profits, not a salary or wages, and can perhaps sell the company for a lot more money than you could have earned in wages as an employee).

Chapter 1 Lecture Enhancers PPT Lecture Slides for Chapter 1 Outside the Classroom: www.sba.gov: The Small Business Administration (SBA) is a government agency that supports and promotes entrepreneurs. The SBA offers free or inexpensive pamphlets on a variety of 1-5 | P a g e

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business subjects. Some local offices offer counseling to small business owners through SCORE or the SBDC system. www.eonetwork.org: Entrepreneurs Organization provides learning and networking opportunities worldwide for young entrepreneurs. www.zeromillion.com: This site, run by Zero to One Million author Ryan Allis, provides resources for young entrepreneurs, a networking list of contacts called The Entrepreneurship Directory, discussion forums, and links to articles and courses.

Entrepreneur magazine Subscriptions: www.entrepreneur.com MIT Entrepreneurship Center http://entrepreneurship.mit.edu The Concise Encyclopedia of Economics http://www.econlib.org/library/Enc/Entrepreneurship.html Chapter 1 Key Terms Acquisition 22 Capital 5 Capitalism 5 Commission 9 Corporate entrepreneurship 17 Cost/benefit analysis 11 Dividend 9 Due diligence 22 Entrepreneur 4 Family enterprise 17 Franchise 22 Free-enterprise system 5 Green entrepreneurship 15 Lifestyle business 16 Mentor 12 Microenterprise 22 Necessity-based entrepreneurship 4 Opportunity cost 11 Opportunity-based entrepreneurship 4 Product 3 Profit 23 Salary 9 Service 3 Social business 15 Social entrepreneurship 14 Trade-off 24 Unicorns 17 1-6 | P a g e

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Venture Philanthropy 15 Voluntary Exchange 5 Wage 9 Chapter 1 Class Activity Ideas and Group Exercises 1.

Direct students individually or in small groups to brainstorm problems they see in society, their neighborhoods, the school, or their own lives. After a few minutes, ask each student or group to choose one problem. How could it be turned into an opportunity—a product or service—that might help solve the problem? Have students/groups present their ideas to the class.

2.

Ask each student to identify one profession or occupation he or she is considering as a career. Group students based on jobs/businesses that are in similar interest groupings or in comparable industries: for example, working with numbers (accounting, insurance), or in entertainment (actor, musician), or scientific careers. Give each group a few minutes to brainstorm ways to turn the career into a business opportunity so that students could work for themselves. How might they think about their interests in terms of entrepreneurship?

Have each group briefly share its ideas.

3.

Guest Speaker Panel. Invite several local entrepreneurs to serve as panel members for a discussion of the benefits and challenges of entrepreneurship. Consider inviting an entrepreneur from each major type of business (manufacturing, wholesale, retail, service).

Try to match the demographic characteristics of the panel to your class (e.g., women, African Americans, Hispanics, Asians) and to include entrepreneurs from different age groups. Prep the panel members to be able to give a brief overview of their respective businesses (product/service description, type of business, when started, annual sales, etc.) and discuss why they became entrepreneurs, what they see as the main benefits of entrepreneurship, what their greatest challenges have been, what their goals are, etc. Have students come up with lists of additional questions before the speakers arrive.

4.

Invite students visit http://www.yahoo.com and http://www.google.com and conduct a comparative SWOT analysis of the two search engine competitors. Which should the class invest in? Why?

5.

Have students search the Internet for “case studies on entrepreneurs.” Have them find noteworthy entrepreneurs and write up what these people have accomplished.

Chapter 1 Critical Thinking Exercises 1-1. What would be the best thing about owning your own business? What would be the worst for you? Why? L.O. 1.1 Summarize what entrepreneurship is and what entrepreneurs do.

AACSB Reflective thinking Answers will vary with students. Typically, they will draw upon the items on pages 8 through 11. Best: control over time; fulfillment; independence/autonomy; creation/ownership; financial reward/control over compensation; control over working conditions; self-esteem, and 1-7 | P a g e

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contribution to society. Worst: business failure; obstacles; loneliness/isolation; financial insecurity; long hours/hard work, strain on personal relationships. Encourage students to write complete sentences and use paragraphs to clearly convey and organize their thoughts.

1-2. Choose three non-financial benefits of entrepreneurship that might be important to you.

Write a paragraph about each and why it would be important.

L.O. 1.2 Examine how free-enterprise economies work and how entrepreneurs fit into them.

AACSB Application of knowledge Answers will vary with students. Non-financial benefits might include selfesteem, satisfaction, excitement, and the like. Much like previous question, but explicitly excludes financial rewards.

1-3. If you were to start a business five years from now, what would you expect opportunity cost to be? In other words, what would be the next-best use of your time? How much money could you make working as an employee, instead? The answer to this question will give you a rough idea of how to value your time when you start a business and figure out how much to pay yourself.

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking My opportunity cost would be the cost of other activities that I could pursue during that time. My time is worth approximately $ per hour.

1-4. Select and describe an idea that you have for a business. Summarize how it could satisfy a consumer need. What problem is it solving? For whom?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking Example: I plan to start a business called “Oldies but Goodies DJ Service.”

Customers will hire me to DJ at special events including family reunions, retirement parties, birthdays, and anniversary celebrations. Oldies but Goodies will specialize in playing Motown-era music from the 1960 and 70s.

My business will cater to older customers who enjoy this period and style. I will deliver my DJ services directly to my clients. When I am hired to play at a party, I will transport all of my equipment and music to the event.

Many DJs focus on playing the latest, most cutting-edge tracks, but older customers do not value this feature. I will be satisfying my customers’ need to hear the music they enjoy most. Oldies but Goodies will offer its customers a fun-filled, nostalgic musical experience that they can share with their friends 1-8 | P a g e .

and relatives.

1-5. Provide an example of a change that has occurred or is about to occur in your area/neighborhood. Discuss at least three business opportunities this change might create.

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking Student’s examples should stem from a change in laws, situations, or trends. Example: I live in a hip and trendy neighborhood of young people. Lately, I’ve noticed that many people in my neighborhood are starting families. Business opportunities created by this change might include day-care and babysitting services, diaper-delivery services, and mother’s helper services.

1-6. Identify and list five business opportunities in your environment and the need(s) each would satisfy. Indicate whether each opportunity you describe is likely to be a lifestyle business, microenterprise, small business, unicorn or some other type of business.

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking and application of knowledge Business Opportunity and Type:

Need(s) Satisfied:

1. (Example) a cafe/bookstore (lifestyle business)

1. a place where teenagers can hang out because it doesn’t serve alcohol

2.

2.

3.

3.

4.

4.

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5.

5.

__________________________

1-7. How have you worked to develop the critical skills discussed in the chapter? Which skills are your strongest? How might you build those that need improvement?

L.O. 1.10 Develop skills for a future career – employment or entrepreneurship.

AACSB Reflective thinking and application of knowledge.

Students will provide a range of areas. For example: I have done many things to develop the critical skills discussed in this chapter. I have taken courses that involve developing and using the skills. I have read books, watched videos, and listened to podcasts on several the skills. I practice the skills as much as I can.

My strongest skills include: critical thinking, teamwork, and leadership. I may be able to improve upon my information technology skills by taking additional courses or using tutorials to learn skills and projects to practice them.

Chapter 1 Key Concept Questions 1-8. Define small business according to the U.S. Small Business Administration terms. How, if at all, does this differ from what you expected the definition to be?

L.O. 1.3 Describe small business.

AACSB Application of knowledge and reflective thinking A small business has fewer than 500 employees and has less than $5 million in annual sales. Students often envision small business as being 25 or fewer employees and lower than $1 million in annual sales. They are surprised to learn how many businesses are considered small.

1-9. Explain how profit works as a signal to the entrepreneur.

L.O. 1.9 Explain success signals for entrepreneurs.

AACSB Analytical thinking When a business earns a profit, it tells the entrepreneur that he or she has made good decisions about how to use scarce resources to meet consumer needs.

1-10. It will probably take about three to 18 months for your business to start earning a profit. Do you agree or disagree? Why? If you disagree, how long do you expect it to take? What are the three most important factors in determining the time frame?

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L.O. 1.9 Explain success signals for entrepreneurs.

AACSB Analytical thinking This will generally have “disagree” as the answer, as most businesses take more than three months to generate profits. The length of time they provide will likely be between 12 and 24 months. They should be able to explain the answer. Most important factors include: revenues, startup costs, cost of goods sold, and fixed costs.

1-11. Summarize three facts about capitalism.

L.O. 1.2 Examine how free-enterprise economies work and how entrepreneurs fit into them.

AACSB Application of knowledge Capitalism is an economic system in which anyone is free to start a business. In a capitalistic society, the government does not set prices for most goods and services. Capitalism is based on voluntary exchange.

1-12. Compare and contrast the meaning of a business opportunity and a business idea.

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking Business Opportunity Customer segment tested and real Product or service defined sufficiently to test Sufficient customers who will pay sufficient prices frequently enough to generate profitability in the foreseeable future It is attractive to customers because it creates or adds value for its customers It will work in the business environment It can be executed in a defined window of opportunity It can be implemented with the right team to make it durable

Business Idea Customer segment untested Product or service can be wholly “imaginary” Because the segment is untested, it is not clear that the business can become profitable Unknown Unknown Unknown Unknown

1-13. Visit the U.S. Small Business Administration Website (http://www.sba.gov). Read an article on starting a business and write a summary of the key information (200 words or fewer). Remember to create a proper citation for the article.

L.O. 1.1 and 1.6 Summarize what entrepreneurship is and entrepreneurs do, and identify 1-11 | P a g e .

and evaluate opportunities to start your own business.

AACSB Written and oral communication & information technology Student answers will vary widely. They all should be well written and contain at least one citation in the requisite format.

Chapter 1 Application Exercises 1-14. Have a conversation with a friend or relative. Discuss things he or she finds frustrating in his or her area/neighborhood. a . Write down these comments. b. Generate at least three business opportunities from this conversation. c. Use the checklist below to evaluate your three business ideas as opportunities. d. Choose the best of the business opportunities and develop a SWOT analysis for it. e. Create a cost/benefit analysis for starting this business. Use the analysis to explain why you would or would not actually start it.

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking Students should fill out checklists for three business opportunities they generate by talking with a friend or relative and then supply a cost/benefit analysis for each. The SWOT analysis can be in paragraph form or as a table and should include internal strengths and weaknesses and external opportunities and threats.

Business Idea

Critical Evaluation

Would it be attractive to potential customers?

Would it work in your business environment?

Is there a window of opportunity?

Do you have the skills and resources to create this business?

If you do not have the skills and resources to create this business, do you know someone who does and might want to create this business with you?

Yes Yes Yes Yes

No No No No

Yes___

No___

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Business Idea

Critical Evaluation

Would it be attractive to potential customers?

Would it work in your business environment?

Is there a window of opportunity?

Do you have the skills and resources to create this business?

If you do not have the skills and resources to create this business, do you know someone who does and might want to create this business with you?

Yes Yes Yes Yes

No No No No

Yes

No

Business Idea

Critical Evaluation

Would it be attractive to potential customers?

Would it work in your business environment?

Is there a window of opportunity?

Do you have the skills and resources to create this business?

If you do not have the skills and resources to create this business, do you know someone who does and might want to create this business with you?

Yes Yes Yes Yes

No No No No

Yes__

No

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Chapter 1 Exploring Your Community 1-15. Interview an entrepreneur, preferably in person. Entrepreneurs are busy people, but many are willing to spend time speaking with someone who is interested in what they are doing. Meeting over a light meal might be the most efficient use of the entrepreneur’s time.

Before the interview, brainstorm 10 questions in the following four categories. After the interview, be sure to send a thank-you note. a. Information gathering: Open the interview with questions about the entrepreneur’s family (any other entrepreneurs in it?) and educational and work background. b. Starting the business: Next, ask questions about how the business was started. How did the entrepreneur recognize an opportunity and develop it? c. Running the business: Ask about which challenges arose as the business got underway and how they were solved. d. Reflection: Ask the entrepreneur to reflect. What advice would he or she give to an aspiring entrepreneur? Has running a business been rewarding?

Reflect on the interview and what you learned about entrepreneurship and small business. Summarize your thoughts and describe how this new learning may impact you as an entrepreneur.

L.O. 1.1 and 1.4 Summarize what entrepreneurship is and what entrepreneurs do, and understand the costs and benefits of entrepreneurship.

AACSB Written and oral communications & reflective thinking Student answers will vary according to whom they interview, but they should reflect understanding of what motivates entrepreneurs and how they decide to start businesses. Some sample questions include: 1. To get us started, please briefly describe your current business(es) to me.

2. What, if any, other business(es) have you owned?

3. When did you start or acquire your business(es)? (Sort out what’s been bought versus what the owner started from the ground up and whether there are or ever were other owners.)

4. How did you think of your business idea(s)? Please be specific with examples, if possible.

5. What, if any, changes have occurred in your business in the past 2 years? These can be in terms of markets, customers, products, staffing, technology, and the like.

6. Were these changes, if any occurred, driven internally through you or your team or externally? Please explain.

7. How did you feel about the changes?

8. How, if at all, are computers used within your business(es)? How does this compare with others in your industry?

9. In what other ways, if any, is technology used within your business(es)?

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11. Do you hold any patents for products? If so, for what?

12. Do you own any copyrights or have any published work? If so, for what?

13. What did you expect to accomplish through the current business(es)? (Prompt for financial, personal, and other goals.)

14. Were you able to accomplish the goal(s)?

15. What did you gain from the business?

16. How do you ensure that the quality of your products/services meets your standards?

17. Where in the family birth order do you fall?

18. What is your highest level of education completed?

19. Who, if any, are the other entrepreneurs in your family, including parents, siblings, offspring, and aunts and uncles?

20. What is your work experience?

21. What, if any, memberships do you hold in community organizations, churches, and industry or professional groups?

22. What do you like about what you do?

23. What, if any, paths did you take in business that you wish you hadn’t? Why? 24. What advice would you give someone thinking of starting a business?

Chapter 1 Exploring Online 1-16. Visit an Internet search engine, such as Google, Yahoo! or Bing. Search for one of the following terms: entrepreneurship ideas, businesses for sale, or franchise opportunities. For the search that you selected answer: a. Which search engine and term did you use? b. What were the number of matches (“hits”)?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Information technology & application of knowledge Students should simply list the search engine, term and number of hits.

For example, Google, “Franchise Ideas”, about 66,000,000 hits.

1-17. Find a website based on question 1-15 that looks promising and answer these questions: L.O. 1.5 Recognize the various entrepreneurial options.

AACSB Information technology & analytical thinking a. What is the website (URL and name)? Example: Franchise Direct, http://www.franchisedirect.com b. Who is sponsoring the website? Example: Franchise Direct USA, Inc. c. Is the website selling a product or information (as a primary function, not through banner ads)? If so, what product(s) or information? Example: This is a company that 1-15 | P a g e .

promotes franchises to potential franchisees. d. Identify three businesses/ideas/opportunities from the site, and state why they might or might not be viable opportunities for you. Example: Petland, TailWaggers Doggy Daycare, Wag’N Tails Mobile Pet Grooming. The first two require $100,000 minimum cash while Wag’N Tails requires $10,000. Students may address a multitude of issues, but cash is likely to be one of them.

Each answer will differ but should demonstrate completion of each aspect that was needed.

Chapter 1 Case Studies Case Study Analysis: Urban Decay: Finding an Entrepreneurial Opportunity 1-18. What unmet needs of the consumer contributed to the success of Urban Decay?

L.O. 1.7 Distinguish between ideas and opportunities.

AACSB Analytical thinking Lerner saw that women wanted nail colors that were not the “traditional” colors of that time. This was a fashion and preference choice. The market for nail polishes had ample competitors. Urban Decay identified a niche.

1-19. Was founding Urban Decay an expected next step after leaving Cisco Systems for Sandy Lerner? Why or why not?

L.O. 1.8 Explore the multiple paths to entrepreneurship.

AACSB Reflective thinking Urban Decay was not a likely next step. Given Sandy Lerner’s knowledge of the information technology industry and success in that field, most people would expect her to do work in that area. Perhaps those nearest to her would have predicted such a step.

1-20. What characteristics made Urban Decay an opportunity rather than simply an idea?

Which of the five roots of opportunity apply here?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Application of knowledge Urban Decay met all of Timmons’ criteria for being an opportunity: attractive, durable, timely, and adds value. It included two of the primary roots of opportunity. UD identified a problem that it could solve and changes in fashion trends (grunge look).

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1-21. Is there a future for Urban Decay? Assess what might that future look like?

L.O. 1.9 Explain success signals for entrepreneurs.

AACSB Reflective thinking As the case note, the “grunge look” is less prevalent. However, Urban Decay has kept current with trends (if it isn’t ahead of them), and has built a loyal customer base. It has been popular and is now part of a larger company, so it should continue to thrive. Its profitability and niche made it a successful venture.

Case Study Analysis: Foursquare 1-22. Evaluate how Foursquare fits Schumpeter’s definition and the five basic ways entrepreneurs find opportunities to create new businesses.

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Application of knowledge Foursquare fits Schumpeter’s definition of creative destruction by the way it changed social networking at a significant level. He says that entrepreneurs create value “by exploiting an invention, or more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply materials or a new outlet for products, by reorganizing and industry and so on.” The notion of checking in at various locations and sharing information was quite powerful. The use of incentives to bring users back is a solid marketing strategy. One could argue that the founders used an existing technology to produce an old product in a new way, as they used location specific technology to have people say where they were when previously people could call one another. Of course, with Foursquare, all of the people in their social network could be notified simultaneously. Students may make other valid arguments here.

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1-23. Identify elements of Selvadurai’s seven formulas that were surprising/different for you. How have you already implemented some of these formulas in your life? How might you use them in the future?.

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking Selvadurai’s Formulas Keep good company

Ways I’ve implemented Surrounded myself with friends who are positive

Make something people want Build around an “atomic action” Seek mentors early

Recognize an opportunity Recognize an opportunity Found my first mentor as an 11-year old through Big Brothers Trusting my instincts regarding which ideas to pursue. Then, doing research. For example, selecting this university.

Assess the risk of traveling to a wartorn area with known information & my best guesses.

Have been a member of my sorority and am always looking for great new members.

Hunch, then data

Balance unknowns with knowns

Always be recruiting

Future opportunities Avoid wasting time with people who are not positive & supportive Start a business that is successful Do something that matters Set & achieve a goal of finding a professional mentor by age 22 Not over-analyzing.

Using the lean startup methodology for my next business.

Know what I can before accepting a job but recognize the presence of unknowns.

Build my future business by keeping my eyes open for talent & actively recruiting.

1-24. Apply Porter’s generic strategies to the industry in which Foursquare Swarm competes, using case information and your own knowledge. Synthesize your analysis. Based on this work, what did you find?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

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AACSB Analytical thinking & written communications

Students may suggest that the strategy is either broad or narrow, although a Focus Strategy (narrow market, low cost) seems to be the best fit from the user definition. From the aspect of customers, a Differentiation Strategy (broad, product uniqueness) appears to fit best. Foursquare appeals to tech savvy individuals with interests in checking-in and reporting about the places they visit. It appeals to multiple types of consumer market companies for advertising and promotion. Depending upon their own knowledge, students may be able to speak to the industry as a whole (however they define it) and map out the users and the customers. A key distinction is to be made between users and customers.

1-25. What prepared the founders to create Foursquare and its specific products?

L.O. 1.1 Summarize what entrepreneurship is and what entrepreneurs do.

AACSB Application of knowledge Both founders had experience in information technology and social networks. They were working for technology companies when they met.

Crowley has degrees in advertising and interactive telecommunications.

Selvadurai has computer science degrees. Crowley had built and sold a company to Google and worked for Google after the sale. Selvadurai had experience at related types of businesses. They had the types of experiences needed to make Foursquare work.

1-26. What gaps in the founders’ team and resources needed to be filled by outside sources? Name four specific resources they acquired.

L.O. 1.4 Understand the costs and benefits of entrepreneurship.

AACSB Analytical thinking While they were well prepared, there were resources needed. These included: 1. Users – a social network only works with active users 2. Creative methods to engage users 3. Venture capital – Four rounds totaling $112.35 million 4. Mentors 5. Qualified and motivated personnel 6. An “atomic action”

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1-27. Identify the features and benefits the founders included in the original Foursquare app to ensure its popularity. Why were these selected?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Application of knowledge & analytical thinking

The founders wanted to create a useful app that users would return to over and over again. Users can check-in at various locations (the app indicates choices nearby) and use this to:  Tell friends where they are  Construct a set of places visited to serve as reminders (with recommendations/reviews)  Create and use recommendations to add value for themselves and others By including incentives into the app, such as badges and discounts, Foursquare created additional benefits for users. Each feature was designed to boost usage and customer satisfaction.

1-28. Is Foursquare Swarm the only app of its kind? If not, what other apps are similar? How do you know this?

L.O. 1.7 Distinguish between ideas and opportunities.

AACSB Analytical thinking & information technology No, Foursquare in not the only app of its kind. It is in the SoLoMo (Social Location Mobility) arena. Depending upon how students define it, they will find a variety of other apps. They may even name Facebook, Instagram and Twitter as competition. Some will suggest Trip Advisor, Yelp and/or Google. Since the introduction of Swarm for check-ins by Foursquare, there may be others. They may have done an online search or may be a user of a competing service.

1-29. What future do you predict for Foursquare Swarm and City Guide?

L.O. 1.9 Explain success signals for entrepreneurs.

AACSB Reflective thinking Students will answer this in any number of ways. Some will have negative views and some positive views. They should address the role of market competitiveness and profitability somewhere in their answer.

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Chapter 2 Pathway to Success: Process and Instruments Chapter 2 Contents Feasibility Analysis: Will My Idea Work? 38 Analyzing Product and/or Service Feasibility 38 Analyzing Market and Industry Feasibility 39 Analyzing Financial Feasibility 41 Using the Lean Startup Methodology 42 Creating a Business Model Canvas 43 What Is a Business Plan? 46 Do You Need a Business Plan? 47 Your Business Plan Is the Key to Raising Capital 48 The Business Plan Is an Operations/Execution Guide 48 Business Plan Components 49 Cover Page and Table of Contents 49 Executive Summary: A Snapshot of Your Business 50 Mission, Vision and Culture: Your Dreams for the Organization 50 Company Description -- Background and Track Record 50 Opportunity Analysis and Research --Testing Ideas 51 Marketing Strategy and Plan: Reaching Customers 52 Management and Operations: Making the Plan Happen 53 Financial Analysis and Projections: Translating Action into Money 54 Funding Request and Exit Strategy: The Ask and the Return 58 Appendices: Making the Case in Greater Detail 59 Business Plan Suggestions 59 Presenting Your Business Plan 60 Business Plan and Venture Competitions 61 Chapter 2 Overview This chapter is an introduction to the concepts of feasibility analysis, lean startup, business models, and business plans. The reasons for creating these documents and the recommended contents and applications are discussed.

Chapter 2 Objectives Learning Objective 2.1: Describe what a feasibility analysis is and choose when to create one.

Learning Objective 2.2: Articulate the Lean Startup methodology.

Learning Objective 2.3: Prepare a Business Model Canvas.

Learning Objective 2.4: Identify primary business plan contents.

Learning Objective 2.5: Summarize the various purposes for a business plan and the audiences for one.

Learning Objective 2.6: Differentiate the components of a business plan.

Learning Objective 2.7: Recognize and demonstrate proper development and formatting of a business plan.

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Chapter 2 Outline I.

II.

III.

IV.

V.

VI.

VII.

Describe what a feasibility analysis is and choose when to create one. The feasibility analysis essentially tests a business concept for viability through: A. product and/or service feasibility, B. market and industry feasibility, and C. financial feasibility.

Articulate the lean start-up methodology.

The lean startup methodology is a hypothesis-driven approach for start-ups to validate business models using: A. Hypotheses often illustrated in a business model canvas B. Minimum viable products C. Pivots, perseverance, and perishing D. Actionable metrics E. Build–measure–learn loops Prepare a Business Model Canvas and make a visual representation of the nine facets: A. Key partners B. Key activities C. Key resources D. Value propositions E. Customer relationships F. Channels G. Customer segments H. Cost structure I. Revenue streams Identify primary business plan contents.

A. the story of what the business is and will be, B. all costs and a marketing plan, C. description of how the business will be financed, and D. an estimate of projected earnings.

Summarize the various purposes of a business plan and the audiences for one.

A. A business plan is used by entrepreneurs to organize their thoughts before starting a business and to determine business viability.

B. It can be used to raise money from investors and lenders. Almost always, bankers and other potential investors will refuse to consider funding an entrepreneur who does not have a business plan.

C. It can help guide the operation of the business.

Differentiate the components of a business plan.

The parts of a business plan include a cover page; table of contents; executive summary; mission, vision, and culture; company description; opportunity analysis; marketing strategy and plan; management and operations; financial analysis and projections; funding request; and exit strategy.

Recognize and demonstrate proper development and formatting of a business plan.

A solid, viable business plan that is sloppy and filled with errors may be rejected on that basis alone. The business plan should be well organized, neatly presented, and written in correct English. .

Chapter 2 Teaching Notes Class Discussion Ideas: 1. Present this problem: The students want to go from your location to Wall Street, in New York. Ask them how they would figure out how to get there. Some may say, use MapQuest (or Google Maps or your car’s GPS system)—particularly if it is within driving distance. Others may suggest getting train, subway, bus or airline schedules (depending on your location). There may be some who recommend driving east, north, or south until reaching New York City, and then finding Wall Street. Discuss how there can be many ways to achieve the same goal. Explore the estimated travel time and cost of each option. Emphasize that different financial costs and time investments can be involved to accomplish the same goal. Next, ask what happens if they simply get into a car and start driving with no particular destination in mind.

Make the connection with the road map to success.

2. The chapter’s opening quote, from Lewis Carroll, is: “If you don’t know where you are going, any road will get you there.” Ask class how this pertains to business. How does it relate to business plans?

3. Ask students to describe what they would want to know about a business before they invested in it? What would determine how much they would invest? (Should help with understanding of contents and rationale.) What would determine whether or not they would invest at all?

4. Suggest that students imagine themselves working at a bank rather than being individual investors. What is the role of the lending officer? (Looking for sales of loans and making profitable loans that are repaid on time.) What would you need to know about a business before approving a loan, or making a positive recommendation to a loan committee?

5. Give students examples of different businesses to show distinctions in what a plan could emphasize. Start with an example such as a student-run T-shirt silkscreenprinting business. Then, progress to a restaurant or retail store. Next, present a hightech venture. Discuss commonalities and differences in what their respective business plans should include and emphasize.

6. Show examples of well-formatted and poorly formatted business plans and ask students for their reactions to each. Explore reasons why style and format matter.

7. Select an excellent business plan presentation and a poor one or develop one of each.

Demonstrate approximately one minute of each. Launch a discussion regarding presentation quality.

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Chapter 2 Lecture Enhancers PPT Lecture Slides Chapter 2 Outside the Classroom: http://www.rmahq.org: Risk Management Associates is an organization that provides comparative financial information for businesses. http://www.entrepreneurship.org: The Kauffman Foundation site provides a broad array of resources and information for entrepreneurs, as well as significant financial resources to support entrepreneurship education.

The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything, by Guy Kawasaki (Portfolio, 2004).

Business Model Generation: A Handbook for Visionaries, Game Changers, Challengers, by Alexander Osterwalder and Yves Pigneur (John Wiley & Sons, 2010).

The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, by Eric Reis (Crown Business, 2011).

The Startup Owner’s Manual: The Step-by-Step Guide to Building a Great Company, by Steve Blank and Bob Dorf (K & S Ranch, 2012).

Start Your Own Business, by Rieva Lesonsky (Entrepreneur Press, 4e, 2007).

Chapter 2 Key Terms Actionable metrics 42 advertising 52 asset 56 balance sheet 56 breakeven point 57 business model 43 Business Model Canvas 43 business plan 46 cash flow statement 56 competitive analysis 52 culture 50 direct marketing 52 elevator pitch 60 environmental analysis 51 feasibility analysis 38 income statement 56 industry analysis 51 initial public offering (IPO) 59 Lean Startup 42 .

liability 56 marketing mix 52 marketing plan 52 minimum viable product 43 mission 50 mission statement 50 net worth 56 owner’s equity 56 profit and loss statement (P&L) 56 proof of market 51 public relations 52 publicity 52 target market 52 vision 50 Chapter 2 Class Activity Ideas and Group Exercises 1. Pick a familiar product or service, such as computers or fast food, and list several companies for that product or service category—for example, Apple, IBM, Dell, and Asus; or Sonic, McDonald’s, Wendy’s, KFC, and Burger King. Break students into small groups and assign one company to each. Have each group create a list of key competitors, including direct and indirect competition, and what makes the company unique. Have them summarize this on a poster board and present it. Then, discuss how each company might incorporate the information into their business plan.

2. Form several teams to create fictitious companies in different fields. Ask them to answer the following about their company (when they have answered the questions, explain that they have essentially created an Executive Summary for a business plan): a. Name b. Type of business (manufacturing, retail, wholesale, or service) c. Location (city and state at a minimum) d. Key product or service e. Who will buy/use the product or service? f. What makes the company different from its competition? g. Why is this a good opportunity? h. How will customers know about the product and be induced to buy it? i. Who will manage the company? What are their qualifications? j. How long will it take before the company is profitable? k. How much will it cost to start the company? l. Where will the start-up funds come from? If they are borrowed or invested, how will investors or lenders be paid back or realize gains? m. How will the owners exit from the company?

3. Divide the students into pairs. Distribute examples of excellent and poor executive summaries from business plans to each pair. Ask the students to identify the differences in the summaries and comment on them to the class. Depending upon class size, the number of plans may range from 2 to 6. .

4. How does voice inflection affect how an elevator pitch is received? Have the students do some research on psychological studies of voice inflection. What things can you do to be more convincing?

5. Give students a simple business plan or one from the text and have them write elevator pitches to present in front of the class.

Chapter 2 Critical Thinking Exercises 2-1. Shawn is creating a business that provides advertising on public restroom stall doors. He is funding the project from his personal savings of $5,000 and does not expect to use any outside financing. Should he utilize the Lean Startup process?

Create Business Model Canvases? Develop a business plan? Why or why not?

L.O. 2.5 Summarize the various purposes for a business plan and the audiences for one.

AACSB Application of knowledge Shawn should first put his hypotheses into the Business Model Canvas format and use the Lean Startup process to complete customer discovery and test the viability of the concept. Once he has found a sustainable, profitable model, he should develop a business plan for funding and to guide his operations. He may find that he needs outside funding or that what he had in mind is not practical.

2-2. Charity and Devon are planning to license technology from NASA that would make it impossible to accidentally lock a child in a car. The technology is complex, and the market analysis and financial assumptions take up a lot of pages. The two women have written a 63-page business plan. Explain your concerns about the plan considering the chapter text.

L.O. 2.7 Recognize and demonstrate proper development and formatting of a business plan.

AACSB Application of knowledge & Analytical thinking The plan is just too long. Investors and lenders will not want to sift through that much information. Charity and Devon need to revise the plan to make it more concise. They need to explain the complex technology in terms that non-technical people can understand, but not so simplistically that technical reviewers are put off.

2-3. What factors make the difference between a good business plan and an excellent one?

L.O. 2.4 Identify the primary business plan contents. .

AACSB Analytical thinking A good plan contains all the required information but may not be interesting or engaging. It may look functional but not attractive. Or, it may be too elaborate. An excellent plan includes all the requisite information, is visually appealing, is clear and concise, and draws the reader into the concept. An excellent business plan “sells” the business.

2-4. Visit an Internet shopping site such as the Home Shopping Network (http://www.HSN.com) or QVC (http://www.QVC.com). Select five products for sale that you find interesting or unusual. Make a list of the products and your explanation of the market opportunities they reflect.

L.O. 2.4 Identify the primary business plan contents.

AACSB Information technology and analytical thinking Answers will vary.

2-5. Explain how this statement applies to business plans: Errors of omission can sometimes be greater than errors of commission.

L.O. 2.7 Recognize and demonstrate proper development and formatting of a business plan.

AACSB Reflective thinking and ethical understanding and reasoning Leaving out parts of a business plan is worse than putting in too much information. For example, an investor or lender cannot evaluate a plan without a complete set of financial statements and may reject the entire concept due to a lack of a cash flow statement, or other crucial item. Also, there are ethical implications of excluding information that may represent a substantial, known or expected, risk for the business.

Chapter 2 Key Concept Questions: 2-6. Explain why a prospective business founder might want to create a feasibility study or Business Model Canvas before developing a complete business plan.

L.O. 2.1 Describe what a feasibility analysis is and choose when to create one.

AACSB Reflective thinking A prospective business owner can save time and money by discovering early in the process that an idea or strategy is not viable and that a pivot is in order. He or she can avoid prolonged product development efforts that are based upon “hunches” or hypotheses by testing the hypotheses and creating products and services that are more viable.

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2-7. How can investing time in the Lean Startup process save an entrepreneur time and money in the short and long term?

L.O. 2.2 Articulate the Lean Startup methodology.

AACSB Reflective thinking Answers should include: a. Potential loss of investment and personal assets may be avoided by determining viability up front. b. The process of lean startup involves answering many questions about business strategy, tactics, and operations before “opening the doors.”

This can save both time and money. c. Preparation in general is a time saver because of the focus it brings.

2-8. What are the parts of a Business Model Canvas? How can the entire canvas assist an entrepreneur?

L.O. 2.3 Prepare a Business Model Canvas.

AACSB Reflective thinking The components of a Business Model Canvas are: A. Key partners B. Key activities C. Key resources D. Value propositions E. Customer relationships F. Channels G. Customer segments H. Cost structure I. Revenue streams It provides a visual representation of the business model that clarifies the organizations thinking and compels customer inquiry and development. It can assist in shortening the time to market and make the development process more efficient.

2-9. Explain why the executive summary is the most important section of any business plan.

L.O. 2.6 Differentiate the components of a business plan.

AACSB Application of knowledge The executive summary is the most important section because it usually is the first part of the plan that an investor or lender will read. It needs to capture their attention and entice them to read more, or they will go no further.

2-10. One mistake entrepreneurs make in their business plans is that of only including an .

income statement. What other financial statements should be incorporated and why?

L.O. 2.6 Differentiate the components of a business plan.

AACSB Application of knowledge The balance sheet and cash flow statements should also be included.

Although not strictly financial statements, the financial ratios should also appear. The balance sheet shows what the business owns and owes, as well as its liquidity and debt structure. The cash flow statement shows the inflows and outflows of cash from the business. Both documents help readers understand the whole picture of company finances. For example, a business can be profitable but temporarily in a poor cash flow situation.

2-11. Print an assignment or any body of text, with 1-inch margins, double-spaced, using 12-point Times New Roman font. Then, print the same document with 0.8-inch margins, single-spaced, using a 10-point Arial typeface. Which is easier to read?

Why? How would this relate to a business plan?

L.O. 2.7 Recognize and demonstrate proper development and formatting of a business plan.

AACSB Application of knowledge The former is easier to read than the latter. The document has space around the text and the font size is more legible. The same is true for business plans.

2-12. Name three categories of investors/lenders that might have an interest in your business plan.

L.O. 2.5 Summarize the various purposes for a business plan and the audiences for one.

AACSB Analytical thinking Answers will vary depending upon the business interests of the student. They typically include bankers, venture capitalists, angel investors, friends, family, and crowd funders.

2-13. Why is it important to identify a business’s culture from the beginning?

L.O. 2.6 Differentiate the components of a business plan.

AACSB Reflective thinking Identifying an organization’s culture from the beginning is important because it impacts all aspects of the business going forward, from hiring to product development to customer service.

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Chapter 2 Application Exercises 2-14. Prepare a Business Model Canvas for Honest Tea based on the business plan included at the end of this chapter.

L.O. 2.3 Prepare a Business Model Canvas.

AACSB Application of Knowledge Key Partners Tea growers (access to markets) Retail stores (new, novel products)

Key Activities Bottling Marketing

Key Resources Production capacity Marketing expertise Funding for startup - $1.1 million Cost Structure Bottling by outside vendor Tea and sweetener

Value Propositions Less sweet tea Organic product Quenching thirst without the calories Performance

Customer Customer Relationships Segments Consumers build Niche relationships markets through blogs Athletes and Health correspondence conscious Retailers have consumers direct contact Consumers with sales force of organic Channels foods Retail health food stores Independent sales representatives (Really not addressed well in plan) Revenue Streams Paying for a less sweet alternative to energy drinks and/or a more flavorful alternative to water Revenue type: sale of product (bottled iced tea)

2-15. Call or visit an entrepreneur in your community to discuss business plans. a. Ask whether he or she wrote a business plan before starting the business. Since then? b. If the owner did write a plan, for what has it been used? c. If the owner did not write a plan, why not? d. Did the owner have any assistance in writing or reviewing the plan? e. If so, what was the source of assistance?

L.O. 2.5 Summarize the various purposes for a business plan and the audiences for one.

AACSB Application of knowledge .

The answers will vary but should respond to each part of the exercise.

Chapter 2 Exploring Online 2-16. Find and provide the URL for a business plan on the Internet. Examine it to see whether it follows the guidelines provided in this text. Use a highlighter to mark the sections of the plan that are present. Then, make a list of missing or incomplete sections. Indicate how it does/does not follow the “rules” for formatting and content. Is the plan viable? Why or why not? Would you invest in it? Why or why not?

L.O. 2.6 Differentiate the components of a business plan AACSB Application of knowledge and reflective thinking The student should cite the URL and include a business plan from the Internet that has each part of the plan highlighted. Often, there are missing, or incomplete sections and the students should list them. Then, there should be formatting and content comments/critiques. The student should evaluate viability and the rationale for the answer. He/she should do the same with the question of whether or not to invest.

2-17. Find a Business Model Canvas example online (can be a video). Compare its hypotheses to the types identified in the Business Model Canvas section of the chapter. What has been added? What is missing?

L.O. 2.3 Prepare a Business Model Canvas AACSB Application of knowledge and reflective thinking Students will find a variety of BMCs on the web. Some will be full of description and information, while others will have barely any hypotheses.

Clearly, the specifics will vary. Some students may find mission model or lean canvases as well.

Chapter 2 In Your Opinion 2-18. If an entrepreneur presents a business plan that an investor believes is deliberately vague and has provided inflated financial statements, what should that investor do?

L.O. 2.7 Recognize and demonstrate proper development and formatting of a business plan.

AACSB Ethical understanding and reasoning.

Recommendations will vary but should note the importance of clarity and realistic projections. One answer will probably be that the investor should decline the opportunity. Another may be to probe for better, more realistic information. .

2-19. What, if any, value do you see in the hypothesis-driven approach of the lean startup, with its iterative processes? How does this compare to the value in the traditional linear process of creating a business plan? How do they conflict, if at all? How do they complement one another?

L.O. 2.2 Articulate the Lean Startup methodology.

AACSB Analytical thinking Students may see that the lean startup lends itself to opportunities to fail early and often but minimize the risk of fully scaling without a good model.

It may lead to a higher business success rate. They may comment on the intuitive nature of generating hypotheses and the scientific process of testing the hypotheses. The lean startup process is more iterative or even circular than the linear business plan development process. While a business plan may be of value for financing or operations, it does not explore the customer discovery and validation of lean startup. They don’t conflict as much as they take different perspectives. They complement one another because the resources for one support the other.

Suggested Answers for Chapter 2 Case Studies Short Case Study Analysis: Frankie’s Challenge: Customer Discovery 2-20. What specific steps of customer discovery are described above? What, if anything, is missing?

L.O. 2.2 Articulate the Lean Startup methodology.

AACSB Application of knowledge Frankie conducted several steps of customer discovery including: observation of problems for specific target customers, identification of value propositions, brainstorming, hypothesis generation, creation of evolving Business Model Canvases, pivots, and customer interviews. Business interviews are missing.

2-21. How might Frankie improve her chances of success? Identify a minimum of five ways.

L.O. 2.2 Articulate the Lean Startup methodology.

AACSB Analytical thinking Frankie could improve her chances of success by incorporating more entities into the process and increasing her understanding of the entire pictures.

Some specifics include: .

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Complete customer interviews with independent funeral homes

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Create and test an MVP

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Partner with a website developer

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Worth with an industry association

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Plan to attend a professional association meeting and/or tradeshow

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Understand the competition better

2-22. What customer segments and value propositions would you suggest apply for this business? How would you test them?

L.O. 2.2 Articulate the Lean Startup methodology.

AACSB Analytical thinking Customer Segment

Value Propositions

Tests

Consumers – immediate need

Convenience, comfort, easeof-use, speed

Provide partial online options to current customers. Interview prior customers.

Consumers – pre-planning

Convenience, comfort, easeof-use, privacy

Use wireframe MVP to gather emails and contact.

Provide partial online options for inquiries at present locations. Interview new customers.

Independent funeral homes

Cost savings, efficiency

Conduct customer discovery interviews with specific pass/fail criteria.

Honest Tea Business Plan The Honest Tea Business Plan is included in Chapter 2 to illustrate what a real company did as an early plan. This can be discussed in class or given as an assignment. The “Exploring Online” questions from the chapter are a good starting point.

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Chapter 3 Creating Business from Opportunity Chapter 3 Contents What Defines a Business? 99 Use Effectual Reasoning to Your Advantage 100 What Sort of Organization Do You Want? 101 Your Company’s Core Values 101 Your Company’s Mission Is to Satisfy Customers 102 Your Company’s Vision Is the Broader Perspective 102 Your Company’s Culture Defines the Work Environment 102 The Decision Process 103 Your Competitive Advantage 105 Find Your Competitive Advantage by Determining What Consumers Need and Want 105 You Have Unique Knowledge of Your Market 106 Factors of Competitive Advantage 106 Is Your Competitive Advantage Strong Enough? 107 Checking Out the Competition 108 Example: The Most Chocolate Cake Company 108 Competitive Strategy: Business Definition and Competitive Advantage 111 Feasibility Revisited: The Economics of One Unit as a Litmus Test 112 Defining the Unit of Sale 113 Cost of Goods Sold and Gross Profit 113 Your Business and the Economics of One Unit 114 The Cost of Direct Labor in the EOU 115 Hiring Others to Make the Unit of Sale 116 Going for Volume 117 Determining the Value of a Business 118 Asset Valuation Method 118 Earnings Valuation Method 119 Cash Flow Valuation Method 119 Chapter 3 Overview This chapter teaches the students to start thinking like entrepreneurs. Although some business opportunities come from unique inventions or discoveries, many business opportunities are available just by noticing that some existing product or service can be greatly improved. This improvement creates a business opportunity. The chapter then helps the students learn how to begin determining if the opportunity is viable.

Chapter 3 Objectives Learning Objective 3.1: Define your business.

Learning Objective 3.2: Distinguish between entrepreneurial and managerial thinking.

Learning Objective 3.3: Articulate your core beliefs, mission, and vision.

Learning Objective 3.4: Decide how to approach business opportunities.

Learning Objective 3.5: Analyze your competitive advantage.

Learning Objective 3.6: Prepare viability tests using the economics of one unit.

Learning Objective 3.7: Calculate the value of a business. © Copyright 2020 Pearson Education, Inc.

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Chapter 3 Outline 1. Define your business. 

Identify the three basic types of “product” businesses.

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Manufacturing is the making of a tangible product.

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Wholesale is the buying in quantity from a manufacturer and selling to a retailer.

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Retail is selling to individual consumers.

2. Distinguish between managerial and entrepreneurial thinking 

Effectual logic

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Bird-in-hand principle

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Crazy quilt principle

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Lemonade principle

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Pilot-in-the-plane principle

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Affordable loss principle

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Causal logic

3. Articulate your core beliefs, your mission, and your vision. 

Core values include the fundamental ethical and moral philosophy and beliefs that form the foundation of the organization and provide broad guidance for all decision making.

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Mission statement are concise communications of purpose, business definition, and values.

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Vision statements are broader and more comprehensive than missions, painting a picture of the overall view of the desired future

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Culture is the core value in action.

4. Decide how to approach business opportunities. 

Brainstorm problems and potential wants and solutions

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Identify “hot” markets and trends

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Start with a business idea

5. Analyze your competitive advantage. 

Your competitive advantage is whatever you can do better than the competition that will attract customers to your business.

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Find your competitive advantage by analyzing what consumers in your market need.

6. Prepare viability tests by calculating the economics of one unit of sale. 

The EOU is the basis of business profit.

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Entrepreneurs use profits to pay themselves, expand the business, and start or invest in new businesses.

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The entrepreneur chooses how the unit is defined:

© Copyright 2020 Pearson Education, Inc.

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One item (unit) or One hour of service time (if the business is a service business)



For businesses that sell differently priced items, the average sale per customer, or total sales divided by the number of customers: Total Sales/Number of Customers  Average Unit of Sale



Entrepreneurs analyze the cost of goods or services sold (COGS or COSS) of a unit.



Once you know your cost of goods sold, you can calculate gross profit. Subtract total COGS from your total revenue to get your gross profit.

Revenue – COGS  Gross Profit

7. Calculate the value of a business. 

Use asset, earning, and/or cash flow valuation methodologies to arrive at a range of potential prices.



Consider the spectrum of nonfinancial factors in the price.



Arrive at an offer and maximum price before entering the negotiations.

Chapter 3 Teaching Notes Class Discussion Ideas: 1.

Present the following problem. Name two companies you can think of that fit each of the following business types: manufacturing, wholesale, retail, service. For which business type was it easiest and hardest to think of, respectively?

2.

Introduce the idea of competitive advantage. Pick a product category that students are familiar with (such as hamburgers), and list several companies (such as McDonald’s, Burger King, Wendy’s, a local burger restaurant that is not part of a chain) and itemize the strengths and weaknesses of each. Encourage students to think along several lines: food quality and variety, price, store atmosphere, service, etc. Ask them to summarize: What is each company’s competitive advantage in relation to the others? Repeat with different product categories and different types of businesses (manufacturing, retail, service) until they understand the concept and how it applies in different business scenarios.

3.

A simple way to show your competitive advantage is through your name. Ask: What should a business name do? What makes a good business name? What makes a bad business name? Why? (Answers will probably relate to the name as the identity of the business; how the name should clearly describe what the company does and, preferably, its benefits or its target customers; it should not use the entrepreneur’s family name or be hard to understand or pronounce, and it should not be a joke that might be misinterpreted.)

Have students think of or come up with examples of good and bad business names (such as Staples or Dunkin Donuts for good, and Smith’s High-Carb Buns for bad).

4.

Give examples from different businesses to figure units of sale. Start with easier product examples, such as a pizza parlor (one pizza), computer store (one computer), or Starbucks (one cup of coffee). Discuss how services usually have a unit of sale based on time—“per hour”—and give examples (accountant, lawyer, writer). Even in service businesses that have standard rates—for example, a haircut for $20—the unit of sale is still usually based on time, because the barber/hairdresser has learned he/she can do one haircut every half

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hour. Then move to more complicated examples, to businesses that sell differently priced items, such as a discount store or restaurant. Show the average-unit-of-sale equation and give examples. Close by explaining that the unit of sale is important to know so that you can control costs and make a profit.

5.

Ask students to discuss the advantages of becoming a business leader (and not having one’s own labor included in the cost of a product or service), as discussed in the text.

6.

Ask students to consider which would be the best deal: having a job at $20 an hour, having an independent contract that provides services with a gross profit of $20 per hour, or opening one’s own business that won’t make any money for a month but then has the potential to make $10 gross profit per sale with expected growth projections of 4 percent per year. What makes the selected option appealing to the student?

7.

Introduce gross profit per unit. Discuss how the sale price (what a customer pays for one unit) is not the amount of money the entrepreneur actually makes. Businesses incur costs in the purchase of raw materials and in the process of “adding value.” These costs must be subtracted to determine what’s left over for the entrepreneur to use elsewhere. This leftover amount is gross profit.

8.

Ask students to speculate why knowing the economics of one unit is so important to an entrepreneur. (Answers should include how this information provides a snapshot of the whole business—whether it is profitable or not. If one unit is profitable, the business as a whole can be profitable; however, if one unit isn’t profitable, it doesn’t matter how many units the business sells, it won’t be profitable. Knowing the economics of one unit also helps the entrepreneur determine what he/she can hire other people to do—the entrepreneur should try to not be part of the labor in the economics of one unit.)

Chapter 3 Lecture Enhancers PPT Lecture Slides for Chapter 3 Outside the Classroom: www.mbda.gov: The Minority Business Development Agency (MBDA) is a federal agency that fosters the establishment and growth of minority-owned businesses. MBDA provides funding for a network of Minority Business Development Centers (MBDCs), Native American Business Development Centers (NABDCs), and Business Resource Centers (BRCs). The Centers provide minority entrepreneurs with one-on-one assistance in writing business plans, marketing, management and technical assistance, and financial planning to support viable start-up business ventures. www.score.org: The Service Core of Retired Executives (SCORE) is a group of retired businesspeople who volunteer as counselors and mentors to entrepreneurs. www.nawbo.org: The National Association of Women Business Owners helps female entrepreneurs network. You can join a chapter of female entrepreneurs in your area.

Inc. Magazine Subscriptions: http://www.inc.com

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Chapter 3 Key Terms asset valuation 118 barriers to entry 107 cash flow valuation 119 causal logic 100 competitive strategy 111 core values 101 cost of goods sold (COGS) 113 cost of services sold (COSS) 113 currency 118 direct labor 114 earnings valuation 119 economics of one unit of sale (EOU) 113 effectual logic 100 foreign exchange (FX) rate 118 gross profit 113 strategy 111 tactics 111 unique selling proposition (USP) 108 unit of sale 113 Chapter 3 Class Activity Ideas and Group Exercises 1. Focus on mission-statement analysis. Using the Internet, have students collect several samples of mission statements from the Web sites of national or local companies. If possible, they should collect at least three from companies in the same product category (e.g., McDonald’s, Burger King, Wendy’s; or Wal-Mart, Target, Costco; or Starbucks, Dunkin Donuts, and a local cafe). Using the questions and criteria presented in the textbook, have students in small groups determine the business definitions and competitive advantages from the mission statements, and evaluate the mission statements in terms of their ability to clearly communicate.

2. Ask students in pairs or groups to brainstorm “exit strategies” for taking themselves out of the economics of one unit for their businesses. You may have to give them an example to start: a service provider such as a fashion designer may have to train someone else in her technique; a manufacturer may have to provide equipment/tools for someone else. Have a few students share their ideas. Summarize how this process leads to overall economic growth for the community and the nation by providing jobs for other people.

3. Provide an Internet idea search. Split students into teams. Instruct each to use Internet search engines to look for ideas related to one of the following: problems, new laws, trends, inventions, technological advances, new knowledge. Instruct each team to pick one of the ideas and brainstorm ways to turn it into a business opportunity. Have each team create a poster or slide presentation to share its creation with the class.

4. Discuss company core beliefs. Explain that individuals are not the only ones who live by core beliefs, mottos, or inspiring statements; businesses do, too. Often these core beliefs are found in corporate mission statements. Have students research online for mission statements from well-known companies, such as Disney or General Motors. Also, they might ask local business owners if they have mission statements or search the Internet for © Copyright 2020 Pearson Education, Inc.

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mission statements of those same companies. Based on the statements they find, discuss with class what these companies’ core beliefs are.

5. Have students identify problems in everyday life or inconvenient issues or products that are not optimal. All these offer opportunities for improvement. Have the students recommend new solutions and/or businesses to compensate for these inadequacies.

Chapter 3 Suggested Answers for Critical Thinking Exercises 3-1. Use the following charts to define a business you would like to start and analyze your competitive advantage. Sample answer below.

L.O. 3.1 Define your business.

AACSB Analytical thinking Business Definition Question

Response

The Offer: What products and services will be sold by the business?

I will offer DJ services specializing in R&B and Motown-era music.

Target Market: Which customer segment will the business focus on?

Production Capability: How will that offer be produced and delivered to those customers?

I will target customers ages 50–75 who live in Atlanta, Georgia.

My DJ services will be delivered directly by me using albums, CDs, and audio equipment.

Competitive Advantage Question

Competitive Difference (USP)

The Offer: What will be better and different about the products and services that will be sold?

I can offer customers a wide variety of recordings including a large selection of rare recordings. I will also provide my own high-end equipment.

I will focus on older customers who were fans of R&B and Motown soul music during the 1950s and 1960s.

Target Market: Which segments of consumers should be the focus of the business to make it as successful as possible?

Production and Delivery Capability: What will be better or different about the way the offer is produced and delivered to those customers?

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My DJ equipment is state of the art.

Customers can request that I play particular artists. I can customize my lineup of songs to suit my customers’ preferences.

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Wt.

Your Company

Competitor #1

Competitor #2

Competitor #3

Rating

Rating

Rating

Rating

Wtd. Rating

Wtd. Rating

Wtd. Rating

Wtd. Rating

Quality

0.30

5

1.50

4

1.20

5

1.50

2

0.60

Price

0.10

3

0.30

3

0.30

1

0.10

5

0.50

Location

0.05

5

0.25

3

0.15

2

0.10

2

0.10

Selection

0.10

4

0.40

4

0.40

2

0.20

1

0.10

Service

0.25

4

1.00

3

0.75

5

1.25

1

0.25

Speed or Turnaround

0.05

2

0.10

2

0.10

3

0.15

1

0.05

Specialization

0.10

5

0.50

4

0.40

3

0.30

3

0.30

Personalization 0.05

5

0.25

4

0.20

4

0.20

1

0.05

4.30

xxxxx

3.50

xxxxx

3.80

xxxxx

1.95

Total

1.00 xxxxx

3-2. Are there customers for your business in other countries? How would you plan to reach them?

L.O. 3.1 Define your business.

AACSB Application of knowledge and analytical thinking Again, answers will vary. Most students will say that there aren’t but may need prompting to think again about opportunities. If they say there are customers in other countries, they often site social media, local retail stores, or sales forces.

3-3. Describe any international competitors you have found who may be able to access the same customers. How would you compete?

L.O. 3.5 Analyze your competitive advantage.

AACSB Information technology and analytical thinking The answer should convey that they have searched the Internet for other companies worldwide and could look at direct and indirect competitors.

Answers should include a couple of clearly identified competitive advantages or methods, including quality, price, location, selection, service, and speed/turnaround.

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3-4. Describe three core values you will use to run your own company.

L.O. 3.3 Articulate your core beliefs, mission, and vision.

AACSB Reflective thinking Answers will vary but should include identification of fundamental ethical and moral philosophy and beliefs.

3-5. What are three of the concepts that a mission statement should contain and why?

L.O. 3.3 Articulate your core beliefs, mission, and vision.

AACSB Application of knowledge Target customers Products and services Markets served Use of technology Importance of public issues Importance of employees Focus on survival, profitability, and growth Reasons should include shared values, communication and goals.

3-6. Write a mission statement for your planned or envisioned business.

L.O. 3.3 Articulate your core beliefs, mission, and vision.

AACSB Application of knowledge Answers to include the above topics and be 21 – 40 words in length. Students frequently write very long and complicated answers to this.

Chapter 3 Key Concept Questions 3-7. Gross profit is the profit of a business before which other costs are subtracted?

L.O. 3.6 Prepare viability tests using the economics of one unit.

AACSB Application of knowledge Gross profit is a business’s profit before fixed operating costs are subtracted.

What is the average unit of sale for the following businesses (3-8, 3-9)?

L.O. 3.6 Prepare viability tests using the economics of one unit.

AACSB Application of knowledge 3-8. A restaurant that serves $2,100 in meals per day to 115 customers per day. $18.26 © Copyright 2020 Pearson Education, Inc.

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3-9. A record store that sells $1,500 worth of CDs per day to 75 customers per day. $20.00 3-10. Sue, of Sue’s Sandwiches, sells sandwiches and sodas from a sidewalk cart in a popular park near her house. She sets up her cart in the summers to earn money for college tuition. Last month she sold $1,240 worth of product (sandwiches and sodas) to 100 customers. She spent $210 on the sandwich ingredients and buying the sodas wholesale. Her unit is one sandwich ($4) plus one soda ($1). Define the unit of sale and calculate the economics of one unit for Sue’s Sandwiches.

L.O. 3.6 Prepare viability tests using the economics of one unit.

AACSB Analytical thinking Economics of One Unit—Sue’s Sandwich Shoppe Selling Price per Unit

$5.00 ($4 + $1)

Cost of Goods Sold: $2.10 ($210/100) Other Variable Costs: $0 Cost of Goods Sold per Unit

$2.10 ($2.10 + $0)

Gross Profit per Unit

$2.90 ($5 - $2.10)

3-11. When Steve Wozniak and Steve Jobs envisioned a computer in every home, computers were large, expensive machines owned only by the government, universities, and large companies. What technology currently available today to only a few people can you envision meeting a need for many consumers in the future?

L.O. 3.4 Decide how to approach business opportunities.

AACSB Reflective thinking Answers will vary. Example: Today only a few people have access to drones. I think this technology will become less expensive and more widely available.

3-12. Is there a service presently available to only a few consumers, or one that is not available yet? Write about a service that you can imagine eventually becoming very popular and the need(s) it will meet.

L.O. 3.1 Define your business.

AACSB Reflective thinking Answers will vary. Example: Space travel, which is currently only available to governments, will become available to consumers looking for adventurous and educational vacations. © Copyright 2020 Pearson Education, Inc.

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3-13. If the FX rate between the U.S. dollar and the Japanese yen is 1:119, how many yen will it take to equal $20?

L.O. 3.5 Analyze your competitive advantage.

AACSB Application of knowledge 20 x 119 = 2,380 yen 3-14. If the FX rate between the Japanese yen and the euro is 189.35:1, how many yen will equal 10 euros?

L.O. 3.5 Analyze your competitive advantage.

AACSB Application of knowledge 189.35 x 10 = 1,893.50 yen 3-15. Explain three ways businesses can be valued.

L.O. 3.7 Calculate the value of a business.

AACSB Application of knowledge Businesses can be valued in numerous ways. The three primary methods are through the valuation of assets, earnings or cash flow. Within asset valuation there are four common standards: book value, adjusted book value, liquidation value, and replacement value. The earnings valuations method considers a few types of earning flows: historical, future ones under current ownership, and future ones under new ownership. The cash flow valuation method uses projected future cash flows discounted back to the present value.

Chapter 3 Application Exercises 3-16. You own a small record label. You sell CDs through your Web site for $15, including shipping and handling. You get an offer from someone who owns a record store in Germany who wants to buy your CDs at $10 each and sell them for €30. He says his profit from each sale would be €12 and he will split it with you. Assuming the exchange rate between the dollar and the euro is $1 = €2.

L.O. 3.6 Prepare viability tests using the economics of one unit.

AACSB Analytical thinking and application of knowledge a. How much profit would you get from the sale of each CD in the German store? €6

(€12/2)

b. How much is that profit in dollars? $3

(€6/2)

c. Is this a good business opportunity for you? Why or why not?

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Not financially: I could make more money selling the CDs myself for $15. By selling them to the German storeowner, I earn $10 + $3 = $13. I lose $2 per CD by selling to him. Also, I may have to pay shipping costs to send the CDs overseas, depending upon our negotiations. d. If the FX rate between the dollar and the euro falls to $1 = €1, will this still be a good business idea for you? Why or why not?

Yes, if the FX rate falls to 1:1, my profit for each CD sold in Germany would be €6, or $6. I would make $16 per CD which is more than I currently make.

Chapter 3 Exploring Online 3-17. Use the Internet to research suppliers for a business you would like to start or can envision. Describe the business and list the URL, e-mail, phone and fax, and street address for five suppliers you located via the Internet.

L.O. 3.1 Define your business.

AACSB Information technology and application of knowledge Answers will vary. Students should provide complete information for a minimum of 5 vendors.

Information Name URL Email Phone Fax Address Notes

Supplier I

Supplier II

Supplier III

Supplier IV

Supplier V

3-18. Search online for the story of an entrepreneur and the founding and growth of his or her company. Compare the thinking and steps described to the entrepreneurial thinking articulated in this chapter. Which of the principles of effectuation did the founder demonstrate? Provide specific examples of each and cite your sources.

L.O. 3.2. Distinguish between entrepreneurial and managerial thinking AACSB Information technology and analytical thinking Answers will vary, but students should be able to find and cite an appropriate article, list at least several steps and principles, such as birdin-hand, pilot in the plane, lemonade, affordable loss, and crazy quality.

For each principle, they should identify at least one example.

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Chapter 3 Case Studies Case Study 1: Happy Belly Curbside Kitchen—Finding Opportunity in Healthy Food 3-19. How did Terry and Dawn Hall identify the market for Happy Belly Curbside Kitchen?

What process did they follow to analyze opportunities?

L.O. 3.2 Distinguish between entrepreneurial and managerial thinking.

AACSB Application of knowledge They recognized some trends as they traveled and from there they used their knowledge and skills to create Happy Belly. They applied the birdin-hand, crazy quilt and pilot in the plan principles.

3-20. What knowledge, skills, and abilities did the Halls have before starting their company?

L.O. 3.1 Define your business.

AACSB Analytical thinking They had 30 years of experience in the hospitality business and grew up in households with parents that were small business owners. They had hospitality education and restaurant experience. They also were able to find and secure financial resources and market successfully in a highly competitive market place.

3-21.Why might Shape magazine have named Happy Belly Curbside Kitchen as one of the 10 Healthiest Food Trucks in America? How would they be healthier than most food trucks?

L.O. 3.5 Analyze your competitive advantage.

AACSB Analytical thinking They are focused on providing fresh, local, healthy foods when many food trucks are not. Including the Big Green Egg allows them to grill and produce even healthier foods than usual.

3-22. How was this business tied to a social mission? What did the owners do to demonstrate their commitment?

L.O. 3.3 Articulate your core beliefs, mission, and vision.

AACSB Reflective thinking The mission of supporting the community through healthy eating was critical to the Halls. They partnered with a local farmer for their “farm to street” business and donated a percent of profits to the local Boys and Girls Club.

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3-23. Identify four critical resources for Happy Belly and how the owners secured them.

L.O. 3.1 Define your business.

AACSB Application of knowledge Financial – Access to Capital for Entrepreneurs (ACE) through the Create Jobs for USA funds 2. Human capital – their own experience and education 3. Marketing/Collaboration – corporate sponsor is the Big Green Egg 4. Facilities – commercial kitchen and curbside kitchen 1.

Case Study 2: Traci Lynn Jewelry: Sparkling Opportunities 3-24. Explain how Traci Lynn Burton and her team incorporate the Four Ps into a creative, effective, integrated marketing effort.

L.O. 3.1 Define your business.

AACSB Reflective thinking They deliberately, and thoughtfully address each factor to create their marketing.

For example: 1. Products– Jewelry, accessories, and handbags.

2. Pricing – Affordable for their target market. Prices between $16 and $125 for jewelry and $89 and $169 for handbags.

3. Place – While they are in Florida, the home-base is irrelevant to much of what they do. Their direct selling consultants are the face of the organization in individual communities. Dr. Burton travels to address the salesforce. The use of catalogs and online sales means that sales happen wherever the customers are.

4. Promotion – TLJ cross promotes for each of it products and uses social media to further enhance its visibility. The direct sales consultants are the key to oneon-one promotion.

3-25. What product mix has Traci Lynn Jewelry developed?

L.O. 3.1 Define your business.

AACSB Application of knowledge Traci Lynn has developed a mix of jewelry products including rings, earrings, watches, necklaces and the like with handbags and travel bags, all with a distinctive style. These products line will combine with any others they add.

3-26. How are its products delivered (through what channels)?

L.O. 3.5 Analyze your competitive advantage AACSB Application of knowledge

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Their products are delivered through the direct sales channel, specifically via the party plan. While customers can shop for TLJ products online and may acquire catalogs, the purchases are made through direct selling consultants, a competitive advantage to TLJ. 3-27. How are opportunities identified/recognized and assessed at Traci Lynn Jewelry? By Dr. Traci Lynn?

L.O. 3.4 Decide how to approach business opportunities AACSB Analytical thinking Initially, Traci Lynn selected jewelry as an opportunity when she was marketing clothing and recognized the many sizes and designs of clothing created inventory challenges that she could not handle. Jewelry is mostly “one-size-fits-all” and has less seasonality, so it was better suited to her needs. She also wanted to find a business that would serve women like her…”fashionistas that are still somewhat frugal.”

TLJ looks at trends for its target customers with an emphasis on products that appeal to its direct selling consultants. New products are introduced two times a year. There is a three-person design team.

3-28. What was the role of effectuation and each of its key principles (bird-in-hand, crazy quilt, lemonade, affordable loss, pilot-in-the-plane)? Be specific and provide examples.

L.O. 3.2 Distinguish between entrepreneurial and managerial thinking.

AACSB Reflective thinking Principle Bird-in-hand

Examples Use of her resources to purchase $200 of fashion jewelry at whole, put it in a container and sell it at church. She used her limited resources to buy products and sold them to a familiar people.

Traci Lynn started with what she knew (fashion), who she knew (friends, family, church members), and who she was (motivational, talented leader).

Crazy quilt

Lemonade

Using accessible and known resources and existing target markets when introducing handbags.

Traci Lynn’s use of various resources to enhance her business development and product choices. Input from internal staff, sales consultants, customers, and colleagues and was patched together to innovate.

Connections with DSA and members.

Traci Lynn learned that selling clothing meant difficulties in logistics and inventory management. She pivoted and sold jewelry which has fewer sizes, is smaller, and requires less inventory.

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Affordable loss

Pilot-in-the-plane

When she learned that selling mutual funds was not a good career for her, Traci Lynn made the best of a negative situation by selling clothing and growing sufficiently to do it full time.

Demonstrated by Traci Lynn as she entered and exited businesses rather than spending good money after bad. She lost $100,000 before digging out and must have felt that was her level of affordable loss at that point in the company.

Exhibited throughout the case. Traci Lynn focused on what she could control. She clearly believes that there was a destiny and a purpose to her life, but that she had control over reaching the potential available to her.

UNIT 1 CASE STUDY ANALYSIS – SPANX—Idea to Entrepreneurial Opportunity U1-1. What benefits of entrepreneurship does Sara Blakely appear to have attained?

L.O. 1.1 Summarize what entrepreneurship is and what entrepreneurs do.

AACSB Reflective thinking Blakely has secured a job that she loves, apparently been fulfilled, become independent, uses her creativity, received substantial financial rewards, and contributed to society.

U1-2. Is the desire to earn an income a key motivator for Blakely? Explain your answer.

L.O. 1.1 Summarize what entrepreneurship is and what entrepreneurs do.

AACSB Reflective thinking Students may answer yes or no. Most likely, they will say that it is not a key motivator at this point. Blakely continues to be the sole owner of the company that is generating substantial revenues and returns. She has seen so much money that she can commit to giving it to her foundation and others.

U1-3. What was Blakely’s opportunity cost when she started Spanx?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking At the time that she started Spanx, Blakely was a sales representative for an office equipment company. The opportunity cost for her was the salary that she had to forgo and any time that she had to invest. In fact, the opportunity cost is whatever her next best option would have been.

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U1-4. Which of Schumpeter’s five basic ways to find opportunities applies to Spanx, both at its start and today? What was the opportunity?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Application of knowledge Originally, Blakely was using an existing technology to produce an old product in a new way. Pantyhose had been on the market for decades when she developed her original idea. However, she took the product in a new direction by cutting off the feet and adding more “control” to them. More recently, she introduced control/firming garments for men, which is more along the lines of developing a new market for an existing product. Blakely didn’t invent control/firm garments, she found a way to make them better for the customer.

U1-5. Which of Porter’s generic strategies best fits Spanx?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Application of knowledge Blakely selected a focus strategy (differentiation) by identifying a narrow market segment and relatively high product uniqueness.

U1-6. If Blakely had wanted to buy an existing business to create Spanx, what sort of company would have been logical? Why? Would an acquisition have been feasible?

Why or why not?

L.O. 1.6 Identify and evaluate opportunities to start your own business.

AACSB Analytical thinking She might have wanted to buy a company that already owned a hosiery mill or one that marketed hosiery produced by an internal or external mill. If she found a hosiery company that already had products in the stores where she wanted to sell, her products would have been a line extension and the sales forces, distribution and production would have already been in place. If she didn’t want to acquire the whole package, she might have found a hosiery mill to purchase so that she had control over the production of her finished product. However, neither of these was feasible with the resources Blakely had at hand or appeared to have readily accessible. Although she was employed, and her father was an attorney, the costs of either acquisition would have been quite high.

U1-7. If you were writing a business plan for the Spanx start-up, what knowledge, skills, and abilities would you attribute to Blakely? What expertise would you suggest was needed?

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L.O. 2.6 Differentiate the components of a business plan.

AACSB Reflective thinking Blakely had knowledge of sales and the ability to see an opportunity where others did not. She had the ability to put herself in front of strangers to promote her product and to think creatively. She also was able to juggle multiple responsibilities and work on the business while continuing her job for a year. She also found creative ways to reduce the costs of introducing her initial products. Blakely had learned to encourage willingness to fail in order to be successful from her family. She also completed college and had a supportive family. Her experience as a stand-up comedienne helped her in naming the product. She needed legal, financial, operations, and management expertise.

U1-8. Create a business model canvas for Spanx at its start-up in 2000. How would it differ today?

L.O. 2.3 Prepare a business model canvas.

AACSB Analytical thinking

Key Partners Manufacturer Retail stores (new, novel products)

Key Activities Marketing Production

Key Resources Production capacity Marketing expertise Funding for startup Cost Structure Production by outside vendor Packaging/design

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Value Propositions No line hose that can be worn with sandals/open toe shoes.

Thinner appearance No lines No restriction on style of shoe

Customer Relationships Consumers build relationships through direct selling Retailers have direct contact with sales force Channels High end department stores.

Blakely selling

Customer Segments Niche markets Women Upper income Shop at high end department stores

Revenue Streams Paying for improved appearance.

Revenue type: sale of product (Spanx)

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Today, there are more and different customers and many more products, each with a specific value proposition. For example, Spanx is now sold under special labels to Target and Kohl’s, no longer solely in high-end department stores. Also, it has products for men and specifically for pregnant women. The cost structure likely includes a substantial amount for marketing. Clearly, Blakely is no longer the only salesperson. Students may suggest many other changes.

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Chapter 4 Exploring Your Market Chapter 4 Contents Markets and Marketing Defined 137 Research Prepares You for Success 138 Research Your Market Before You Open Your Business 138 Types and Methods of Research 139 Getting Information Directly from the Source: Primary Research 139 Getting Information Indirectly : Secondary Research 141 Segment and Industry Research Help You Make Decisions 143 Customer Research 144 Industry Research: The 50,000-Foot Perspective 145 Make Market Research an Integral Part of Your Business 146 Owning a Perception in the Customer’s Mind 148 Features Create Benefits 148 Home Depot: Teaching Customers So They Will Return 148 Which Segment of the Market Will You Target? 149 Successful Segmenting: The Body Shop 149 Applying Market Segmentation Methods 150 The Product Life Cycle 152 Is Your Market Saturated? 154 Market Positioning: Drive Home Your Competitive Advantage 154 Developing a Marketing Plan 147 Chapter 4 Overview This chapter shows how marketing differs from selling. In particular, this chapter aims to show how to learn about customers: who they are, what they want, and where they live. Once students have learned this information, they can adapt their products to fit these discoveries.

Chapter 4 Objectives Learning Objective 4.1: Discriminate between marketing and selling.

Learning Objective 4.2: Summarize how market research prepares you for success.

Learning Objective 4.3: Choose your research methods.

Learning Objective 4.4: Determine your target market segments.

Learning Objective 4.5: Position your product or service within your market.

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Chapter 4 Outline I.

Discriminate between marketing and selling.

A. Marketing is the business function that identifies your customers and their needs and wants.

B. Through marketing, your business will come to mean something clear and concrete in the customer’s mind. Above all, marketing is the way a business communicates its competitive advantage to its market.

II.

Summarize how market research prepares you for success. Market research is the process of finding out who your potential customers are, where you can reach them, and what they want and need.

A. Getting the information directly from the subject: Primary research 1. Personal interviews 2. Telephone surveys 3. Written surveys 4. Focus groups 5. Observation 6. Tracking B. Getting the information indirectly: Secondary research 1. Online searches 2. Books and articles 3. Trade associations, chambers of commerce, and public agencies 4. Review of books and records 5. Researching customers and industries

III.

Choose your research methods.

A. Customer research including discovery and other primary and secondary methods B. Industry research C. Ongoing research throughout the life of your organization

IV. Determine your target market segments.

A. A market segment is composed of consumers who have a similar response to a certain type of marketing.

B. Segmentation methods: 1. Geographic segmentation—dividing a population up by location.

2. Demographic segmentation—dividing a population based on a variable like age, gender, income, or education.

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3. Psychographic segmentation—dividing a population by psychological differences such as political opinion (conservative, liberal) or lifestyles.

4. Behavioral segmentation—dividing the market by observable purchase behaviors, such as brand loyalty or responsiveness to price.

V.

Position your product or service within your market.

A. The goal of market positioning is to distinguish your product or service from others being offered to the same market segments. You can do that by focusing on your competitive advantage.

B. Use the following format to develop a positioning statement for your business: (Your business name/brand) is the (competitive industry/category) that (provides these benefits, or points of difference) to (audience/target market).

Chapter 4 Teaching Notes Class Discussion Ideas: 1. Discuss market segmentation. The term “market” comprises everyone who has a potential need for a product/service and the ability to pay for it. Ask students to describe the market of people who go to movie theaters (e.g., teens, children, families, couples). Point out that a market is rarely composed of only one type of person. Introduce the concept of the multi-sided market where there are users and customers and distinguish between them, perhaps using Google as an example. Different segments have different needs and derive different benefits from, say, going to the movies. Ask students to speculate what the needs and benefits are for the groups they listed. Create a chart on the board to organize the information. Explain how sometimes businesses don’t try to appeal to everyone; instead, they target only one type of customer—one segment. From the chart, note how segmentation is often based more on benefits than on customer characteristics alone. Ask: What would be the advantage of creating a movie theater focused only on teens or on couples? (Answers will probably relate to better satisfying their needs or employing better use of financial resources.)

2.

Discuss product life cycles. Ask the students for examples of long product life cycles and short product life cycles. By knowing if a product or service will likely have a short or long product life cycle, how can you use this information to market the product or service?

The following link relates to product life cycles and the next is an example.

Use this for supplemental teaching: http://productlifecyclestages.com https://www.ausmed.com/articles/product-life-cycle-relates-healthcare/

3.

Ask students to recall the last time they purchased a snack and then answer these questions:

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a. Why did you buy the product? b. How much did you pay? c. How much would you have been willing to pay? d. Where did you buy it? e. How would you improve the product? f. What similar products did you consider before choosing this one? g. Why didn’t you choose one of the other options?

Collect and tally responses on the board. Ask students how they might use this information if they owned a snack company. Point out that you just conducted a survey, one of the most common ways of collecting market information.

Chapter 4 Lecture Enhancers PPT Lecture Slides for Chapter 4 Outside the Classroom: www.ipl.org: The Internet Public Library is a fascinating site that is a good source for industry and market statistics. www.internic.net: InterNIC provides public information regarding Internet domain name registration services. It’s a good place to start when you are ready to look into registering your own Web site. www.statcounter.com: This site provides free counters you can install to analyze and monitor all visitors to your Web site.

Fast Company magazine Subscriptions: www.fastcompany.com Chapter 4 Key Terms brand 137 demographics 145 market 137 market research 143 market segment 149 marketing 137 positioning 154 primary research 139 product life cycle (PLC) 152 secondary research 139

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Chapter 4 Class Activity Ideas and Group Exercises 1. Pick a product (such as Apple iPhones, oranges, sunglasses, shoes). Divide students into small groups and assign each a potential market (such as elementary school children, teenage boys, businesspeople, grandparents); have them brainstorm product benefits for their respective markets. Allow each group to share, and then compare the benefits for the different markets.

2. Focus on consumer analysis. For example, bring in a variety of women’s beauty or fashion magazines. Group students and give each group one magazine. Ask them to flip through the magazine and notice photos, article titles, types of products/services advertised, and the like. Based on this information, have groups create a character profile of the “typical” consumer who reads this magazine by location, population, personality, and behavior categories: How old is she? Does she work? What type of work does she do (e.g., professional, secretarial, blue-collar)? How much money does she make (a lot, not much)? What race or ethnicity is she? Is she married or single? Does she have children?

How educated is she? What does she seem most interested in? What seems to be her biggest challenges? Tie this profile back to marketing terms used in the text by suggesting that this typical woman describes the magazine’s target market segment.

3. Talk to the class about different ways focus groups have been conducted. Divide the class into groups. Assign each group to be the host of a focus group. One group may host a focus group for a new food product. Another group may host a focus group for an existing restaurant. Another group may host a focus group for a new spa. Encourage them to be creative. Have them decide how to invite attendees to the focus group and then have them give a presentation as if they were conducting the focus group. See how they identify new and creative ideas that will help to determine what would be a good market for the product or service and how best to sell to that market.

Chapter 4 Critical Thinking Exercises 4-1. Step One: Consumer Analysis Describe the typical consumer your business plans to target.

L.O. 4.4 Determine your target market segments.

AACSB Analytical thinking Answers will vary.

Gender: Male and female Age: 50–70 Education: college Income: $45,000 per year and up Interests: dancing, friends, high school and college reunions What need(s) do you plan to satisfy for this customer? © Copyright 2020 Pearson Education, Inc.

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My business will provide affordable music services for parties with music targeted to the party’s tastes.

4-2. Step Two: Market Analysis o How large is the total addressable market (TAM) for your product or service? How did you arrive at this figure? o How large is your served available market (SAM)? How do you know? o Which segment of this market do you intend to target? Why? How large is the segment? o Describe your segmentation method. Why did you choose this method?

L.O. 4.3 Choose your research methods.

AACSB Information Technology and application of knowledge The answers should be complete and specific for the business they are studying.

Example: According to the American Disc Jockey Association, there are an estimated 60,000 DJs employed in the United States alone. DJs earn between $600 and $1,000 for a four- to five-hour event. DJs typically deliver their services in private homes, catering halls, schools, and outdoor settings.

According to the Los Angeles Times, DJs work 3 days per week for 8 to 12 hours a day on average. DJ services are in higher demand during the December holidays when many people like to throw parties. April through September is also an active period because the majority of weddings take place during this time. It is not uncommon for DJs to book several events on a single weekend to accommodate more business. Weekends are when DJ services are in the highest demand.

According to the 2000 U.S. Census, 400,000 people live in the Atlanta metro area. Of this total, approximately 115,000 are aged 50-70. I am assuming that at least 5 percent of this market segment—approximately 6,000 people—will be potential customers for my business.

I will assess my market segment based on location and population. My business focuses on serving a particular demographic (older adults) located in a particular geographic area (Atlanta metro).

I plan to target individuals as well as companies and organizations that service my market segment. For example, there are a total of 50 senior centers and private retirement communities in Atlanta.

In order to achieve the goals outlined in my yearly projected income statement, I would only need to reach 4 percent of the market.

Here is my rationale: target market = 6,000 people. Projected total units sold = 240. 240 = 4% of 6,000.

Sources: American Disc Jockey Association (www.adja.org) and Los Angeles Times, August 2, 1993, Monday, Orange County Edition, Business; Part D; © Copyright 2020 Pearson Education, Inc.

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Page 5; Column 3; Financial Desk, 436 words, INSIDE JOB: OCCUPATION: MOBILE DISC JOCKEY, Researched by JANICE L. JONES/Los Angeles Times).

4-3. Research can give you a great deal of information, but you will have to use your math skills to make it more useful. For example, imagine you are interested in opening a dog care service, and you have gathered the following facts: •

In 2010, the U.S. Census Bureau estimated that there were 2.55 people per household.

•

According to your city’s public records, the population of your community is 80,000.

•

The U.S. Pet Ownership & Demographics Sourcebook estimates that the number of dog-owning households in a community equals 0.361 multiplied by the total number of households.

•

This Sourcebook also estimates that the number of dogs in a community equals 0.578 multiplied by the total number of households, or 1.6 multiplied by the number of dogowning households.

L.O. 4.3 Choose your research methods.

AACSB Application of knowledge Calculate: a. The number of dog-owning households in your community.

80,000 people/2.55 people per household = 31,373 households in my community.

31,373 households x 0.361 = 11,326 dog-owning households b. The number of dogs in your community. Round your answers off to the nearest whole number.

11,326 dog-owning households x 1.6 = 18,121 dogs in my community.

4-4. Analyze and describe what you would expect the target market to be for a single seat hybrid automobile that gets 120 miles per gallon according to the demographics, psychographic and behavioral segments. Consider such factors as gender, age, marital status, occupation, household size, household income, interests, and beliefs about global warming, gasoline prices and the like. How might you determine this?

L.O. 4.3, 4.4, and 4.5 Choose your market research methods, determine your target market segments, and position your product or service within your market.

AACSB Analytical thinking and application of knowledge Of course, answers will vary but may include such things as describing a customer archetype of: Female, unmarried, professional, household of one person with a pet, income of $50,000 or greater (would need pricing to know more), environmentally

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conscious, with a long commute, concerned about global warming and the cost of gasoline. We could determine this through the use of marketing research.

Primary research would likely be best for the details, while secondary research could help with industry and market data.

4-5. Choose five people from your market segment to research with a survey. Write 10 questions on a scaled format and ask the survey participants to frame their responses on a scale of 1 to 5 or design your own range. Also ask five open-ended questions to test your customer and product hypotheses (questions that cannot be answered with a yes or no or scaled response). Was one type of question more valuable to your research goals than the other? Why or why not? Which question yielded the most useful responses?

L.O. 4.3 Choose your research methods.

AACSB Analytical thinking Example of 10 scaled response questions: Scale

1 Never

2 3 Infrequently Sometimes

4 Often

5 Always

1. How often do you listen to music?

2. How often do you listen to jazz?

3. How often do listen to gospel music?

4. Do you enjoy live concerts?

5. Do you go to dance parties?

6. Do you prefer DJs to live bands?

7. Have you traveled more than 50 miles for a musical performance?

8. Do you expect to pay more than $600 for a party DJ for 4 hours?

9. When you have a party at your home, do you hire a DJ? 10. Have you been to weddings where DJs are the entertainment?

Example of five open-ended questions: –

Who are your favorite performers from the Motown era?

–

What is your favorite song?

–

What artists would you NOT want me to play?

–

Which occasions would you hire my services to celebrate?

–

What special requests do you have?

The answers to the final questions will depend upon student experiences.

Chapter 4 Key Concept Questions 4-6. Which four factors should market research include, and why?

L.O. 4.2 Summarize how market research prepares you for success. © Copyright 2020 Pearson Education, Inc.

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AACSB Application of knowledge Market research should include surveys and focus groups, general research, statistical research, and industry research. These types of research will help to create a robust picture of the situation and yield better decisions.

4-7. Write a positioning statement for your business, or one that you envision, using the format provided.

L.O. 4.5 Position your product or service within your market.

AACSB Reflective thinking (Your business name/brand) is the (competitive industry/category) that (provides these benefits or points of difference) to (audience/target market).

Oldies but Goodies DJ Service is the DJ party service that provides carefully selected R&B and Motown recordings to customers who were fans of this music in the 1950s and 1960s.

4-8. Assess where you think your product or service is in the product life cycle. Where is it and why did you reach this conclusion? Remember that while your company may be in its infancy, the product/service or industry may be in maturity or decline.

L.O. 4.5 Position your product or service within your market.

AACSB Analytical thinking Answer should be one of the following: introduction, growth, maturity, or decline.

It should discuss how the industry has evolved to date and where this fits the cycle.

4-9. Read and interpret the chart in Figure 4-2.

L.O. 4.4 Determine your target market segment.

AACSB Analytical thinking

a. Which single provider has the largest market share? What is the percentage?

Dell has the largest share at 18.60%. b. What share do the two largest suppliers enjoy together?

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Together, the two largest suppliers share 18.60% + 15.60% or 34.20%. c. How much bigger is IBM’s share than Apple’s?

IBM’s share is 2.50% larger than Apple’s share. d. If there are approximately 100 other smaller makers of personal computers, about how much market share would each have on average?

The “Others” have a 52.70% share of the market, so if there are approximately 100 other companies, each would have an average share of 0.53%.

Chapter 4 Application Exercises Order food at three different restaurants/vendors; then answer the following questions.

4-10. Did you observe any differences in how the employees handled your order?

Compare and contract them.

4-11. Relate what you believe to be the marketing vision of each restaurant based on what you observed. Write a positioning statement for each restaurant.

4-12. Examine the market for each restaurant, using the four methods of market segmentation analysis: geographic, demographic, psychographic, and behavioral.

4-13. Where do you think each restaurant is in the product life cycle?

L.O. 4.3 and 4.4 Choose your research methods and determine your target market segments.

AACSB Application of knowledge and analytical thinking Answers will vary based on each student’s experience but should reflect understanding of the topics.

Chapter 4 Exploring Online 4-14. Go online and conduct an industry-wide search for competition for your business or one that interests you. Illustrate a profile of the competition (this may be written using a word-processing program or shown as a table using Excel). It should include minimum and maximum prices, minimum and maximum ordering times, and any other information you feel is pertinent.

L.O. 4.3 Choose your research methods.

AACSB Application of knowledge Each student should provide ample information regarding the industry chosen and specific competitors.

Example: Based on my market research, only one other DJ service in the

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Atlanta metro area specializes in these specific musical genres.

Competitor

Weakness

Strengths

DJ Shay

DJ Shay has been playing oldies at parties for years.

Customers complain that he has lost his creative edge. He plays the same tracks over and over again. His reputation has suffered.

DJ Shay hosts a radio show on WRBX that features Motown-era recordings. He has excellent name recognition in Atlanta.

Internet/CD burning

While people can play legally downloaded music themselves, playing a CD is not the same as hiring a live DJ. A DJ can stir the crowd and influence the energy at a party in a positive way.

Burning a CD gives the customer total control over the music at an event. It also costs less money than hiring a DJ. It is legal.

Party in a Box Productions

Party in a Box specializes in providing “all music for all occasions.” They own a basic collection of oldies, but their selection is limited.

This company has an established reputation in Atlanta. Their prices are very affordable.

4-15. Find the NAICS code for your planned venture or one that interests you. Using the U.S. Census Bureau sources, list six facts about the industry.

L.O. 4.3 Choose your market research methods AACSB Information technology and application of knowledge Example: Food Truck. NAICS 722330. Information: “This industry comprises establishments primarily engaged in preparing and serving meals and snacks for immediate consumption from motorized vehicles or nonmotorized carts. The establishment is the central location from which the caterer route is serviced, not each vehicle or cart. Included in this industry are establishments primarily engaged in providing food services from vehicles, such as hot dog carts and ice cream trucks.

Illustrative Examples: Ice cream truck vendors Mobile food concession stands Mobile canteens Mobile refreshment stands Mobile food carts Mobile snack stands” (census.gov)

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$960m revenue 7.3% annual growth 2012 – 2017 14,566 employees 4,406 businesses Chapter 4 Case Studies Case Study: American Electrical: Understanding the Market Sparks a New Venture 4-16. In what areas of the market did McCormick do research before starting his business?

L.O. 4.2 Summarize how market research prepares you for success.

AACSB Application of knowledge He had led the skunk works project that created a business plan and proposals. He knew where his first 100 sales were going to come from; he had already researched who and how.

Extra: What does skunk works mean? Where did this epithet originate? Definition: A semi-official project team that is tacitly licenses to bend the rules and think outside the box.

“We must start in Dogpatch, the fictional place in the backwoods of Kentucky (or possibly Arkansas) made famous between 1934 and 1977 as the home of professional mattress tester Li’l Abner, in the comic strip written and drawn by Al Capp. The original was Skonk Works (skonk is a dialect variant of skunk), the place of unexplained function near which Lonesome Polecat and Hairless Joe brewed their highly illicit bootleg Kickapoo Joy Juice from ingredients such as old shoes and dead skunks.

We must now move to the very real Burbank, California. In 1943, a small group of aeronautical engineers working for the then Lockheed Aircraft Corporation (headed by Clarence “Kelly” Johnson) were given the rush job of creating an entirely new plane from scratch, the P-80 “Shooting Star” jet fighter. This they did in 143 days, 37 days ahead of schedule. Their secret project was housed in a temporary structure roofed over with an old circus tent, which had been thrown up next to a smelly plastics factory. The story goes that one of the engineers answered the phone on a hot summer day with the phrase “Skonk Works here” and the name stuck. It is also said that Al Capp objected to their use of his term and it was changed to Skunk Works.

One division of the company, formally the Lockheed Martin Advanced Development Program, is still known as the Skunk Works. The term has been trademarked by Lockheed Martin, which has been aggressive in protecting it.

As a generic term, it dates from the 1960s. One definition is very much that of the original and the one you describe: a small group of experts who drop

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out of the mainstream of a company’s operations in order to develop some experimental technology or new application in secrecy or at speed, unhampered by bureaucracy or the strict application of regulations (Kelly Johnson formulated 14 visionary rules for running such an operation, which are still regarded as valid even now). It is also sometimes used for a similar group that operates semi-illicitly, without top-level official knowledge or support, though usually with the tacit approval of immediate management.”

From Michael Quinion, World Wide Words 4-17. What research methods would you recommend for American Electrical today? Name three specific sources of information.

L.O. 4.3 Choose your research methods.

AACSB Analytical thinking and information technology He could use the NAICS to correctly identify the code for his industry or any of the other sources identified to correctly find his industry code. Then he can use this information to perform data searches to find relevant statistics and reports in such sources as the Standard and Poor’s Industry Surveys or the U.S. Census Website. And then he can conduct customer research through such vehicles as interviews, observation, and trade associations, to name a few.

4-18. How did McCormick identify American Electrical market? Name the segmentation method and the segment he chose.

L.O. 4.4 Determine your target market segment.

AACSB Application of knowledge McCormick observed that he could create another company to sell accessory items to the 50 percent of the market not being supplied through the existing company because of distribution restrictions. This would be a geographic segmentation. His new company sold to these American companies that were not served with the old company.

4-19. What is the role of marketing in McCormick’s business?

L.O. 4.1 Discriminate between marketing and selling.

AACSB Reflective thinking Marketing is essential in any business. In this case, there was a segment of the market not being served and AEI came in as the only supplier offering the electrical and electronic controls with the quality and service they could deliver.

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Case Study: Michael Elliot, Hollywood Screenwriter to Franchise Entrepreneur 4-20. Why has Michael Elliot been successful?

L.O. 4.2 Summarize how market research prepares you for success.

AACSB Reflective thinking Michael has been successful because he knows himself and his customers and he never underestimates his customer. He perseveres in the light of failure and has a strong vision of the future. He has created authentic movies, and his franchises create an environment that is tailored to their purposes. He also never thought small, rather considered business on a grander scale by designing franchises from the start. He identified and creatively exploited niches that he researched.

4-21. Describe the target market that Elliot is trying to appeal to in his business ventures (demographic, geographic, psychographic, and behavioral). What does this target market value?

L.O. 4.5 Position your product or service within your market.

AACSB Analytical thinking Elliot’s Hammer and Nails franchise appeals to men who want to have grooming services such as pedicures, but don’t want to get the services in a nail salon designed for women. These men are sufficiently affluent and have the time and inclination to go to a men’s salon. They are typically urban.

4-22. Elliot grew up surrounded by hip-hop music and culture. He then became disenchanted and decided to study how to become a screenwriter. In what ways did these experiences give him an advantage in the current marketplace? How might his insider knowledge also function as a limitation?

L.O. 4.2 Summarize how market research prepares you for success.

AACSB Application of knowledge Elliot’s upbringing and life experiences gave him unique knowledge of his market that he used to position himself as an authentic screenwriter and he experienced success in that endeavor. By becoming affluent, he also used the salon services and saw how they were not suited to his needs. He knew the people from his time in the hip-hop and film industries and worked to create a men’s environment that they would appreciate. His unique knowledge might have hampered him if he had focused only on African American customers and might have prevented him from creating a viable franchise, but he adapted to his target market.

4-23. Brainstorm a business idea that you could pitch to Michael Elliot that would be appropriate for his brands and interests. What market research would you need to conduct in advance to assess whether your idea has the potential to be successful? © Copyright 2020 Pearson Education, Inc.

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L.O. 4.5 Position your product or service within your market.

AACSB Analytical thinking Answers will vary. Example: My business idea is a set of high-end men’s grooming tools and products to privately label under the Hammer and Nails brand. It would be important to understand the markets and his customers, as well as the needs of his franchisees. Primary and secondary research such as surveys and industry research would be helpful.

4-24. Why would Elliot give up 60 percent of the ownership of his business to outside investors?

What factors are important?

L.O. 4.2 Summarize how market research prepares you for success.

AACSB Application of knowledge While Elliot did his research in advance of creating the franchise, he also knew that it would require substantial funding and insights. He most likely either did not have enough capital or was not willing to risk so much. Also, he may have wanted other owners to participate in the design and planning, as well as aiding as the firm developed. He may have decided that 40 percent of a larger, successful organization was better than majority ownership of a smaller or unsuccessful one.

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Chapter 5 Developing the Marketing Mix and Plan Chapter 5 Contents The Marketing Mix 165 Product: What Are You Selling? 167 Focus Your Brand 167 Ford’s Costly Failure: The Edsel 168 Ford’s Focus on Success: The Mustang 168 How to Build Your Brand 168 Price: What It Says About Your Product 170 Strategies and Tactics for Effective Pricing 170 Place: Location, Location, Location! 172 Key Factors in Deciding on a Location 173 Promotion: Advertising and Publicity 173 Use Integrated Marketing Communications for Success 173 Promotional Planning and Budgeting 174 Delving into the Advertising Advantage and Sales Promotion 177 Types of Advertising 178 Media Planning and Buying: Focus on Your Customer 178 Marketing Materials Should Reinforce Your Competitive Advantage 178 Sales-Promotion Solutions 179 Additional Marketing Solutions 181 Electronic and Social Media Marketing 183 Publicity Potential 186 Telling the Story 187 Sample Press Release 188 Follow-Up a Press Release 188 Public Relations 188 The Fifth P: Philanthropy 190 Cause-Related Marketing 190 Gaining Goodwill 190 Not-for-Profit Organizations 191 What Entrepreneurs Have Built 191 You Have Something to Contribute 192 Developing a Marketing Plan 192 Marketing Analysis 192 Marketing as a Fixed Cost 193 Calculate Your Breakeven Point 193 Chapter 5 Overview This chapter focuses on clearly identifying your product and identifying it as a brand.

Introduction to not-for-profit organizations and charitable contributions is introduced as causerelated marketing that can attract additional customers to your cause and product. Breakeven analysis is introduced and the importance of knowing your fixed costs is covered to find a profit.

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Chapter 5 Objectives Learning Objective 5.1: Explain the marketing mix.

Learning Objective 5.2: Choose the attributes of your product or service.

Learning Objective 5.3: Price your products for success.

Learning Objective 5.4: Find the best location for maximum efficiency and effective distribution.

Learning Objective 5.5: Select the mix of promotion to use for your business.

Learning Objective 5.6: Identify the best advertising and sales promotion options.

Learning Objective 5.7: Use publicity to your advantage.

Learning Objective 5.8: Add another P, philanthropy, to your business.

Learning Objective 5.9: Recognize the importance of a marketing plan.

Chapter 5 Outline 1.Explain the marketing mix. 

Four Ps o Product o Price o Place o Promotion



Seven Ps of Services Marketing o Four Ps + o People o Processes o Physical Evidence



Four Cs of Marketing o Customer o Convenience o Cost o Communication

2. Choose the attributes of your product or service. 

Intangible versus tangible



Brand o Business name o Logo o Reputation o Personality

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o Communicate the brand 3. Price your products for success. Implement strategies and tactics to reach your goals. 

Value pricing



Prestige pricing



Cost-plus pricing



Markup pricing



Penetration pricing



Skimming price strategy



Meet-or-beat-the competition pricing



Follow-the-leader pricing



Personalized (dynamic) pricing



Variable pricing



Price lining strategies

4. Find the best location for maximum efficiency and effective distribution. 

Know and use the key factors for site selection. o Access for customers and suppliers o Climate and geography o Convenience o Cost of facilities o Demographics o Economic conditions and business incentives o Governmental regulations and laws o Labor pool

5. Select the mix of promotion for your business. 

Promotion is the use of advertising and publicity to get your marketing message to your potential customers.



Publicity is free mention of your business – in newspapers, magazines, and social media or on radio or television.



An advertisement is a paid announcement that a product or service is for sale. Examples of advertising include television commercials, billboards, and magazine ads.

6. Identify the best advertising and sales promotion options. 

Advertising – institutional and product

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

Sales promotion (advertising specialties, trade show exhibits, mall carts, or kiosks)



Other options (guerilla, buzz, branded entertainment, lifestyle, in-store)



E-active (e-commerce, interactive, online, brand spiraling

7. Use publicity to your advantage 

Tell the story



Pitch letter



Press release



Special events, sponsorships, networking, public speaking

8. Add another P, philanthropy, to your business. 

Philanthropy is the giving of money, time, or advice to charities to help solve a social or environmental problem, such as homelessness, pollution, or cruelty to animals.



You can be philanthropic even if you have very little or no money to offer. You can donate your time by volunteering for an organization that has aims you want to support.

9. Recognize the importance of a marketing plan: 

Demonstrate to potential investors that your company can grow and offer returns.



Identify the most profitable target markets for the organization.



Evaluate the competitive and industry environments.



Illustrate the pricing strategy.



Detail the promotional plan and budget.

Chapter 5 Teaching Notes Class Discussion Ideas: 1.

Write on the board or share verbally the following Mark Twain quote and ask students to interpret what he meant: “Many a small thing has been made large by the right kind of advertising.”

2.

Discuss that Internet marketing is one of the fastest-growing mediums for companies to inform customers about their products. Ask students to think of the most popular or well-known ways the Internet is used to market. Ask them for any other less known ways that they have encountered.

3.

Define “breakeven point” from the text. Usually a breakeven point is given in breakeven units. Review the definition of unit of sale. Ask: Why is the breakeven point important to know? (It’s the minimum number of units the business must sell to cover fixed operating costs; it helps entrepreneurs plan their time and resources by giving them a minimum sales goal; it helps “red flag” a problem if costs are too high or prices too low.) Write the breakeven point formula on the board:

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Breakeven Units = Monthly Fixed Costs ($)/Gross Profit per Unit ($) Explain to students why we use fixed operating costs and gross profit per unit rather than sales revenue and a sum of COGS/COSS, variable costs, and fixed operating costs in this equation. (Because the gross profit per unit amount already accounts for sales revenue and COGS/COSS and variable costs paid.) Breakeven analysis focuses on how much an entrepreneur needs to bring in above and beyond the costs of each sale to contribute to the general operations of the business.

4.

Focus on logos. Have students display their business logos so that everyone can see them. Ask the class what aspects of these logos are original (design, color combination, motto, the way the name is depicted/displayed). Pretend to like one logo in particular and announce that you are going to copy it for your own business. Ask the student to whom the logo belongs: What should you do to protect your logo?

Transition into a discussion that defines intellectual property and the three main ways the government protects different forms of intellectual property: patents, trademarks, and copyrights. Establish that “intellectual or artistic property” is a product that gives form to an idea; it has value for its creator or inventor. For example, book pages by themselves are not intellectual property, but the ideas and the arrangement of the words on them are. A CD is not artistic property, but the music and lyrics contained on it are.

Elicit other examples from the students, such as a car-engine design, a company slogan or logo, the seasoning recipe for KFC, a T-shirt design, a movie (what’s on the DVD, not the DVD itself), and a new digital process for making movies.

5.

Discuss pricing. Emphasize that pricing not only affects marketing but also directly impacts income and profit: if a company does not price effectively, it may be difficult to be profitable. Discuss the different pricing strategies given in the text, and either provide examples or have students suggest some (e.g., key stoning is a cost-plus strategy; a 20 percent markup on a printing order is cost-plus; new discount airlines that provide deep discounts for new routes is market penetration; prescription drugs, computers, and other technology products such as plasma TVs use skimming; pizza parlor discount wars or “match any price” promotions or “we accept competitors’ coupons” policies are beat-the- competition strategies).

Chapter 5 Lecture Enhancers PPT Lecture Slides Outside the Classroom: www.uspto.gov/main/profiles/copyright.htm: If you create any art, music, or literary works that are important to your business, copyright them through the U.S. Copyright Office. www.ecommerce-guide.com: The E-Commerce Guide reviews the latest products for ecommerce Web sites, keeps track of industry statistics, and encourages networking among online entrepreneurs.

Business Week Subscriptions: www.businessweek.com

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Inc. Magazine Subscriptions: http://www.inc.com Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant, by W. Chan Kim and Renée Mauborgne (Harvard Business School Press, 2005).

Brand Sense, by Martin Lindstrom (Free Press, 2010).

Buy-o-logy: Truth and Lies About Why We Buy, by Martin Lindstrom (Crown Business, 2008).

Contagious: Why Things Catch On, by Jonah Berger (Simon & Schuster, 2013).

Conversation on Networking: Finding, Developing, and Maintaining Relationships for Business and Life, by Steven Smolinsky and Kay Keenan (Forever Talking Press, 2006).

Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, by Geoffrey A. Moore (Harper Business, 2006).

The Dragonfly Effect: Quick, Effective, and Powerful Ways to Use Social Media to Drive Social Change, by Jennifer Aker, Andy Smith, Dan Ariely, and Chip Heath (Jossey-Bass, 2010).

Duct Tape Marketing: The World’s Most Practical Small Business Selling Guide, by John Jantsch (Thomas Nelson, 2008).

Guerilla Marketing: Easy and Inexpensive Strategies for Making Big Profits from Your Small Business, 4th ed., by Jay Conrad Levinson (Houghton Mifflin Harcourt, 2007).

Influence: The Psychology of Persuasion, by Robert B. Cialdini (Harper Collins, 2009).

The Long Tail: Why the Future of Business Is Selling Less of More, by Chris Anderson (Hyperion, 2006).

Made to Stick: Why Some Ideas Survive and Others Die, by Chip Heath and Dan Heath (Random House, 2007).

Positioning: The Battle for Your Mind, 3rd ed., by Al Ries and Jack Trout (McGraw Hill, 2000).

Purple Cow: Transform Your Business by Being Remarkable, by Seth Godin (Portfolio, 2003).

Setting the Table: The Transforming Power of Hospitality in Business, by Danny Meyer (Harper © Copyright 2020 Pearson Education, Inc.

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Paperbacks, 2008).

The Tipping Point: How Little Things Can Make a Big Difference, by Malcolm Gladwell (Back Bay Books, 2002). www.mbda.gov: The Minority Business Development Agency (MBDA) is a federal agency that fosters the establishment and growth of minority-owned businesses. MBDA provides funding for a network of Minority Business Development Centers (MBDCs), Native American Business Development Centers (NABDCs), and Business Resource Centers (BRCs). The Centers provide minority entrepreneurs with one-on-one assistance in writing business plans, marketing, management and technical assistance, and financial planning to support viable startup business ventures. www.score.org: The Service Core of Retired Executives (SCORE) is a group of retired businesspeople who volunteer as counselors and mentors to entrepreneurs. www.nawbo.org: The National Association of Women Business Owners helps female entrepreneurs network. You can join a chapter of female entrepreneurs in your area.

Chapter 5 Key Terms blog 184 blogosphere 184 brand spiraling 183 buzz marketing 181 cause-related marketing 190 cost-plus pricing 171 e-active marketing 183 edutainment 182 follow-the-leader pricing 172 foundation 190 goodwill 191 guerilla marketing 181 institutional advertising 178 logo 169 markup pricing 171 meet-or-beat-the-competition 172 not-for-profit organization 190 penetration pricing 171 personalized pricing 172 philanthropy 190 pitch letter 186 press release 186 prestige pricing 171

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price lining 172 product advertising 178 promotion 165 skimming pricing strategy 171 stealth marketing 184 trademark 169 value pricing 171 variable pricing strategy 172 viral marketing 185

Chapter 5 Class Activity Ideas and Group Exercises 1. Ask the students to think of two or three well-known companies, sketch their logos and write their slogans.

2. Ask the students to name the two best commercials they’ve seen on TV or heard on the radio lately. What makes them so effective? How might they improve on them?

3. Distribute copies of newspaper and magazine. Ask students to identify the ads as primarily product/service, institutional, or cause-related.

4. Challenge the students with this instruction: List the parts of your business that are unique, unlike any other. Think about your name, products, business operations, marketing materials, and the like. Which of these assets could be protected by a patent, copyright, or trademark? Discuss the results and list examples on the board.

5. Use a guest speaker. Invite a local inventor, artist, or attorney to discuss with your class the purposes and processes of protecting intellectual property from his/her point of view. Alternatively, assemble a panel of people with different points of view on a common topic (e.g., the designer, the inventor, the licensed manufacturer, and the intellectual property lawyer for a product). Suggest that the speaker bring samples of relevant documents for students to see and analyze. Have the class prepare questions before the speaker arrives and reflect upon their learning afterwards.

6. Many philanthropic organizations in the United States were established by entrepreneurs. Chefs and restaurant owners often are entrepreneurs. Have the students research some local and/or famous chefs and restaurant owners and list their connections and contributions to charity.

7. Assign the students to read the following article written by an experienced graphic designer. Have them do some research on the websites referenced in the article.

Have them find examples on different websites of poorly constructed logos and well-constructed logos. They should explain their reasons for both conclusions.

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Designing a Logo

By Dana James There is plenty of information on the internet about what makes a good logo. But beyond the actual look, the three most important are: 1. Effective without color: will it reproduce in black and white and still be readable?

2. It's scalable: can the logo shrink to the size of a pen imprint and still be legible? If you blow it up to use on a billboard, does it hold up?

3. Relevant to the industry: does the logo stand on its own, without looking out of place among its industry brethren?

I'm a designer, so I strongly recommending letting a designer design a logo. Then again, there are a lot of bad designers out there who have no conception of how to distinguish between what looks good and what is effective for a business. If you want to see just how bad some so called designers are, go to a web site that works as a graphic design clearing house, that allows businesses to post their jobs online and have several designers then do up logos for them to choose from for a set price. The range is remarkable.

But that is an option, using such a site. A business or entrepreneur can post online their business name and the basic idea for their logo, set a price and have a hundred designers upload potential logos to choose from. There are pros and cons for this option: PRO: can be cheaper, many options to choose from CON: cheaper can cost you in the long run; more options do not translate into better options The only way an entrepreneur should be using such a site is if THEY know what a good logo actually is. Otherwise, they may end up with a logo that doesn't fit the main criteria mentioned above.

My suggestion is to look around your community or online or wherever, and find logos that you like, that are relevant to your industry, so you can compare apples to apples. Then call the business and ask who did their logo. (Obviously, don't call a franchise. You want small business.) Then contact the designer who did the logo, ask to see other samples, and find out the range they charge for doing not just the logo, but an identity package, which is the logo plus a letterhead system at the minimum. Expect a range, not a hard figure as to cost.

The more effort the entrepreneur puts into the front end of the logo design, the better the result. Not knowing what you want going in leaves you open to guesswork by the designer, added cost, and unknown results.

Another consideration is what you really expect out of your logo. Basic and cheap is fine, as long as it fits the top 3 criteria. If you want a logo that you plan to feature on sellable merchandise, like for a restaurant, you want to go the extra mile and dollar to be sure you have

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something marketable. If you are primarily service oriented and plan on having uniforms that feature embroidery, make sure the logo is tailored to that function.

To sum up: 1) Your logo should meet the top 3 criteria.

2) Do your homework before you even begin your search for a logo designer. Know the difference between different styles of logos.

3) Be prepared for mixed results if you use a graphic design online service for logo design.

4) Don't let a friend, a cousin, or a student design your logo. Let someone else be their guinea pig.

5) Make sure your contract with the designer provides you will all necessary formats of the logo, from a simple .jpeg to an .eps file (and your logo should almost always be provided in that format because .eps enables wide scalability).

6) Maybe most important, you should LOVE your logo. You should be able to defend it against all who would question its greatness. And your designer should be able to explain the logo to you, so you understand what makes it great.

Chapter 5 Critical Thinking Exercises 5-1. Select a product or service and explain how it will fit into and complement your marketing mix.

L.O. 5.2 Choose the attributes of your product or service.

AACSB Analytical thinking Example: My service, Oldies but Goodies DJ Service, provides exactly the type of music my target market most wants to hear at parties.

5-2. Discuss how pricing tells a story about your product.

L.O. 5.3 Price your products for success.

AACSB Application of knowledge Students should pick a product or service and set a price and tell why they set that price and what that price means, i.e., it’s affordable, difficult to obtain, etc.

5-3. Where do you plan to locate your business? Explain this choice.

L.O. 5.4 Find the best location for maximum efficiency and effective distribution.

AACSB Application of knowledge

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Example: Oldies but Goodies will have an office at my home in Wilmington, Delaware because much of the work will need to be done after the nine-tofive workday.

5-4. How do you plan to include philanthropy in your marketing mix?

L.O. 5.8 Add another P, philanthropy, to your business.

AACSB Application of knowledge Example: I can offer my DJ services for free at local charity events. I will also consider throwing an annual Motown dance party for seniors in my community. I will offer DJ classes to young people at my local YMCA. I plan to donate at least 5 percent of my net profits to local charities each year.

5-5. Use the chart below to illustrate your marketing mix, using the Ps or Cs. L.O. 5.1 Explain the marketing mix.

AACSB Application of knowledge Marketing Mix Chart -- My Market Segment The Marketing Ps Decision

Explanation

The Marketing Cs

Product/Service

DJ service specializing My service provides my target Customer in market the music it most Motown-era music wants to hear at parties.

Price

$150 for three hours of If customers want to hire me Cost for more than three hours, service; $50 they will pay an additional $50 for every per hour. I wanted to set up additional my pricing so that each gig is hour worth my time and effort.

Place

We bring our services to the customer.

I will also set up a home office so that customers can reach me at their convenience in the evenings and on weekends.

Convenience

Promotion

Promo cards, business cards, press releases, radio ads

I will focus on radio stations that my target audience listens to and will leave cards at places they frequent.

Communication

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Philanthropy

Offering in-kind DJ services at local events, teaching DJ classes at the YMCA, contributing money to local charities

I plan to highlight my business’s contributions to the community in my promotional materials and when I meet with customers directly. I want my customers to feel good about supporting a business that gives back to our community.

5-6. Use computer software to create a logo for your business. Do you intend to trademark your logo? Explain.

L.O. 5.6 Identify the best advertising and sales promotion options.

AACSB Application of knowledge Answers will vary but should include understanding of trademark concept and some sort of logo design.

5-7.

If you were to start a home-based business, what would it be? Why? What key factors would you consider before start-up?

L.O. 5.1 and 5.2 Explain the marketing mix and choose the attributes of your product or service AACSB Reflective thinking Again, would vary significantly. Reasons might include convenience, absence of a need for an office or other building location, reduction in overhead, and the like.

The key factors to consider are:

Access for customers Access for suppliers Climate and geography Convenience Cost of facilities Demographics Economics conditions and business incentives Governmental regulations and laws Labor pool Proximity to competitors Visibility

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5-8. Why is physical location critical for a distribution business?

L.O. 5.4 Find the best location for maximum efficiency and effective distribution.

AACSB Reflective thinking They need to find places where rent or property costs are low, where there is space for large commercial buildings, and where their trucks and vans have easy access to roads and highways. Much of their cost comes from storage and transportation, so they need inexpensive storage and convenient access to major transportation routes.

5-9. What is the role of demographic information in the selection of a retail location?

L.O. 5.4 Find the best location for maximum efficiency and effective distribution.

AACSB Application of knowledge Demographic information is vital in the selection of a retail location. In no type of business is location more essential than retailing. The storefront needs to be where the target customers are, and demographics are generally a critical determinant of the target.

5-10. Identify a well-known public figure and discuss his or her brand. How has this individual enhanced the brand? How has he or she damaged it?

L.O. 5.2 Choose the attributes of your product or service.

AACSB Analytical thinking Answers will vary. They may choose someone who has repeatedly done things to improve their image, including affiliation with charitable purposes or they may choose the opposite. The selections often depend upon current events.

5-11. Why does viral marketing have such success potential? How can a viral marketing campaign work against a company?

L.O. 5.5 Select the mix of promotion to use for your business.

AACSB Reflective thinking Viral marketing markets through social networking which is a fast-growing industry. The number of mediums that you can use will only continue to increase. It’s also very inexpensive. The risk is possibly too fast of growth or miscommunication as it is spread from one person to another.

5-12. What role should the unique selling proposition play in a company’s advertising strategy?

L.O. 5.9 Recognize the importance of a marketing plan AACSB Analytical thinking A company’s USP becomes valuable when it is successfully communicated to your target customers and should motivate purchasing and repeat purchasing decisions.

A USP that is successfully communicated can be priceless.

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Chapter 5 Key Concept Questions 5-13. Define cost-plus pricing. Why is it used so frequently? What are the drawbacks associated with using it?

L.O. 5.3 Price your products for success AACSB Analytical thinking Cost-plus pricing takes the cost and adds a desired profit margin. It is simple to calculate, and you determine the profit you want to make. It doesn’t take marketing into account. Price is another way in which a business can communicate its marketing vision to customers, but cost-plus pricing just tacks a desired profit margin onto the COGS. 5-14. What is penetration pricing? Provide an example of a company that has used penetration pricing to introduce a new product. What was the product?

L.O. 5.3 Price your products for success.

AACSB Analytical thinking and possibly information technology Penetration pricing is the use of a low price during the introduction of a product to market to capture customers. Some Internet Service Providers, such as Verizon, do this and then raise the price the customer must pay after one year.

Other examples include cable providers and apartment complexes.

5-15. Brainstorm five creative ways for a new business with a tight budget to advertise and promote its products or services using the latest developments in communications and Internet technology.

L.O. 5.5 Select the mix of promotion to use for your business AACSB Analytical thinking A. Use local cable TV ads.

B. Use Internet radio ads.

C. Trade Web links with other related but not competing businesses (each business places a small banner ad from another business on its Web site).

D. Send an e-mail newsletter once a month to customers who have agreed to accept it.

E. Offer fun, free ring tones that can be downloaded from its Web site, changing them frequently so that customers have a reason to return to the site.

5-16. Visit Yahoo! Small Business or another provider of online storefronts. List three advantages and three disadvantages of opening a website for your business through such a service, rather than having a site built specifically for your organization.

L.O. 5.9 Recognize the importance of a marketing plan.

AACSB Analytical thinking

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Advantages: 1. I can sell to my customers around the world.

2. I can sell online and save money by not having to rent a physical store.

3. I can network online to meet new suppliers and customers.

Disadvantages: 1. I may wind up spending a lot of time online, perhaps more than is productive.

2. I may neglect my local customer base.

3. Setting up an online store can be expensive.

5-17. Summarize why breakeven is a critical concept for any organization.

L.O. 5.9 Recognize the importance of a marketing plan.

AACSB Analytical thinking Breakeven calculation will tell you if your marketing plan is viable. Your revenues must exceed your fixed costs. To do this, you must always be aware of your breakeven point and your revenues.

5-18. What are the types of communications budgets? What is the best method for budgeting?

L.O. 5.9 Recognize the importance of a marketing plan.

AACSB Analytical thinking The types are: percentage of sales, competitive spending, excess funds, and objective and task.

5-19. List four common marketing objectives. Explain why each is important.

L.O. 5.9 Recognize the importance of a marketing plan.

AACSB Application of knowledge     

Building brand and image => to increase readiness to buy and frequency of purchase Providing information => to gain customer interest and trust Persuading => to convert interest into a desire to own/purchase Stimulating action => making the sale Reinforcing the purchasing decision => encourage repeat purchases and referrals

Chapter 5 Application Exercises 5-20. What is the role of demographic information in the selection of a retail location?

Provide an example of a retailer near you and the demographics that are significant for the company.

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L.O. 5.4 Find the best location for maximum efficiency and effective distribution.

AACSB Application of knowledge Demographic information determines what location is best for the target market to a large extent. For example, locating a low-end food market in an upscale shopping center is mismatching the location and demographics. A student might select Talbots and suggest that there should be higher income women (with conservative fashion tastes) in the area.

5-21. Visit (virtually or physically) a library and locate its reference section. What resources can help you to open a business like Happy Belly Kitchen? Identify at least six resources.

L.O. 5.1 Explain the marketing mix.

AACSB Information technology and application of knowledge Students should visit a library, use reference search tools, and ask the librarian for various reference books and materials that can help with information gathering and how-to guides for business start-up. They will be able to get more specific references if they pick a business and a desired location. The sources should be cited in proper format.

5-22. Visit three independently owned businesses (in the same industry) in person. Identify the target market for each (demographic, geographic, psychographic, and behavioral).

Note the various advertising and promotional methods in use for each location. Search online for company websites. Ask the store owner or manager where the business advertises and whether it creates press releases. Report back on the results.

L.O. 5.5 Select the mix of promotion to use for your business.

AACSB Application of knowledge Students will likely choose a few restaurants or other local businesses. They should provide the URL and identify multiple resources for each. Their notes from the quick interviews should address the promotional methods in use. The best answers will compare the responses and what they observed.

Chapter 5 Exploring Online 5-23. Research and report how much it would cost to run a banner ad on three websites.

What are the pricing options? Are they listed on the companies’ websites? Where did you find the information?

L.O. 5.5 Select the mix of promotion to use for your business. © Copyright 2020 Pearson Education, Inc

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AACSB Information technology and application of knowledge Students will provide any number of different answers. They are likely to find pay per click and cost per thousand pricing. Pricing may be fixed or may be based upon an auction. For example, Google AdWords uses a cost per click auction where customers pick a daily budget and set a maximum cost per click.

The price they pay is combined with Google AdWords quality scores to determine ranking in searches and display. LinkedIn has multiple options including: medium rectangle (300 x 250 pixels), skyscraper (160 x 600 pixels), text links, and a leader board (728 x 90 pixels). Students may find pricing on the Web sites or in articles about pricing. They should provide citations for the information found.

5-24. Using the internet and appropriate tools, map your home address and draw circles around the location at 2, 10 and 20 miles away. Submit the map and comment on what sorts of businesses people would generally frequent within 2 miles of their homes, if possible.

L.O. 5.4 Find the best location for maximum efficiency and effective distribution.

AACSB Application of knowledge Students should submit maps with concentric circles defining the distances. Some common types of businesses to be very close to home are gasoline stations, food stores, and day care centers. They also may list restaurants and schools.

Bonus 1: Visit the U.S. Census Bureau Web site at http://www.census.gov. Pull up the census tract data both for your home address and for your campus address. If the tracts are the same, pick another college or university. Compare the two locations as potential sites for each of the following. Use a street map, too, if it will help.

•

A bookstore

•

A store specializing in golfing-related goods

•

A children’s day care center

•

A distribution center for cleaning supplies Because of the differences in geography, the demographics will be quite different. However, each discussion should include demographic, geographic, psychographic, and behavioral factors.

Bonus 2: Select either your own company or an entrepreneurial venture that interests you. Find three similar businesses on the Internet and select the two best sites. What features make them attractive? Why did you think they were better than the third site? How would you distinguish your own site?

This would be an excellent opportunity to create a comparative chart. The

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discussion should include features versus benefits and Unique Selling Propositions.

Bonus 3: Perform an Internet search on either a product or service comparable to what you plan to market, or one that you personally own. Attempt to find at least three sites that sell it. a. List the applicable price point, including all discounts, allowances, and promotions, plus any shipping and handling required.

Answers will vary. They should have investigated all pricing options. b. Are there more or less than three prices available? Why do you suppose this is?

Some companies may have higher fixed costs to cover and need to charge higher prices. Others may offer more discounts. Some companies may be trying to get start-up business. c. Explain any challenges you had in performing the steps in this exercise. What do they tell you about the product or service? The companies selling them?

Answers will vary. Often, students have difficulty finding prices and discounts.

Chapter 5 Case Studies Short Case Study Analysis: MekaMon Robots: Finding the Right Marketing Mix Case Study Analysis: 5-25. Identify the parts of the marketing mix for Reach Robotics using either the four Ps and the four Cs and give examples of each.

L.O. 5.1 Explain the marketing mix.

AACSB Application of knowledge The Marketing Ps Product/Service

Place Price Promotion

Example(s) Anthropomorphized robots for techies and parents encouraging STEM Online & Apple stores $299.95 at retail Apple in-store plus publicity, trade shows, technology conferences, and viral marketing.

The Marketing Cs Customer

Convenience Cost Communication

5-26. What channel decision did the founders make to accelerate Reach Robotics speed to market?

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L.O. 5.9 Recognize the importance of a marketing plan.

AACSB Reflective thinking They elected to sell through Apple Stores rather than solely through their website.

5-27. Consider the two target markets that are noted above. What are the pros and cons of each? Suggest another target market.

L.O. 5.2 Choose the attributes of your product or service.

AACSB Analytical thinking The target of techies a natural fit for the group of engineers that created the products. These are the early adopters and are easier to sell such a complex technology to rather than less sophisticated buyers. However, they may be more demanding and may not want to pay for the finished product when they can build one. The target of parents encouraging their kids is good because of the willingness to spend for educational “toys” and to boost learning. It is difficult because the high price is out of reach for many families. Using the Apple store as a channel partner takes advantage of these. Perhaps schools (lower grades?) could use the robots in their courses.

5-28. If you were going to meet with Silas Adekunle, what would you want to discuss and why?

L.O. 5.9 Recognize the importance of a marketing plan.

AACSB Reflective thinking Student answers will vary and should include an explanation.

Long Case Study Analysis: Malia Mills: Love Thy Differences Case Study Analysis: 5-29. List the unique features of Malia Mills’ products.

L.O. 5.2 Choose the attributes of your product or service.

AACSB Application of knowledge The suits are not one size but rather the tops and bottoms of the suits are sized separately and with more size dimensions that just small, medium, and large. The fabrics are unique since they are purchased in small lots. The quality is higher than most bathing suits. They are made in the U.S.A. 5-30. Malia Mills Swimwear is not inexpensive. Why do you think customers are willing to pay a premium for her suits?

L.O. 5.3 Price your products for success.

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AACSB Analytical thinking Malia Mills can use prestige pricing. She helps customers feel good about themselves as they are. She lets them know that they are special as they are.

Her products are made in relatively short runs, so that customers will not see the same suit on others.

5-31. The case mentions that Malia Mills Swimwear experimented with paid advertising. If you oversaw marketing for the company, how would you assess whether or not it was cost-effective enough to continue purchasing advertising?

L.O. 5.5 Select the mix of promotion to use for your business.

AACSB Analytical thinking I’d compare sales for same time of year last year when there was no advertising and see if the incremental sales surpass the cost of the advertising. I’d also have the staff ask how customers had found the shop.

5-32. What kind of environment is Malia Mills trying to create in her stores? Why is this important?

L.O. 5.2 Choose the attributes of your product or service.

AACSB Analytical thinking Comfortable, relaxed, warm. So the customers are happy and can realize all that suits have to offer as an advantage.

5-33. Besides her own boutiques, specialty stores, and the Internet, what might be some additional sales venues for Malia Mills Swimwear to consider exploring?

L.O. 5.2 Choose the attributes of your product or service.

AACSB Analytical thinking Catalogs, door-to-door sales reps, at-home clothing parties.

5-34. Why was the Polaroid project a successful promotional venture?

L.O. 5.7 Use publicity to your advantage.

AACSB Reflective thinking It was something ordinary people could relate to. They weren’t looking at models that represented something they couldn’t be. They saw real people looking good and thought they might to!

5-35. Imagine a scenario in which Malia Mills Swimwear hired you as a media consultant.

Respond to the following: L.O. 5.6 Identify the best advertising and sales promotion options.

AACSB Analytical thinking a. Devise a cause-related marketing strategy for the company.

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Answers could include the psychological advantages to letting people feel good about themselves. Using local seamstresses to help the local economy. b. Suggest three strategies for the company to pursue in obtaining media coverage.

1. She might design a bathing suit for a celebrity that does not have a model’s body and have pictures taken of how nice the suit makes the star look.

2. Write a press release about the suits and submit it to many different media.

3. Come up with a clever name for the suits or the Polaroids, i.e. the Polaroid Project, and get the attention of the media.

4. Students will have other suggestions.

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Chapter 6 Smart Selling and Effective Customer Service Chapter 6 Contents Selling Skills Are Essential to Business Success 205 Selling Is a Great Source of Market Research 206 The Essence of Selling Is Teaching 206 The Principles of Selling 206 The Sales Call 208 Email, Blogs, and Social Networks 208 Prequalify Your Sales Calls 209 Focus on the Customer 209 The Eight-Part Sales Call 210 Three Call Behaviors of Successful Salespeople 211 Analyze Your Sales Calls to Become a Star Salesperson 212 Turning Objections into Advantages 212 Use Technology to Sell 213 Creating a Sales Force 213 Company Sales Team – Selling Directly 213 Independent Sales Representative Firms 214 Outsourced Customer Service Representatives 214 Successful Businesses Need Customers Who Return 214 Customer Service Is Keeping Customers Happy 215 The Costs of Losing a Customer 215 Customer Complaints Are Valuable 216 Customer Relationship Management Systems 217 Why Does CRM Matter? 218 Components of CRM for the Small Business 219 How Technology Supports CRM 220 Chapter 6 Overview This chapter helps the students understand the importance of planning and evaluating your sales approach. In addition, the importance of customer service to gaining and maintaining business is discussed and methods for monitoring and improving this are provided.

Chapter 6 Objectives Learning Objective 6.1: Explain the importance of personal selling skills.

Learning Objective 6.2: Plan successful sales calls.

Learning Objective 6.3: Explore options for adding a sales force.

Learning Objective 6.4: Recognize and arrange excellent customer service.

Learning Objective 6.5: Define customer relationship management and interpret its value.

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Chapter 6 Outline 1. Explain the importance of personal selling. 

Make a good personal impression.



Know your product or service.



Believe in your product or service.



Know your field.



Know your customers.

2. Plan successful sales calls. 

Prepare your sales presentation.



Think positively.



Keep good records.



Make an appointment.



Treat your customers like gold.



Use technology to assist you.



Prequalify your leads, so that you are making the best use of your time and theirs.



Focus on the customer, not on the product or service.



Incorporate the eight parts of successful sales calls.

3. Explore options for adding a sales force. 

Company sales team with inside sales and customer service representatives are the best controlled and focused.



Independent sales representatives often work for multiple companies.



Outsourced customer service representatives reduce overhead.

4. Recognize and arrange excellent customer service. 

Customer service is everything you do to keep your customers happy, especially after the sale. It includes maintaining and repairing the product or service once it has been sold and dealing with customer complaints.



A successful business is built on repeat customers.

5. Define customer relationship management and interpret its value. 

Identify the key components of CRM.



Recognize that CRM can be simple or complex and that you can incorporate technology to obtain higher value.



Use CRM to tailor your products, services, and promotions to customers to yield increased profitability.

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Chapter 6 Teaching Notes Class Discussion Ideas: 1.

2.

Discuss marketing versus selling. Ask students: How are marketing and selling alike?

(Both focus on customer needs, both bring customer and product together, both emphasize learning about the customer.) How are they different? (Marketing brings the customer to the product but selling brings the product to the customer; marketing uses mostly impersonal and indirect communication vehicles but selling uses mostly personal and direct interaction.)

Initiate a discussion on the various options for creating a sales force. Ask students to form small pair and share groups. Each group should brainstorm the names of 10 businesses, large and small. Then they should identify the type of sales force used (they may have to do a quick Internet search) and consider why the company would make that choice. Then, they can share what they have discovered.

3.

Challenge the students: Once the customer has agreed to buy your product or service, is your job as a salesperson done? Have students raise their hands if they think “no” and call on a few to give their reasons. Solicit from the students that, in most cases, follow-up to a sales call is required. Pretend that a student has purchased an item you are selling. On the board, write a sample sales receipt for the transaction, calculate the 10 percent commission, and model good “after sales” customer service (shaking hands, arranging delivery, asking if the customer is satisfied, adding information into a customer database). Ask the students to suggest additional after sales follow-up ideas based on this chapter.

4.

Discuss customer service experiences. Invite the students to share personal experiences: Think of a time when you purchased something and thought the customer service was excellent. What made it so? How did you feel? Think of a time when you thought the customer service was awful. What made it so? How did you feel? Get the students to generalize an observation from each example, and record these on the board.

5.

Say: “List the types of situations in which customer service plays an important role (at point of sale, customers’ phone calls, product returns, warranty claims, product liability claims, requests for information, use of your Web site, etc.).” Help students realize that just about everything a company does should consider customer service as a component: Anytime you interact with a customer (or even influence an interaction “behind the scenes” (such as setting up a return policy) is a “moment of truth,” or choice point, for improving or hurting relationships with customers.

6.

Elicit from the class or explain that customer service involves listening to customers every time a business interacts with them; it is a form of market research. Ask: How could the company collect this information? How might a company organize this information to be useful? How might the company use the information?

Chapter 6 Lecture Enhancers PPT Lecture Slides Outside the Classroom: © Copyright 2020 Pearson Education, Inc.

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www.eyesonsales.com/: Eye on Sales provides guidance, webinars and information for sales professionals.

Forbes magazine Subscriptions: www.forbes.com The Art of the Pitch; Persuasion and Presentation Skills That Win Business, Peter Coughter (Palgrave MacMillan, 2012) Permission Marketing: Turning Strangers into Friends, and Friends into Customers, Seth Godin (Simon & Schuster, 1999) Super Service: Seven Keys to Delivering Great Customer Service . . . Even When You Don’t Feel Like It! . . . Even When They Don’t Deserve It! Jeff Gee (McGraw-Hill; 1st edition, 1999).

Customer Service Training 101: Quick and Easy Techniques That Get Great Result, Renee Evenson (AMACOM, 2006).

The Sales Bible: The Ultimate Sales Resource, New Edition, Jeffrey Gitomer (Harper Collins, 2008).

Chapter 6 Key Terms customer relationship management (CRM) 217 customer service 215 lurk 209 prospect 209 spam 209 Chapter 6 Class Activity Ideas and Group Exercises 1.

2.

Hold a mock sales call. This activity will give students an opportunity to practice the principles of this lesson. Based on the chapter’s principles and steps and your running example in class, have each student prepare to sell the kind of shirt or other garment he or she is wearing to a fellow student. Pair up students and provide time for each partner to act as the salesperson and receive feedback. Allow a few more minutes for revising the sales approach based on the critiques.

Set up customer service scenarios. Have pairs of students think of and write a brief description of one entrepreneurial situation in which customer service could be important, without specifying what should be done or what the outcome is (that is, they just “set the scene”). Each pair should write its scenario on a sheet of paper; then have them fold the paper in quarters and identify it as theirs on the outside. Collect the papers and then redistribute them, one each to a different pair. Tell them that they will role-play the people in the situation and try to create a favorable customer service outcome.

As students prepare for their roles, instruct them to consider: What should the business owner do during the scenario? What should he/she do in the long term? Students may also refer to the textbook for customer service tips. Give the groups time to think about and discuss the issues and plan their role play; then invite each pair to the front of the room to play out the situation in character. Have the class evaluate the role plays. What

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was realistic? What was done well? What could have been done differently? Why? Chapter 6 Critical Thinking Exercises 6-1. Describe the features of each product/service listed below and then create a benefit statement for each product that you would use as selling points.

L.O. 6.1 Explain the importance of personal selling skills.

AACSB Analytical thinking Home pick-up/delivery dry cleaning and laundry service Feature: home pick-up/delivery Benefit: This service saves customers time and gives them more time for the things they prefer to do. They get clean clothes without the work of cleaning them.

Screen projector cover for smart phones Feature: Cover with projection capability Benefit: Customers can show information to others at a size that is more legible and convenient from their phones rather than needing laptops and projectors.

Vegetarian dog food Feature: Meat-free dog food Benefit: Studies show that dogs thrive on vegetarian dog food. Not only do they get enough protein, but the extra vitamins and fiber make their coats shiny and keep them energetic and happy.

Personal lie detector Feature: Small size Benefit: Often, it is difficult to tell when someone is telling the truth. By carrying a personal lie detector, it would be possible to get a sense of this without alerting the other person. While it would not give definitive results, it would help to assess the situation.

6-2. Create a customer profile database for your business containing at least 20 data fields.

Which five questions will you ask every customer?

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Application of knowledge Each student will provide a different answer. The data fields can include: name, e-mail address, phone, fax numbers, mailing addresses, preferences, family size, family members, hobbies, memberships, purchase histories, payment histories, when the contact was made, who made the contact, how was the contact made, what has been discussed, when is the follow-up, and the like. The questions should be specific to the products and services provided, or that of their competition.

Example for the DJ: I will use an electronic database program. Five © Copyright 2020 Pearson Education, Inc.

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questions I plan to ask every customer include: Who are your favorite performers from the Motown era? What is your favorite song? What artists do you NOT want me to play? What is the occasion that is being celebrated? Do you have any special requests or needs?

6-3. Identify a business for which you are a customer. Describe the customer service you receive there. What do you like (or dislike) about it? How could it be improved?

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Reflective thinking Answers will vary but should reflect an understanding of what qualities good customer service should include, such as courteousness, patience, and meeting of customer needs.

6-4. List five things you intend to do in your business to offer superior customer service.

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Application of knowledge Again, answers will vary widely, but should reflect an understanding of what defines excellent customer service in their market space.

Example: 1. I will use my electronic database to fine-tune my play lists so that when I return to DJ for a customer, I can play the music he/she really wants to hear.

2. I will have a Web site where customers can e-mail me about finding obscure Motown-era recordings.

3. I will give each customer a burned CD of his/her ten favorite songs after an event.

4. Customers will be able to reach me 24/7 via my cell phone and pager.

5. I will always bring a positive, upbeat attitude to my events.

6-5. Identify five specific sales-call prospects for your business. Prequalify them using these questions: (a) Is the prospect in my market? (b) Does he or she need my product/service? (c) Will my product/service remove a problem or source of “pain” or improve the individual’s life? (d) Can he or she afford it?

L.O. 6.2 Plan successful sales calls.

AACSB Application of knowledge and analytical thinking

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Example: Sales Prospect

Description

Terrance Small

My grandfather’s best friend. He plans to throw a big party for his 50th wedding anniversary in June. He has no idea how to throw a party of this size. He is a retired executive and can easily afford my services.

Elaine Cartwright

Human Resources Manager at a local law firm and family friend. She is responsible for coordinating employee retirement events. Her experience is in HR, not running events! Generally, the firm has an adequate budget for my services.

Anthony DeSouza

Community Coordinator–Peach Grove Retirement Complex.

He organizes a big summer bash for seniors each year on the Fourth of July. He’d like some new ideas to change up the party a little. While budgets are often tight, they may have enough funds.

Tanya Spalding

Program Director–YMCA Senior Center. She coordinates social and educational activities for local seniors. She has been doing this for several years. Affording my services may be a challenge.

Marcella Robinson

Friend of the family. She organizes several local charity events each year. New ideas may help to refresh the event and bring in new donors. The budgets vary, but often are large enough to afford my services and cannot include live bands.

6-6. Create an advertisement, brochure or web landing page for your business. Have three friends and a mentor (someone more experienced who you respect and who can give you good business advice) look at your materials and give you feedback. Write a brief memo listing their suggestions and what you plan to do to improve your marketing materials.

L.O. 6.2 Plan successful sales calls.

AACSB Analytical thinking Answers will vary, but the memo should indicate that the students did have some people evaluate their marketing materials.

Chapter 6 Key Concept Questions 6-7. Explain Joe Girard’s Law of 250 in your own words and give examples from your own life.

L.O. 6.2 Plan successful sales calls.

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AACSB Application of learning Answers will vary but should reflect understanding that every person encountered has the potential to influence another 250 people.

6-8. Why is customer service an extension of marketing?

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Analytical thinking Every contact a customer has with the business is an opportunity to reinforce the marketing vision. In addition, customer service is a source of market research.

6-9. Give three reasons why it is important to keep collecting market research even after you have opened your business.

L.O. 6.5 Define customer relationship management and interpret its value.

AACSB Analytical thinking 1. Customers who have used my product or service are a great source of information on how to improve it.

2. Remembering that I want to keep collecting market research will keep me talking to my customers and valuing their opinions.

3. If I keep collecting market research, I can keep continuously improving my product/service.

6-10. What do you expect your personal “look” to be when you start selling your product/service, and why?

L.O. 6.2 Plan successful sales calls.

AACSB Application of knowledge Answers will vary but should include a neat, clean appearance that also reflects the image of the company.

6-11. What sources of information can you use to develop a customer profile?

L.O. 6.5 Define customer relationship management and interpret its value.

AACSB Analytical thinking Programs and books that are already written. For example, Microsoft Access or a specialized customer service software system for your industry.

6-12. List three ways you intend to provide superior customer service.

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Analytical thinking Each student will have a different approach. Example:

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1. I will interview each customer prior to the event to get very specific information about his/her needs.

2. I will write down customers’ needs and preferences to make sure I have an accurate record.

3. I plan to follow up with all my customers within three days after the event to make sure they were satisfied with my services. I want them to give me feedback about how I can improve.

6-13. Create a company signature for your business e-mail. Keep it under eight words.

L.O. 6.1 Explain the importance of personal selling skills.

AACSB Information technology Example: Oldies but Goodies—We play your favorite music.

Chapter 6 Application Exercises 6-14. Develop a brief sales pitch for three items that you are wearing. Try out the pitch for each on a partner. Have your partner help you time the pitches to one minute. Do the same for your partner.

L.O. 6.2 Plan successful sales calls.

AACSB Application of knowledge Students should emphasize understanding customer wants and needs and selling based on benefits rather than features.

6-15. Write a memo to your partner discussing his or her sales calls and how they could be improved. When analyzing your partner’s efforts, use the eight steps of a sales call in the text as your guide.

L.O. 6.2 Plan successful sales calls.

AACSB Written and oral communications and reflective thinking Memoranda will vary in content. They should be clearly written and address the positive and negative aspects of the sales call. The eight steps below should be mentioned: 1.

2.

3.

4.

5.

6.

7.

8.

Preparation Greeting Showing the product or service Listening to the customer Dealing with objections Closing the sales Follow-up Asking for references

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6-16. Arrange to receive a sales pitch from a competitor in the business field that you intend to enter. After the presentation, write down your objections to purchasing the product/service. Use Brian Tracy’s method to categorize your objections and then phrase them in a single question composed of 25 words or less. Avoid deception in arranging your sales pitch.

L.O. 6.3 and 6.4 Explore options for adding a sales force, and recognize and arrange excellent customer service.

AACSB Application of knowledge Answers will vary but should follow Brian Tracy’s method: Write down every single objection and then group them under the following headings: 1. Price 2. Performance 3. Follow-up service 4. Competition 5. Support 6. Warranties and assurances Rephrase the set of objections in a single question of 25 words or less.

Chapter 6 Exploring Your Community 6-17. Visit three businesses in your community and take notes on your experience as a shopper. Write a memo comparing the customer service at each. Include such information as the following: Were you greeted when you came in? Did anyone offer to help you? If you bought something, were you given a survey? What differentiates the best of the three from the worst in terms of customer service?

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Written and oral communications and application of knowledge Answers will vary.

6-18. Interview an entrepreneur about the types of CRM he or she uses. Discuss customer service and complaint handling in particular. Summarize the interview in a short paper.

L.O. 6.5 Define customer relationship management and interpret its value.

AACSB Written and oral communications and application of knowledge Answers will vary.

Chapter 6 Exploring Online 6-19. Visit the website of a direct selling organization such as Scentsy, Mary Kay, Advocare, Nu Skin Enterprises, Primerica, or Team National and read the information on becoming an independent representative. What does the company sell? What does it tell you about

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the opportunity to become part of its sales team? What is the cost of joining the organization (start-up kit and other costs)? What compensation is promised? How might becoming a direct selling organization fit for your company?

L.O. 6.3 Explore options for adding a sales force.

AACSB Reflective and analytical thinking Each of the sites is likely to have a special section on joining its sales force. This area should provide information on the start-up process, commission structure, earnings levels of existing representatives, any costs to sign on and earn commissions (as opposed to simply purchasing products). There will be product and service pages detailing what is being sold. None of the sites should promise specific amounts of compensation, rather they should explain how they pay out compensation and when. Students should find this information readily from Direct Selling Association member sites and may have difficulty with others. Some student business ideas lend themselves to becoming direct selling organizations, so some students may explain the fit.

Chapter Case Studies BNI—Building Businesses through Networking Case Study Analysis 6-20. How does BNI reinforce the importance of selling based on benefits?

L.O. 6.1 Explain the importance of personal selling skills.

AACSB Application of knowledge Members are expected to provide referrals for one another on both a formal and informal basis. For example, they are asked to share information at the regular meetings.

6-21. List three things that BNI does that you could adopt to help build business relationships.

L.O. 6.5 Define customer relationship management and interpret its value.

AACSB Analytical thinking Use a conversational approach that welcomes interaction. Adapt each discussion to the particular situation. Focus on real, everyday issues that people have experienced and develop long-term professional relationships.

6-22. What type of referral network might support your proposed venture? Find such a group and write a paragraph about it and why it could be of value.

L.O. 6.3 Explore options for adding a sales force.

AACSB Information technology and analytical thinking

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Answers will vary. They may suggest BNI, Rotary, trade groups, chambers of commerce, or others.

6-23. Visit the BNI site at http://www.bni.com and find the chapter closest to your home. a. What is the name of the chapter? b. When does it meet? c. Who is the executive director of the chapter? d. How many members are in the chapter? e. What are the professional classifications of three of the members?

L.O. 6.2 Plan successful sales calls.

AACSB Information technology Answers will vary but should include all the requested information.

Case Study Analysis: Amazing Customer Service Propels Amazon 6-24. Why would Amazon accept responsibility for the shipping problems of its vendors, UPS and FedEx? How would you feel about the company’s response if you were among the customers who did not receive two-day shipping as promised?

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Reflective thinking Customer service is critical for Amazon and lapses are not tolerated.

The total experience is wrapped around the customer to build customer satisfaction, sales, and repeat purchases. Amazon had to accept responsibility if it wanted to maintain its customer base.

Most students will express feelings of frustration and anger.

6-25. List the pros and cons of Amazon’s customer relationship management system from the company and customer perspectives.

L.O. 6.5 Define customer relationship management and interpret its value.

AACSB Analytical thinking Pros: The CRM system helps Amazon increase sales. Customer feedback helps Amazon customize their website and give insight to other customers through the reviews and ratings.

From the customers’ perspective, they get customized promotional emails, up-to-date tracking, and opportunities to provide feedback.

Cons: Customers have high expectations that Amazon must maintain.

Some customers may find all the contact annoying and may not like Amazon © Copyright 2020 Pearson Education, Inc.

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knowing so much about their account information.

6-26. How has Amazon compensated for the lack of brick-and-mortar stores?

L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Analytical thinking Amazon carries a wide selection of merchandise. “Amazon’s user-friendly website, along with low prices, one-click shopping, no-hassle returns, freeshipping options” helps them compensate for the lack of “brick-and-mortar stores.” Note: As of this writing Amazon has begun to add physical retail sites and students may comment on the change.

6-27. Go to the Amazon.com site and search for The Lean Startup by Eric Reis. a. What formats are available? b. What other categories of information are provided, and how might they boost sales for the company? c. What ordering options are offered? Are any more convenient than others?

Why? L.O. 6.4 Recognize and arrange excellent customer service.

AACSB Information technology and analytical thinking Answers will vary but should reflect genuine research. They should note print and electronic options, reviews, prices, and the like. Ordering options should include one-click ordering, regular ordering, electronic delivery, and various shipping options.

UNIT 2 CASE STUDY ANALYSIS: INTEGRATED MARKETING Unit 2 Opportunity Assessment: Kitchen Arts & Letters, Inc. —An Independent Bookstore Defies Industry Odds U2-1. What opportunity did Nach Waxman identify when he founded Kitchen Arts & Letters?

L.O. 4.4 Determine your market segments.

AACSB Analytical thinking When Waxman created KA&L, he envisioned a store that was more than just a cookbook outlet. He wanted to provide books on all subjects related to food.

U2-2. What are the business-definition aspects of KA&L (offer, target market, capability, problem solving)?

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L.O. 3.1 and 5.2 Define your business and choose the attributes of your product or service.

AACSB Application of knowledge Offer: an inventory of approximately 13,000 titles including books on food chemistry, the restaurant business, ethnographic monographs, and various food-related items, such as stationery and art.

Target market: KA&L customers are generally either culinary professionals or home cooks. These customers are not the “mass market” readers who are typically drawn to the larger chains or online behemoths.

Production/Delivery Capacity: U2-3. What is the competition, direct and indirect, for the company?

L.O. 3.5 Analyze your competitive advantage.

AACSB Analytical thinking The competitors include other bookstores including independent, chains, and online.

Other competitors include: online retailers such as Amazon and eBay and specialty stores such as William-Sonoma. Indirect competitors might include TV cooking shows.

U2-4. Create a qualitative competitor analysis chart for KA&L. Given its target customers, list the top five competitive factors. Select three competitors (name them). This will require some research.

L.O. 3.5 and 5.1 Analyze your competitive advantage and explain the marketing mix.

AACSB Analytical thinking Answers will vary but should reflect significant online research for the three competitors. The competitive factors might include: product selection, service, price, location, and knowledge of staff, etc.

U2-5. Which of the six factors of competitive advantage apply for KA&L? Explain.

L.O. 3.5 and 6.4 Analyze your competitive advantage, and recognize and arrange excellent customer service.

AACSB Analytical thinking Four of the six factors of competitive advantage apply to KA&L. The first is quality. Nach Waxman has created a quality independent bookstore that is NOT just a cookbook store but a “cultural zone” devoted to all aspects of food. His location on Lexington Avenue in Manhattan is a convenient location for his target customers. His selection of 13,000 titles is tailored for his two separate clienteles: the amateurs and professionals. Finally, his staff provides superior service and helps direct the customers to the appropriate product offerings. Customers are encouraged to talk to the staff to insure © Copyright 2020 Pearson Education, Inc.

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they find “the right books for the right individuals.”

U2-6. Describe the segmentation for KA&L in geographic, demographic, psychographic, and behavioral dimensions.

L.O. 4.4 Determine your market segments.

AACSB Analytical thinking Geographic: Although KA&L operates in Manhattan, one of the food capitals of the world, it is a “destination shopping location” for customers anywhere who are seriously interested in food. Because books can be ordered online, the world truly is its market.

Demographics: The independent bookstore demographics are: College graduates (57 percent of the market, twice the rate of any other group), adults ages 45 to 64 (spend 28 percent to 33 percent more than average on books), married couples (with or without children), between 18 and 24 and 65 and older (they spend the least) and high-income buyers.

Psychographic: Clearly their customers’ lifestyles and values are centered around serious knowledge and preparation of food.

Behavioral dimensions: for professionals, KA&L stocks the books with photographs of the foods as prepared, restaurant-industry information, culinary history, memoirs, and literature. For the amateur, the focus is more on preparation and cooking techniques (cookbooks) and culinary experiences.

U2-7. Complete the following positioning statement: Kitchen Arts & Letters, Inc., is the ___________ that ___________ to ___________.

L.O. 4.5 Position your product or service within your market.

AACSB Application of knowledge Answers will vary. They should mention food and the target customer base.

U2-8. Where in the product life cycle are independent bookstores? Where is KA&L? Why is it the same or different from others?

L.O. 4.5 Position your product or service within your market.

AACSB Analytical thinking Independent bookstores are in the decline stage, but KA&L is most likely in the maturity stage. It can avoid decline by being specialized in products and

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serving niche that is growing (foodies).

U2-9. Create a three-question survey that would be of value to Nach Waxman and his team. To whom would it be administered? By whom? How would it be administered? Why would it be useful?

L.O. 4.3 Choose your research methods.

AACSB Application of learning Examples might include: “How did you hear about our business?”, “Were you able to find what you needed?”, “What additional product offerings would you purchase?”, and “How often do you shop at KA&L?” It could be administered to customers who make a purchase via an online survey on the bottom of the cash register receipt. It might help Waxman in his promotional efforts and product offerings.

U2-10. What secondary research could be of value to KA&L management? Find three specific sources and cite them properly.

L.O. 4.2 Summarize how marketing research prepares you for success.

AACSB Information technology and written and oral communication Again, answers will vary but students will probably cite several sources on independent bookstores, food/cooking specialty businesses, and even food magazines such as Gourmet or Bon Appetit.

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Chapter 7 Understanding and Managing Start-Up, Fixed, and Variable Costs Chapter 7 Contents Start-Up Investment 236 Brainstorm to Avoid Start-Up Surprises 236 Keep a Reserve Equal to One-Half of Start-Up Investment 237 Predict the Payback Period 239 Estimate Value 239 Fixed and Variable Costs: Essential Building Blocks 240 Calculating Critical Costs 240 Fixed Operating Costs Do Change over Time 244 Allocate Fixed Operating Costs Where Possible 244 The Dangers of Fixed Costs 246 Using Accounting Records to Track Fixed and Variable Costs 246 Three Reasons to Keep Good Records Every Day 247 Cash versus Accrual Accounting Methods 249 Recognizing Categories of Costs 249 Chapter 7 Overview Being aware of the many costs associated with starting, running, and maintaining a business is crucial to the sustainability of the business. This chapter makes the student aware of the start-up costs, the many obvious costs, the possible surprise costs, and ways to keep up with these costs.

The chapter puts these costs into categories of fixed and variable costs and demonstrates the proper accounting methods and systems that are universally accepted.

Chapter 7 Objectives Learning Objective 7.1: Assess the costs of starting a business.

Learning Objective 7.2: Describe fixed and variable costs.

Learning Objective 7.3: Select financial record keeping for your business.

Chapter 7 Outline 1. Assess the costs of starting a business. 

Start-up investment is the one-time expense of starting a business.



Cost of goods sold (COGS) is the direct cost of producing the product or service.



Operating costs comprise the funds necessary to run the business, not including the COGS.



Payback period is estimation of the time required to bring in enough cash to cover the seed funding.



Net present value addresses the viability of an investment opportunity that considers investment-return criteria.

2. Describe fixed and variable costs. 

Variable costs change with sales. They are divided into two subcategories:

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a. Cost of goods sold, which are the costs associated specifically with each unit of sale, including o the cost of materials used to make the product (or deliver the service) and o the cost of labor used to make the product (or deliver the service). b. Other variable costs, including o commissions and o shipping and handling charges, etc. o Fixed costs stay constant whether you sell many units or very few units. There are several main categories of operating costs: I SAID U R  “Other FXs” •

Insurance

•

Salaries (indirect labor—managers, office staff, sales force)

•

Advertising

•

Interest

•

Depreciation

•

Utilities (gas, electric, telephone, Internet access)

•

Rent

•

Other Fixed eXpenses

3. Select financial record keeping for your business. 

Recognize the importance of keeping complete, accurate, and timely records.



Determine whether to use the cash or accrual accounting method.



Categorize the accounting entries properly, whether using a manual or computerbased accounting system.

Chapter 7 Teaching Notes Class Discussion Ideas: 1. Present this problem: If friends offer to give you $100 in a month if you give them $100 today, using the information from this chapter, would you do it? Why or why not? How much would they have to pay back for you to give them the $100 today? What assumptions did you make?

2. Pose one of the following problems for students to discuss in groups or pairs. Easier problem: Would you prefer investing in a company where you would get your money back at the end of the week or at the end of the month? Why? More difficult problem: Would you prefer investing $1,000 in a company where you would get $1,100 at the end of the week or $1,500 at the end of the month? Why? © Copyright 2020 Pearson Education, Inc.

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3. Ask: Why might variable costs be considered less risky than fixed costs? (Fixed costs don’t change in relation to sales, so they still must be paid, even if there is no income.) For example, if you market cookies baked in your facility. What happens if you don’t sell any cookies one month or sell only a hundred? The riskiness of fixed costs demonstrates why it’s a good idea for entrepreneurs to have a cash reserve in the bank equal to three months of fixed costs.

4.

Ask: What are some types of nonfinancial returns someone might gain from opening a business? (Examples include feeling good, having pride in a job well done, feeling excitement, learning new skills, opening new opportunities, making new friendships, enjoying status/prestige.)

Chapter 7 Lecture Enhancers PPT Lecture Slides Outside the Classroom: www.cpafinder.com: CPA Finder can help you locate a certified public accountant for your business. www.accountingweb.com: Information for accountants and about accounting.

Fortune magazine Subscriptions: www.fortune.com The Accounting Game: Basic Accounting Fresh from the Lemonade Stand, 2nd ed., Judith Orloff and Darrell Millis (Sourcebooks, Inc., updated rev. ed., 2008).

Accounting Made Simple: Accounting Explained in 100 Pages or Less, Mike Piper (Simple Subjects, LLC, 2013).

Barron’s Accounting Handbook, 5th ed., Joel G. Siegel and Jae K. Shim (Barron’s Educational Series, 2010).

E-Z Accounting, 5th ed., Peter J. Eisen (Barron’s Educational Series, 2009).

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine, Mike Michalowicz (Portfolio 2017).

Chapter 7 Key Terms accrual method 249 audit 247 cash accounting method 249 cash reserve 237 contribution margin 240 depreciation 243 fixed operating costs 242 fixed costs 240 inventory costs 242 net profit 244 payback period 239 © Copyright 2020 Pearson Education, Inc.

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prototype 236 seed capital 236 variable costs 240 Chapter 7 Class Activity Ideas and Group Exercises 1.

From the Internet (Bankrate.com) or a newspaper, provide (or have students research) different interest rates for different types of loans, such as car, house, signature, credit card, education. Ask students: Using what you’ve learned about risk, why are credit card rates higher than car loan rates, five-year car loan rates higher than three-year? Have them speculate: Why are stock return rates generally higher than savings rates? Why are bank loan rates higher than bank savings account rates?

2.

Do a card-exchange simulation. Assign the roles of entrepreneur, wholesaler, radio station, and two or more customers to students. Distribute play money to the entrepreneur and customers. Give an opened deck of cards to the wholesaler. Have the wholesaler sell the whole deck to the entrepreneur in exchange for a negotiated sum of money. Record on the board the number of cards (52) and the dollar amount exchanged. Have the entrepreneur buy an ad from the radio station to advertise the cards at an agreed-upon price. Record the dollar amount exchanged. Have the customers buy cards from the entrepreneur for a price set by the entrepreneur. Record the number of cards and dollar amount purchased by each customer. Have students calculate the entrepreneur’s revenue, COGS, variable costs, gross profit, fixed costs, and net profit for the transactions.

3.

Divide the class into pairs. Distribute accounting materials (journal, receipts, invoices, purchase order slips) to each pair. This game can be played step by step if you read each transaction below aloud in sequence and allow a few minutes for pairs to complete the task. Or the game can be played as a race, if you show all the transactions at once on the board or in a handout. In either case, pairs get points for being the first to complete each or all steps accurately. Student pairs are to complete the accounting process for each transaction, including writing checks, making journal entries, and creating invoices, receipts, and purchase orders where appropriate.

Transactions (Don’t Drop That Tot, Inc. is on an accrual basis) 3/1:

You and a friend start a babysitter-training business, Don’t Drop That Tot, Inc., by each investing $400 to sell two-hour sessions for $50 per session.

3/2:

You buy some computer equipment from Staples for $600 because you plan to deliver the training over a website; you write a purchase order and acquire it on a Bank of America credit card.

3/3:

You hire another friend, Pat Luck, to help sell training sessions on 10 percent commission, to be paid at the end of every month. No sales have been made, yet.

3/4:

You print and distribute $100 worth of flyers and e-mails to young people to publicize your new business. The printing company, Sir Speedy, invoices you immediately.

3/6:

Two people sign up online for your training and are being invoiced.

3/7:

You invoice the two customers who signed up.

3/8:

The credit card invoice from Bank of America arrives with your Staples purchase for your computer equipment ($600), and you pay half of it on a two-payment plan.

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3/10: Your commissioned salesperson brings you checks for 15 customers to take your training.

3/11: You buy 50 certificates at $1 each to send to customers who complete your training. You pay by check to OfficeMax. 3/15: You receive a check for $50 from one of the customers you invoiced.

3/17: You receive a check for $50 from the other customer you invoiced.

3/25: Three more people sign up online, pay with PayPal (3% fee to PayPal), and take your training.

3/26: You pay your electricity bill to Big Power Company for $16 on the day it arrives.

3/27: You pay your Internet Service Provider, Slowsky Internet, Inc., a monthly fee of $50 when it is due today.

3/30: You pay 60 cents in postage to USPS for mailing a certificate to each customer who took your training this month.

3/30: You calculate and write a commission check to your salesperson, Pat Luck, for 15 sales.

3/30: You determine your monthly profit.

3/30:

You pay 25 percent tax on your profit to the IRS.

3/30:

You determine your after-tax profit.

3/30:

You calculate your cash flow.

Transaction Answers 3/1: Enter investment of $800 in journal and check register; balance.

3/2:

Write purchase order for $600. Record A/P.

3/3: Nothing. No transaction.

3/4:

Record invoice for printing $100 from Sir Speedy.

3/6:

Write invoices for $100.

3/8:

Write check for $300 to Bank of America, enter transaction in journal, balance.

3/10: Deposit payments in account, enter transaction in journal (15 x $50 = $750), balance.

3/11: Write check for $50 to Office Max for the supplies, enter transaction in journal, balance.

3/15: Deposit money in account, enter transaction in journal, balance.

3/17: Deposit money in account, enter transaction in journal, balance.

3/25: Record direct deposit of $150 - $4.50 (3% PayPal fee) = $145.50 in account, enter in journal, balance.

3/26: Write check for $16 to Big Power Company, enter transaction in © Copyright 2020 Pearson Education, Inc.

7-5

journal, balance.

3/27: Write check for $50 to Slowsky Internet, Inc., enter transaction in journal, balance.

3/30: Write check for $12 (0.60 x 20 students) to USPS, enter transaction in journal, balance.

3/30: Write check for $75 (15 x $50 x 0.10) to Pat Luck, enter transaction in journal, balance.

3/30: Income = $750 + $100 + $150 = $1,000 Expenses = $600 + $100 + $50 + $4.50 + $16 + $50 + $12 = $832.50 Profit = $1,000 - $832.50 = $167.50 3/30: Pay the IRS. Taxes = Profit x 0.25 = $167.50 x 0.25 = $41.88 3/30: Net Profit = Profit – Taxes = $167.50 – 41.88 = $125.62 3/30: Cash In = $800 + $750 + $100 + $145.50 = $1,795.50 Cash Out = $300 + $50 + $16 + $50 + $12 + $75 = $503.00 Net Cash = $1,795.50 - $503.00 = $1,292.50 Discussing the Accounting Game.

Go over each transaction and the journal entries. Clarify any points they misunderstand. Using their documents, ask the following questions:  How is the business doing? (Reasonably well, since it turned a small profit the first month, but it has plenty of room to grow.)  How much money does it have left? ($1,292.50, which should be the ending cash balance.) What is the business’s ROI on its initial investment? (125.62/800 = 15.7 percent)  What is its return on sales (ROS)? (125.62/1,000 = 12.6 percent)  What might the two entrepreneurs do to grow or improve the business? (Answers will vary but most likely will focus on increasing marketing, expanding services, keeping costs low, etc.)

Chapter 7 Critical Thinking Exercises 7-1. Give an example of a business that you have observed lowering the price of a product.

How do you think the business was able to reduce the price?

L.O. 7.2 Describe fixed and variable costs.

AACSB Analytical thinking Answers will vary considerably. They may suggest decreases in fixed costs such as rent or in decreased variable cost due to reduced materials costs.

They may say a reduction in profit margins. One example: The cost of Internet service has come down because many ISPs have moved their customer service departments to India, where the employee costs are lower.

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7-2. Describe the recordkeeping system you intend to set up for your own business. Why did you choose that particular system?

L.O. 7.3 Select financial record keeping for your business.

AACSB Application of knowledge and reflective thinking Answers will range from simple manual logs, as shown in the text, to EXCEL or other spreadsheets, free services like Wave or well-known options like QuickBooks, to the use of industry-specific accounting systems. Reasons should address topics such as the volume and nature of transactions, complexity, convenience, cloud storage and backup, and reporting requirements.

Example: I will create a computer database to track my client and billing records. I also plan to create a backup paper filing system so that I have hard copies of all my documents. My recordkeeping system will include the following: Filing Category

Function

Music Research and Library

To maintain my competitive advantage, I will continue to track down rare Motown-era recordings. I plan to catalogue my collection carefully so that I know exactly what I own.

Paid Invoices

I will keep copies of all checks and credit card receipts attached to client invoices.

Accounts Receivable

I will file bills I owe to suppliers such as the phone company and my Internet Service Provider.

Accounts Payable

I will keep track of invoices for payments owed to me by clients.

Marketing Materials

I will keep samples of flyers, business cards, logo designs, and promotional cards.

Prospective Clients

I plan to collect information about potential clients who may be interested in hiring Oldies but Goodies.

7-3. What bank accounts do you intend to open for your business? Which bank will you use?

Why (provide at least three reasons for your choices)?

L.O. 7.3 Select financial record keeping for your business.

AACSB Analytical thinking Most students should indicate the establishment of a checking account, at a minimum. Retail businesses will need credit card acceptance

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7-7

accounts, if not using Square, PayPal or the like. Beyond this, the answers will vary.

Example: I will open checking, savings, and line of credit accounts at SelfHelp Credit Union. The checking account will permit me to send payments by check and through EFT to suppliers using my business name. I can earn a small amount of interest by depositing my sales revenue into a savings account. Once cash balances increase, I can convert to an overnight sweep account to maximize earnings. My line of credit will cover me if I owe money to suppliers and don’t have the cash flow to fully cover my outstanding balances in the short term. I plan to pay my line of credit loans back in full each month.

I selected Self-Help because it is a community development credit union conveniently located in my area. Rates are excellent, and fees are minimal.

They granted me a line of credit when two banks rejected my applications.

7-4. Imagine that you have invented a guitar strap that goes over both shoulders, thereby reducing shoulder strain for the guitarist. This item could be a big seller, but before you can apply for a patent or convince investors to back your production plans, you will need a prototype. Find at least three manufacturers that could create such a prototype for you. Could you create the prototype?

L.O. 1 Assess the cost of starting a business.

AACSB Information technology Students should either use the Thomas Register (www.thomasregister.com) to find prototype manufacturers or search through other online databases.

They may conduct library research as well. They may say that they could create a prototype from a couple of guitar straps or from other supplies.

7-5. For a business you would like to start, estimate the fixed and variable costs.

L.O. 7.1 Assess the costs of starting a business.

AACSB Analytical thinking Example: Fixed Cost

Amount

Utilities Salaries Advertising

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Description $100.00 I will have to pay electricity, Internet, and phone costs. $0 I do not plan to pay myself a salary. $150.00 I will have average monthly costs for business cards, classified ads, promo cards, flyers, and radio ads.

7-8

Insurance

$75.00 A general business liability insurance monthly charge will need to be paid.

Depreciation

$200.00 I will budget a monthly cost for the depreciation of my DJ equipment.

Interest

$0 I will have no interest because my business is not being financed with debt.

Rent

$100.00 I will budget a monthly cost to keep my records and equipment at a secure storage facility.

Unexpected

$75.00 There are always unexpected costs in business. I am budgeting for the unexpected at an average rate of $75 per month.

TOTAL

$700.00

Chapter 7 Key Concept Questions 7-6. What is the reason to calculate the payback period and the net present value for a business investment? What distinguishes the two?

L.O. 7.1 Assess the costs of starting a business.

AACSB Analytical thinking The payback period is an estimate of how long it will take your business to bring enough to cover the start-up investment. NPV is used to determine the current value of proposed investments. If the NPV calculation is a positive value, the investment will result in a positive return based on the investors’ required rate of return. The payback period does not take into consideration the future earnings, opportunities for alternative investments, or the overall value of the company.

7-7. Calculate Total Revenue for the items below: L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge Unit a. b. c. d. e.

Units Sold 25 30 12 75 20

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Selling Price $4.64 $12.99 $1,233.00 $645.75

Total Revenue $116.00 $389.70 $14,796.00 $48,431.25

$45.03

$900.60

7-9

7-8. Calculate Total Variable Costs for the same items.

L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge Unit a. b. c. d. e.

Units Sold 25 50 12 75 20

Total Variable Costs per Unit Total Variable Costs $2.0 $50.00 00 $6.5 $195.00 0 $620.0 $7,440.00 0 $270.0 $20,250.00 0 $20.0 $400.00 0

7-9. Calculate Total Contribution Margin for the same items.

L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge Total Revenue a. $116.00 b. $389.70 c. $14,796.00 d. $48,431.25 e. $900.60

Total Variable Costs Total Contribution Margin $50.00 $66.00 $195.00 $194.7 0 $7,440.00 $7,356.00 $20,250.00 $28,181.25 $400.00 $560.60

7-10. Calculate Total Profit for the same units.

L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge

a. b. c. d. e.

7-11.

Total CM $66.00 $194.70 $7,356.00 $28,181.25 $560.60

Total Fixed Operating Costs $25.00 $70.00 $425.00 $13,000.00 $200.00

Total Profit $41.00 $124.70 $6,931.00 $15,181.25 $360.60

Calculate Profit per Unit for the same units.

L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge

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Units Sold a. 25 b. 30 c. 12 d. 75 e. 20

Total Profit $41.00 $124.70 $6,931.00 $15,181.25 $360.60

Profit per Unit $1.64 $4.16 $577.58 $202.42 $18.03

7-12. The following business concepts have been developed by your colleagues, and they have asked you to provide feedback on each as a potential investment. Using the data provided, calculate the payback period and NPV of each.

L.O. 7.1 Assess the costs of starting a business.

AACSB Analytical thinking

Project

Seed

Rate of

Net

Net Cash

Net Cash

Net Cash

Net Cash

Other Net

Payback

Capital

Return

Cash

Flow

Flow

Flow

Flow Year

Cash Flow

Period

(%)

Flow

Year 2

Year 3

Year 4

5

NPV

Year 1 A

$1000

5%

$200

$300

$400

$500

$0

$0

3.2 years

$219

B

$250,000

8%

$2000

$25,000

$25,000

$1 million

$148,000

$200,000/year

3.2 years

$871,619

6.3 years

$861,104

for 5 years C

$8 million

17%

$0

$0

$0

$1 million

$5 million

D

$50,000

25%

$0

$1000

$29,000

$35,000

$70,000

$0

3.6 years

$2,762

E

$120

6%

$0

$0

$20

$80

$40

$20 million in

4.5 years

-$21.37

million

million

million

Year 6, $5

$6 million for 3 years

million

million

million in Year 7

Using EXCEL: Initial Investment Required Return Net Cash Year 1 Net Cash Year 2 Net Cash Year 3 Net Cash Year 4 Net Cash Year 5 Net Cash Year 6 Net Cash Year 7 Net Cash Year 8 Net Cash Year 9

$ $ $ $ $

A 1,000 $ 0.05 200 $ 300 $ 400 $ 500 $ $ $ $ $ $

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B 250,000 $ 0.08 2,000 $ 25,000 $ 25,000 $ 1,000,000 $ 148,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000

C D E 8,000,000 $ 50,000 $ 120,000,000 0.17 0.25 0.06 $ $ $ 1,000 $ $ 29,000 $ 20,000,000 1,000,000 $ 35,000 $ 80,000,000 5,000,000 $ 70,000 $ 40,000,000 6,000,000 $ 20,000,000 6,000,000 $ 5,000,000 6,000,000

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Net Cash Year 10 PV NPV NPV > 0?

$ $

1,219 219 Yes

$ $ $

200,000 1,121,619 871,619 Yes

$ $

8,861,104 861,104 Yes

$ 52,762 $ 98,629,845 $ 2,762 $ (21,370,155) Yes No

Chapter 7 Application Exercises 7-13. Ariel LeBec, of Ariel’s Sandwiches, sells po’ boy sandwiches and soda from a sidewalk cart in a popular park near her home in New Orleans. She sets up her rented cart in the summers to raise money for college. Last month she sold $8,000 worth of product (sandwiches and sodas) to 400 customers. She spent $1,600 on the sandwich ingredients, wrapping materials, and sodas. Her monthly costs are the following: Utilities = $200, Salary =$3,000, Advertising = $500, Insurance = $10, Interest = $0, Rent = $700, and Depreciation = $0. a.

What are Ariel’s variable costs? Explain.

L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge Variable costs are those that vary with sales. Ariel’s variable costs are what she spends on her sandwich ingredients and sodas, which equals $1,600.

b.

What is Ariel’s COGS? Explain.

L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge Ariel spent $1,600 total COGS for 400 sales; therefore her COGS is $1,600/400 = $4.

c. What are her other variable costs? Explain.

L.O. 7.2 Describe fixed and variable costs.

AACSB Application of knowledge Ariel has no other variable costs. d. What are her fixed costs? Explain.

L.O. 7.2 Describe fixed and variable costs.

AACSB Analytical thinking Her monthly fixed operating costs are $200 + $3,000 + $300 + $700 + 10 = $4,210 per month.

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e. What is Ariel’s EOU? L.O. 7.2 Describe fixed and variable costs.

AACSB Analytical thinking Economics of One Unit—Ariel’s Sandwich Shoppe Selling Price per Unit

$20.00 ($8,000/400)

Cost of Goods Sold: $4.00 Other Variable Costs: $0 Cost of Goods Sold per Unit

$4.00 ($4.00 + $0)

Gross Profit per Unit

$16.00 ($20.00 –

$2.00) f. How much cash reserve should she keep in the bank?

L.O. 7.1 Assess the costs of starting a business.

AACSB Application of knowledge Ariel should keep at least three times her monthly fixed operating costs in the bank, or $4,210 x 3 = $12,630.

Note: The instructor may ask Profit = Sales – Total Variable Costs – Total Fixed Costs $8,000 - $1,600 – 4,210 = $2,190 Chapter 7 Exploring Your Community 7-14. Ask an entrepreneur in your neighborhood to discuss his or her accounting system. Write a one-page report about the pros and cons of the system, based on the entrepreneur’s comments and quick analysis, and use it to make an oral report to the class.

L.O. 7.3 Select financial record keeping for your business.

AACSB Written and oral communications and analytical thinking Answers will vary but should show an understanding that the entrepreneur needs an organized system of filing and accounting. They may discuss search and selection criteria. The better answers will incorporate information gleaned from additional research on software or applications to assess the pros and cons.

7-15. Interview an entrepreneur about business start-up costs. How much funding did it take before sales began? Over what period? What were the major costs? How did the actual costs compare to the expected ones? Why?

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L.O. 7.1 Assess the costs of starting a business AACSB Application of knowledge Answers will vary but should completely address all questions. Better answers will include amounts for specific items of costs.

Chapter 7 Exploring Online 7-16. Research three different accounting software programs online. Choose a program (or programs) for your business and explain your choice in a brief essay.

L.O. 7.3 Select financial record keeping for your business.

AACSB Information technology Programs students might choose include Peachtree, QuickBooks, Quicken, and other personal or small business accounting software.

They may also find industry-specific software suited to their particular business interests.

7-17. Conduct online searches for start-up costs of food trucks, medical devices, and web/mobile apps. Using two sources for each (cite them), what did you discover? Why do these costs have such large ranges within the same type of business? Why do they vary so much from one business to another?

L.O. 7.1 Assess the costs of starting a business.

AACSB Information technology and analytical thinking Students will find numerous sources. Whatever they find should be cited in the format required by the instructor. They should report the numbers of ranges that they found for each. They will undoubtedly find that the start-up costs vary within and across industries with the greater variability between industries. They may explain them according to technology, complexity, capital investment, and nature of markets.

Chapter 7 In Your Opinion 7-18. While many business owners keep their financial records on their computers or in the cloud, others still prefer to record them on paper. Would you rather keep your financial records in an accounting ledger or on your computer? Why? In each case, how would you protect your records from being lost in a disaster, such as a fire, or, in the case of the computer, a hard-drive crash?

L.O. 7.3 Select financial record keeping for your business.

AACSB Reflective thinking Student’s answer should include protection for paper records, such as using a fireproof safe and keeping a copy in a separate location, and protection for computer files, such as using antivirus software, backing up files, and having surge protection.

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7-14

Case Studies Short Case Study Analysis – Vison for the Legally Blind – eSight Eyewear 7-19. What categories of costs would you expect to see in a list of eSight start-up costs?

L.O. 7.1 Assess the costs of starting a business.

AACSB Application of knowledge Expensed equipment Financial institution fees Identity set/stationary Insurance Licenses Marketing materials Payroll with benefits and taxes Professional fees – accounting Professional fees – legal Professional fees – other Rent Research and development Supplies Travel Utilities Web fees Other Equipment Furniture and fixtures Inventory Leasehold improvements Machinery 7-20. It took over a decade from idea to market for eSight. Clearly, it is a long development and start-up period. Reflect on the emotional and other nonmonetary factors that were likely involved for Lewis.

L.O. 7.1 Assess the costs of starting a business.

AACSB Reflective thinking Lewis must have faced considerable frustration, excitement, and a full range of emotions during this time. It is a very long time to span from idea to market. It certainly would have affected his relationships with his family and friends.

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7-15

7-21. We do not know how much funding Lewis invested personally but we know the approximate amount of equity sold and the government investment publicly reported.

What was the mix of funds—by percentage—used by eSight?

L.O. 7.1 Assess the costs of starting a business.

AACSB Analytical thinking.

Equity investors = $500,000 + 750,000 + 1,829,440 + 4,200,000 + 562,631 = $7,842,071= 89.2% Government Funds = $950,000 = 10.8% Total = $8,792,071 (excludes earlier investments and records $CA & US 1:1) 7-22. What might be the appeal of a donation campaign for eSight to its donors?

L.O. 7.1 Assess the costs of starting a business.

AACSB Analytical thinking Answers will vary but are likely to include the physic value of contributing to a worthwhile cause, perhaps due to a family member suffering from limited vision and perhaps a discussion of improving people’s capacity to work. Others will be intrigued by the technological innovation.

Long Case Study Analysis — Damon White Party Promotions 7-23.

Assume that Damon decides to start a party-planning business: a. Identify two ways he could assess the cost of goods or services sold for this business.

L.O. 7.1 Assess the costs of starting a business.

AACSB Application of knowledge Damon could either consider the food, decorations, and miscellaneous supplies as his cost of goods sold, or he could use the DJ and security wages as his cost of services sold. b. Which costs, described in the case study, will become part of Damon’s operating-cost structure?

L.O. 7.2 Describe fixed and variable costs.

AACSB Analytical thinking Damon’s fixed operating costs include: Utilities—Space rental (includes insurance) Salaries—Wages for DJ and security people Advertising— Graphic design and flyer production. c. Make a list of additional items Damon will need to purchase to get his business off the ground. Research the cost of these items.

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7-16

L.O. 7.1 Assess the costs of starting a business.

AACSB Analytical thinking Answers will vary but might include items like business cards, voice mail, and a Web site. Students should provide cost information for each.

7-24. One of the reasons why Damon earned a substantial profit is because he convinced his personal contacts to provide their services at a discounted rate. If he decides to grow his party-planning business, do you think that he can continue to use this strategy? Why or why not? What would his costs have been if he had paid full price for everything?

L.O. 7.1 Assess the costs of starting a business.

AACSB Reflective thinking I think as the business grows, his friends will be unwilling to continue to work at discounted rates because they will see that he’s making a profit.

The good news is that Damon will probably be able to pay his friends their full rate. Some additional costs would be: DJ +$400, Security +$250 (est.), Space +$200, Graphics +$100 for a total of approximately $950.

7-25. Brainstorm three things Damon might have done differently in planning his party to increase his sales revenue.

L.O. 7.2 Describe fixed and variable costs.

AACSB Analytical thinking Answers will vary. They may include charging more for admissions or food, adding other items to sell and the like.

7-26. At the end of the case, Damon describes how he profited as an individual from the experience of throwing the Halloween party. What did he mean by this? Is it possible to profit from something on a personal level, even if you do not necessarily earn a financial profit? Can you think of an example from your own life where this happened? Explain.

L.O. 7.1 Assess the costs of starting a business.

AACSB Reflective thinking.

Answers will vary but should include some ideas regarding nonfinancial satisfaction derived by entrepreneurs, such as enhanced self-esteem, confidence.

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7-17

Chapter 8 Using Financial Statements to Guide a Business Chapter 8 Contents Scorecards for the Entrepreneur: What Do Financial Statements Show? 261 Income Statements: Showing Profit and Loss over Time 262 Parts of an Income Statement 262 A Basic Income Statement 263 The Double Bottom Line 264 An Income Statement for a More Complex Business 264 Balance Sheets: Snapshots of Assets, Liabilities, and Equity at a Point in Time 266 Short- and Long-Term Assets and Liabilities 267 The Balance Sheet Equation 268 The Balance Sheet Shows Assets and Liabilities Obtained through Financing 268 The Balance Sheet Shows How a Business Is Financed 269 Analyzing a Balance Sheet 270 Depreciation 272 Financial Ratio Analysis: What Is It and What Does It Mean to You? 272 Income Statement Ratios 273 Balance-Sheet Analysis 275 Chapter 8 Overview In this chapter, students learn about the three basic financial statements that show the health of a business at a glance. They will learn what these statements are and what they mean. A breakdown of the parts of each statement will be presented and explained.

Chapter 8 Objectives Learning Objective 8.1: Identify the four basic documents used to assess business health.

Learning Objective 8.2: Understand an income statement.

Learning Objective 8.3: Examine a balance sheet to determine a business’s financing strategy.

Learning Objective 8.4: Perform a financial ratio analysis on an income statement.

Learning Objective 8.5: Analyze a balance sheet.

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Chapter 8 Outline 1. Identify the four basic documents used to assess business health  Income Statement (statement of performance)  Statement of Owner’s Equity  Balance Sheet (statement of position)  Cash Flow Statement 2. Understand an income statement.  An income statement illustrates whether the difference between revenue (sales) and expenses (costs) is a profit or a loss.  If sales are greater than costs, the income-statement balance will be positive, showing that the business earned a profit. If costs are greater than sales, the balance will be negative, showing a loss.

3. The elements of an income statement are: a. Net Revenue. Income from sales of the company’s products or services net of returns and allowance. For companies using the cash method of accounting, sales are recorded when payment is received. b. Cost of Goods Sold (COGS). These are the costs of materials used to make the product plus the costs of the direct labor used in production plus any indirect costs allocated to it. c. Gross profit. Net revenues minus COGS. d. Operating Expenses. The indirect costs associated with operating a business that have not been allocated to the cost of goods sold. Common fixed operating costs included in operating expenses are rent, salaries, utilities, advertising, and insurance. e. Operating Income or Earnings Before Interest and Taxes (EBIT). The result of gross profit minus operating expenses (interest and taxes are not subtracted here). f. Other Income/Expenses. Includes interest income, interest expenses, dividend income, and gains/losses on the sale of assets. g. Income before Taxes. EBIT minus other income/expenses. This is a business’s profit after all costs (including Selling, General and Administrative as well as Interest) have been deducted, but before taxes have been paid. h. Taxes. A business must pay taxes on the income it earns as a separate entity from the owners’ personal taxes if it is a C corporation. i. Net Income or Net Profit. This is the business profits or losses after taxes.

4. Examine a balance sheet to determine a business’s financing strategy.  A balance sheet is a financial statement showing the assets (items the business owns), liabilities (debts), and owner’s equity (net worth or value) of a business.  Every item a business owns was obtained through either debt (bonds, loans) or equity (stock or other ownership); therefore, the total of all assets must equal the total of all liabilities and owner’s equity.  The balance sheet shows the use of debt and equity to support the business.  Comparing balance sheets from two points in time can provide insights into the business operations and reveal opportunities for improvement.

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

Depreciation affects the value of assets by reducing them to reflect wear and tear and obsolescence.

5. Perform a financial ratio analysis of an income statement. 

Expressing each item on the income statement as a percentage of sales makes it easy to see the relationship between items.  Financial ratio analysis will also allow you to compare the income statements from different months or years more easily, even if the sales are for varying amounts.  Profitability  Return on Investment (ROI)  Return on Sales (ROS) 6. Analyze a balance sheet. 

The following are balance sheet ratios o Quick ratio o Current ratio o Debt ratio o Debt-to-equity ratio o In addition, operating efficiency ratios are calculated using data from the income statement and balance sheet o Receivables collection rate (days) o Receivables turnover ratio o Inventory turnover

Chapter 8 Teaching Notes Class Discussion Ideas: 1.

Introduce the concept of income statements by using the analogy of a scorecard—just as a score in sports tells who is winning the game, the income statement tells entrepreneurs and investors which companies are winning in business. Winning refers to making a profit, and profit signifies that a company is successfully using its resources to meet customer needs. Make sure students are clear on the terms: net profit/“in the black” and net loss/“in the red” (shown by numbers in parentheses). In business, the more profit a company makes, the more value it has for the owner and the higher the price it can command if it is sold. One general rule (experts differ on this and depending on other variables) is that a company is worth three times its net profit. In summary, an income statement tells an entrepreneur 1) how well the company is doing, and 2) how much the company is worth.

2.

Write the cost categories—start-up costs, COGS, variable operating costs, and fixed operating costs—on the board. Then read them aloud and have the students categorize the following costs: advertising, initial inventory, insurance, sales commission, rent, shipping, wholesale cost of product, raw materials, manager salary, equipment to make product. Answer: Start-up costs (equipment, initial inventory), COGS (wholesale cost of product, raw materials), variable costs (sales commission, shipping), fixed costs

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(advertising, insurance, rent, salaries). Let the students debate and resolve any differences of opinion, having them give reasons for their choices.

3.

Present the following for the students to solve: What is the return on investment if a person invested $500,000 and made, after all costs and taxes, $150,000 after one year?

Was this a good investment? (Answer: 30% (150,000/500,000); 30 percent is a good return rate for one year, but not good for, say, ten years.)

4.

Put the following information on the board for students—individually or in teams—to conduct a percentage analysis, create a bar chart, and calculate ROS. Check answers and discuss whether this company is “winning” (is profitable) or not.

Answer: Sales Gross Profit Operating Costs Pretax Profit Taxes Net Profit

$100.00 $50.00 $20.00 $30.00 $5.00 $25.00

100% 50% 20% 30% 5% 25%

ROS = 25/100 = 25% 5.

Using David’s income statement from the chapter, remind the students that the bottom line does not tell how the business came to make or lose money. Solicit from the students (or show them) how to transform the dollar figures in David’s income statement into percentages. Then show how these percentages can be represented graphically in a pie chart to give a quick look at how the business’s sales revenue is used. Ask students: What is the largest expense? (COGS) What might this chart suggest David should do to try to get net profit to become a larger slice of the pie? (Reduce the size of the other slices by negotiating with wholesaler for lower COGS, for instance, or reducing fixed costs.)

Explain that such percentage/cost analysis is what led to the innovation of the moving assembly line by Henry Ford—he looked closely at how cars were made and figured out a way to do it at a lower cost, sell at a lower price than his competitors, and make a profit.

6.

To continue the discussion, remind students: The bottom line provides a single number that signifies “winning” or “losing,” and percentage analysis/charts help show where the bottom line came from. A third way to analyze income statements is by calculating a few financial ratios: ROI and ROS. They are called “ratios” because they involve division into net profit by different numbers on the income statement or balance sheet. Review the ROI formula and give the ROS formula: ROI = Net Profit ÷ Investment ROS = Net Profit ÷ Sales Calculate David’s ROI (if he initially invested $1,000) and his ROS. Ask students to speculate: Why is it a good idea to calculate both ratios? (Answer: ROI tells you how efficiently you are using money that comes from the “outside”—financing—and ROS tells you how efficiently you are using money that comes from the “inside”—sales,

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business operations.)

7.

To show how this analysis is related to the others, explain that, bottom line, percentage/chart and financial-ratio analyses are often done on one income statement.

Using the statements below, draw bar charts on the board for COGS and operating costs. Explain how a bar chart can be used to show trends.

Month Jan Feb Mar Apr May

COGS 50 75 125 125 47

Operating Costs 24 40 50 55 55

Net Profit 20 27 19.25 15.40 (20.79)

Ask: •

What are the trends in COGS, operating costs, COGS relative to sales, etc.?

•

What do these charts suggest the entrepreneur might do to improve the business?

(Answers could include: to better control operating costs [especially fixed], find a new wholesaler, or renegotiate with current one.)

8. The income statement focuses on “winning” financially in a business, but there are other ways of winning besides financially. What other benefits can an entrepreneur receive besides making a profit? (Answers could include benefits discussed in the Double Bottom Line section of the text: clean environment, good citizen/safe society, good relations with people.)

9. How is the IRS (Internal Revenue Service) Schedule C form like a Profit and Loss Statement?

10. Profit and Loss statements can be used to value a business. When looking at Profit and Loss statements, you must be aware of the business to determine if certain categories of expenses are too high or too low. Discuss how to know if these numbers are too high or too low and how you might add or subtract to the Net Income to adjust the value of the business.

11. What’s the tradeoff for a business not showing all their expenses? (Net Income will be greater, and taxes will be higher, but the value of the business will also be higher.)

Chapter 8 Lecture Enhancers PPT Lecture Slides Outside the Classroom: www.bizminer.com: It’s important to be able to compare the financial ratios derived

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from the projected income statements for your business to industry benchmarks.

Bizminer.com offers samples of industry-wide financial ratios and benchmarks.

www.allbusiness.com: All Business provides sample forms of income statements and other forms and agreements small business owners need, as well as business advice, directories, and periodicals.

Black Enterprise magazine Subscriptions: www.blackenterprise.com Interpreting and Analyzing Financial Statements, Third Edition by Karen P. Schoenebeck (Prentice Hall, 2003).

Chapter 8 Key Terms current assets 268 current liabilities 268 current ratio 275 debt ratio 277 debt-to-equity ratio 277 fiscal year 266 investment 274 liquidity 275 long-term assets 268 long-term liabilities 268 net worth 266 operating ratio 273 owner’s equity 266 profit margin 274 quick ratio 276 return on investment (ROI) 274 return on sales (ROS) 275 wealth 274

Chapter 8 Class Activity Ideas and Group Exercises 1.

Divide the class into pairs. Using any of the other income statement examples in the text, have one student be the business owner and the other an entrepreneur who wants to buy the business. Using the “3 times net profit” rule and percentages and financial ratio analyses have the students negotiate a selling price. For example, analyses might be used by the seller to show that operations are efficient, and he/she tries to negotiate above the “3 times” amount, or the buyer might point out that fixed costs are high and ask for a discount, etc. After students have completed their negotiations, discuss the issues that surfaced and how they were dealt with.

2.

Use the income statement card game. Create three decks of index cards: a “sales” deck, a

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“COGS” deck, and an “expenses” deck. For each deck, create several cards. The sales deck cards each should include a selling price and the number of units sold (e.g., $1, 10; $3, 5, etc.). The COGS deck should include cards with different wholesale purchase prices. (These should be a lower range than the sale prices.) The expenses deck should include cards with fixed operating cost amounts and variable operating costs per unit. The game makes two assumptions: Product bought equals product sold, and the tax rate is figured at 10 percent. Divide the class into small groups. Shuffle each deck separately, and give each group one card from each. The groups will then create income statements using the card information. Track who finishes first with accurate figures and which group’s “company” made the most money. Note that some combinations of cards will result in net losses. Continue as long as student interest and time permit.

3.

Conduct an Internet activity. Have students search online for the balance sheets of three publicly traded companies, which are often found in annual reports on company websites, usually in “investor relations” links or in the Edgar site. Have them use ratio equations to analyze their balance sheets. Ask how they are doing financially relative to one another.

4.

Do a ratio scramble. This activity allows students to gain practice in calculating the different types of balance sheet ratios. Divide the class into teams of four students each.

In the center of each team, put four folded sheets of paper for debt ratio, debt-to-equity ratio, quick ratio, and current ratio. Instruct students to write their answers neatly on these sheets. Create a basic balance sheet format on the board. Write figures in the balance sheet categories and then say “Go!” Students must take one of the sheets, calculate the appropriate ratio using the information you provided, and raise their hands when done.

The team that completes all calculations accurately in the shortest time wins a point.

Sheets are refolded, placed in the center again, and “scrambled.” Continue with different balance sheet figures if time and interest permit.

5.

Walk students through several ROI problems. Use the formula: Net Profit/Investment Give examples of where the ROI is: •

Positive (which represents recouping costs plus profit).

•

Zero (which is roughly recouping costs only or breaking even).

•

Negative (which is losing some or all the investment).

Help students recognize that a small business may have a negative ROI in the early days, but it may become positive and grow too far outweigh those early losses. Business failure occurs when ROI stays negative too long.

ROI can be used to compare businesses if their ROIs cover the same length of time (usually a year). Give students several examples of annualizing ROI by using the step-bystep instructions in the text.

Chapter 8 Critical Thinking Exercises 8-1. Repeat the exercise from Key Concept Questions for this chapter using free © Copyright 2020 Pearson Education, Inc.

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accounting software (such as Wave) or spreadsheet software. Then run the following what-if scenarios and create graphs or other visuals showing how each scenario would affect the business’s monthly and yearly financial picture: L.O. 8.2 Understand an income statement.

AACSB Analytical thinking •

What if the restaurant finds a paper supplier that is willing to supply paper for only $8,000 in June and $96,000 for the year?

Monthly Income Statement Sales $300,000 Less Total Cost of Goods Sold: Food 66,000 Paper 8,000 Total COGS 74,000 Gross Profit 226,000 Less Fixed Operating Costs 175,000 Profit before Taxes 51,000 Taxes 15,000 Net Profit/(Loss) $36,000



792,000 96,000 888,000 1,712,000 1,000,000 712,000 178,000 $534,000

What if sales for June were $250,000 and sales for the year were $2,000,000? (Do not forget the taxes, assumed at 25 percent.)

Monthly Income Statement Sales $250,000 Less Total Cost of Goods Sold: Food 66,000 Paper 9,000 Total COGS 75,000 Gross Profit 175,000 Less Fixed Operating Costs 175,000



Year’s Income Statement $2,600,000

Year Income Statement $2,000,000 792,000 108,000 900,000 1,100,000 1,000,000

Profit before Taxes Taxes

0 0

$100,000 25,000

Net Profit/(Loss)

$0

$75,000

What if the owner of this franchise faced start-up costs of $400,000 instead of $300,000? How would that affect the ROI?

$467,000 (return) - $400,000 (investment) x 100 = 17% $400,000 (investment) 8-2. If you were to open a clothing store, what would be a reasonable operating ratio for the rent, and why?

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L.O. 8.4 Perform a financial ratio analysis on an income statement AACSB Information technology and reflective thinking To answer this question, students should research (online or in a library) the operating ratios for retail clothing stores, especially for those in their region.

8-3. Which items in your business would you depreciate, and why?

L.O. 8.3 Examine a balance sheet to determine a business’s financing strategy.

AACSB Application of knowledge Answers should show understanding of concept of depreciation by including expensive long-term-use items such as computers or cars that a business depreciates to put aside money to eventually replace the items.

8-4. Using, Exhibit 8-11, the balance sheet of Angelina’s Jewelry Company at the end of July, which follows, calculate all four financial ratios (quick, current, debt, and debt-to-equity) for the business.

L.O. 8.4 Perform a financial ratio analysis on an income statement.

AACSB Analytical thinking Exhibit 8-11 Balance Sheet for Angelina’s Jewelry Company Angelina’s Jewelry Company Balance Sheet as of July 30, 2018 Assets

Liabilities

Current Assets Cash

Short-Term Liabilities $ 1,000

Accounts Payable

$ 1,000

Inventory

1,000

Short-Term Loans

500

Securities

1,000

Total Short-Term Liabilities

$ 1,500

Total Current Assets

$ 3,000

Total Long-Term Liabilities

1,500

Long-Term Assets

7,000

Total Assets

$10,000

Owner’s Equity

$ 7,000

Total Liabilities & Owner’s Equity

$10,000

Quick ratio: 1.33 Current ratio: 2.00 Debt ratio: 0.30 Debt-to-equity ratio: 0.04 8-5. Write a memo analyzing the financial strengths and weaknesses of Angelina’s venture.

Use the common-sized statement information shown in Exhibit 8-12. Would you invest in her business? Why, or why not?

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AACSB Reflective thinking

Exhibit 8-12 Comparative Balance Sheet for Angelina’s Jewelry Company Angelina’s Jewelry Company Balance Sheet Aug. 30, 2018

% Change

July 30, 2018

Assets Current Assets Cash

$

500

$ 1,000

(50%)

Inventory

2,000

1,000

100%

Securities

1,500

1,000

50%

Total Current Assets

$ 4,000

$ 3,000

33%

Net Long-Term Assets

7,000

7,000

0%

$11,000

$10,000

10%

Accounts Payable

$ 1,500

$ 1,000

50%

Short-Term Loans

—

500

(100%)

Total Assets Liabilities Short-Term Liabilities

Total Short-Term Liabilities

$ 1,500

$ 1,500

0%

Total Long-Term Liabilities

500

1,500

(67%)

Total Liabilities

$2,000

$3,000

(50%)

Owner’s Equity

$ 9,000

$ 7,000

29%

Total Liabilities & Owners’ Equity

$11,000

$10,000

10%

Answers will vary depending on each student’s risk tolerance but should include some understanding of how to use financial ratios to analyze a business.

8-6. Using The Greasy Spoon balance sheet in Exhibits 8-7 and 8-8, answer the following: L.O. 8.5 Analyze a balance sheet.

AACSB Analytical thinking a. What are the debt-to-equity ratios at the beginning and end of the 2018 fiscal (business) year? Has it improved? If so, by how much?

Debt-to-equity ratio at beginning of 2018: $9,000/$13,000 = 0.69 Debt-to-equity ratio at end of 2018: $5,000/$17,000 = 0.29

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b. The restaurant has less cash at the end of the year than it had at the beginning. Is this a bad thing or not? Explain.

The restaurant doesn’t have any more total assets than it had at the beginning of the year, and it has less cash. On the other hand, the business has less debt than it did. The balance sheet equation (Assets = Liabilities + OE), indicates that the owners have increased equity in the business by paying off (paying down) some debt. Paying down debt is one of the smartest things a business can do with extra cash. c. Do you think the restaurant has enough cash to pay its expenses going into 2019?

Yes, it has strengthened its cash position by reducing debt, as it won’t have as many payments to make during the year. d. If the restaurant grew its owner’s equity by 31 percent during the 2018 fiscal year, at that rate, how much will the business have in owner’s equity after one more year (on December 31, 2019)? $17,000 x 0.31 = $5,270 $17,000 + $5,270 = $22,270 $22,270 x 0.31 = $6,904 $22,270 + $6,904 = $29,174 e. The restaurant added some capital equipment during the year. Do you think it took out another loan for that equipment, or did it pay cash? Explain your thinking.

It must have used cash, because owner’s equity increased. If it had used a loan, that would have had a negative impact on OE. 8-7. Using spreadsheet software, create a balance sheet for Tropical Aquaculture - a shrimp farm - using the following information. Calculate and analyze the quick, debt, and debtto-equity ratios.

Cash Accounts Receivable Shrimp Feed Accounts Payable Equipment Bank Loan Property and Ponds

$ 45,000 $ 12,000 $ 8,400 $ 9,700 $ 75,000 $ 20,000 $124,000

L.O. 8.5 Analyze a balance sheet.

AACSB Analytical thinking

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Assets Cash Accounts receivable Shrimp feed Equipment Property and ponds Total assets

$45,000 $12,000 $8,400 $75,000 $124,000 $264,400

Liabilities Accounts payable $9,700 Bank loan $20,000 Total Liabilities $29,700 Owner’s equity $234,700 Total Liabilities + OE = $264,400

Quick ratio: $45,000/$9,700 = 4.64 Debt ratio: $29,700/$264,400 = 0.11 Debt-to-equity ratio: $29,700/$234,700 = 0.13 8-8. Use the following balance sheet to answer the subsequent questions: Jean M’s Florida-Style Subs, Inc.: Balance Sheet Ending December 31 2018

2017

$10,000 $2,000 $20,000 $32,000

$10,000 $7,000 $25,000 $42,000

Plant and machinery Land Total Net Long-Term Assets

$5,000 $9,000 $14,000

$9,000 $8,000 $17,000

TOTAL ASSETS

$46,000

$59,000

Liabilities Accounts payable Taxes payable Total Liabilities

$10,000 $6,000 $16,000

$15,000 $5,000 $20,000

Shareholder’s Equity LIABILITIES and EQUITY

$30,000 $46,000

$39,000 $59,000

ASSETS Currents Assets Cash and cash equivalents Accounts receivable Inventory Total Current Assets Net Long-Term Assets

As you can see, total liabilities and equity equal the total assets.

L.O. 8.5 Analyze a balance sheet.

AACSB Application of knowledge a. What is the year-to-year percentage change in the value of the following?

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Inventory Accounts payable Land Taxes payable Liabilities and OE Inventory: –20 percent Accounts payable: –33 percent Land: +12.5 percent Taxes payable: +20 percent Liabilities and OE: –32.5 percent b. What is the ratio of the following: Cash equivalent to inventory in 2018? How has it changed from 2017? Owner’s equity to total assets in 2018? How has it changed from 2017?

1:2; 2:5 in 2017 20:46 or 10:23; 33:68 in 2017 c. Investors and buyers like to put their money into companies that have a low ratio of liabilities to assets. Has that ratio become more or less appealing from 2017 to 2018?

Ratio of assets to liabilities was 35:68 (almost 1:2 or slightly more than half or slightly more than 50 percent) in 2017 and it was 26:46 or 13:23 (slightly higher than 1:2) in 2018, so it has become slightly less appealing using that ratio. You can check the ratios by converting 35:68 into a percent (51.47 percent) and comparing it to 13:23 (56.52 percent). The 2017 relationship shows a slightly higher ratio of assets to liabilities (35:68 vs. 13:23) than the 2018 relationship.

8-9. Create a Projected Balance Sheet for your business for one year.

L.O. 8.1 Identify the four basic documents used to assess business health.

AACSB Analytical thinking Students will have widely varying balance sheets.

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a. Create a pie chart showing your current assets, long-term assets, current liabilities, and long-term liabilities.

Example:

b. What is your debt ratio? Answers will vary c. What is your debt-equity ratio? Answers will vary

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Chapter 8 Key Concept Questions 8-10. Given the following data, create monthly and yearly income statements for this QuickGourmet in New York City.

L.O. 8.2 Understand an income statement AACSB Analytical thinking a. Sales for the month of June were $600,000. Sales for the year were $5,200,000. b. The sum of $132,000 was spent on food in June ($1,584,000 for the year). The store spent $18,000 on paper to wrap food items in June and $216,000 for the year. c. Taxes for June were $30,000. For the year, they were $466,000. d. Fixed operating costs for June were $350,000. Operating costs for the year, they were $2,000,000. e. Use Excel or other software to create a graph showing the monthly and yearly income statements for this business.

Monthly Income Statement Sales Cost of Goods Sold: Food Paper Total COGS Gross Profit Fixed Operating Costs Profit before Taxes Taxes Net Profit/(Loss)

$600,000

Year Income Statement $5,200,000

132,000 18,000 150,000 450,000 350,000

1,584,000 216,000 1,800,000 3,400,000 2,000,000

$100,000 30,000 $70,000

$1,400,000 466,000 $934,000

Students should create bar or pie charts to show this.

8-11. If the owner of Quick-Gourmet invested $600,000 in start-up costs, what was her ROI for the year? (Assume June as average.)

L.O. 8.4 Perform a financial ratio analysis on an income statement.

AACSB Application of knowledge ($70,000 x 12) = $840,000 or actual = $934,000 Using the $840,000 in net profit yields $840,000/$600,000 = 140.0% 8-12. Calculate the financial ratios (ROI and ROS) for both the monthly and the yearly income statement. What do the financial ratios tell you about this business?

L.O. 8.4 Perform a financial ratio analysis on an income statement AACSB Analytical thinking

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Monthly ROI: $70,000/$600,000 = 0.117 x 100 = 11.7% Monthly ROS: $70,000/$600,000 = 0.11.7 x 100 = 11.7% Yearly ROI: $934,000/$600,000 = 1.557 x 100 = 155.7% Yearly ROS: $934,000/$5,200,000 = 0.177 x 100 = 17.7% The financial ratios tell me that the business was facing differing levels of costs over the individual months but was able to generate significant profits.

8-13. What would the profit before taxes be if the Quick-Gourmet owner found a paper supplier who only charged $200,000 for the year?

L.O. 8.2 Understand an income statement.

AACSB Application of knowledge Total COGS would be $1,584,000 + $200,000 = $1,784,000 Gross profit would be $5,200,000 – $1,784,000 = $3,416,000 Profit before taxes would be $3,416,000 – $2,000,000 = $1,416,000 8-14. What would the annual profit margin percentage be for Quick-Gourmet if the paper supplier charged $200,000 rather than $216,000?

L.O. 8.4 Perform a financial ratio analysis on an income statement.

AACSB Application of knowledge Profit margin is return on sales: Net Income/Sales x 100 Net income would be $1,416,000 – $466,000 = $950,000 $950,000/$5,200,000 x 100 = 18.3% (assuming taxes did not change) 8-15. Suppose Quick-Gourmet’s owner wanted to raise profits by $5,000 a month. What would you recommend she do, and why?

L.O. 8.2 Understand an income statement.

AACSB Analytical thinking I would suggest finding ways to use less paper or find a less expensive paper supplier. She should look for ways to cut her fixed operating costs.

8-16. State the financial equation for the balance sheet in three different ways.

L.O. 8.3 Examine a balance sheet to determine a business’s financing.

AACSB Application of knowledge Assets = Liabilities + Owner’s Equity Assets – Liabilities = Owner’s Equity Assets – Owner’s Equity = Liabilities

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8-17. How is depreciation treated on the balance sheet, and what is the logic behind the treatment?

L.O. 8.3 Examine a balance sheet to determine a business’s financing.

AACSB Analytical thinking Accumulated Depreciation is a contra asset. It reduces the book value of the associated long-term asset. This reflects the annual recognition of the usage of the asset and the nominal decline in value of the asset.

Chapter 8 Application Exercises 8-18. The following is a real estate investor’s balance sheet (in millions) as of December 31, 2018. All the businesses in her real estate empire were separately incorporated for liability reasons, and many of them were heavily leveraged, or debt-financed. Calculate the debt ratios for each of the properties; then answer the questions.

L.O. 8.5 Analyze a balance sheet.

AACSB Application of knowledge Estimated Worth

Debt

Net Worth

Debt Ratio*

The Pyramids of Giza

$820

$820

$0

1.0

East Side Yards

900

350

60

0.39

Phoenix Casino

640

275

345

0.43

Mogul’s Lair Casino

600

415

6

0.69

Serena’s Shuttle

800

800

0

1.0

Cash

130

160

–30

1.23

Igor’s Condos

115

5

45

0.04

Marketable Securities

15 0 30

30

0.83

Grand Brand Hotel (50%)

18 0 70

40

0.43

Igor Regency

65

85

–20

1.31

Igor Plaza Coops

45

0

25

0.0

Mogul Air

40

0

30

0.0

Personal Transportation

40

0

30

0.0

Personal Housing

30

40

–9

1.33

Total (in millions)

$ 4,475

$ 3,130

$ 552

0.70

Asset

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a.

What was the mogul’s highest-priced asset? The Pyramids of Giza

b.

What was the mogul’s net worth for the Serena’s Shuttle? Why? Zero, because it was financed completely by debt.

c.

On which asset was the mogul’s net worth the greatest? Phoenix Casino

d.

Which asset carried the most debt? The Pyramids of Gaza

e.

Which properties did the mogul own free of debt? Igor Plaza Co-ops and Mogul Air

f.

On which properties did the mogul owe one dollar of debt for each dollar of the asset?

The Pyramids of Gaza and Serena’s Shuttle.

Chapter 8 Exploring Online Use the Internet to find the balance sheets of two companies with which you are familiar.

Use percentages to analyze these balance sheets and compare how well each is doing to The Greasy Spoon Diner example from this chapter. Then compare them to each other. Consider choosing either two similar companies, such as Pfizer Inc. and Johnson & Johnson, or two companies from different industries, such as an airline and a car manufacturer.

8-19. Create common-size balance sheets for each.

L.O. 8.5 Analyze a balance sheet.

AACSB Application of knowledge Answers will vary, but there should be two common-sized balance sheets.

8-20. Calculate their balance sheet ratios.

L.O. 8.5 Analyze a balance sheet.

AACSB Application of knowledge Answers should include correctly calculated quick, current and debt ratios.

8-21. How do the companies compare in growing owner’s equity?

L.O. 8.3 Examine a balance sheet to determine a business’s financing strategy.

AACSB Analytical thinking Answers will vary. They should state the levels of equity over time and percent growth rates. An explanation of the differences and potential reasons.

8-22. How do the companies compare in reducing debt?

L.O. 8.3 Examine a balance sheet to determine a business’s financing strategy.

AACSB Analytical thinking Answers will vary.

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8-18

8-23. Describe how you think market conditions (such as gas prices) are affecting each company’s growth.

L.O. 8.2 and 8.5 Understand an income statement and analyze a balance sheet.

AACSB Reflective thinking Answers will vary depending upon the industries and firms selected. They should show a good understanding of the impact of outside factors on firm performance.

8-24. How, if at all, do the ratios of these companies relate to that of The Greasy Spoon Diner?

L.O. 8.4 Perform a financial ratio analysis on an income statement.

AACSB Application of knowledge Answers will vary according to the companies chosen to compare.

Search online for two (2) articles regarding the best small business accounting software or the best entrepreneurial business accounting software and answer the following.

8-25 What sources did you find? Cite them in proper format.

L.O. 8.1 Identify the four basic documents used to assess business health.

AACSB Information technology Students should create a sentence addressing the sources and two citations in the required format.

8-26 What were the selection criteria used by each of the reviewers (e.g., affordability, ease of use, automated entries, invoicing, bill payment, financial reports, and synchronization)?

L.O. 8.1 Identify the four basic documents used to assess business health.

AACSB Information technology and application of knowledge Students may create a table comparing the options or simply write a list. The answer should reflect a consideration of the types of reports/statements needed.

8-27 List two (2) of the recommendations from each article and the key reasons for their selection by the reviewers.

L.O. 8.1 Identify the four basic documents used to assess business health.

AACSB Information technology and application of knowledge This response demonstrates the student’s understanding of the critical thinking done by the reviewers. The best answers will show information literacy by pulling out the most important criteria.

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8-19

8-28 Which accounting software appeals to you the most? Why? L.O. 8.1 Identify the four basic documents used to assess business health.

AACSB Information technology and reflective thinking Students should respond with a cogent analysis of one of the options that they explored. The best responses will include the options/features and benefits as well as reviewer comments. They will suggest ways that the software will work for their business.

Case Studies Case Study Analysis: Gentle Rest Slumber, LLC: Using Financial Statements to Build Employee Performance Case Study Analysis: 8-29. What are the positive aspects the employees could glean from the financial data?

L.O. 8.1 Identify the four basic documents used to assess business health.

AACSB Analytical thinking Revenues have increased by 10% when the industry had a 5% decline. The cost of labor relative to revenues is lower than the industry.

8-30. What concerns should they have?

L.O. 8.2 Understand an income statement.

AACSB Analytical thinking Material and labor costs have risen and gross profits, ROS, ROI, and the current ratio have declined while the debt to equity ratio increased and collections slowed. Material costs, the debt to equity ratio, and the collection period are worse than the industry. Gross profit, ROS, ROI, and the current ratio are lower than the industry. Things are looking grim.

8-31. What additional information would you want to know?

L.O. 8.5 Analyze a balance sheet.

AACSB Analytical thinking I would want to know whether the D/E ratio rose because of additional debt or reduced equity or both. I would like to know why the collection period was extended. Why did material and labor costs go up so much?

8-32. What would you recommend if you were an employee? Why? L.O. 8.2 Understand an income statement.

AACSB Reflective thinking

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8-20

The suggestions will vary widely. Among them could be: study costs structures more carefully to examine places to reduce costs; don’t increase revenues just to increase them; speed up collections and examine the financing strategy.

Long Case Study Analysis — Green & Clean: Jonathan Lee’s Business Idea 8-33. Evaluate the economics-of-one-unit analysis that Jonathan conducted and then answer the following: L.O. 8.4 Perform financial ratio analysis on an income statement.

AACSB Analytical thinking a. For every $30 in laundry sales, Jonathan assumed that his COGS per unit would be $14.76. Calculate the markup percentage.

Markup/Cost x 100 = Markup Percentage $($30.00 - 14.76)/$14.76 = $15.24/$14.76 x 100 = 103.3% b. For every $35 in dry cleaning sales, he assumed that the COGS per unit would be $21. Calculate the markup percentage.

Markup = $35 – $21 = $14 $14/$21 x 100 = 70.0% c. Because Clean & Green uses a contractor for its dry-cleaning services, how much control does Jonathan have over the costs of dry cleaning versus laundry? Why? Jonathan has limited control depending upon his ability to switch suppliers and negotiate prices for the dry cleaning. He does not control production and the associated costs, so he is at the mercy of his supplier.

8-34. Consider Jonathan’s decision to contract with the existing eco-friendly dry cleaner for services. List the pros and cons of this decision. What is the greatest potential risk?

L.O. 8.2 Understand an income statement.

AACSB Reflective thinking Pros Reduced investment in equipment No direct labor costs Consistent supply (maybe) Known costs Easier to manage

Cons No control over quality Offsite production Lower priority for vendor than vendor’s customers Vendor may change prices Must work with an outside company Vendor markup increases costs

8-35. Evaluate Jonathan’s income statement for his first month of operations.

L.O. 8.2 Understand an income statement.

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8-21

AACSB Application of knowledge a. Is the company operating at a profit or a loss?

For the first quarter, Green & Clean operated at a net loss of $18,782.

First month sales = $5,870 First month COGS = (151 units of laundry x $14.76) + (65 units dc x $21) = $2,229+ $1,365 = $3,594 First month operating costs = $24,423/3 = $8,141 Net Loss = $5,870 - $3,594 - $8,141 = ($5,865) b. Calculate the breakeven. How many units above or below breakeven were sold?

Breakeven = Fixed Costs/Gross Profit per Unit Because they sell more than one product, the weighted gross profit must be calculated.

The sales show: 151 loads of laundry and 65 units of dry cleaning => COGS: (151 x ($24 - $14.76)) + (65 x ($35 - $21)) = (151 x $9.24) + (65 x $14) = $1,395 + $910 = $2,305 Gross Profit average: $2,305/216 units = $10.67 $8,141/$10.67 = 763 units that must be sold to break even 216 units sold in the first month 763 - 216 = 545 units below breakeven that were sold in the first month 8-36. Jonathan decided to take on $95,000 in debt to finance his start-up investment.

Each month he is are paying $450 in interest charges. Look at the total monthly fixed costs. What percentage of total monthly fixed costs does this $450 represent?

L.O. 8.2 Understand an income statement.

AACSB Application of knowledge $450/$8,141 x 100 = 5.5% 8-37. What is the debt-to-equity ratio of the Green & Clean?

L.O. 8.5 Analyze a balance sheet.

AACSB Application of knowledge Debt/net worth = 95,000/52,630 = 1.81 8-38. Compare the Green & Clean key ratios to the industry norms. How are they different?

How can you explain these differences?

L.O. 8.2 and 8.5 Understand an income statement and analyze a balance sheet AACSB Analytical thinking

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Ratio Current Gross Profit

Green & Clean 2.6% 43.6%

Industry 1.6% 74.6%

Net Profit

-0.2%

17.0%

ROA

-4.6%

22.6%

Comments Higher. Less A/P. Lower. Outsourcing. Discounts.

Inefficient. Low scale.

Start up. Not generating enough sales and margins.

New. Losing money. Has relatively high machinery and equipment versus established businesses with items that are more fully depreciated.

8-39. Look at each section of the Green & Clean cash flow statement. Write a memo highlighting three insights you have about this business, based on what you see in its cash flow statement.

L.O. 8.1 Identify the four basic documents used to assess business health.

AACSB Analytical thinking Answers will vary but should include fact that sales are not covering operating expenses, that start-up investment was too high, and that he spent too much on outside services.

8-40. Review the balance sheet. Explain why the net value of Property and Equipment has decreased from start-up to the end of the first year.

L.O. 8.5 Analyze a balance sheet.

AACSB Application of knowledge This has occurred because the property and equipment were depreciated.

8-41. Review all the financial statements and list a minimum of six questions or concerns that arise as you consider them. What errors did you identify? What explanations are needed?

L.O. 8.5. Analyze a balance sheet.

AACSB Analytical thinking 1.

2.

3.

4.

5.

6.

7.

Start-up costs assume no payroll, but there should be some training.

Investors are being repaid quarterly when the company is losing money.

The interest calculation seems incorrect (too low).

Cash grows very quickly.

Compensation payable is too low.

Taxes payable are too low.

On the balance sheet, the 4th quarter and 1st year numbers do not match.

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8-23

Chapter 9 Cash Flow and Taxes Chapter 9 Contents Cash Flow: The Lifeblood of a Business 297 The Income Statement Does Not Show Available Cash 298 Rules to Keep Cash Flowing 299 Noncash Expenses Can Distort the Financial Picture 299 The Working Capital Cycle 299 The Cyclical and Seasonal Nature of Cash Flows 300 Using a Cash Flow Statement 302 The Cash Flow Equation 302 Forecasting Cash Flow: The Cash Budget 304 Creating a Healthy Cash Flow 305 Managing Inventory to Manage Cash 306 Managing Receivables to Manage Cash 307 The Cash Effects of Accounts Receivable 308 The Life Cycle of Accounts Receivable 308 The Financing of Accounts Receivable 308 Managing Accounts Payable to Manage Cash 309 Negotiating Payment 309 Timing Payables 310 Capital Budgeting and Cash Flow 310 The Burn Rate 311 The Value of Money Changes over Time 312 The Future Value of Money 312 The Present Value of Money 313 Taxes 314 Cash Flow and Taxes 314 Filing Tax Returns 315 Collecting Sales Tax 315 Tax Issues for Different Legal Structures 315 Make Tax Time Easier by Keeping Good Records 316 Chapter 9 Overview This chapter teaches students how important knowledge of money is in a business. It is important to keep good and accurate account of the finances of the business. In this chapter, students learn about cash flow statements, i.e., what they mean and how to use them. The end of the chapter teaches about business taxes and how to keep track of them.

Chapter 9 Objectives Learning Objective 9.1: Understand the importance of cash flow management.

Learning Objective 9.2: Describe the working capital cycle.

Learning Objective 9.3: Read a cash flow statement.

Learning Objective 9.4: Analyze receivables for cash management.

Learning Objective 9.5: Use accounts payable management to manage cash.

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9-1

Learning Objective 9.6: Define capital budgeting.

Learning Objective 9.7: Calculate the time value of money.

Learning Objective 9.8: Plan for taxes.

Chapter 9 Outline 1. Understand the importance of cash flow management.  Cash flow is the difference between the money you take in and the money you disburse.  Without cash on hand, you can find yourself unable to pay essential bills, even while the income statement says you are earning a profit.

2. Describe the working capital cycle.  The formula for working capital is: current assets minus current liabilities.  It tells you how much cash is left over after paying all your short-term debt.  Working capital should be considered when creating cash flow projections.

3. Read a cash flow statement. 

Know how to read one to understand the cash position of your business.



Cash Flow = Cash on Hand + Cash Receipts – Cash Disbursements



Direct and indirect methods are used to create cash flow statements.



A cash budget is a projection of cash flows.



Healthy cash flow is vital to business survival and success.



Inventory management matters…inventory is like cash sitting on the shelf.

4. Analyze receivables for cash management. 

Prompt collections improve cash flow.



Create an aging schedule for accounts receivable.



Bill and collect on a timely basis.



Be aware of receivables factoring and its implications.

5. Use accounts payable management to manage cash. 

Credit extends your cash, but has its challenges.



Payment terms can be negotiated with vendors.



Create an aging schedule for accounts payable.



Companies want to collect quickly and pay slowly.

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9-2

6. Define capital budgeting. 

Planning for capital/fixed assets requires cash management.



Budgeting can assist in understanding the full costs, including financing, as well as tax effects.



Financial effects of the disposal of assets are also considerations.



You can also calculate and incorporate the burn rate in management.

7. Calculate the time value of money. 

Understand the future value of money and know how to calculate it multiple ways.



Calculate the present value of money and understand its meaning.

8. Plan for taxes. 

Income tax and self-employment tax returns must be filed by specific dates (corporate returns are due earlier than individual returns).



Tax returns must be filed on time and accurately.



If you sell products or services to the public, in most states, you will have to charge your customers applicable sales tax and then turn it in to the state periodically.



Apply to your state’s department of taxation for the necessary forms.

Chapter 9 Teaching Notes Class Discussion Ideas: 1. Discuss the concept of cash flow. Define cash as money that is easily accessible and that could be used right away. Cash is kept in a checking or savings account. Remind students that entrepreneurs always pay with a check to keep a record; they don’t pay cash like we do at McDonald’s. Convey the following scenario to the class: You do website design for a variety of customers. Let’s say it’s the middle of the month. Your last month’s balance sheet shows you have $1,000 in cash as an asset. Your last month’s income statement shows revenue of $1,500, but you invoice your customers at the end of each month and don’t receive their payments until a month after that. Your monthly expenses run $500 a month. This month, you have a $2,000 payment for the computer equipment you bought when you started your company. Will you have enough cash to pay this bill? As students give their answers, make sure they include their reasoning. Explain the answer by focusing on the timing of when cash comes in and goes out. It may be helpful to create a table or other visual on the board.

2. Let students brainstorm how a business might run out of cash. (Answers could include credit squeeze, cyclicality of business, customers’ late payments, increased fixed expenses, big bills due, too much or slow-moving inventory.) These expenses are part of the “burn rate.” Put the “burn rate” formula on the board, and then go through a few scenarios:

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9-3

Cash on Hand/Negative Cash Outflow per Month Scenarios:

3.

Cash on Hand

Monthly Expenses

Answer

$10,000

$2,000

5 months

$12,000

$3,000

4 months

$25,000

$2,500

10 months

Explain that an entrepreneur needs to watch business cash carefully—not just the amount he/she has but also the timing of when it will flow into and out of the business.

Explain or solicit from the students that timing is important because 1) customers often do not pay immediately when they receive an invoice (it may not be due for 30 days, and some may pay late); 2) there may be seasonality or business cycles involved, where costs and cash payments do not coincide (e.g., a nursery incurs year-round overhead relating to uncut Christmas trees but only takes in cash in late November and December). If the entrepreneur runs out of cash, the business will be in trouble and he/she either has to find quick sources of financing (loans, investors), goes bankrupt, or closes. Clearly define all terms: inflows/receipts for “cash in,” outflows/disbursements for “cash out.” It may be helpful to give a few examples (such as, receipts are $500, and disbursements are $300, $500 and $600).

Chapter 9 Lecture Enhancers PPT Lecture Slides Outside the Classroom: www.bplans.com/common/calculators/cashcalculator.cfm: Use this fun calculator to experiment with factors affecting cash flow. www.upyourcashflow.com: This site provides a free trial version of its software, which creates profit and loss forecasts, cash flow forecasts, balance sheet forecasts, and budgets for small businesses. www.irs.gov: You can download any tax form you need from the Internal Revenue Service’s Web site, which also provides answers to many questions you might have about filling out tax returns for your business.

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine by Mike Michalowicz (Portfolio, 2017).

Consistent Cash Flow: How to Get It, Track It and Keep It in Your Business by Tom Palzevicz (The Truth, LLC, 2014).

Software: Monthly Cash Flow Projection http://www.tops-products.com/socrates/

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9-4

Chapter 9 Key Terms burn rate 311 cash flow statement 298 compound interest 313 credit 309 factoring 308 future value 313 noncash expenses 299 pilferage 306 present value 313 sales tax 315 self-employment tax 314 working capital 299 Chapter 9 Class Activity Ideas and Group Exercises 1.

Perform a financial statement analysis. Have students search for annual reports or actual company financial statements online through Edgar or via corporate investor relations. Have students in groups compare and contrast the information shown on the balance sheet, income statement, and cash flow statement of each company.

Have groups compare financial statements across companies in the same industry, asking questions such as the following: Which ones are doing better regarding assets or equity or low debt? Which ones are doing better regarding income or lower expenses? Which ones are doing better regarding cash flow? Have students read the introduction (“front matter”) of an annual report to find out what the management thinks is the most important financial data in terms of how the business is doing.

Ask students: Would you buy this company’s stock right now? Why or why not?

2.

What are monthly State Sales and Use Tax Returns for retail businesses? Why would they be helpful in reviewing financing for purchasing a business? (Hint: Profit and Loss statements are frequently not audited but the State Sales and Use Tax Returns are documented and reported proof of what a business claims as income.)

Chapter 9 Critical Thinking Exercises 9-1. Describe the expected seasonality for one year for each of the businesses listed and explain how cash flow would be affected over the course of the year.

L.O. 9.1 Understand the importance of cash flow management.

AACSB Analytical thinking a. Ski shop in Vermont – High cash flow in winter and late fall, inventory clearance in spring, low cash flow for the balance of the year. b. Christmas tree farm in Iowa – All revenues in a four-week period from Thanksgiving until Christmas. c. Candy store in San Francisco – Peak cash flow on certain holidays such as Copyright 2020 Pearson Education, Inc.

9-5

Valentine’s Day, Mother’s Day, and Easter. d. Disney World (Orlando, Florida) – Highest cash flow at peak attendance times – Spring break, Summer, and Christmas week when kids are out of school. e. Car wash in Fargo, North Dakota – This is more challenging. The peak times could be the summer and after there is snow and slush on the ground. f. Fitness Center in Texas – The greatest influx of cash from new members is at the beginning of January when people make New Year’s resolutions to lose weight.

Answers will vary but should reflect understanding that sales and cash flow may fluctuate based on seasonality issues. For example, a business on the Ocean City, Maryland boardwalk would likely have the bulk of its customers from Memorial Day through Labor Day, peaking at the Fourth of July. It would have to purchase a lot of merchandise in advance and stretch out payment until the cash flows as customers arrive. Any lines of credit would likely need to be seasonal with interest only payments in the winter and accelerated principal payments in the summer.

9-2. Imagine you are the owner of an upscale clothing store, like Barneys in Manhattan, which was driven out of business by a 7 percent pilferage rate. What creative solutions could you identify to reduce pilferage?

L.O. 9.3 Read a cash flow statement.

AACSB Analytical thinking Answers will vary but may include such ideas as hidden tags on clothing, trained plain clothes security, security cameras, and random bag checking.

9-3. State three rules for managing your cash.

L.O. 9.1 Understand the importance of cash flow management.

AACSB Application of knowledge a. Collect cash as soon as possible. b. Pay your bills by the due date, not earlier. c. Check your available cash daily. d. Lease or finance instead of buying equipment where practical. e. Avoid buying inventory you don’t need. f. Plan ahead for seasonal or contractual needs by seeking financing.

9-4. Calculate the projected burn rate for each of the following businesses: L.O. 9.5 Use accounts payable management to manage cash.

AACSB Analytical thinking a. Application developer for iPhones with $1,100,000 cash on hand, no revenues, and cash outflows of $100,000 per month = $1,100,000/$100,000 = 11 months b. Bookstore with $25,000 cash on hand, $2,500 per month in revenues, and cash outflows of $5,000 per month = $25,000/($2,500-$5,000) = $25,000/$2,500 = 10 months Copyright 2020 Pearson Education, Inc.

9-6

c. Restaurant with $2,000 cash on hand, $80,000 per month in revenues, and cash outflows of $84,000 per month = $2,000/($80,000-$84,000) = $2,000/$4,000 = ½ month Answer should reflect the use of the formula: Burn Rate = Cash on Hand/Net Cash Outflow per Month 9-5. Figure out how much income tax each of the following individuals owes. The marginal tax rates are structured as follows:       

$0 to $8,925 = 10% rate $8,925 to $36,250 = 15% $36,251 to $87,850 = 25% $87,851 to $183,250 = 28% $183,251 to $398,350 = 33% $398,351 to $400,000 = 35% $400,001 and above = 39.6%

The different rates apply to different portions of one’s income.

L.O. 9.8 Plan for taxes.

AACSB Application of knowledge

Taxable Income Jamie: $42,000 Miguel: $98,750

Tax Due 89.25 + 4,098.75 + 1,437.25 = $5,625.25 89.25 + 4,098.75 + 12,899.75 + 3,051.72 = $20,139.47

Suzette: $24,000 Kimu: $100,520

89.25 + 2,261.25 =$2,350.5 89.25 + 4,098.75 + 12,899.75 + 3,547.32 = $20,635.07

Chapter 9 Key Concept Questions 9-6. Create a cumulative cash flow graph for a business with the following monthly cash balances: L.O. 9.3 Read a cash flow statement AACSB Analytical thinking Month January February March Copyright 2020 Pearson Education, Inc.

Cumulative Cash $80,000 $50,000 $26,000 9-7

April May June July August September October November December

$10,000 $24,000 $4,000 $0 $0 $3,000 $17,000 $24,000 $42,000

Cumulative Cash ($1,000) 50 45 40 35 30 25 20 15 10 5 0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

9-7. Fill in the following table, using the future value chart or a financial calculator, to show the amounts of $1,000 invested growth at the interest rates and time periods given.

L.O. 9.7 Calculate the time value of money.

AACSB Application of knowledge Periods

Interest Rate (%)

FV Factor

Future Value

2 5 10 15 7

5 3 10 1 8

1.1025 1.1593 2.5937 1.1610 1.1738

$1,102.50 $1,159.30 $2,593.70 $1,161.00 $1,713.80

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9-8

9-8. Fill in the following table, using the present value chart or a financial calculator, to show the amounts of the net present value of $10,000 at the interest rates and time periods given.

L.O. 9.7 Calculate the time value of money.

AACSB Application of knowledge Periods 2 5 10 15 7

Interest Rate (%) 5 3 10 1 8

PV Factor 0.907 0.863 0.386 0.861 0.583

Present Value $9,070 $8,630 $3,860 $8,610 $5,830

9-9. Calculate working capital for Angelina’s company. Describe how her level of working capital might affect her business decisions.

L.O. 9.6 Define capital budgeting.

AACSB Reflective thinking

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9-9

$3,000 (Current Assets) – $1,500 (Current Liabilities) = $1,500 in Working Capital Angelina has $1,500 in working capital, which is how much cash she would have left if she paid all her short-term debt with the cash she has on hand. Her relatively high level of working capital might encourage her to build her business by investing in more inventory or spending on some marketing.

Chapter 9 Application Exercises 9-10. Create a projected cash flow statement for your business for one year.

L.O. 9.3 Read a cash flow statement.

AACSB Analytical thinking Answers will vary but should follow a similar format.

CASH FLOW STATEMENT Jan

Feb

Units

20

Mar 20

Apr

May

20

20

Jun

Jul

20

Aug

20

Sep

20

Oct

20

Nov

20

Dec

20

20

20

Cash Flow from Operating: Cash Inflows: Sales

$3,000

$3,000

$3,000

Total Cash Inflows

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

Cash Outflows: Variable Costs COGS

$900

$900

$900

$900

$900

$900

$900

$900

$900

$900

$900

$900

Other Variable Costs

$150

$150

$150

$150

$150

$150

$150

$150

$150

$150

$150

$150

Utilities

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

Salaries

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Advertising

$150

$150

$150

$150

$150

$150

$150

$150

$150

$150

$150

$150

Insurance

$75

$75

$75

$75

$75

$75

$75

$75

$75

$75

$75

$75

Interest Expense

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Rent

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

Unexpected

$75

$75

$75

$75

$75

$75

$75

$75

$75

$75

$75

$75

Tax Total Cash Used in Operating Activities

$250

$250

$250

$250

$250

$250

$250

$250

$250

$250

$250

$250

Net Cash Flow from Operating Activities

$1,800

$1,800

$1,800

$1,800

$1,800

$1,800

$1,800

$1,800

$1,800

$1,800

$1,800

$1,800

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

Cash Flow Out from Investing Headphones Additional Records for My Collection

$100

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$150

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Blank CD Stock

$25

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Speakers

$500

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Protective Cases for Records $150

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

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9-10

Amplifier

$550

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Promotional Cards

$15

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Legal Fees

$500

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Business Cards Net Cash Flow Out from Investing

$35

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$2,025

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Financing: Myself

$3,000

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Father Net Cash Flow in from Financing

$1,000

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Net Increase/(Decrease) in Cash Cash, Beginning: Cash, End:

$4,000

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$3,175

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$1,200

$0

$3,175

$4,375

$5,575

$6,775

$7,975

$9,175

$10,375

$11,575

$12,775

$13,975

$15,175

$3,175

$4,375

$5,575

$6,775

$7,975

$9,175

$10,375

$11,575

$12,775

$13,975

$15,175

$16,375

9-11. Look at the cash flow statement for the Green & Clean case in Chapter 8. Is it created using the direct or indirect method? Jonathan has $ ______ loan at ______ % for _____ years and another one for $35,000 at _____% for _____ years. What is the future value of the money for each lender (i.e., what will Jonathan pay back)? For example, in problem 9-7, if Jonathan had borrowed $1,000, the bank would receive $1,102.50 in two years.

L.O. 9.7 Calculate the time value of money AACSB Application of knowledge It is done using the direct method.

Loan Microloan Vehicle Loan

Amount Interest Rate $50,000 8% $35,000 6%

Term 5 years 5 years

FV Factor 1.4693 1.3382

Total Paid $73,465 $46,837

Chapter 9 Exploring Online 9-12. Print the tax documents list available at http://www.ideacafe.com/tax_center/ and highlight the tax forms that a C corporation producing glass bottles will need.

L.O. 9.8 Plan for taxes.

AACSB Information technology There are a number of forms to file, some depend upon whether there are employees or not. Form 1120 or 1120 – A – Report income Form 1120W – Estimated tax Form 8109-2 – Deposit form Copyright 2020 Pearson Education, Inc.

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$0

Form 1099 – Issued for contract work W-2, W-3 – Transmittal of wage and tax statements Form 941 – Employers’ quarterly federal tax return Form 940 or 940 E-Z – Federal unemployment (FUTA) withholding 9-13. Visit Business Owners Idea Café online (http://www.businessownersideacafe.com/ ) and use the tool provided under Financing to figure out how much capital you will need to get your business off the ground. Don’t worry that you don’t have exact values yet. Do the best you can with the numbers you know and can estimate.

L.O. 9.6 Define a capital budget.

AACSB Analytical thinking Answers will vary by business. They should show their work.

Case Studies Short Case Study Analysis — Holterholm Farms – Radical Change for Maximum Impact 9-14. Why did switching the cows’ feed to entirely grass improve Holterholm Farms’ cash flow?

L.O. 9.1 Understand the importance of cash flow management.

AACSB Analytical thinking Ron saved on veterinarian bills and on the cost of feed and other expenses.

9-15. How could adding beef, eggs, and produce be beneficial from a cash flow perspective?

L.O. 9.1 Understand the importance of cash flow management.

AACSB Application of knowledge They are relatively small revenue generators, but also require comparatively few cash outlays and generate reliably positive cash flows.

9-16. Search for Community Support Agriculture (CSA) on the Internet. Why might it be good for Holterholm Farms to have a CSA? What are the risks involved? Why would consumers be willing to pay for their produce up front.

L.O. 9.3 Read a cash flow statement.

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A CSA would provide upfront cash flow for the products and does not require a specific quantity of production. The CSA could add exposure and revenue for the farm with relatively little investment. The main risks are the investment in marketing and equipment up front. If insufficient shares are sold, there could be losses. Consumers may be willing to pay for their produce up front because they want farm fresh, organic produce for themselves and their families.

9-17. What would you ask the Holter family about the cash management of Holterholm Farms?

L.O. 9.1 Understand the importance of cash flow management.

AACSB Reflective thinking.

Answers will vary.

Long Case Study Analysis – Scentsy: Founders Manage Cash to Succeed 9-18. How have Heidi and Orville Thompson been able to finance their businesses? List all of the methods that apply.

L.O. 9.3 Read a cash flow statement.

AACSB Analytical thinking Event Sales – credit cards, lines of credit and vendor credit Backpack – personal funds Car Wax – personal funds Scentsy – Founder loan from Kara and Colette, bootstrapping (debt free for much of its history…no other option), leaving funds in the business until goals reached (no salaries), and inventory loans (convenience).

9-19. What methods have they used to manage cash flow? Why is each important?

L.O. 9.1 Understand the importance of cash flow management.

AACSB Application of knowledge Event Sales – Termed out lines of credit to reduce principal more rapidly.

Scentsy – Deferred expenditures, so less to pay and less demand for cash.

Accelerated receivables, to speed up inflows of cash.

Minimized debt, to keep cash requirements lower.

9-20. What are the pros and cons of starting new businesses when an existing business is in a downturn?

L.O. 9.2 Describe the working capital cycle.

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AACSB Analytical thinking Some pros include the opportunity to offset declines in sales and profit, planning ahead for negative contingencies, and being proactive. Some cons include being a distraction from the hard work needed to address the struggling part of the business and the added strain on financial, human and other resources.

9-21. What was most interesting in this case? Why? L.O. 9.1 Understand the importance of cash flow management.

AACSB Reflective thinking Answers will vary widely.

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Chapter 11 Addressing Legal Issues and Managing Risk Chapter 11 Contents Business Legal Structures 3 6 7 Sole Proprietorship 367 Partnership 368 Corporation 369 Tips for Entrepreneurs Who Want to Start a Nonprofit Organization 372 Contracts: The Building Blocks of Business 374 Working with an Attorney 374 Drafting a Contract 375 Letter of Agreement 376 Breach of Contract 376 Small Claims Court 376 Arbitration 376 A Contract Is No Substitute for Trust 376 Commercial Law and the Entrepreneur 377 The Uniform Commercial Code (UCC) 377 The Law of Agency 378 Bankruptcy 378 Protecting Intangible Assets: Intellectual Property 380 Trademarks and Service Marks 380 Copyright 381 Electronic Rights 382 Patents 384 Protecting Tangible Assets: Risk Management 384 Insurance Protects Your Businesses from Disaster 384 Basic Coverage for Small Business 385 How Insurance Companies Make Money 386 Protect Your Computer and Data 387 Disaster Recovery Plans 387 Licenses, Permits, and Certificates 388 Chapter 11 Overview This chapter describes the available business structures and the importance of choosing the right one for your business. In addition, the importance of protecting your business through contracts, legal advice and insurance is presented.

Chapter 11 Objectives Learning Objective 11.1: Choose a legal structure for your business.

Learning Objective 11.2: Discover the importance of contracts.

Learning Objective 11.3: Recognize key components of commercial law.

Learning Objective 11.4: Evaluate ways to protect your intellectual property.

Learning Objective 11.5: Plan to protect your tangible assets and manage risk.

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Learning Objective 11.6: Select the types of licenses, permits, and certificates required Chapter 11 Outline 1. Choose a legal structure for your business.  A sole proprietorship is owned by one person who also may be the sole employee.  A partnership consists of two or more owners who make the decisions for the business together and share the profits and losses.  A corporation is a legal entity composed of stockholders under a common name.  A Subchapter S corporation limits the number of stockholders to 100. It offers most of the limited liability protection of the more common C corporation, but Subchapter S corporate income is only taxed once—as the personal income of the owners.  A nonprofit (or not-for-profit) corporation is set up with a specific mission to improve society. Churches, museums, charitable foundations, and trade associations are examples of nonprofit corporations. Nonprofit corporations are tax-exempt.  A limited liability company (LLC) combines the best features of partnerships and corporations and is an excellent choice for many small businesses.

2. Discover the importance of contracts.  A contract is a formal agreement between two or more parties.  The relationships between the links in a production-distribution chain are defined by contracts.  Never sign a contract without having an attorney examine it.  Never sign a contract that you have not read yourself from top to bottom.  A successful contract should: • Avoid misunderstanding.

• Ensure work.

• Ensure payment.

• Avoid liability.

3. Recognize key components of commercial law.  The Uniform Commercial Code is a collection of business laws adopted by most states that covers a broad spectrum of transactions.  The law of agency addresses principal-agent relationships.  The bankruptcy code concerns the inability or impaired ability to pay debts as they come due.

4. Evaluate ways to protect your intellectual property.  Your ideas and creations are your intellectual property.

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 Trademarks and service marks protect your brand identity.  Copyrights protect works of authorship.  Patents protect invented products and processes.

5. Plan to protect your tangible assets and manage risk.  Insurance protects people and businesses from the risk of having property or wealth stolen, lost, or destroyed.  When buying insurance, choose the policy with the highest deductible you can afford.

This will give you the lowest possible premium.  Consider the normal and customary types of business insurance: • workers’ compensation • disability • commercial fleet • property • liability • business income • errors and omissions • life.  Create and practice a disaster recovery plan.

6. Select the types of licenses, permits, and certificates required.  Depending upon the business and its location it may be required to have a variety of permits, licenses, and/or certificates.  The permit is an official document that gives a party the right to hold a specific event or take a particular action.  Licenses are official documents that grant the right to engage approved activities for a specified period.  A certificate is an official document that verifies something.

Chapter 11 Teaching Notes Class Discussion Ideas: 1. Discuss the advantages and disadvantages of incorporation. It may be helpful to provide examples for each bullet point. Limited legal liability Money raised through stock. Relay stories of recent initial public offerings (IPOs) described in the Wall Street Journal. Easily transferred ownership. Describe how people buy and sell stock every day, which

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is the buying and selling of ownership in different companies. Buy/sell contracts. Recall recent mergers in the news. Corporations are more heavily taxed. Explain that the corporation must pay business income taxes on the profit it makes, and the stockholders must pay personal income taxes on the dividends they receive. If possible, look up on the Internet a concrete example of a dividend-paying company (McDonald’s) to provide real numbers. Possible loss of control by founder/entrepreneur to board of directors. Many expenses to start. Explain that the incorporation process involves hiring lawyers and filing a lot of paperwork, such as Articles of Incorporation. If feasible, ask a local entrepreneurial corporation to provide you with a copy of its articles as a show-and-tell prop. Businesses are subject to many government regulations. Explain that corporations are closely watched regarding their accounting practices, disclosure of information, ways stock is offered, persons who may or may not hold stock, etc. Some students may be familiar with and want to share what they know about—or be able to investigate and report on— corporate scandals such as those involving Enron, Adelphia, or WorldCom. 2. Focus on contractual relationships. Take a poll. How many students have ever entered into contractual (formal, legal, written) relationships? Such relationships might include opening a bank account, signing up for Internet service, leasing a mobile phone, buying something on layaway, renting a car or bicycle, flying on a plane, or checking luggage. What other everyday activities do students take part in that involve contractual relationships?

3. Focus on agreements. Have students discuss the following agreement in pairs. Kevin agrees over the phone to buy a lawnmower from Andy and take over his lawn-cutting business. Kevin will pay Andy 10 percent of the money he earns from the business. What could go wrong with this agreement?

4. Set up the following scenario: Suppose you own a company that makes skateboards.

Someone has an accident while using one of your skateboards. The customer claims the skateboard was defective and that this caused the accident. You are sued for $100,000.

What can happen if the customer wins? (You might lose everything—not just your initial investment but personal belongings and resources, too.) Different legal structures allow entrepreneurs several ways to set up businesses that affect risk and return. Challenge the class: Why might the government allow these different forms of legal structures? (Answers will vary but should include that different businesses are opened under different circumstances and for different reasons [for example, some businesses require a lot of startup financing, are started by individuals who work as partners, or are types of businesses that are more vulnerable to lawsuits by customers]; the free enterprise system allows owners the freedom of choice within the law so that they can set up businesses as they wish; businesses serve different purposes; they require different kinds of investment, operation, and ownership.)

5. Set up the following scenario: You own a company that makes testing kits for diabetics.

What sorts of insurance would you need? (Answers should include the basic business insurance types.)

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Chapter 11 Lecture Enhancers PPT Lecture Slides Outside the Classroom: How to Incorporate: A Handbook for Entrepreneurs and Professionals (How to Incorporate) by Michael R. Diamond and Julie L. Williams (Wiley, 2008).

Sole Proprietorship: Small Business Start-Up Kit by Daniel Sitarz (Nova Publishing Company, 2011).

Chapter 11 Key Terms arbitration 376 bankruptcy 378 boilerplate language 375 breach of contract 376 certificate 388 commercial law 377 contingency 375 contract 374 corporation 369 deductible 385 electronic rights 382 insurance 384 letter of agreement 376 license 388 limited partnership 368 partnership 368 patent 384 permit 388 premium 385 public domain 384 service mark 380 signatory 376 small claims court 376 sole proprietorship 367 statute of limitations 376

Chapter 11 Class Activity Ideas and Group Exercises Class Activity Ideas: 1.

Invite a guest speaker. Look up inventors through a local invention membership organization and invite one to your class to demonstrate how he or she creates ideas for products, decides which ones to develop or sell to manufacturers, and chooses how to

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work with manufacturers. Encourage the speaker to bring sketches, models, prototypes, and other show-and-tell items to augment the presentation.

2.

Invite a guest speaker. If you plan to choose a guest speaker from a local government business regulatory agency or the chamber of commerce (or plan to take the class to one of these locations), as one of the Extend the Learning activities, make contact and arrangements well in advance. Alternatively, these agencies may have informational videos or print materials they will share ahead of time.

3.

Instruct students to use the library or Internet to find legal cases brought against major companies (tobacco corporations, McDonald’s “hot coffee” spill, or obesity cases; Securities and Exchange Commission financial misconduct cases; the pollution case featured in the Erin Brockovich movie, etc.). Have students list the types of issues that can lead to a lawsuit, discuss how a company can protect itself from lawsuits, and discuss the types of consequences that ensue from a lawsuit (payouts, changes in procedure or products, effect on stock price, bankruptcy, etc.).

Invite the students to distinguish between legitimate and frivolous consumer lawsuits and discuss the concept of tort reform to limit legal liability.

4.

Another possibility for a guest speaker would be a local entrepreneur who runs a corporation to share his/her story of incorporating (challenges, benefits, etc.), or ask a corporate lawyer to describe the basic process, and documents needed, of incorporation.

5.

Use a memory test. Instruct students to put their pens/pencils down and not take notes.

Relate the following story: Maria and Alicia decide to go into business together. Maria can sew, and Alicia can paint. They want to make custom-designed T-shirts and scarves. Maria has $500 in savings and Alicia has $300 but is willing to borrow another $200 from her parents. Maria can start sewing T-shirts immediately. Alicia has to finish a school project, so she can’t start painting on the T-shirts until the following month. Maria agrees to go ahead and buy materials and start sewing as long as Alicia will set up the business checking account and secure her loan. Then, in the second month, Maria agrees to try to find a sales outlet for the T-shirts while Alicia paints. The girls agree to split the profits equally after Alicia’s parents are paid back.

Ask students to summarize the story using as many details as possible.

Define what a contract is. Contracts legally protect the interests and rights of everyone involved through a formal agreement. Discuss the need for formal, written agreements— contracts—when an entrepreneur involves others in his/her business.

Recall the case of Maria and Alicia. Ask: What did Maria agree to? What did Alicia agree to? Almost certainly, many students will get some of the details wrong.

Determine with the class that people’s memories are limited. Establish that not writing things down can lead to misunderstandings, omission of details, and disagreements.

Remind students that written contracts do not replace trust or trustworthiness. They should always keep their word even without a contract, because trustworthiness will make them a better friend and a more respected businessperson, but contracts will help ensure that promises that are made are kept.

6.

Assign an Internet activity. Instruct students to use an Internet search engine to find

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breach-of-contract lawsuits. Have them find and bring to class one legal case to share; then have the class list the types of breaches that can lead to a lawsuit, discuss how a person/company can protect itself from lawsuits through better contracts, and examine the effects of lawsuits on the people/companies (tarnished reputation, payouts, changes in procedure or products, effect on stock prices, bankruptcy, etc.).

Chapter 11 Critical Thinking Exercises 11-1. Identify what can happen to an entrepreneur who is personally liable for his or her business in cases of legal, financial, or other business problems. How can an entrepreneur protect himself or herself from personal liability? Imagine that your friend wants to start a business making custom skateboards. Write a memo to your friend explaining the risks involved and suggestions for limiting liability.

L.O. 11.5 Plan to protect your tangible assets and manage risk.

AACSB Written and oral communication The memo should note that the entrepreneur can have personal property taken and be sued personally. One solution is to properly form the organization to limit personal liability and to secure appropriate insurances.

It should include a reminder that skateboard businesses need liability insurance in addition to other usual and customary types of insurance. This is particularly true because skateboarders do tricks and flips and can easily be injured. Also, language in the product packaging should limit liability. Of course, the products should be as safe as practical for such products.

11-2. With a partner, make a list of the technological tools each of you can personally access. Brainstorm how you might combine your resources to create a successful business. Describe in detail how the partnership would work. For example, would the person contributing more technology have a larger share of the business, or would profits and expenses be split equally? Draw up a partnership agreement that specifies each partner’s duties and how much money and time each will invest.

L.O. 11.2 Discover the importance of contracts AACSB Application of knowledge Answers will vary but should include a partnership agreement that also explains how profits will be split and what would happen should one or both partners decide to leave the business.

11-3. Which legal structure will you choose for your business?

L.O. 11.1 Choose a legal structure for your business.

AACSB Application of knowledge Sole proprietorship Partnership Limited partnership

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C corporation Subchapter S corporation Limited liability corporation (LLC) Nonprofit corporation a. Why did you choose this structure?

Example: The LLC legal structure will protect me and my personal assets in the unlikely event that Oldies but Goodies is sued or goes bankrupt. b. Who will the partners, members or stockholders, if any, for your company be?

Example: I am the primary shareholder. I own 100 percent equity stake in my business.

11-4. If your business will be incorporated, what percentage of the company would be represented by one share of stock? Will your corporation’s stock be publicly or privately held? Why? L.O. 11.1 Choose a legal structure for your company.

AACSB Reflective thinking Answers will vary. Typical answer will be “privately held.”

11-5. Use computer software to create a logo for your business. Do you intend to trademark your logo? Explain why or why not.

L.O. 11.4 Evaluate ways to protect your intellectual property.

AACSB Application of knowledge Whatever logo they design, they will probably plan to trademark it to protect their rights.

11-6. Describe any intellectual property you are developing (without improperly disclosing a potential patent).

L.O. 11.4 Evaluate ways to protect your intellectual property.

AACSB Application of knowledge Answers will vary; they may include inventions, songs, books, videos, logos, and the like. Some students may have developed patentable technology.

11-7. How do you plan to protect your intellectual property (e.g., trademark, copyright, patent)?

Explain why it would qualify for protection.

L.O. 11.4 Evaluate ways to protect your intellectual property.

AACSB Application of knowledge Answers will vary. For each item of intellectual property, students should pair up patents, trademarks, sales marks, and copyrights, appropriately.

The most common error is to report that they will patent their logo.

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11-8. Give an example of a business in your community that you think may be infringing on someone else’s intellectual property. Explain why you believe this to be possible.

L.O. 11.4 Evaluate ways to protect your intellectual property.

AACSB Analytical thinking Answers will vary. An example might be a bar named Margaritaville. Jimmy Buffett may not be accepting of this.

11-9. What types of insurance will your business need and why? What is the highest deductible you feel you can afford? Pick one type of insurance you want to have for your business and find a company online that sells it. List the premium, deductible, and payout value.

L.O. 11.5 Plan to protect your tangible assets and manage risk AACSB Information technology Students should list the typical forms of insurance and anything that is particular to their business type. a. workers’ compensation b. disability c. commercial fleet d. property e. liability f. business income g. errors and omissions h. life.

The deductible level will be based upon their preferences.

Chapter 11 Key Concept Questions 11-10. What is the most important contract you will need to operate your business? Why is it so important? Describe any additional contracts you have or plan to secure.

L.O. 11.2 Discover the importance of contracts.

AACSB Analytical thinking Answers will vary depending upon the nature of the business.

Example: All of my customers will need to sign a service contract. This contract will protect me in case an event is cancelled or postponed. With the signing of the service contract, I will require customers to pay Oldies but Goodies a 25 percent deposit of the total service charge. The remainder will be due at the event. The service contract also explains my cancellation policy.

11-11. Negotiate and write a letter of agreement between you and a fellow student. You could agree to become business partners, for example, or to supply a product or Copyright 2020 Pearson Education, Inc.

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service for the other student’s business.

L.O. 11.3 Recognize key components of commercial law AACSB Interpersonal relations and teamwork Letter should be dated and signed by both students and the agreement should benefit both parties.

11-12. Find a lawyer who might be willing to help you with your business. Ask your parents/guardians who are in business or store owners in your community for referrals. The Small Business Administration or Community Legal Aid Society sometimes offers free or low-cost legal services to entrepreneurs.

Describe how you found the attorney and what criteria you used.

L.O. 11.2 Discover the importance of contracts.

AACSB Information technology Example: My attorney is Darius Greaves. He operates his own law practice in downtown Atlanta and works with many entrepreneurs in my community. He was listed on the internet and he was mentioned by several of my referral sources.

11-13. What is the purpose of securing a building permit during leasehold improvements? To whom does it matter? Why? L.O. 11.2 Discover the importance of contracts.

AACSB Analytical thinking Securing a building permit ensures that the proposed property improvements are compliant with local codes, will be inspected, and are deemed to be safe. The permit is important to the issuing body and may matter to the landlord and to other tenants. Unsafe or illegal renovations can lead to dangerous circumstances.

11-14. What does your signature at the bottom of a contract mean in a court of law? Which two things should you do before signing a contract?

L.O. 11.2 Discover the importance of contracts.

AACSB Application of knowledge My signature on a contract means I have read, understood, and agreed to every word in it. Before I sign a contract, I should read it, making sure I understand every word, and I should show it to a lawyer.

11-15. Suki is buying a van from her father-in-law to start her flower-basket delivery service.

She planned to buy auto insurance that would pay all her expenses in case she ever got into an accident. She finds that such insurance will cost $3,000 per year, which, according to her business plan projections, is more than she can afford. What are Suki’s

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options? What should she do? Why? L.O. 11.5 Plan to protect your tangible assets and manage risk.

AACSB Analytical thinking Suki should decide whether this particular van is affordable when all of her costs are considered. Should she explore other options? Perhaps a different vehicle would be more affordable overall. She can continue to shop for the insurance coverage that she can afford, perhaps acquiring quotations from multiple companies. She needs to determine how much of a deductible she can afford and then look for a less expensive insurance that will not cover all her expenses in case of an accident but which she can afford. It is not advisable to make a purchase knowing that the necessary coverage is out of reach. It is also not viable to have the vehicle without coverage for legal and liability reasons.

11-16. Some businesses do sell products and services that can injure customers. List three examples and explain how these companies probably use insurance.

L.O. 11.5 Plan to protect your tangible assets and manage risk.

AACSB Analytical thinking Three examples of businesses that sell products and services that sometimes injure customers are airlines, skating rinks, and hospitals.

These companies can protect themselves by carrying liability insurance and medical malpractice insurance.

Chapter 11 Application Exercise 11-17. Carry out a search online for the name you intend to use for your business. What did you find? Will you still use this name? Why or why not? How do you plan to protect the name of your business?

L.O. 11.4 Evaluate ways to protect your intellectual property.

AACSB Information technology and analytical thinking Example: Pup’s Pet Shop LLC. A quick search using Google showed a company with the name Pup’s Pet Supply that is an internet seller. It would be good to confirm that there is not an existing Trade Mark and that the similar name does not infringe. It would be better to find no clear conflict, but that maybe quite difficult.

Trademarks and copyrights would assist in creating intellectual property protection.

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Chapter 11 Exploring Your Community 11-18. What nonprofit business could you start in your community? Answer the following questions to describe it: L.O. 11.1 Choose a legal structure for your business.

AACSB Application of knowledge Answers will vary with an example given. a. What is the name of your nonprofit?

Love for Dogs and Cats b. What societal problem(s) are you are trying to solve?

I want to help solve the problem of unwanted kittens and puppies being produced in New York City in large numbers by dogs and cats that have not been spayed or neutered. c. Describe the mission of your organization.

My organization will raise funds to support free spaying and neutering services for owners of dogs and cats who might otherwise not be able to afford to have their pets fixed. d. Describe the programs and services you plan to create.

I will hold biannual fundraising parties and partner with several veterinary hospitals to help them bring this free service to the community. e. How will your organization achieve the changes you intend to bring about?

We will bring about a reduction in the number of unwanted and euthanized puppies and kittens born in New York City by providing free neutering services that will reduce the number of adult dogs and cats that can reproduce. f. What is the unit of change (per person, animal, house, etc.)?

Each animal that is neutered will represent one unit of change. g. How will you measure these changes?

Each neutering operation will be recorded, and the total number compiled twice a year and reported at our fundraising parties. h. Who are your competitors?

There are no free animal neutering services in New York City. i. How much will it cost to deliver one unit of service?

We will partner with veterinarians willing to perform this service at cost, plus $25. Our cost per unit will be $100. j. What sources of funding will you seek?

Sources of funding will include personal donations, the city of New York,

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animal shelters and other nonprofits that support animal rights and animal services.

11-19. Interview an entrepreneur about insurance policies. Ask how he or she decided what kind of insurance to carry and whether to have high or low deductibles.

L.O. 11.5 Plan to protect your tangible assets and manage risk.

AACSB Written and oral communication Each entrepreneur will provide a different list. Students should probe for basic and more unusual types of insurance. The logic behind their choices should be described and the deductibles discussed. Some students may also note that entrepreneurs do not carry insurance that the students think would be important.

Chapter 11 Exploring Online 11-20. For the business you plan to start or one you can imagine, research licensing regulations in your area and describe how they will affect the business.

L.O. 11.6 Select the types of licenses, permits and certificates required.

AACSB Application of knowledge and information technology a. What are the zoning laws in your location? Would your business comply? b. Are there particular professional certifications that you need before securing a license?

If so, what are they?

These answers will vary widely but should reflect research into such issues as home-based business regulations, parking, specialty licenses, inspections, and the like. For restaurants, students may note the need for safety and sanitation inspection. For other types of businesses, professional credentials and licenses may be required.

11-21. Search online for bankruptcy data for your state. List the state, year and source. How many business bankruptcies were filed in the most recent year for which data is available?

How many of each chapter were filed? How many personal bankruptcies were filed.

What is the proportion of business bankruptcies to personal bankruptcies in that state?

L.O. 11.3 Recognize key components of commercial law.

AACSB Information technology and application of knowledge Answers will vary depending upon the state and type of business. One example is for North Carolina. There were 514 filings in 2017 according to the U.S. Bankruptcy Courts (http://www.uscourts.gov/sites/default/files/data_tables/bf_f2_0930.2017.pdf).

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Of these 254 were Chapter 7, 125 were Chapter 11, 13 were Chapter 12, and 52 were Chapter 13. There were 14,010 personal bankruptcy filings during the same period. The proportion is 514/14,010 or 3.66%.

Case Studies Short Case Study Analysis — The Bun Company – Rising through Time 11-22.What legal issues have the Harringtons needed to address?

L.O. 11.1 Choose a legal structure for your business.

AACSB Application of knowledge The Harringtons have needed to address many legal issues as business owners.

Some of these include:        

Choosing a legal structure for the businesses.

Zoning for facilities.

Health and safety rules.

Protection of company names.

Contracts with vendors and customers.

Purchase and sale agreements for real estate.

Compliance with local, state and federal laws.

Interstate commerce rules.

11-23. What kinds of regulations would you expect her baking, transportation, and storage companies to encounter?

L.O. 11.3 Recognize key components of commercial law.

AACSB Application of knowledge They would encounter numerous regulations, many of which would vary by geographic location and local rules.

Baking – primarily zoning, health and safety rules. For example, safe, sanitary handling of food products.

Transportation – primarily interstate transportation and state rules for trucking companies.

Storage – primarily zoning and health rules.

11-24. With whom would you expect The Bakery Companies to have contracts? Why? L.O. 11.2 Discover the importance of contracts.

AACSB Analytical thinking The Bakery Companies likely have contracts with suppliers, financial institutions, customers, key employees, and landlords. They would have

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them to protect the businesses from risks of inconsistent supplies, loss of business and key personnel, and access to facilities. The agreements with financial institutions would be for things like lines of credit that give reliable access to financing. Some of these contracts are simply required by organizations such as financial institutions and landlords to protect their interests. If they want access to their funds and properties, the contracts must be executed.

Long Case Study Analysis — Airbnb – Navigating the Sharing Economy 11-25. What types of contracts does Airbnb need? With whom?

L.O. 11.2 Discover the importance of contracts.

AACSB Application of knowledge Airbnb needs contracts with the hosts and guests to clarify their role as the link between the two with no liability for the actual rental.

They also need to define how they collect payment and any limits on their involvement. Because of potential problems, they distance themselves from the actual transaction.

11-26. How is insurance involved in the Airbnb business model? How would you recommend this be changed, if at all? Why? L.O. 11.5 Plan to protect your tangible assets and manage risk.

AACSB Reflecting thinking Airbnb has to protect its reputation with respect to host and guest safety and personal property while legally separating itself from liability for the same. This is a difficult distinction to establish and they have worked to do so. Airbnb has a $1,000,000 Host Guarantee to cover property. It “doesn’t cover cash and securities, rare artwork, collectibles, jewelry, pets, and personal liability.” They also encourage hosts to carry their own insurance and provide a trust and safety department. There is no particular insurance for guests.

One suggested change may be finding a way for hosts to buy more comprehensive coverage at a portion of each rental fee. Another may be offering insurance through a third party for hosts and guests alike.

Safety and personal property protection are two of the greatest risks in the sharing model and Airbnb should limit those risks.

11-27. How does Airbnb distribute the liability between itself, hosts, and guests?

Provide examples.

L.O. 11.5 Plan to protect your tangible assets and manage risk.

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AACSB Analytical thinking Airbnb has gone to great lengths to distribute the liability, putting most of the burden on the hosts with guests following that. Airbnb includes statements such as the one in the case that clearly hold hosts liable for compliance with zoning, agreements with third parties, laws governing rentals, and other prevailing agreements. They can disable access to the site for violations. Airbnb limits its liability with respect to guests and the listings through legal terms. At the same time, the company assists in creating a more secure environment through its reviews, messaging system, customer support, and secure server for payments.

11-28. Why would hotels, motels, and bed and breakfasts be unhappy with Airbnb?

L.O. 11.3 Recognize key components of commercial law.

AACSB Reflective thinking Clearly, Airbnb is taking customers away from the commercial lodging industry. In addition, it has the advantage of not having to comply with legal registration and all of the rules and taxes that apply. The commercial lodging providers see Airbnb as having an unfair advantage.

11-29. Visit the Airbnb Web site (http://www.airbnb.com) and search for an accommodation for yourself. Describe the legal and risk issues you saw addressed during the process, and those that would be of most concern if you booked a reservation.

L.O. 11.2 and 11.5 Recognize the importance of contracts and plan to protect your tangible assets and manage risk.

AACSB Analytical thinking Each answer will differ but should include the times of protections identified above. Their greatest concerns are likely to be: the place isn’t as described, the host may be a thief or may have an unsafe environment, other guests may be risky, and the money may be lost.

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Chapter 12 Operating for Success Chapter 12 Contents Operations Permit Businesses to Deliver on Their Promises 400 The Production-Distribution Chain 400 Supply Chain Management 401 Finding Suppliers 402 Managing Inventory 402 Enterprise Resource Planning (ERP) 404 Facilities, Location, and Design 405 The Location Decision 406 Facilities Design and Layout 410 Special Considerations for Home-Based Businesses 413 Special Considerations for Web-Based Businesses 414 Defining Quality: It Is a Matter of Market Positioning 415 Profits Follow Quality 415 Organization-Wide Quality Initiatives 416 Chapter 12 Overview This chapter explores the operations side of running a business. In every business, it’s important to have a plan for product distribution and management of suppliers and inventory and in the case of manufacturing businesses, the idea-to-product process can be very elaborate. It also includes a discussion of selecting a location for the business. This chapter discusses the many important details that need to be considered.

Chapter 12 Objectives Learning Objective 12.1: Examine the significance of operations in a business.

Learning Objective 12.2: Develop a production-distribution chain for your business.

Learning Objective 12.3: Manage suppliers and inventory.

Learning Objective 12.4: Recognize the value of the facilities, location, and design decisions.

Learning Objective 12.5: Evaluate product quality methodologies.

Chapter 12 Outline 1. Examine the significance of operations in a business.

• Operations is delivering on promises.

• What is required depends on the specific industry and business.

• Inputs are transformed or converted into outputs through operations.

2. Develop a production-distribution chain for your business.

• Manufacturers make products in large quantities.

• Wholesalers buy smaller quantities in bulk from manufacturers.

• Retailers buy from wholesalers (and sometimes from manufacturers).

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• Consumers buy from retailers.

3. Manage suppliers and inventory.

• Supply-chain management is used to create and maintain efficient flow of materials between supply partners.

• Suppliers may be found in a variety of ways and may be located worldwide.

• Inventory can be managed to minimize cost and maximize customer satisfaction.  Consider implementation of an enterprise resource planning (ERP) system.

4. Recognize the value of the facilities, location, and design decisions.

• The most important location factors will be governed by the nature of the business.

• Key factors for most organizations include: • Access for customers and to suppliers • Climate and geography • Cost of facilities • Demographics • Economic conditions and business incentives • Laws and regulations • Workforce readiness • Competitive environment • Manufacturing, warehousing, and distribution facilities must provide the space to operate cost-effectively.

• Retail facilities must draw maximum revenue from design and layout.

5. Evaluate product quality methodologies.

• Quality is determined by meeting and exceeding standards, including customer satisfaction.

• Profits follow quality.

• Organization-wide approaches to quality include: • ISO 9000 certification • Six Sigma certification • Total quality management (TQM) • Malcolm Baldrige National Quality Awards

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Chapter 12 Teaching Notes Class Discussion Ideas: 1. Give examples of two businesses. Moonbucks Coffee provides consistently excellent coffee, prepared to customer specifications in a clean, pleasant atmosphere with quick and efficient customer service. MeToo Coffee delivers inconsistent quality, prepared to customer specifications just under 50 percent of the time, in a somewhat shabby setting.

Both charge the same amount and have identical menus. Explore the role of operations and quality assurance in this case. What do students expect the future to bring for Moonbucks Coffee and MeToo Coffee?

2. Ask students to describe the production-distribution chain for college sweatshirts.

Diagram it.

3. Introduce sourcing suppliers and selection factors. Ask students to imagine that they are starting a fashion boutique. Solicit suggestions for potential sources of suppliers. Probe for selection criteria. Do the same for a manufacturer of jeans.

4. Ask students to speculate as to why a company would go through the process of ISO 9000 certification and/or entering the Malcolm Baldrige National Quality Award program. Explore thresholds for participation. Size? Readiness? Other?

5. Explore the ways that the definition of quality may be different for a Cadillac Escalade, a Mercedes coupe, a Honda Civic, and a SMART car (or other distinctly different vehicles). Assist them in identifying five or six key criteria.

6. Introduce the idea of Economic Order Quantity. Pick a product category that students are familiar with, such as CDs at a music store. Work through a case with them establishing the volumes and the EOQ calculation.

7. The textbook gives some examples of manufacturing layouts. Have the students come up with additional examples so that they think through what each process really means.

8. Have the students discuss leasehold improvements. When is more beneficial to find an existing structure that does not require many leasehold improvements and in what cases might it be beneficial to make a lot of leasehold improvements just to get the right location? Hint: Restaurant businesses are many times better off moving into an existing restaurant structure than undergoing the extensive leasehold improvements that would be necessary to be up to code whereas businesses that don’t have as extreme of build out requirements may be better off considering a more ideal location and making the leasehold improvements.

9. Ask the students to consider “How important is it to be exact when calculating your selling space based on expected annual sales and average sales per square foot?”

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Chapter 12 Lecture Enhancers PPT Lecture Slides Outside the Classroom: http://www.asq.org: American Society for Quality (ASQ) is a professional organization for those involved in quality assurance and management. It has considerable information regarding ISO 9000 and other quality standards and measures. http://www.ansi.org: Like ASQ, the American National Standards Institute (ANSI) site provides information regarding ISO9000 and other quality standards and measures. http://www.icsc.org: International Council of Shopping Centers, ISCS. The principal aims of ICSC are to advance the development of the shopping center industry and to establish the individual shopping center as a major institution in the community through: Promoting the role of shopping centers in the marketing of consumer goods and services. Establishing codes of fair business ethics and dealings with retailers and consumers and with government and public agencies. Encouraging research into the architecture and design of shopping centers and into the development of improved management and maintenance methods. Collecting and disseminating information among members pertaining to techniques of profitable operation, which can serve to improve the individual shopping center and the industry. Study economic, marketing and promotional conditions affecting the shopping center industry. Promoting the prestige and standing of members as reputable specialists in the field of shopping center development and management. http://www.sba.gov/content/tips-choosing-business-location: The Small Business Administration gives tips on choosing the right business location.

In Search of Excellence: Lessons from America’s Best Run Companies, by Thomas J. Peters and Robert H. Waterman (Harper Business; Reissue edition, 2012).

Supply Chain Management: Strategy, Planning, and Operation, by Sunil Chopra and Peter Meindl (Pearson, 2016).

The Art of Woo: Using Strategic Persuasion to Sell Your Idea, by G. Richard Shell and Mario Moussa (Penguin Group, 2007).

Bargaining for Advantage: Negotiation Strategies for Reasonable People, by G. Richard Shell (Penguin Group, 2006).

Chapter 12 Key Terms benchmarking 416 center of gravity method 409 clustering 410 continuous improvement 418 Copyright © 2020 Pearson Education Inc.

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economic order quantity (EOQ) 403 enterprise resource planning 404 factor-rating method 408 geographic information systems (GIS) 408 leasehold improvements 410 operations 400 process management 417 quality 415 reorder point (ROP) 403 safety stock 403 supply chain management (SCM) 401 total quality management (TQM) 418 visual control 402 Chapter 12 Class Activity Ideas and Group Exercises 1. Focus on inventory management. Have students break into small groups (3 – 4 students each). Each group should name a manufacturing firm, a traditional retailer, and an online retailer with which they are familiar. These companies can be a mixture of locally owned and operated firms and larger national and international organizations. For each company, they should identify the type of inventory management system that they would expect and why. Have them report back.

2. Have students pair up and make a list of companies that have gone out of business and another list of those that have grown significantly within the past 2 years (at least 5 of each). Ask them to brainstorm the operational reasons that contributed to success or failure. How might the failure have been averted?

3. Discuss the production chain. Break students into groups and have each choose a familiar product category found in a grocery or department store (such as cereal, macaroni and cheese, clothing, electronics). Using the Internet, or interviewing local manufacturers or retailers, have groups research how the product is made and distributed and reaches the consumer—from raw materials to arrival at someone’s home. It may be helpful for them to choose one brand, such as Cheerios. Invite students to share their findings in class. Discuss how the different types of businesses are related: from raw- materials suppliers to manufacturers to wholesalers to retailers to consumers. Ask students to speculate how this chain applies or does not apply to service businesses.

4. Discuss the conversion of inputs to outputs. Make figure 12-1 available to all students. Break the class into small groups. Have each team designate a reporter who will compile the answers either onto a poster or the blackboard/whiteboard in class. Hold a competition for creating a diagram of the conversion process for business types that you provide to each group. Present a “prize” for the winning team.

5. Provide an Internet search opportunity. Make a list of business categories or names for the class. Depending upon the number of available computers, divide the students into pairs or small groups and have each find the name of a possible supplier from at least three of the following sources: trade shows or conferences; trade catalogs or journals; The Yellow Pages; Internet search engines; wholesale supply houses and brokers; Thomasnet.com; and newspapers and magazines. If there is time, have them suggest which competitors and Copyright © 2020 Pearson Education Inc.

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firms outside of the trading area might be resources.

6. Have students work in teams to create the proposed layout of a new restaurant that caters to college students. Share these and discuss the strengths and weaknesses of various designs.

7. Discuss the definition of quality measures for various businesses. Have students draw the names of familiar companies from a number of choices or assign them to pairs. Each student or pair should identify at least 6 measures of quality for the business. For each measure, they should suggest what rating to assign the business (e.g., 1 = poor, 5 = excellent) and describe how they came up with it. Reinforce the concept of measurable standards.

8. Write the quotation “We succeed in enterprises which demand the positive qualities we possess, but we excel in those which can also make use of our defects.” Give the students some time to individually write what that quotation means to them. Then have the class share their opinions.

9. Have the students investigate various average sales per square foot for different industries.

Reference in the book was made to the International Council of Shopping Centers, the public library reference center, and the U.S. Census Bureau. Why do different industries have different numbers? Are these numbers different for the same industries in different geographic locations throughout the country?

10. Have students pick a business and two possible locations for this business and then use the factor-rating method for their business following the six steps outlined in the chapter. This activity could also be done in groups to help the students learn to work better in teams.

11. Have the students research GIS systems. Have them make presentations of their results of simple and complex systems.

12. Discuss the U.S. Census Bureau. How do states use the information gathered by the U.S. Census Bureau to receive federal funds?

Chapter 12 Critical Thinking Exercises 12-1. Answer the following questions about the production-distribution chain: a. How do you plan to distribute your product to your target market? b. What is the estimated delivery time between when you place an order with your suppliers and when the product will be available for your customers?

L.O. 12.2 Develop a production-distribution chain for your business.

AACSB Application of knowledge Answers will vary depending upon the business that the student has selected. They should be discussion the links along the chain. Frequently, they focus on the use of FedEx versus UPS rather than the broader issue of channels.

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12-2. Give an example of a business that is known internationally for the quality of its products.

What defines quality for this company?

L.O. 12.5 Evaluate product quality methodologies.

AACSB Application of knowledge Answers will vary but should include a discussion of several measures that are quantifiable.

12-3. Describe how the design of a facility affect product quality and production efficiency?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Analytical thinking The design of a facility affects product quality and production efficiency by making it easier or more difficult to produce goods to meet the quality standards that apply to them and creating obstacles that slow down production or make it easy to speed up the production of quality goods. For example, if a product must be handled multiple times because of the layout when another layout would require handling once, the design is inefficient.

12-4. Choose a partner in class and make a list of the technology resources (hardware and software, including apps) each of you can personally access. Brainstorm how you might combine your technological resources to create a successful business. Describe in detail how the partnership would work. For example, would the person contributing more technology have a larger share of the business, or would profits and expenses be split equally? Draw up a partnership agreement that specifies each partner’s duties and how much money and time each will invest in the business.

L.O. 12.3 Manage suppliers and inventory.

AACSB Written and oral communications Answers will vary but should include a partnership agreement that also explains how profits will be split and what would happen should one or both partners decide to leave the business. It should spell out the technology available to the partners and how it would contribute to the company.

12-5. Examine a label on either the shoes or a piece of clothing you are wearing today. Which items were made in foreign countries? How many dollars or cents per hour do you think the people earned who made these articles of clothing? (You are welcome to research it.)

Why do you think the company that manufactured these items had them made abroad (if they were)?

L.O. 12.3 Manage suppliers and inventory.

AACSB Analytical thinking Answers should include understanding of the concept that companies save money by having their products manufactured in countries with lower wages.

It is interesting to tally the number of items from each country. Students are Copyright © 2020 Pearson Education Inc.

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frequently surprised by the mix of sources.

12-6. Identify two sets of business clusters in your area. Explain why they may have been formed.

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Analytical thinking Answers will vary and should hopefully be more creative than automobile dealerships! Grocery stores might be one example.

12-7. Where would you locate your business, and why?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Reflective thinking Answers will vary but students should be encouraged to defend their answers based on the information learned from the text. They should identify the type of business and the location factors most pertinent to the business type.

12-8. If you were to start a home-based business, what might it be? Why? What key factors would you consider before startup (specific to the topics of the chapter)?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Application of knowledge Again, the students should be sure to include information from the chapter about the important details that must be researched before deciding on a home-based business. Some factors may include: allocating work and family time, zoning, overhead, overall strategy, deed restrictions, lease restrictions, availability and suitability of space in the home, convenience for customers, and general viability.

12-9. What is the customary role of demographic information in the selection of a retaillocation?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Application of knowledge You want to be accessible to your target market and be in a location that is in fitting with the image of the company. The demographic factors commonly considered include: size of the target population within the typical travel time/distance for your type of retail stores, age, gender, education, income, wealth, race, family status, and the like.

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Chapter 12 Key Concept Questions 12-10. Use your local telephone company’s business-to-business directory, The American Wholesalers and Distributors Directory, or an online source to locate suppliers for a coffee shop from which you could order products for resale at your coffee shop. Which resource did you select? Why? How many potential sources did you locate? What can they supply? How many are in your state? How many are international? What did you observe about the availability of contact information?

L.O. 12.3 Manage suppliers and inventory.

AACSB Analytical thinking There should be wide range of answers to this, but students are most likely to select internet sources through simple searches. A quick Google search of “wholesale coffee shop supplies” resulted in a plethora of potential suppliers of equipment and consumables. A second search would be needed by state.

This book also provides an appendix of resources, including a list of online wholesalers. Students may have some difficulty identifying appropriate wholesalers that are local but will generally recognize that shipping is required.

They may use the above resources, including the Thomas Register. Contact information availability will vary.

12-11. Choose one of the quality-assurance methodologies described in this chapter and explain how it might apply to your educational institution.

L.O. 12.5 Evaluate product quality methodologies.

AACSB Application of knowledge Depending upon the measures that they select, answers will vary. They may select benchmarking, ISO 9001, Six Sigma, TQM, or the Baldrige award.

Benchmarking is likely to be the easiest for them to apply to their university.

Some students may find measures of quality on the university Web site.

Certainly, some measures, such as average SAT/ACT scores, percentage of graduation at 5 and 6 years, and the like may be included.

12-12. What factors are most critical to the location decision for a manufacturer?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Application of knowledge Manufacturing facilities have multiple location-criteria considerations that are primarily centered on customer service and costs. Manufacturers need to meet and exceed customer delivery and quality goals. They are often concerned with access air, rail, highway, and waterway systems; labor availability; environmental regulations; government incentives; proximity to raw material and customers; facilities costs; zoning restrictions; overall costs, and quality of life.

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12-13. How can zoning affect the location for a home-based business?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Application of knowledge Some places completely forbid the operation of home-based businesses; whereas others may restrict the type of operation, number of cars, foot traffic, or commercial vehicles in the neighborhood. Sometimes hours of operation are limited, and signage proscribed.

Chapter 12 Application Exercises 12-14. What might the supply chain look like for one of the following: L.O. 12.2 Develop a production-distribution chain for your business.

AACSB Analytical thinking a. Manufacturer of custom rims for automobiles Parts & components=>conversion (production)=>finished rims=>automobile parts wholesaler=> retailer=>consumer b. Car dealership Vehicles from manufacturer & parts=>Retailer (the dealership)=>consumer c. Building materials wholesaler Materials from manufacturers & processors=>wholesaler=>contractor d. Video game publisher Intellectual property from developer=>production of games=>finished packages of games=>retailers=>consumer e. Medical device distributor Devices from manufacturers=>end users 12-15. Suggest at least three quality-assurance measures for the following businesses: L.O. 12.5 Evaluate product quality methodologies.

AACSB Analytical thinking a. Bank Accuracy of financial statements, customer satisfaction ratings, timeliness of reporting to federal and local regulators b. Residential cleaning service On-time arrival at appointments, time to complete service, breakage rate c. Commercial HVAC (heating, ventilation and air conditioning) contractor On-time arrival, customer satisfaction, call backs for incorrect work d. Computer manufacturer Computer pass rate for checks against performance measures, return rate, customer complaints e. Pure play Internet shoe retailer On-time delivery, return rate, customer complaints

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12-16. Xavier Zumsteg is selecting a location for his upscale urban fashion boutique. He has selected three cities to consider and needs to make a choice. Using the factor-rating method identify the five key factors to consider and their weights. Then, rate each of the cities on a scale of 0 to 100. Calculate the most preferable option.

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Analytical thinking Factor

Factor Weight

Total

1.00

Detroit Rating

Atlanta Rating

Boston Rating

Detroit Weight

Atlanta Weight

Boston Weight

Answers will vary. Factors could include: number of competing boutiques in the area, rent rates, the city’s reputation in the fashion industry, labor availability, public transportation, etc.

Chapter 12 Exploring Your Community 12-17. Identify two businesses in your community with which you are familiar. Suggest four measures of quality for each. Rate each business on these quality dimensions. Then, answer the questions below.

L.O. 12.5 Evaluate product quality methodologies.

AACSB Reflective thinking Measure of Quality Measure 1

Rating (1 is poor, 5 is excellent) Company #1

1

2

3

4

5

Measure 2

1

2

3

4

5

Measure 3

1

2

3

4

5

Measure 4

1

2

3

4

5

1

2

3

4

5

Measure 2

1

2

3

4

5

Measure 3

1

2

3

4

5

Measure 4

1

2

3

4

5

Measure 1

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a. What do these measurements tell you about the respective businesses? b. How might they improve on one of the indicators? c. Does each business have a customer feedback mechanism? If so, what is it?

If not, what would you recommend?

Answers to these questions will vary widely but should include completing the table and addressing each of the questions in a manner that displays understanding.

Chapter 12 Exploring Online 12-18. Visit the Web site of a business that you know has at least three locations in your area (preferably not a franchise or chain).

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Information technology and analytical thinking a. b. c. d. e. f. g.

Obtain the addresses of the locations nearest to your home (up to 10).

Map these locations on an ordinary street map.

Map them on a census map.

What geographic pattern, if any, emerges?

Is there a common set of demographic data? If so, what?

Name a couple of competitors and map up to 10 of their locations.

Does the pattern that emerges show clustering?

Answers will vary. They should produce two maps, a street map and a census map. Once plotted, patterns may emerge to suggest clustering. More technologically savvy students will use GIS systems to complete this task.

12-19. Visit the U.S. Census Bureau Web site at http://www.census.gov. Pull up the census tract data both for your home address and for your campus address. If the tracts are the same, pick another college or university. Compare and contrast the two locations as potential sites for each of the following. Use a street map, too, if it will help.

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Analytical thinking and information technology a. b. c. d.

A bookstore A store specializing in golfing-related goods A children’s day-care center A distribution center for cleaning supplies

Answers will vary. Students should be encouraged to be thorough in their comparisons of the two locations.

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12-20. Select a specific street address and use an online program for drawing a radius around a location to map 1 mile, 3 miles, 10 miles, and 20 miles. Some options may include https://www.freemaptools.com/radius-around-point.htm and https://www.mapdevelopers.com/draw-circle-tool.php.

L.O. 12-4 Recognize the value of the facilities, location, and design decisions.

AACSB Information technology and application of knowledge Example:

Chapter 12 Case Studies Short Case Study Analysis - Producing Quality American Made Furniture: Gat Creek Furniture 12-21. How has Gat Creek brought modern technology to the traditional processes of building furniture?

L.O. 12.1 Examine the significance of operations in a business.

AACSB Application of knowledge Gat Creek has created a state-of-the-art facility and a network of small job shops. Gat Creek monitors all materials entering and leaving its facility to reduce waste, pollution, and emissions. Gat Creek uses a state-of-the-art renewable biomass boiler system so that scrap materials become fuel for heating. The company has an innovative storm water management system

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12-22. What are the sources of production inputs for Gat Creek?

L.O. 12.2 Develop a production-distribution chain for your business.

AACSB Application of knowledge Materials are sourced locally with 95 percent of raw materials originating within 350 miles of the factory. The primary suppliers are lumber mills.

12-23. How might Gat Creek assure quality? Why? L.O. 12.5 Evaluate product quality methodologies.

AACSB Reflective thinking Benchmarking and ISO 9001 seem to be most appropriate. Students will have variable answers regarding the selection of quality assurance and the rationale for their answers. Gat Creek assures quality by having strict standards, having skilled workers that sign the furniture pieces they build and by requiring subcontractors to meet the company’s specifications.

12-24. What types of regulations are particularly important to Gat Creek and its employees, given the nature of the business? Give at least three examples L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Reflective thinking Regulations, such as those from OSHA regarding safety are of particular importance. Environmental regulations are also a factor. Also, the standard business and labor regulations are critical.

12-25. Discuss ways the company’s core values are exhibited.

L.O. Refers to previous chapters.

AACSB Reflective thinking Gat Creek exhibits its core values of environmentalism and concern for its people and quality in numerous ways. The company uses local renewable hardwoods, creates no waste and is essentially self-sufficient for fuel and water.

Many employees have been with Caperton for a number of years and have become quite skilled in their work. Quality assurance is personal and is highly valued.

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Long Case Study Analysis -- Sewing Up Business in New Ways — Sew What? Inc. 12-26. Describe ways that technology supported and sustained Megan Duckett’s businesses.

L.O.12.1 Examine the significance of operations in a business.

AACSB Analytical thinking The use of technology is critical to Megan’s businesses. It can be as simple as a commercial sewing machine or cutter. It can be as complex as the pattern making and quotation software that is used. Office equipment is kept up-todate and state- of-the-art accounting and manufacturing systems are in place.

The website also plays a crucial role, including the availability of “e-swatches” for customers. The automated translation of sewing instructions into Spanish is critical for the sewing department. In addition, with the growth of the organization to include multiple businesses, customer systems and warehousing are more complex and need additional controls.

12-27. Why did Duckett credit computer technology and the Internet for a significant portion of her company’s growth?

L.O. 12.2 Develop a production-distribution chain for your business.

AACSB Application of knowledge Megan realizes that she has been able to gain access to customers worldwide through the use of the Web. She also has been recognized by Dell for integration of computer technology into a business and has seen direct benefits in terms of quality and efficiency.

12-28. What were six critical steps in the growth of the company? Why were these so important?

L.O. 12.1 Examine the significance of operations in a business.

AACSB Analytical thinking Among these are: moving from a home base; securing a contract and hiring an employee; incorporating the use of technology; adding a website; moving to a large facility; and securing contracts with highly visible clients.

12-29. Describe and illustrate the sales cycle(s) for Sew What?

L.O. 12.2 Develop a production-distribution chain for your business.

AACSB Analytical thinking The sales cycles for Sew What? vary according to the type of customer. For rock and roll customers, the sales cycle may be quite short and consistent with a ready design and quickly negotiated contract with rapid turnaround requirements. For school and churches, the cycle is more protracted based upon the need to garner competitive bids and fundraise. Students should Copyright © 2020 Pearson Education Inc.

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include the form and frequency of contact, the specification process, the funding and bidding processes, and the like in a visual.

12-30. What channels of distribution would you expect the company to use to get products to its customers? Why? L.O. 12.2 Develop a production-distribution chain for your business.

AACSB Reflective thinking I would expect the company to sell directly to customers, to theater supply companies, possibly to interior decorators, and to trade show booth manufacturers.

12-31. Visit the company website at http://www.sewwhatinc.com. What new and/or interest operations or production information do they report? Provide specific examples.

L.O. 12.1 Examine the significance of operations in a business.

AACSB Information technology Students should find the company’s press releases and other information and report on new activities or changes. They have added related businesses and changed distribution and warehousing.

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Chapter 13 Management, Leadership, and Ethical Practices Chapter 13 Contents The Entrepreneur as Leader 431 Leadership Styles That Work 431 How Entrepreneurs Pay Themselves 432 Manage Your Time Wisely 433 Business Management: Building a Team 435 What Do Managers Do? 435 Adding Employees to Your Business 436 Growing Your Team 441 Creating and Managing Organizational Culture 442 Determining Organizational Structure 443 Getting the Best Out of Your Employees 443 Human Resources Fundamentals 445 Performance Management 447 Firing and Laying Off Employees 447 Ethical Leadership and Ethical Organizations 449 An Ethical Perspective 449 Establishing Ethical Standards 450 Corporate Ethical Standards 451 Doing the Right Thing in Addition to Doing Things Right 452 Balancing the Needs of Owners, Customers, and Employees 452 Social Responsibility and Ethics 453 Leading with Integrity and by Example 453 Encourage Your Employees to Be Socially Responsible 454 Chapter 13 Overview This chapter is about ethical, entrepreneurial management of employees. It deals with how to hire employees and build a team and a business culture. It discusses the responsibilities of the manager for successfully maintaining an excellent work force. And, it covers the possible firing or laying off of employees. In addition, issues related to leadership and ethical practices are introduced.

Chapter 13 Objectives Learning Objective 13.1: Identify leadership styles Learning Objective 13.2: Summarize the role of managers in adding employees.

Learning Objective 13.3: Evaluate roles in creating and managing culture and structure.

Learning Objective 13.4: Understand the functions of human resources management.

Learning Objective 13.5: Pursue ethical leadership to build an ethical organization.

Learning Objective 13.6: Incorporate social responsibility into your company

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Chapter 13 Outline 1. Identify leadership styles.

• A leader is someone who has the confidence and energy to do things on his or her own.

• Leadership comes from self-esteem. If you believe in yourself, you can do things with confidence and inspire confidence in others.

• Leaders learn how to manage their time, so they can get more done.

2. Summarize the role of managers in adding employees.

• Planning: strategic, tactical, and operational • Organizing • Leading • Controlling 3. Evaluate roles in creating and managing culture and structure.

The culture of a company is the shared beliefs, values, and attitudes among employees.

• The entrepreneur can strategically determine the culture.

• Cultures vary, from entrepreneurial to administrative.

• A multitude of cultural components are conveyed through words, actions, and structures.

Determine your organizational structure.

• Structure evolves as the company grows and changes.

• The transition from entrepreneur to entrepreneurial manager is often difficult.

• Different organizational stages are related to the maturation of the company.

4. Understand the functions of human resources management.

• Compensation and payroll • Benefits administration • Organizational development • Education and development • Labor law and HR compliance • Performance appraisal and review • Human resources strategy • Firing and laying off employees 5. Pursue ethical leadership to build an ethical organization.

• View decisions through an ethical lens.

• Establish ethical standards.

• Build ethical employer/employee relationships.

6. Incorporate social responsibility into your company.

• Encourage environmentalism.

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• Support charitable efforts.

• Maintain a safe and healthy workplace.

• Consider sustainability throughout the organization.

Chapter 13 Teaching Notes Class Discussion Ideas: 1. In Good to Great, management expert Jim Collins says that great leaders “get the right people on the bus—sometimes even before a company decides exactly what business it will be in.” Have the students break into groups and discuss their interpretations and opinions about this quotation.

2. Ask the students, if you’re the hiring/firing manager and an employee is not doing well, under what circumstances should you fire them and hire a new employee in order to not waste more time and money?

3. When is firing an employee justified?

4. Have the students break into groups and identify creative interview approaches and questions. Have them role play interviews using the approaches and questions. Reflect.

5. What are the advantages/disadvantages of hiring young, relatively inexperienced employees versus older, more experienced employees? What age is the best to consider for employment? Why? Discuss age discrimination. Help tease out the differences between age and experience.

6. Focus on good corporate citizenship. Have students brainstorm: Think of as many examples as possible of companies that have contributed to charitable causes or supported socially responsible and positive efforts in your community. (Answers include Ronald McDonald House, Ben and Jerry’s, local small businesses that sponsor a “fun run” to raise money for a children’s hospital, local companies that donate money to advertise in the school yearbook or the sports program, companies that support Big Brothers/Big Sisters, etc.) Why do they put forth the funds and/or efforts?

7. Focus on social issues. Ask the students to work in pairs or small groups to discuss three (3) social problems, issues, or concerns that they think are important to address. How might a business support the efforts to alleviate these problems? Is there a for-profit option?

8. Pose this problem: If your business made a net profit of $100,000 this year, how much would you consider giving to a good cause? If you made $1,000,000, how would the answer change? To which causes would you give, and why?

9. Ask students: What are the benefits for the entrepreneur and those for society of a socially responsible business? (Examples: For entrepreneur—goodwill, good reputation, his/her own life or well-being improved; for society—a stronger community, hope, improved well-being for everyone.)

10. Discuss ethical and unethical businesspeople using your favorite timely examples. Have students do the following: List two or three people you know or who are in the news who are good examples of ethical businesspeople. List two or three people who are examples of unethical businesspeople. (They may have to do a quick Internet search.) Discuss the results as a class. Why are these people considered ethical or unethical? What ethical dilemmas might they have faced?

11. Ask students to take sides and debate the question: Should ethical violations by corporations be punishable through the legal system (civil or criminal penalties) or through industry ethical standards boards?

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Chapter 13 Lecture Enhancers PPT Lecture Slides Outside the Classroom: www.osha.gov: The U.S. Department of Labor’s Occupational Safety and Health Administration’s Web site details the regulations that employers must obey to ensure the safety and health of America’s workers. www.svn.org : The Social Venture Network offers information that entrepreneurs can use to help ensure that their businesses are socially responsible. www.bsr.org: The Business for Social Responsibility Web site reports the latest developments in global initiatives regarding ethical business behavior, including environmental impact and other guidelines.

Making Ethical Decisions, by Michael Josephson (Josephson Institute, 2011).

The Ethical Entrepreneur: Succeeding in Business without Selling Your Soul, by Paul Silberberg (Morgan James Publishing, 2016).

Entrepreneur Voice on Effective Leadership by Jeffrey Hayzett (Inc., 2018).

Chapter 13 Key Terms advisory board or council 452 behavioral interview 438 chain of command 443 code of conduct 450 code of ethics 450 code of ethics and business conduct 450 corporate governance 451 corporate social responsibility 453 ethical dilemma 450 ethical relativism 450 ethics 449 human resources 445 in-kind donation 453 interview guide 438 job offer letter 439 job profile 437 leader 431 line organization 443 line and staff organization 443 operational plan 435 payroll tax 446 performance appraisal 447 position description 437 recruitment 436 severance 449 social entrepreneurship 453 Copyright © 2020 Pearson Education Inc.

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span of control 443 strategic plan 435 sustainable 454 tactical plan 435 tax evasion 451

Chapter 13 Class Activity Ideas and Group Exercises 1. Perform online research to identify a list of companies that have creative hiring techniques. What are the techniques? Discuss why you think these are good ideas or not so good ideas.

2. Go to www.indeed.com and www.monster.com. Are these good websites for posting entrepreneurial job listings for new companies? Why or why not?

3. What is meant by the statement: “The culture of an entrepreneurial firm can be its competitive advantage”?

4. List multiple things you would do or say as an interviewer to make a candidate feel more comfortable in an interview. What would you avoid saying or doing for the same reason?

5. How often should performance appraisals be performed? Why? Is there such a thing as reviewing performance too often? What are the positive and negative outcomes that can result from performance reviews?

6. One interest that a lot of entrepreneurs have in common is going beyond profits to helping others and doing what’s right. Outline three ways an entrepreneur can do something good: 1) Focus on customer needs and add value to product/service; 2) be ethical in all business situations; 3) do philanthropic work.

7. Define the term “ethical.” Ask students to come up with actual or hypothetical ways that businesspeople behave unethically. Have students brainstorm ways that these businesspeople could have acted more ethically.

8. Discuss types of community involvement. Ask students to give examples of socially responsible acts by businesses. List the students’ ideas on the board and ask them to look for patterns and to group the acts by type of issue (such as education or health), by type of donation (such as gift of money or donated services), or by type of activity (such as cause-related marketing or creation of a foundation). Have students summarize by brainstorming general ways an entrepreneur might be socially responsible. (Examples include giving money, give employees time, letting a charity use the company’s name or reputation, donate products, donate services, donate use of facilities.)

9. Divide the class into groups and distribute newspapers and/or magazines. Ask students to find examples and select pages with advertisements that include a cause-related marketing element (i.e., seem to support a social, environmental, political, or cultural cause outside the company itself or its products). For each example, have students speculate why they think the company chose the particular cause to support.

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10. Invite a social entrepreneur to make a presentation to your class about starting a nonprofit organization—the strengths, challenges, opportunities, etc., involved. You may assign students a reflective essay based on the discussion.

11. Invite a local representative of the Better Business Bureau (BBB) to discuss with your class which services the BBB provides, the number and types of complaints most often made against different types of businesses, and the methods businesses can use to keep their BBB record clean. Encourage students to understand the role of membership and what enforcement capacity the organization has.

Chapter 13 Critical Thinking Exercises 13-1. Will you be hiring employees during your first year of operations? If so, name their positions and describe the required qualifications, anticipated compensation, and their role in helping your business.

L.O. 13.4 Understand the functions of human resources management.

AACSB Analytical thinking Example: I plan to hire subcontractors after I complete my first year of business operations. Using subcontractors will help me to grow my business. Oldies but Goodies can take on additional clients and build our brand. My subcontractors will need to possess outstanding DJ skills and people skills.

They must provide their own top-of-the-line equipment. I will pay my subcontractors an hourly wage of $15 plus a sales commission of 5 percent of the total service fee.

13-2. What are five ways managers can make a business a positive and rewarding place to work?

L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AACSB Analytical thinking They can create an appealing and attractive physical environment. They can encourage the positive exchange of ideas and information. They can model the behavior they hope to create.

13-3. Why is establishing job profiles and position descriptions before recruiting important?

L.O. 13.2 Summarize the role of managers in adding employees.

AACSB Reflective thinking It is important for two reasons: 1) to remember what qualities are most important to you for the job and to be sure to look for those qualities and 2) to be clear to the candidates what qualities are being searched for. It could also be helpful later during employment when an employee is not measuring up to goals and standards and needs to be fired for not performing up to expectation.

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13-4. What are three benefits of a well-executed performance appraisal process?

L.O. 13.4 Understand the functions of human resources management.

AACSB Analytical thinking It is an opportunity to set goals, assess progress, identify opportunities for improvements, plan for individual growth and development, and provide performance feedback. People prefer certainty and clarity and fair and consistent appraisals provide it.

13-5. Describe the components of an organizational culture that you would find appealing.

L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AACSB Reflective thinking Answers will vary but should be well thought out to include components that will lead to a successful company, not just a fun environment to work in.

13-6. What are the characteristics of an organizational culture that you would find unappealing?

L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AACSB Reflective thinking Answers will vary, but are likely to include factors such as lying, laziness, unethical behavior, bullying, and too much or too little formality.

13-7. Describe three leaders you admire. What characteristics do you most admire about them and why?

L.O. 13.1 Identify leadership styles.

AACSB Reflective thinking Answers will vary but should include some of the leadership characteristics discussed in the chapter, such as confidence, energy, positive attitude, and selfesteem.

13-8. Consider ways that you could find 10 additional hours in your weekly schedule to manage your business. Create a weekly time-management schedule for yourself reflecting this activity.

L.O. 13.2 Summarize the role of managers in adding employees.

AACSB Analytical thinking Answers will vary. Students often suggest reducing TV time, video gaming or socializing. They also suggest becoming more organized to reduce wasted time.

13-9. Design a Gantt chart for your business or one that you can imagine, or use Microsoft Project or another software package to do the same thing.

L.O. 13.1 Identify leadership styles.

AACSB Analytical thinking Copyright © 2020 Pearson Education Inc.

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Example: Task Make flyers and business cards.

Create demo CD. Make sales calls to local organizations.

Research speaker and amplifier models online.

Research information about local retirement communities.

Call ten of my grandparents’ friends and tell them that Oldies but Goodies is open for business!

Have lunch with Marcella Robinson— find out about her next charity event.

Meet with my banker and open accounts.

Research the cost of on-air advertising with WXPI. Call my brother’s friend DJ Deluxe in Philadelphia to get insider’s advice about managing my business.

Week One X

Week Two X

Week Three

Week Four

Week Five

Week Six

X

X

Week Seven

Week Eight

X X

X

X

X

X

X

X

X

X X

X

Meet with my banker, accountant, and lawyer.

X

X

13-10. Thinnow Corporation, an entrepreneurial venture, has developed a weight-loss drug, Fatgo. After an intense FDA review and approval process, Thinnow has received permission to bring Fatgo to market. Testing showed that there may be serious (even deadly) side effects to consumers of Fatgo. A warning label is being provided by Thinnow. Identify legal and ethical issues in this situation.

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L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Application of knowledge Legal permission has been given to market Fatgo but if a death were to occur, there would be legal ramifications. Constant legal oversight should be pursued. Ethical issues include whether or not this drug should even be marketed. Is weight-loss so important to possibly cause death? Or is weightloss necessary to avoid death?

Chapter 13 Key Concept Questions 13-11. How old does someone have to be before he or she can work full time in the United States?

L.O. 13.4 Understand the function of human resources management.

AACSB Application of knowledge A full-time employee must be at least 16 years old.

13-12. What is one kind of tax employers must pay for employees?

L.O. 13.4 Understand the function of human resources management.

AACSB Application of knowledge Employers have to deduct payroll tax and contribute to Social Security on behalf of their employees.

13-13. Can you legally fire an employee if you have an argument about religion? Justify your answer.

L.O. 13.4 Understand the function of human resources management.

AACSB Application of knowledge No, laws prohibit discriminating against an employee on the basis of age, race, religion, or national origin or because of color, gender, or physical disability.

13-14. What is an interview guide? What are the critical components of an interview guide?

L.O. 13.2 Summarize the role of managers in adding employees.

AACSB Application of knowledge An interview guide is a document to assist you or your interviewer in developing questions regarding an applicant’s knowledge, skills, abilities, and interests. An interview guide could include questions that reveal competencies of skills and interests, teamwork, problem solving, communication skills, productivity/time management, customer service skills (internal and external) and interpersonal skills. An applicant should be provided with an interview schedule in advance of the interview.

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13-15. What are the four primary functions of management? Describe each briefly.

L.O. 13.2 Summarize the role of managers in adding employees.

AACSB Application of knowledge A. Planning: strategic, tactical, and operational plan development.

B. Organizing: finding resources, hiring employees, buying/leasing equipment, setting up an organizational chart, and defining job responsibilities.

C. Leading: The style in which the manager directs the company.

Managers need to understand their employees’ skills, knowledge, and work styles to be effective.

D. Controlling: Measuring the business’s performance and determining how to improve it.

13-16. What are antidiscrimination laws? What protections do they include? Name at least two of them.

L.O. 13.4 Understand the functions of human resources management.

AACSB Application of knowledge Antidiscrimination laws are laws developed to protect the rights of workers and employees. Various protections include minimum wage mandates, discriminations on the basis of race and color, discriminations against and the harassment of employees aged 40 or older, discriminations against a person who has a disability or is perceived to have a disability, and discriminations against applicants or employees on the basis of their citizenship or national origin. Specific laws include:     

Equal Pay Act of 1963 Title VII of the Civil Rights Act of 1964 Age Discrimination in Employment Act (ADEA) Americans with Disabilities Act (ADA) Immigration Reform and Control Act of 1986 (IRCA)

13-17. Compare and contrast two leadership styles as identified in this chapter.

L.O. 13.1 Identify leadership styles.

AACSB Application of knowledge Choices include:  Coercive  Authoritative  Affiliative  Democratic  Pacesetting  Coaching

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13-18 What is a code of conduct? What are its potential benefits?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Application of knowledge A code of conduct is a set of official standards of employee behavior for a company. It helps to create an ethical business by codifying the fundamental rules of the game. Underlying values provide a basis for ethical behavior; clear, written guidelines can create a firmer foundation and more consistent implementation. By creating, disseminating, and establishing employee buyin, a business will empower employees. A code of conduct can help to eliminate the problem of ethical relativism and can help to prevent or resolve ethical dilemmas.

13-19 What is the relationship between social responsibility and ethics?

L.O. 13.6 Incorporate social responsibility into your company.

AACSB Analytical thinking Ethics, corporate social responsibility and social entrepreneurship are three related topics that are often conflated. Corporate social responsibility is the ethical obligation of a company to its community. It is one aspect of ethics for an organization.

Chapter 13 Application Exercises 13-20. What qualities and qualifications would you look for in employees for your business? List five and explain why they are the most important to you.

L.O. 13.2 Summarize the role of managers in adding employees.

AACSB Reflective thinking Answers will vary but should include qualifications that make sense for the business the student wants to start.  Knowledge of the job and its responsibilities  Skills – experience  Abilities – capacity  Motivation – a desire to excel  Work history – positive track record 13-21. What would push you to fire an employee? List five reasons that would justify termination. Describe how you would expect to handle the firing.

L.O. 13.4. Understand the functions of human resources management.

AACSB Analytical thinking Answers will vary but must show that student understands the issue of wrongful termination and would conduct regular written reviews of Copyright © 2020 Pearson Education Inc.

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employees and maintain files to create a paper trail that would support a termination.

13-22. Visit a local bricks-and-mortar business (not a website) where you buy products or services. Go through your shopping experience as you normally would. Once you have left the place of business, describe its culture. Use the information in Exhibit 13-4 to assist you.

L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AACSB Analytical thinking Values include:  Trustworthiness  Respect  Responsibility  Caring  Fairness  Citizenship Students may observe the actualize forms of these and note other cultural aspects.

13-23. Identify a business leader, preferably an entrepreneur. Describe his or her leadership style based upon at least two public sources (excluding any wikis, such as Wikipedia) and give examples to support your conclusion.

L.O. 13.1 Identify leadership styles.

AACSB Information technology and analytical thinking Answers will vary, but should include coercive, authoritative, affiliative, democratic, pacesetting, or coaching. There should be a rationale for the choices.

13-24. Keep track of the direct opportunities to decide whether to act ethically/unethically and/or legally/illegally that arise during a 48-hour period. What, if anything, surprises you about the list?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Application of knowledge and reflective thinking Answers will vary.

13-25. Choose three things you would plan to do to run a socially responsible business. Explain why you made the selections you did.

L.O. 13.6 Incorporate social responsibility into your company.

AACSB Reflective thinking Answers will vary but might include something like: Whenever possible, I will choose to buy my products and equipment from locally owned businesses Copyright © 2020 Pearson Education Inc.

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so that I will be supporting other entrepreneurs in my community. Some common ideas include: • recycling paper, glass, or plastic; • donating a portion of profits to a charity; • not testing on animals for product research; • offering employees incentives to volunteer in the community, and • establishing a safe and healthy workplace.

Chapter 13 Exploring Online 13-26. Visit the website for a U.S. state, or use another reliable source, to identify the antidiscrimination laws in that state. What form(s) of discrimination does that state prohibit? When were they enacted? To which organizations (type and size) do they apply?

L.O. 13.4 Understand the functions of human resources management.

AACSB Information technology and analytical thinking Answers will vary. You may want to assign states to the students, so answers will cover a variety of states.

13-27. Search the Internet for two position descriptions from different businesses.

Make a chart identifying which of the following are included: job title; job summary; duties to be performed; nature of supervision, and the job’s relation to others in the company. How might each description be improved?

L.O. 13.4 Understand the functions of human resources management.

AACSB Information technology Answers will vary. You may want to give the students suggested websites and/or businesses to look for this information.

Position/Company A

Position/Company B

Job title Job summary Duties to be performed Nature of supervision Job’s relation to others Improvement???

13-28. Using an online search engine, find a company that practices corporate social responsibility and answer the following: a. Which values are important? b. How are these values translated into action? c. Are the values shared broadly within the company, or are they primarily those of the president/CEO? L.O. 13.6 Incorporate social responsibility into your company.

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Answers will vary. They should include items from the values identified in the text.

Chapter 13 In Your Opinion 13-29. Discuss with a group: Should an employer be able to fire an employee if the latter is often ill? Before the discussion, prepare by searching the Internet to determine the legal issues that may be involved. Be ready to identify your sources.

L.O. 13.4 Understand the functions of human resources management.

AACSB Reflective thinking.

Opinions will be divided. Issues of discrimination should be included, as should the Americans with Disabilities Act and the Family and Medical Leave Act. Chapter 13 Case Studies Short Case Study: AYZH Inc. – Seeing Opportunities to Improve Women’s Health 13-30. What type of leader is Bai, according to Goleman’s typology?

L.O. 13.1 Identify leadership styles.

AACSB Analytical thinking Answers will vary but many students will probably see Zubaida as a “pacesetting” type of leader since she sets high personal performance standards.

13-31. What motivates Bai in her company?

L.O. 13.1 Identify leadership roles.

AACSB Application of knowledge As Zubaida states, “AYZH aims to be the leading global provider of lifesaving, life-changing health products for underprivileged women worldwide.

Our goals are to reduce maternal and infant mortality through improved quality of care at time of birth.”

13-32. How do her education and experience relate to her role as founder and CEO of AYZH? L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AACSB Reflective thinking She earned a degree from Madras University in India, studied development of modular products in Sweden, earning a master’s degree in engineering, and earned an MBA in the US. She also gained work experience in the social development space. Her education, work experience, and ability to speak 5 languages, has helped her recognize and meet the health care needs of impoverished women and infants worldwide. On a personal level, she Copyright © 2020 Pearson Education Inc.

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contracted an infection after the birth of her first child that motivated her to help other women who experienced similar problems.

13-33. What is the role of ethics at AYZH? How might the company’s integrity be challenged?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Ethical understanding and reasoning Ethics play a major role at ZYZH since the company is trying to produce, distribute, and sell low cost, sustainable products that will reduce infant and maternal mortality. They should note concerns about profiting from health issues and the like. If products are not going where intended or information is falsely reported, there could be major negative impacts.

13-34. What human resources issues would you anticipate for this organization?

L.O. 13.1 Identify leadership styles.

AACSB Ethical understanding and reasoning Answers will vary. There could be a number of issues. One is that Bai’s leadership style may not be well-suited to the growing organization. Another is that the international nature adds complexity to hiring, managing, and communications. Ethical behavior is defined differently across cultures and could be problematic. Another concern is finding people who will do the work for wages that permit the low cost of the products.

Long Case Study: Crisis at Agritechno Hybrid 13-35. Why are Drs. Andropov and Brown frustrated and angry about the suggestions from Holbrook, Girard, and Castillo?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Analytical thinking They do not want to possibly ruin the future success of their invention.

13-36. What are the arguments for and against notifying Agritechno’s investors? What is the basis for each argument?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Ethical understanding and reasoning The potential argument for notifying the investors is that stock prices may be damaged if news of the problems leak to the investors instead of open disclosure. In addition, heavy rains are expected, and the growers need to be notified. The potential argument for not notifying the investors is that a problem may not really exist. More research is needed to determine this and/or to come up with a solution that can be announced.

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13-37. What are the arguments for and against notifying Agritechno’s growers? What is the basis for each argument?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Ethical understanding and reasoning If the growers are not notified and heavy rains come, and the transgenic corn is affected by the rains, crops could be sacrificed, and lawsuits could ensue. If the growers are notified, they may preliminarily stop any future purchases and the product may not have a future. And the corn may not even have a problem.

13-38. What method of communication, if any, would you recommend for investors? Growers?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Analytical thinking Answers will vary but should certainly include written, documented communication that is thorough and reviewed by legal counsel for advice.

13-39. What should Agritechno tell its investors and growers, if anything, about the crop failures and solutions?

L.O. 13.5 Pursue ethical leadership to build an ethical organization.

AACSB Ethical understanding and reasoning Answers will vary from full disclosure to no disclosure at all.

Bonus Case Study: Casino Grande 13-40. List the pros and cons of Mr. Jackson’s decision to post the coffee-break notice. Was it a good management decision? Why or why not?

L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AASCB Analytical thinking Answers will vary. Students will often suggest that Jackson needed to create a clear policy on breaks for hourly (non-exempt) employees, but that this notice is not appropriate. Issues:     

Addresses only coffee breaks not other types of breaks Casino Grande is required by law to give employees breaks based upon their status and hours worked. Breaks cannot be taken away.

The tone of the memo is aggressive, rude and threatening.

He cannot tell them to have breakfast before they arrive at work (he can say not to eat at their desks).

By saying that office personnel should not visit the cafeteria (for coffee) before 9:30, Jackson is creating a sort of “club” for exempt employees who can use the new facility earlier. Also, the cafeteria is updated to encourage

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  

usage.

Whether individuals or groups go together should not be a concern as long as customer service is not impaired. Often, breaking bread together creates more teamwork.

This presumes that all office personnel have workstations where they should be all day. Many people have to move around to interact with others.

Limiting people from leaving their offices to once a day violates the rights of employees and is demoralizing.

13-41. Imagine a scenario where you are Mr. Parks. What would you have done after the conversation with Mr. Jackson? Write a paragraph describing your action plan.

L.O. 13.4 Understand the functions of human resources management.

AACSB Reflective thinking Answers will vary. Perhaps he should have written notes for himself and spoken with their supervisor. Either they should have met with each woman separately or should have secured written permission to meet with them together (disclosure of human resources information and issues of freely sharing information). A good idea would have been to put in writing the meeting he had with the three women and an action plan to follow. Each of the women could have signed off on the meeting minutes and the action plan.

13-42. Write a paragraph describing Mr. Jackson’s philosophy of human-resources management.

L.O. 13.1 Identify leadership styles.

AACSB Written and oral communication Answers will vary but certainly should include an observation of his almost hands-off approach in terms of direct communication with employees and his approach of not letting his employees give their opinions and help set policies.

13-43. List some examples of why the women might see the reprimands as unfair or unjust.

L.O. 13.4 Understand the functions of human resources management.

AACSB Analytical thinking Examples should include other employees with similar behavior, inconsistent application of rules, and abuses of the policies.

13-44. What is Jackson’s leadership style?

L.O. 13.1 Identify leadership styles.

AACSB Application of knowledge Casual, horizontal management. Achievement-oriented.

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UNIT 4 CASE STUDY ANALYSIS: OPERATING A SMALL BUSINESS EFFECTIVELY ONLC Training Centers: Virtual IT Training in a Classroom U4-1. What did ONLC do to determine where to offer training? What were the critical location factors?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Analytical thinking ONLC management has carefully studied potential opportunities and identified strategic roll-out priorities, by looking at U.S. Census data by metropolitan statistical areas (MSAs). A network of executive-suite locations in areas with greater population densities or rural locations with no direct competitors. ONLC estimates that 80 percent of the U.S. population is within an hour’s drive from one of its training sites.

U4-2. How does this business model democratize distribution?

L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AACSB Analytical thinking By creating a series of locations across the United States and reaching 80 percent of the population relatively conveniently, ONLC has made its services available to the vast majority of residents. With training centers located only in major urban areas, other providers are too costly and inconvenient for many potential clients. Also, by not canceling small classes, people in less populous areas can get training.

U4-3. How could ONLC have over 300 locations and maintain an efficient cost structure at low volumes in each?

L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Application of knowledge They sign short-term, six-month leases using only the necessary space. If a location does not work out, it does not renew the lease. They combine the enrollments from the 300 locations into single classes and they reduce the chances of cancellation. They enroll over 700 students per week.

U4-4. What was the level of importance of the location of the ONLC headquarters? Why? L.O. 12.4 Recognize the value of the facilities, location, and design decisions.

AACSB Analytical thinking The location of the headquarters is relatively unimportant and is not even mentioned in the case. It would only be an issue if the company couldn’t meet Copyright © 2020 Pearson Education Inc.

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its logistics’ needs.

U4-5. What were the main differentiating characteristics of ONLC’s remote classroom instruction offering, compared to its competitors who were also offering virtual training?

L.O. 12.2 Develop a production-distribution chain for your business.

AACSB Analytical thinking Its model combines “in-person” instruction while students from up to nine other physical locations join them through the remote-classroom-instruction.

Their competitors’ virtual training has people accessing the training from their homes or businesses. ONLC founders believe their model reduces technical issues and helps people focus on learning.

U4-6. What was the ONLC business model?

L.O. 13.3 Evaluate roles in creating and managing culture and structure.

AACSB Application of knowledge ONLC is a logistics company that delivers training. Through rapidly expanding the number of training facilities to provide nationwide coverage and by redefining classroom training with its RCI model, ONLC costeffectively delivers classroom training where its competitors can’t.

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Chapter 14 Franchising, Licensing, and Harvesting: Cashing in Your Brand Chapter 14 Contents What Do You Want from Your Business? 473 Continuing the Business for the Family 474 Growth through Diversification 474 Growth through Licensing and Franchising 475 Focus Your Brand 475 When Licensing Can Be Effective 475 Franchising Revisited from the Franchisor Perspective 476 How a McDonald’s Franchise Works 476 Do Your Research before You Franchise 477 Harvesting and Exiting Options 477 When to Harvest Your Business 477 How to Value a Business 478 The Science of Valuation 479 Creating Wealth by Selling a Profitable Business 480 Harvesting Options 480 Which Exit Strategy is Best for You? 482 Investors Will Care About Your Exit Strategy, Too 483 Chapter 14 Overview This chapter presents different ways to grow your business including the options of licensing and franchising. Once the business becomes profitable, there is an opportunity to exit the business and profit from the sale. The exit strategy is important for planning, profitability, and to investors.

Chapter 14 Objectives Learning Objective 14.1: Assess how you want to grow your business and eventually exit from it.

Learning Objective 14.2: Describe how a company can expand via licensing and franchising.

Learning Objective 14.3: Examine options for harvesting and exiting a business.

Learning Objective 14.4: Compare ways to harvest a business.

Chapter 14 Outline 1. Assess how you want to grow your business and eventually exit from it.

• Decide what your ultimate goals and objectives are.

• Consider creating a business that will provide employment and wealth for your family.

• Identify options to broaden product and service offerings through diversification.

• Evaluate replication strategies.

2. Describe how a company can expand via licensing and franchising.

• A brand is a name, term, sign, logo, design, or combination of these that identifies the products or services of a company and differentiates them from those of competitors.

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• The licensee pays a fee for the license and will probably also pay the licensor a royalty (share of the profits).

• Licensing is only effective when the licensor is confident that his or her company name will not be tarnished by how the licensee uses it.

• A franchise is a business that markets a product or service in the exact manner prescribed by the founder or successors of the parent company.

• As an entrepreneur, you could develop a concept and business operation that can be reproduced and sold to other entrepreneurs. They would pay you a fee for the right to run the business exactly the way you direct and pay you a royalty as well.

3. Examine options for harvesting and exiting a business  Determine when to harvest a business  Use methods of valuing a business  Book value (net worth = assets – liabilities)  Future earnings  Market-based (value = P/E  estimated future net earnings)

4. Compare ways to harvest a business.

• Increase the free cash flows. Once you are ready to exit, you can begin reducing reinvestment and collecting revenue as cash.

• Management buyout. The entrepreneur sells the firm to the managers, who raise the money to buy it via personal savings and debt.

• Employee stock ownership plan (ESOP). This provides an employee retirement plan and allows the entrepreneur and partners, as they exit the company, to sell their stock to the employees.

• Merging or being acquired. The company joins together with another company or is bought by one.

• Initial public offering (IPO). Going public is getting your company listed on the stock exchange to be traded on the open market.

Chapter 14 Teaching Notes Class Discussion Ideas: 1.

Discuss with the class what they would expect to be their individual harvesting strategies.

How might these change as they age? Would they like to build a business and then continue to run it until retirement? Or, would they want to sell it when profitable? Would they start and sell another one or more?

2.

Discuss with the students Steven Covey’s quote “a key to being effective in life is “beginning with an end in mind.” Why is this important? Or, why not?

3.

Hold a discussion with the class about exit strategies. Have students give their opinions on which they think are the most attractive and give reasons why for each option.

4.

Break the students into teams. Ask each team to identify businesses they could start while in college or within five years of graduation that could become franchisors. What makes

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them good candidates for franchising? What difference does the time frame make?

Chapter 14 Lecture Enhancers PPT Lecture Slides Outside the Classroom: Franchise Times magazine Subscription: 1-800-528-3296 www.franchisetimes.com The Entrepreneur’s Guide to Patents, Copyrights, Trademarks, Trade Secrets & Licensing by Jill Gilbert (Berkley Books, 2014).

Franchise Bible: How to Buy a Franchise or Franchise Your Own Business, 7e, by Erwin Keup (Entrepreneur Press, 2012).

Franchising & Licensing: Two Ways to Build Your Business, 4e, by Andrew J. Sherman (American Management Association, 2011).

Chapter 14 Key Terms book value 479 diversification 474 fair market value 479 harvesting 477 licensing 475 line extension 475 liquidation 478 merger 482 replication strategy 475 Chapter 14 Class Activity Ideas and Group Exercises 1. The chapter gives a description of how a McDonald’s franchise works. Have each student pick a different franchise (or assign them) and write up a similar explanation.

2. The chapter gives three primary valuation methods for selling a business. Under what circumstances might a buyer pay more or less than these methods indicate?

3. For a business that is not profitable, can it be sold? Why or why not?

Chapter 14 Critical Thinking Exercises 14-1. Compare and contrast licensing and franchising.

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Analytical thinking A license gives the licensee the right to use the licensor’s name to sell products.

The licensee pays a fee for the license and may also pay royalties on sales to the licensor.

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A franchise is a business that is operated in the exact manner prescribed by the individual who developed the parent company. The franchisee buys the right to run the business in the way the franchiser dictates and pays the franchiser a royalty, or a share of the profits.

14-2. Provide an example of a business that could lead to licensing agreements and a business that could be franchised.

L.O. 14. 2 Describe how a company can expand via licensing and franchising.

AACSB Analytical thinking Answers will vary, but licensing is typically successful when the business’s name has already become well known; a franchise operation can work when a business model has been developed that can be easily replicated.

14-3. Do you plan to franchise your business or license any of your products? Explain.

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Reflective thinking Answers will vary.

Example: When my business succeeds, I will consider licensing the Oldies but Goodies brand name to other DJ services. Licensees will need to agree to Oldies but Goodies’ standards of musical genre, selection, and service excellence.

14-4. Describe the exit strategy you plan to use to harvest your business. Why will this exit strategy be attractive to potential investors?

L.O. 14.1 Assess how you want to grow your business and eventually exit from it.

AACSB Reflective thinking Answers will vary but should include any of the following: sale, merger, license, or franchise.

Example: My exit strategy is to sell my business name and equipment to another entrepreneur who shares my love of Motown music and has outstanding DJ skills.

I think this exit strategy will be attractive to my potential investors because it will be easier to build on an existing brand name than to start a new business.

Chapter 14 Key Concept Questions 14-5. Analyze two companies that merged during the past three years. Describe the structure of the merger and what has happened to the resulting organization since then.

L.O. 14.4 Compare ways to harvest a business.

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Answers will vary. They should indicate whether there is a new structure, new name, changed management, increased or decreased revenues, layoffs, and the like.

14-6. Select one of the harvesting strategies described in the chapter and research it in depth.

Write a report per instructor guidelines.

L.O. 14.4 Compare ways to harvest a business.

AACSB Application of knowledge and written communications Answers will vary depending on what strategy the student chooses to research.

Chapter 14 Application Exercises 14-7. Look around your local community and evaluate a popular business that is an independent company – not a franchise or part of a major corporation. Propose the possible harvesting strategies that the owners(s) could employ. What would you recommend and why?

L.O. 14.4 Compare ways to harvest a business.

AACSB Analytical thinking Answers will vary. They should select from selling, maintaining, and licensing.

14-8. Select five companies that are profiled in this text from the Step into the Shoes and Global Impact features. Research whether each has been harvested (you may need to do an Internet search). If so, what strategy did the owner(s) employ? If not, what would you recommend?

L.O. 14.4 Compare ways to harvest a business.

AACSB Analytical thinking Answers will vary. Generally, selling and IPO are the main choices.

Chapter 14 Exploring Online The American Association of Franchisees and Dealers (AAFD) is a national trade association that represents the rights and interests of franchisees and independent dealers across the country. Visit this association online at http://www.aafd.org to learn more about franchises and the resources available. As a potential franchisor, you should know what your prospective customers are reading.

14-9. Search the site for the article, “AAFD Road Map to Selecting a Franchise.” Read the section called “8 Things to Look for in a Franchise.” For each of the eight tips in the article, write a one-sentence summary and note how it might apply to your business as the franchisor. If you cannot access this article, find another article on franchise selection criteria and follow the instruction here. Include a citation.

L.O. 14.2 Describe how a company can expand via licensing and franchising.

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Students will have differing answers to the way that the topics will apply to them. The following is the list of tips.

The Eight Things to Look for in a Franchise Opportunity – from AAFD 1. Select a franchising company that is primarily interested in distributing quality products and services to ultimate consumers. Although this rule may seem obvious, many (if not most) franchising companies are primarily interested in selling franchises and are less concerned with the quality of the products and services they are theoretically in business to sell.

2. Your franchising company should be dedicated to franchising as its primary mechanism of product and service distribution. Be wary of franchisors with a large number of company-owned stores, or franchisors that distribute products through other channels such as supermarkets or discount stores.

3. Your franchising company should produce and market quality goods and services for which there is an established market demand. The value of franchising emanates from the value of the franchisor. Too many prospective franchisees cannot qualify for a widely-recognized franchise and settle for a lesser known system thinking the franchise concept is more important than the product and trade name.

4. Select a franchisor with a well-accepted trademark.

5. Evaluate your franchisor’s business plan and marketing system. A well-established, well-designed marketing system promises substantial and complete training and overall franchisee support.

6. Your franchisor should have good relationships with its franchisees. Likewise, the franchisees should have a strong franchisee organization which has negotiating leverage with the franchising company. A franchisor that does not permit its franchisees to organize is a sure sign of trouble ahead. Strong franchisee associations, on the other hand, will pave the way to successful and collaborative franchising cultures.

7. Only deal with franchising companies that provide sales and earnings data which demonstrate an attractive return on your investment. Do not believe franchisors who claim they are forbidden by law to provide earning projections and evidence of actual performance. To the contrary, all state and federal laws regulating franchising encourage franchisors to provide earnings claims to prospective franchisees.

8. Select a franchisor that supports the AAFD’s Fair Franchising Standards and respects the Franchisee Bill of Rights of the AAFD. Only Select a Franchise That Meets ALL 8 Criteria!

14-10. Through an online search, identify a franchise like the one you might want to create.

Answer the following: a. b. c. d. e. f. g.

What is the franchise? What does it sell?

Why are you interested in it?

What is the franchise fee?

What are the start-up costs?

What is the royalty fee?

Describe the training the franchisor offers to franchisees.

Describe the marketing the franchisor provides for franchisees.

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L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Information technology Answers will vary depending on the franchise each student chooses to research.

They may find that it is difficult to secure all of the answers without contacting the company and prequalifying for a franchise. Some franchisors are more transparent than others with respect to what is publicly available.

14-11. Find a company online that is like the type of business you would like to launch.

Assume you would want to sell it. Using financial data on the company, calculate your desired selling price and explain your valuation method(s).

L.O. 14.3 Examine options for harvesting and exiting a business.

AACSB Analytical thinking Answers will vary depending on the business each student chooses to consider buying but should indicate comprehension of valuation methods discussed in the chapter – book value, future earnings, and market-based value.

Chapter 14 Case Studies Short Case Study: Anago Cleaning Systems - Growth through Franchising 14-12. What benefits did Anago Cleaning Systems gain from franchising?

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Analytical thinking Growth and a steady revenue stream.

14-13. What benefits do Anago’s master franchises get from the company that they would not have independently?

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Analytical thinking They have the exclusive rights to the company’s system in their contractual territories. Master franchises pay for assistance in site selection, live and computer training, computer software, and various support options.

14-14. What are the demographic requirements for selecting a master franchise region?

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Analytical thinking Each contractual region has a population base of at least 500,000 people and at least 5,000 businesses.

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14-15. Who is most likely to be interested in an Anago unit franchise? Why? L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Analytical thinking Answers will vary.

Visit the Anago Cleaning Systems website at http://www.anagocleaning.com and find information about obtaining a master franchise.

14-16. What are the competitive advantages that Anago identifies?

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Application of knowledge They note that Regional Franchises “are not in the cleaning business, you are in the franchising business.” They then list the following:  Exclusive rights to selling franchises  Brand recognition  Network support  Initial and ongoing training  Billing and collection services  Vendor/supplier relationships  Financing and insurance  Industry affiliations  Advanced technology  Marketing support 14-17. What proprietary systems and services are noted?

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Application of knowledge Specifically, Anago notes their proprietary software. There is a New Business Development System and an Invoice Generating and Account Statement system.

14-18. How are master franchisees incorporated into the site?

L.O. 14.2 Describe how a company can expand via licensing and franchising.

AACSB Information technology Master franchises are identified as one of the two ways to secure a franchise.

There is a landing page for them with details about the various features and benefits.

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Long Case Study: iContact – Exiting through a Sale 14-19. What options did iContact’s founders have for harvesting their investment?

L.O. 14.1 and 14.4 Assess how you want to grow your business and eventually exit from it, and compare ways to harvest a business.

AACSB Analytical thinking The most logical options for them were a sale or merger with a related business or taking the firm public.

14-20. Why did a sale to Vocus make strategic sense, if it did?

L.O. 14.4 Compare ways to harvest a business.

AACSB Reflective thinking Vocus was a provider of cloud-based public relations and marketing software, by adding iContact’s e-mail marketing capabilities it broadened its range of products and strengthened its marketing suite.

14-21. What opportunities did selling the company open up for Allis and Houghton?

L.O. 14.1 Assess how you want to grow your business and eventually exit from it.

AACSB Application of knowledge They now had the money to start another startup, invest in other firms and more time for philanthropy, and their leisure activities, i.e. guitar, outdoor activities, etc.

14-22. As young, serial entrepreneurs, how might the founders plan for their respective futures?

What have they done since selling iContact?

L.O. 14.1 Assess how you want to grow your business and eventually exit from it.

AACSB Reflective thinking They can plan their futures according to their personal goals and interests. Of course, they should have their finances invested professionally. Beyond this, they can choose to start other businesses, invest as Angel investors, engage in philanthropic activities, find jobs (it would be a huge adjustment), or live lives of leisure. Aaron Houghton is currently running his fifteenth startup, the RaleighDurham-based BoostSuite, where he is a cofounder and the CEO. Ryan and Aaron are involved in many business and philanthropic activities and continue their phenomenal success as young entrepreneurs.

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UNIT 5 CASHING IN THE BRAND Unit Case: Honest Tea – From Start-Up to Harvest U5-1. What are Honest Tea’s competitive advantages?

L.O. 14.3 Examine options for harvesting and exiting a business.

AACSB Analytical thinking The competitive advantages stem from the fact that Honest Tea is a differentiated product. It delivers a message of being health conscientious by having less sugar and being “USDA organic”. Also ingredients are purchased from individuals and communities in economic need, helping to support the needs of these persons.

U5-2. Look at the list you generated. Which is most important to you as a consumer, and why?

L.O. Overall from text.

AACSB Reflective thinking Answers will vary based on the students’ personal mantras and preferences.

U5-3. Given what you already know about Honest Tea’s business philosophy and practices, if you were Seth’s business advisor, what additional competitive advantages would you encourage him to develop?

L.O. 14.3 Examine options for harvesting and exiting a business.

AACSB Analytical thinking Possibly donate some profits to special causes in line with his idealisms.

Produce some lower cost products to compete with Lipton, Snapple, and Arizona. Secure a relationship with a retailer like Tazo has done with Starbucks. Begin a recycling program that would give consumers a coupon for every Honest Tea bottle they returned to the store (just like Starbucks does with returned coffee bags and Staples does with printer cartridges).

U5-4. What does it mean for a company to engage in “socially responsible business practices”?

L.O. 14.1 Assess how you want to grow your business and eventually exit from it.

AACSB Application of knowledge and ethical understanding and reasoning They try to purchase supplies from companies that are in impoverished communities. They try to use supplies and ingredients that are not harmful to the environment. And they conduct marketing to spread awareness of this.

Socially responsible companies try to minimize the impact they have on the environment and do things to help improve the lives of others.

U5-5. What methods of capital acquisition did Honest Tea employ? Why? L.O. 14.3 Examine options for harvesting and exiting a business.

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Honest Tea used friends and family funding, private investors, investment by a strategic partner, and sale of the company. They were able to access these equity investments through their networks and from the growing network of customers. Private investors also provided some debt capital.

U5-6. How did the sale to Coca-Cola impact Honest Tea’s investors?

L.O. 14.4 Compare ways to harvest a business.

AACSB Analytical thinking They experienced a liquidity event and were finally able to get a return on their investments.

U5-7. What were the arguments for and against selling equity to Coca-Cola?

L.O. 14.4 Compare ways to harvest a business.

AACSB Analytical thinking and ethical understanding and reasoning Pros Access to the Coca Cola distribution network Liquidity for early investors Potential for huge increases in revenues Chance to bring organic beverages into the mainstream Larger scale and wider audience

Cons Elimination of the independent distributors Dilution of brand equity Mission drift Potential loss of credibility Conflicts between the cultures of the large multinational corporation and small, mission driven company

Coca Cola buying into Honest mission rather than Honest “selling out” Capital investments such as the Big Brewer Increased purchasing power Potential profitability U5-8. What does Seth’s transition into Coca-Cola mean for Honest Tea? Consider the topics included throughout this text.

L.O. 14.4 Compare ways to harvest a business.

AACSB Reflective thinking The transition can affect Honest Tea at many levels. Long-term employees may experience a loss and even a void because of the leadership transition. While wellestablished, the culture of the organization was likely to change either gradually or rapidly. Seth’s greater role in Coca-Cola may increase the visibility and significance of Honest Tea, yielding greater investment, expansion and increased profits. Alternately, the company could play a smaller role or even be merged into other operations losing its distinctive character and ethos.

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