Chapter 5

Entrepreneurship: Starting and Managing Your Own Business

LEARNING GOALS

Why do people become entrepreneurs, and what are the different types of
entrepreneurs?

Entrepreneurship involves taking the risk of starting and managing a business

to make a profit. Entrepreneurs are innovators who start firms either to have a
certain lifestyle or to develop a company that will grow into a major
corporation. People become entrepreneurs for four main reasons: the
opportunity for profit, independence, personal satisfaction, and lifestyle.
Classic entrepreneurs may be micropreneurs, who plan to keep their businesses
small, or growth-oriented entrepreneurs. Multipreneurs start multiple
companies, while intrapreneurs work within large corporations.

Which characteristics do successful entrepreneurs share?

Successful entrepreneurs are ambitious, independent, self-confident, creative,

energetic, passionate, and committed. They have a high need for achievement
and a willingness to take moderate risks. They have good interpersonal and
communication skills. Managerial skills and technical knowledge are also
important for entrepreneurial success.

How do small businesses contribute to the U.S. economy?

Small businesses play an important role in the economy. They account for over
99 percent of all employers and produce 51 percent of private-sector output.
Most new private-sector jobs created in the United States over the past decade
were in small firms. A small business is independently owned and operated,
has a local base of operations, and is not dominant in its field. The Small
Business Administration further defines small business by size, according to
the industry. About 98 percent of U.S. businesses have fewer than 100
employees. Small businesses are found in every field, but they dominate the
construction, wholesale, and retail categories.

What are the advantages and disadvantages facing owners of small

businesses?

Small businesses have flexibility to respond to changing market conditions.

Because of their streamlined staffing and structure, they can be efficiently
operated. Small firms can serve specialized markets more profitably than large
firms and provide a higher level of personal service. Disadvantages include
limited managerial skill, difficulty in raising the capital needed for start-up and
expansion, the burden of complying with increasing levels of government
74
Study Guide, The Future of Business, The Essentials, 2e 75

regulation, and the major personal commitment required on the part of the
owner.

How does the Small Business Administration help small businesses?

The Small Business Administration is the main federal agency serving small
businesses. It provides guarantees of private lender loans for small businesses.
The SBA also offers a wide range of management assistance services,
including courses, publications, and consulting. It has special programs for
veterans, minorities, and women.

What are the first steps to take if you are starting your own firm?

After finding an idea that satisfies a market need, the small business owner
should choose a form of business organization. The process of developing a
formal business plan helps the business owner to analyze the feasibility of his
or her idea. This written plan describes in detail the idea for the business and
how it will be implemented. The plan also helps the owner obtain both debt
and equity financing for the new business.

Why does managing a small business present special challenges for the
owner?

At first, small business owners are involved in all aspects of the firm’s
operations. Wise use of outside consultants can free up the owner’s time to
focus on planning and strategy in addition to day-to-day operations. Other key
management responsibilities are finding and retaining good employees and
monitoring market conditions. Expanding into global markets can be a
profitable growth strategy for small businesses.

What trends are shaping the small-business environment?

The tougher business climate has made many people more cautious about
starting businesses. Today’s entrepreneurs have reasonable expectations about
the time and effort it takes to build a company. Funding is harder to secure, and
investors want to see a fully developed feasibility plan. The mountain states are
now the top area for entrepreneurial companies. Opportunities continue to exist
for entrepreneurs of all ages and backgrounds. The numbers of women and
minority business owners continue to increase. The number of start-ups in the
technology sector has declined, but Internet technology is creating numerous
opportunities for new types of small businesses and fueling small-business
growth by making it easier to open Web-based businesses.

MULTIPLE-CHOICE QUESTIONS

Directions: Place the letter of the response that best completes the questions that follow in the
blank space at the left.
76 Chapter 5 Entrepreneurship: Starting and Managing Your Own Business

Why do people become entrepreneurs, and what are the different types of
entrepreneurs?

____ 1. Entrepreneurs are individuals who are said to possess:

a. the ability to innovate

b. large families to assist them
c. money
d. all of the above are correct

____ 2. The difference between small business owners and entrepreneurs is

that small business owners:

a. possess less individual drive

b. do not have flexibility in planning for financing
c. are more likely to accept the status quo
d. take a longer term view than do entrepreneurs

____ 3. Micropreneurs generally:

a. seek to start small and plan to enlarge their operations greatly

b. plan to start small and stay small
c. start their business without regard to their personal satisfaction
d. have the same goals as growth-oriented entrepreneurs

____ 4. Entrepreneurs who start a series of companies are known as:

a. macropreneurs
b. intrapreneurs
c. multipreneurs
d. none of these answers is correct

____ 5. Entrepreneurs who don’t own their own companies but apply their
creativity, vision, and risk-taking within a large corporation are known as:

a. macropreneurs
b. intrapreneurs
c. multipreneurs
d. micropreneurs

Which characteristics do successful entrepreneurs share?

____ 6. Entrepreneurs:

a. have less personal drive than small business owners

b. have more time to take vacations
c. succeed based upon having a great concept for a product or service
d. are the company
Study Guide, The Future of Business, The Essentials, 2e 77

____ 7. Studies of entrepreneurs have shown them to be:

a. ambitious
b. willing to take risks
c. passionate
d. all of the above are correct

____ 8. The distinguishing characteristic of entrepreneurs is:

a. their ability to manage the company that implements the idea

b. having operational strategies that they can implement
c. delegating responsibility and being able to work fewer hours than other
company managers
d. the belief that they can learn many of the technical skills needed to operate
their businesses

____ 9. By being self-confident, entrepreneurs are said to be able to:

a. spot trends
b. be competitive
c. act in a decisive manner and have faith in their ability to resolve problems
d. make personal sacrifices to achieve their goals

____ 10. By being committed, entrepreneurs are said to be able to:

a. spot trends
b. be competitive
c. act in a decisive manner and have faith in their ability to resolve problems
d. make personal sacrifices to achieve their goals

How do small businesses contribute to the U.S. economy?

___ 11. The percentage of small businesses in the United States that have
fewer than 100 employees is:

a. 20%
b. 98%
c. 50%
d. 37.5%
____ 12. A major reason for the increase in small business formation is:

a. corporate greed
b. corporate fraud
c. corporate downsizings
d. all of the above are correct
78 Chapter 5 Entrepreneurship: Starting and Managing Your Own Business

____ 13. A major characteristic that is used when classifying a business as

being “small” is:

a. it has a strong influence in its industry

b. it is nationally based
c. it employs less than 500 people
d. its management can be controlled by a large conglomerate

What are the advantages and disadvantages facing owners of small

businesses?

____ 14. Small businesses are able to thrive because:

a. they provide great satisfaction for their owners

b. large corporations continue to fail at exceedingly high rates
c. the world wide web has been a major failure
d. sales do not represent an important element in the success of entrepreneurs

____ 15. Small businesses owners must recognize that their size makes them:

a. less flexible
b. unable to react to market forces
c. able to develop innovative product ideas
d. leads them to be inefficient and more costly to operate

____ 16. Small business owners often:

a. have a fairly easy time finding investment funds

b. pay interest rates that are lower than larger firms
c. find complying with government regulations more expensive than large
firms
d. find that technical skills are easily converted into management expertise

How does the Small Business Administration help small businesses?

____ 17. The Small Business Administration:

a. is designed to only provide financial assistance to startup firms

b. is a private organization which operates for a profit
c. returns all profits from operations to local small businesses
d. assists small businesses in the areas of starting, managing, winning federal
contracts, and speaking on their behalf when needed

____ 18. Small Business Investment Companies:

a. are government operated investment companies that assist small businesses

b. are SBA licensed and provide long-term financing for small businesses
Study Guide, The Future of Business, The Essentials, 2e 79

c. operate as not-for-profit organizations which make loans to small

businesses
d. lend money to the SBA which then channels the funds to small businesses

____ 19. The Service Corps of Retired Executives and the Active Corps of
Executives:

a. invest directly in small businesses

b. operate small businesses when owners lack the proper training and skills
c. provide free management consulting for small business owners
d. have been prevented by the courts from counseling small business owners

What are the first steps to take if you are starting your own firm?

____ 20. The first step in starting a business is:

a. self assessment
b. finding the idea
c. selecting the form of business organization
d. business planning

____ 21. The written document that details the idea for a new business is
known as a(n):

a. self assessment
b. business plan
c. idea and problem diary
d. organization form

____ 22. Writing a business plan:

a. allows you to immediately get caught up in the day-to-day operations of

the business
b. will eliminate the need for an analysis that forces you to make marketing
decisions
c. can reduce the need to take a critical look at operations
d. helps the business owner to take a critical look at their business venture

____ 23. The most common use of business plans is to:

a. outline day-to-day business operations

b. state marketing strategies
c. persuade lenders and investors to finance the venture
d. provide a description of operations to potential retailers or wholesalers
80 Chapter 5 Entrepreneurship: Starting and Managing Your Own Business

____ 24. Equity is:

a. money raised through the sale of stock in a business

b. borrowed money that must be repaid with interest over a stated period of
time
c. synonymous with debt
d. repaid with interest to stockholders

____ 25. Debt is:

a. money raised through the sale of stock in a business

b. borrowed money that must be repaid with interest over a stated time period
c. synonymous with ownership
d. repaid with interest to stockholders

____ 26. Angel investors are:

a. investment firms that specialize in financing small high-growth firms in

return for an ownership interest and a voice in management
b. individuals or groups of experienced investors who provide funding for
start-up businesses
c. companies that handle the sale of equity instruments
d. companies that handle the sale of debt instruments

____ 27. Venture capital is:

a. financing obtained from investment firms that specialize in financing small

high-growth companies in return for an ownership interest and a voice in
management
b. individuals or groups of experienced investors who provide funding for
startup businesses
c. a city or locality that handles the sale of equity instruments
d. none of these answers is correct

Why does managing a small business present special challenges for the
owner?

____ 28. The main job of a small business owner is to:

a. obtain financing for operations

b. find a prime location to place the physical operations of the business
c. carry out the business plan through all areas of the business
d. seek out markets for the product or service
Study Guide, The Future of Business, The Essentials, 2e 81

____ 29. Some aspects of a small business can be outsourced. This means that:

a. outside sources of raw materials can be obtained to maintain manufacturing

processes
b. sales of products can be made to outside firms when business is slow
c. some aspects of the business can be contracted out to specialists in one or
more areas
d. sources of outside funding can be obtained from venture capitalists

What trends are shaping the small-business environment?

____ 30. A major factor motivating women to start their own businesses is:

a. the success of affirmative action programs

b. the glass ceiling
c. the low cost of technology
d. frustration with their work environment

____ 31. Of the businesses that were considered start-ups:

a. most were high-tech

b. the majority were in biotechnology
c. telecommunications businesses were predominant
d. most were involved with better ways to make things or provide services

TRUE/FALSE QUESTIONS

Directions: Place a T or an F in the space provided to the left of each question to indicate
whether it is True or False.

Why do people become entrepreneurs, and what are the different types of
entrepreneurs?

____ 1. Approximately 13 percent of all nonagricultural workers in the U.S.

are involved in either full- or part-time entrepreneurial activities.

____ 2. All small business owners are considered to be entrepreneurs since

both take risks to create a new business or greatly change the scope and
direction of an existing firm.

____ 3. Small business owners generally take a long-term view of a business

while entrepreneurs are more likely to deal with the status quo.

____ 4. Classic entrepreneurs can also be micropreneurs, in that they start their
own companies based upon innovative ideas but plan to limit the size of their
operations.
82 Chapter 5 Entrepreneurship: Starting and Managing Your Own Business

____ 5. Growth oriented entrepreneurs want to limit the growth of their

businesses so that they don’t rival major corporations.

____ 6. Multipreneurs are entrepreneurs who start a series of companies.

____ 7. Entrepreneurs who expand their business operations to global markets

are known as intrapreneurs.

____ 8. Corporations that create supportive environments for intrapreneurship

retain their most innovative employees along with ownership of products that
they develop.

____ 9. The desire to control one’s own destiny has been cited as a major
reason for the popularity of entrepreneurship.

Which characteristics do successful entrepreneurs share?

____ 10. Most entrepreneurs are typically indecisive and lack confidence in
their ability to resolve problems.

____ 11. The ability to follow trends set by other firms and copy their product
designs is a significant trait of entrepreneurs.

____ 12. Despite being entrepreneurial, an individual must possess the

business skills to run a successful business.

____ 13. Once a new venture demonstrates significant growth, it is important

for entrepreneurs to broaden their roles rather than hire others to do the
additional tasks.

How do small businesses contribute to the U.S. economy?

____ 14. Although there has been growth in small business in the U.S., the
overwhelming majority employ more than 100 people.

____ 15. The Small Business Administration classifies all companies with
under 500 employees as a small business.

____ 16. Among the characteristics that would classify a business as “small” is
that it is based locally and it is not a dominant company in its industry.

What are the advantages and disadvantages facing owners of small

businesses?

____ 17. As a result of their small size, small businesses are not able to react
quickly to changing market forces.
Study Guide, The Future of Business, The Essentials, 2e 83

____ 18. Owner-managers of small businesses, through their direct relationship

with customers, get feedback on how well their firms are meeting customer
needs.

____ 19. Limited managerial skills are more than offset by small company size
when small businesses attempt to respond quickly to changes in the
marketplace.

____ 20. The efficient operations of small businesses can keep costs down.

How does the Small Business Administration help small businesses?

____ 21. The SBA offers financial assistance to qualified small businesses that
cannot obtain financing on reasonable terms through normal lending channels.

____ 22. Small Business Investment Companies are owned and operated by
the federal government hoping to provide long-term funding for small
businesses.

What are the first steps to take if you are starting your own firm?

____ 23. Self-assessment is the first step that an individual should take when
considering whether to go into a business of their own.

____ 24. Starting a firm in a field or industry other than the one in which an
individual has experience is recommended, since the transfer of knowledge
from one field to another is common.

____ 25. It is more important to get a business up and running than to select
whether it should be a sole proprietorship, partnership, or corporation.

____ 26. A business plan helps business owners take an objective and critical
look at their business venture and set goals that will help them manage its
growth and performance.

____ 27. Getting involved in day-to-day business operations does away with
the need for a business plan since the plan has little to do with actual
operations.

____ 28. Once a business is up and running, the business plan becomes a little
used document whose primary purpose was to convince investors to provide
funding for the business.

___ 29. A significant factor that can be a source of difficulty for a small
business is rapid growth, which can place a strain on finances.
84 Chapter 5 Entrepreneurship: Starting and Managing Your Own Business

Why does managing a small business present special challenges for the
owner?

____ 30. The main job of a small business owner is to carry out the business
plan through all areas of the business – from personnel to production and
maintenance.

____ 31. Outsourcing involves the use of outside employment firms to locate
new full-time employees to perform tasks that cannot be done by the current
workforce.

____ 32. The availability of workers interested in joining small firms has
grown to the extent that they are willing to forego comfortable working
conditions, flexible hours, etc.

____ 33. Export managing companies serve the needs of small businesses that
wish to sell their goods abroad by purchasing goods at a discount from the firm
and then reselling them abroad.

What trends are shaping the small-business environment?

____ 34. The Internet is creating numerous opportunities for new types of
small businesses.

____ 35. Firms owned by minorities are a high growth sector of the small
business field.

ENHANCE YOUR VOCABULARY

Comprise Include; involve; contain

Complying Obey; submit; meet the terms
Nostalgia Reminiscence; homesickness
Nurture Care for; cultivate
Resilient Elastic; hard-wearing; tough
Revert Go back to your old ways
Rosters Schedule; list
Self-assessment To evaluate oneself
Sluggish Slow; listless
Toll Fee; charge; tax
Uniqueness Distinctiveness; exclusivity

Directions: Select a word from the above list that best completes each of the following
sentences:

1. _____ with federal regulations is more expensive for smaller firms.

Study Guide, The Future of Business, The Essentials, 2e 85

2. Intrapreneurs enjoy the freedom to _____ their ideas and develop new products.
3. Women business owners _____ one of the most dynamic small-business segments.
4. The _____ economy in the United States has not stopped people from starting new
companies.
5. Small businesses are _____ and can respond to changing economic conditions by
refocusing their efforts on personal service.
6. Businesses will be successful if they focus on their _____ of the business and why it
attracts customers.
7. The stress of managing a business can take its _____.
8. Small service firms are adding international clients to their _____.

REVIEW YOUR KEY TERMS

Directions: Select the best definition in Column B that best defines the word in Column A.

Column A Column B

____ 1. Intrapreneurs a. Individual investors or groups of experienced

investors who provide funding for start-up
businesses.

____ 2. Small Business Administration b. A business that is independently owned,

(SBA) is owned by an individual or a small group of
(although it may serve a larger market), and is
not a dominant company in its industry.

____ 3. Business plan c. People with vision, drive, and creativity who
are willing to take the risk of starting a new
business or of greatly changing the scope and
direction of an existing firm.

____ 4. Small business d Financing obtained from investment firms

that specialize in financing small, high-growth
companies and receive an ownership interest and
a voice in management in return for their money.

____ 5. Entrepreneurs e. A form of business financing consisting of

borrowed funds that must be repaid with interest
over a stated time period.

____ 6. Small Business Investment f. Entrepreneurs who apply their creativity,

Companies (SBICs) vision, and risk-taking within a large
corporation, rather than starting a company of
their own. They enjoy a high degree of
autonomy while receiving a regular salary and
financial backing from their employer.
86 Chapter 5 Entrepreneurship: Starting and Managing Your Own Business

____ 7. Venture capital g. A government agency that helps people start

and manage small businesses, helps small
business owners win federal contracts, and
speaks on behalf of small business.

____ 8. Angel investors h. Privately owned and managed investment

companies that are licensed by the Small
Business Administration and provide long-term
financing for small businesses.

____ 9. Debt i. A form of business financing consisting of

funds raised through the sale of stock in a
business.

____ 10. Equity j. A formal written statement that describes in

detail the idea for a new business and how it will
be carried out; includes a general description of
the company, the qualifications of the owner(s),
a description of the product, an analysis of the
market, and a financial plan.

CRITICAL THINKING EXERCISES

1. P. O. V. (Point of View)

Directions: In this exercise you will be asked to provide your personal opinion regarding
some of the topics in the chapter. At the completion of this exercise, your instructor may wish
to poll the class regarding their responses.

a. Your brother is disenchanted with his position as and advertising artist and has told
you that he plans to leave his job to open a small business. He knows that he has an
excellent reputation and is known as an outstanding artist. He also has a friend in the
advertising industry who will provide him with a loan to start the business. These three
factors (reputation, talent, and start-up financing) are most important if he is to
succeed at his new venture. He has asked you for your opinion regarding his plans.

Agree _______ Disagree _______

b. The distinction between small business owners and entrepreneurs is not clearly
understood. Small business owners typically remain so because the industries in which
they operate are not open to change and innovation, while entrepreneurs are well-
versed in technical fields that are constantly changing.

Agree _______ Disagree _______

Study Guide, The Future of Business, The Essentials, 2e 87

2. Using the Internet

Directions: Creating a business plan is crucial for the success of a new business. It is a
formal document that is used to guide management towards achieving specific goals.
Assuming that you have an idea for a new business that will sell either a product or service,
go to http://www.bplans.com and click on Sample plans; then click on Sample Business Plans
and review at least three plans.

a. Click through the executive summary for each plan and read the mission statement
for each company that you have chosen. List the factors that are common to each
plan.

b. Write a brief executive summary for the business plan for your business.

c. Write a management summary for your business.