Chapter 3 - Study Guide/Review

Designing a Competitive Business Model and Building a Solid Strategic Plan

Learning Objectives

1.      Understand the importance of strategic management to a small business.

2.      Explain why and how a small business must create a competitive advantage in the market.

3.      Develop a strategic plan for a business using the nine steps in the strategic planning process.

4.      Discuss the characteristics of three basic strategies: low cost, differentiation, and focus, and know when to employ them.

5.      Understand the importance of controls such as the balanced scorecard in the planning process.

Introduction                                                                                                                   LO1

      Developing a strategic plan allows a company to create a competitive advantage—an aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market.

      No business can be everything to everyone. Creating a strategic plan prevents a small business from failing to differentiate itself from its competitors.

      Another avenue for entrepreneurs seeking a competitive advantage is through customer intimacy, focusing on the goods and services that customers want and value. When it comes to developing a strategic plan, small companies have a variety of natural advantages over their larger competitors: fewer product lines, a better–defined customer base, a specific geographical area, and closer customer contact.

      Intellectual capital is comprised of human, structural and customer capital and has changed the landscape for the entrepreneur. Entrepreneurs are realizing that the capital stored in these three areas form the foundation of their ability to compete effectively and that they must manage this intangible capital base carefully and with intent.

      The goal is to have it all come together to build a competitive advantage for the entrepreneur and their business.

Building a Competitive Advantage                                                                              LO2

There has been an evolution from financial capital to intellectual capital. Human, structural and customer resources have been affected by this shift.

      The goal of developing a strategic plan is to create a competitive advantage for the small business—the aggregation of factors that sets the small business apart from its competitors and gives it a unique position in the market. Strategic management includes developing a game plan to guide a company as it strives to accomplish its vision, goals, and objectives and to keep it on course. Products, services, pricing and the way these are sold are all aspects of how a small company can build and sustain a strategic advantage.

     

Strategic planning should include:

·         Both a short– and long–term planning horizon

·         Company goals and objectives

·         Complete industry and other relevant information

·         Customer and employee input

·         Customer focus

      Strategic planning can position a business to build a sustainable competitive advantage.

The Strategic Management Process                                                                             LO3            Strategic planning is a continuous process that consists of nine steps:

·         Step 1: Develop a clear vision and translate it into a meaningful mission statement.           

      A vision is the entrepreneur’s dream of something that does not yet exist. It provides direction, a basis for decision making and a source of motivation. A company’s vision statement incorporates the values of its owner and is about more than just making money. A clearly defined vision leads to a company’s mission statement that includes a description of the business, its products, its markets and customers, its competitive distinction, and its effects on the community at large.

·         Step 2: Assess the company’s strengths and weaknesses.

      Strengths are positive internal factors that a company can use to accomplish its mission. Weaknesses are potentially negative factors that could inhibit those efforts. This on–paper analysis allows the entrepreneur to have a better perspective of the overall venture, to establish a foundation to build on (strengths), and to meet and remove the challenges and obstacles standing in the way of success (weaknesses).

·         Step 3: Scan the environment for significant opportunities and threats facing the business.                                               

      With the internal inventory complete, the firm now searches for external opportunities such as specific market niches that match up well with internal resources. The key to success is to take action and to stay a step ahead of the competition. External threats may come from competitors, government agencies, rising interest rates, and so on. The firm must have a plan for shielding itself from those threats.

·         Step 4: Identify the key factors for success in the business.                                     

      Every business has a certain degree of control over key variables such as production capabilities, market opportunities, its labor force, access to raw materials, inventory, and so on. Success comes from the ability to recognize and to capitalize on those opportunities, and to maximize revenues and/or minimize costs accordingly.

·         Step 5: Analyze the competition.                                                                              

      Analyzing all forms of competition must be a never–ending process for all companies. Markets and competitors come and go very quickly. Reaction time is often relatively slow, so the entrepreneur must have the ability to anticipate changes in the marketplace. (Refer to Figure 3.3 – How Small Businesses Compete.) There is an abundance of information available through many sources (public information, Web sites, and market researchers). Knowledge management is the process of collecting information, analyzing it, and taking action in an effective manner. The Competitive Profile Matrix (Table 3.2) quantifies the value of key success factors comparing one business to its competitors.

·         Step 6: Create company goals and objectives.                                                    

      A company (or person for that matter) with no goals may wander aimlessly into the future. Setting goals provides focus and direction for a company and its people. Objectives are the specific targets of performance required to achieve goals, such as production, marketing, financing, and profit standards. Goals and objectives should be measurable, reachable, and stated in writing.

·         Step 7: Formulate strategic options and select the appropriate strategies. LO4

A strategy is a road map of the actions an entrepreneur draws up to fulfill a company’s mission, goals, and objectives. A strategy is the master plan that incorporates all of the parts (marketing, finance, personnel, and operations) to make up the whole. Three basic strategies, as illustrated in Figure 3.4 – Three Strategic Options, include:

1.      Cost leadership

2.      Differentiation

3.      Focus

·         Step 8: Translate strategic plans into action plans.

      Entrepreneurs must convert strategic plans into operating (tactical) plans that guide their companies on a daily basis. Involving and empowering employees throughout the entire process is often a key to successful outcomes. If an organization’s people have a vision for the future direction and goals of a company, and if they are given a stake in the company, they are more likely to work in unison to achieve those goals.

·         Step 9: Establish accurate controls.

      With a vision, mission statement, strategic and tactical plan now in place, managers must constantly measure and assess the actual production, sales, costs, and other performances of their departments and people, and effect any changes necessary to stay on schedule and on budget.

The Balanced Scorecard                                                                                               

Once the entrepreneur identifies and tracks key performance indicators and takes corrective action, a balanced scorecard is a set of measurements unique to a company that includes both financial and operational measures and gives a manager a quick yet comprehensive picture of the company’s total performance in these five areas:

1.      Customer

2.      Internal business

3.      Innovation and learning

4.      Financial

5.      Corporate citizenship

This gives managers a snapshot of a company’s overall performance in each of these key performance areas. The complexity of managing a business demands that an entrepreneur is able to see performance measures in several areas simultaneously.

Conclusion

      The strategic planning process is never ending. Overtime, the strategic planning process will become more efficient. Developing a strategic plan helps the entrepreneur differentiate their business from other companies and meet the customers' needs today while simultaneously looking one step ahead to what customers will need tomorrow.

Chapter Discussion Questions

1.   Why is strategic planning important to a small company?  (LO 1)

Firms must continually strive for strategic and operational excellence. Failing to think strategically about a business is inviting disaster. Strategic planning creates a blueprint for business owners to follow to achieve specific objectives.

2.      What is a competitive advantage? Why is it important for a small company to establish one?  (LO 2)

A competitive advantage is an aggregation of factors that sets a company apart from its competitors. It gives it a unique position in the market. No business can be everything to everyone. Developing a strategic plan helps the small business differentiate itself from other companies—a common pitfall for many small firms. Smaller firms have an advantage over larger firms because they are well suited to concentrate on niche markets. Developing a strategic plan allows the small company to meet the customers' needs today, while looking one step ahead to what they will need tomorrow.

3.      What are the steps in the strategic management process?  (LO 3)

The nine steps in the strategic management process are:

Step 1: Develop a clear vision and translate it into a meaningful mission statement.

Step 2: Assess the company's strengths and weaknesses.

Step 3: Scan the environment for significant opportunities and threats facing the business.

Step 4: Identify the key factors for success in the business.

Step 5: Analyze the competition.

Step 6: Create company goals and objectives.

Step 7: Formulate strategic options and select the appropriate strategies.

Step 8: Translate strategic plans into action plans.

Step 9: Establish accurate controls.

4.      One Business writer says, “The text of a mission statement is what you do with it after you put it in place.” What does she mean? Do you agree? Explain.  (LO 3)

Expect students to appreciate that a mission statement’s value is how it is used within the organization. That is where its value lies. Expect student to support their position supporting this opinion.

5.      “Our customers don’t just like our ice cream,” write Ben Cohen and Jerry Greenfield, co–founders of Ben and Jerry’s Homemade Inc. “They like what our company stands for. They like how doing business with us makes them feel.” What do they mean?  (LO 3)

Ben & Jerry’s mission statement expresses the firm’s character, identity, and scope of operations. The organization and its employees live it each day and translate it each time they come in contact with their customers. It has become a true natural part of the organization, embodied in the minds, habits, attitudes, and decisions of everyone in the company every day.

5.   What are strengths, weaknesses, opportunities, and threats?  Give an example of each.  (LO 3)

·         Strengths: Positive internal factors that contribute to a company's ability to achieve its mission, goals, and objectives.
Examples include: a committed workforce and quality products.

·         Weaknesses: Negative internal factors that inhibit a company's ability to achieve its mission, goals, and objectives.
Examples include: high rates of employee turnover and poor customer service.

·         Opportunities: Positive external options that a business could exploit to accomplish its mission, goals, and objectives.
Examples include: expanding global markets and changes in customer tastes.

·         Threats: Negative external forces that inhibit a business's ability to accomplish its mission, goals, and objectives.
Examples include: expanding global markets and changes in customer tastes.

6.   Explain the characteristics of effective objectives. Why is setting objectives important?  (LO 3)

      Characteristics of effective objectives include:

·         They are specific: Quantifiable and precise.

·         They are measurable: Well–defined reference point from which to start and use as a measuring point.

·         They are attainable: Does not mean easy to accomplish, but difficult enough to require motivation to achieve.

·         They are realistic and challenging: Must be within the organization's reach. The higher the objectives, the higher performance will be.

·         They are timely: Must specify not only what is to be accomplished, but when it is to be achieved as well.

·         They are written down: Makes objectives more concrete, less abstract.

Setting objectives is important. Objectives provide the organization “specifics” on the target(s) ahead. The objectives of a small business are the directions that guide the business to its destination.

7.   What are business strategies?

      Business strategies are road maps of the tactics and actions that an entrepreneur creates to fulfill the firm's mission, goals, and objectives. The firm's mission, goals, and objectives define the ends the company wants to achieve, and the strategy is the means for reaching them. Business strategies can be categories into the areas of cost leadership, differentiation and focus.

8.   Describe the three basic strategies available to small companies. Under what conditions is each successful?  (LO 4)

      Three strategies available to small companies include:

1.      Cost leadership: Strive to be the low–cost leader. The most successful conditions are when buyers are sensitive to price changes, competing firms sell the same commodity products, and companies can benefit from economies of scale.

2.      Differentiation: Seeks to build customer loyalty by positioning goods or services in a unique or different fashion. Key concept is to be special at something important to the customer.

3.      Focus: Select one (or more) segments(s); identify customers' special needs, wants, and interests; and approach them with a product or service specifically designed to excel in meeting these needs, wants, and interests. Key concept is to create the perception of value in the customer’s eyes.

9.      “It’s better to be a company with a great strategy in a crummy business than to be a company with a crummy strategy in a great business,” says one business expert. Do you agree? Explain.  (LO 4)

Expect students to respond to the statement and defend their position. The discussion may first focus on defining a “crummy” versus a “great” business and the trade-offs of those extremes. Identifying the importance and influence of a solid business strategy should follow.

10.  Explain how a company can gain a competitive advantage using each of the three strategies described in this chapter: cost leadership, differentiation, and focus. Give an example of a company that is using each strategy.  (LO 4)

Each of the three strategies offers a competitive advantage.

1.      Cost leadership: By containing costs, lower prices will net sufficient profit margins.
      Examples: Anytime Fitness, Walmart

2.      Differentiation: Positioning one’s product or service apart from the competition builds loyal customers that are not easily pulled away by the competition.
      Examples: Vosges–Haut Chocolate, Ice Hotel, Indigenous Designs, Mercedes
      Benz, Cadillac

3.      Focus: Select one (or more) segments(s); identify customers' special needs, wants, and interests; and approach them with a good or service specifically designed to excel in meeting those needs, wants, and interests.
      Examples: American Plume, Fancy Feather, exercise equipment, tall men’s
      clothing and television networks such as Black Entertainment (BET).

11. How is the controlling process related to the planning process?  (LO 5)

      Most often, the actual results of a small business will deviate from the company's plan. Thus, controlling procedures must be established to measure performance and make corrections as changes occur.

12.  What is a balanced scorecard? What value does it offer entrepreneurs who are evaluating the success of their current strategies?  (LO 5)

A balanced scorecard is a set of measurements unique to a company that includes both financial and operational measures and gives a manager a quick yet comprehensive picture of the company’s total performance. Rather than sticking solely to the traditional financial measures of a company’s performance, the scorecard gives a manager a view from both a financial and operational perspective. The complexity of managing a business demands that an entrepreneur is able to see performance measures in several areas simultaneously.

Chapter Overview

1. Understand the importance of strategic management to a small business.

Companies without clear strategies may achieve some success in the short run, but as soon as a competitive threat arises, they often fail.

2. Explain why and how a small business must create a competitive advantage in the market.

The goal of developing a strategic plan is to create for the small company a competitive advantage—the combination of factors that sets the small business apart from its competitors and gives it a unique position in the market. Every small firm must establish a plan for creating a unique image in the minds of its potential customers. A company builds a competitive edge on its core competencies, which are a unique set of capabilities that a company develops in key operational areas, such as quality, service, innovation, team building, flexibility, responsiveness, and others, that allow it to vault past competitors. They are what the company does best and are the focal point of the strategy. This step must identify target market segments and determine how to position the firm in those markets. Entrepreneurs must identify some way to differentiate their companies from competitors.

3. Develop a strategic plan for a business using the nine steps in the strategic planning process.

Small businesses need a strategic planning process designed to suit their particular needs. It should be relatively short, be informal and not structured, encourage the participation of employees, and not begin with extensive objective setting. Linking the purposeful action of strategic planning to an entrepreneur’s little ideas can produce results that shape the future.

Step 1. Develop a clear vision and translate it into a meaningful mission statement. Highly successful entrepreneurs are able to communicate their vision to those around them. The firm’s mission statement answers the first question of any venture: What business am I in? The mission statement sets the tone for the entire company.

Step 2. Assess the company’s strengths and weaknesses. Strengths are positive internal factors; weaknesses are negative internal factors.

Step 3. Scan the environment for significant opportunities and threats facing the business. Opportunities are positive external options; threats are negative external forces.

Step 4. Identify the key factors for success in the business. In every business, key factors determine the success of the firms in it, so they must be an integral part of a company’s strategy. KSFs are relationships between a controllable variable and a critical factor influencing the firm’s ability to compete in the market.

Step 5. Analyze the competition. Business owners should know their competitors almost as well as they know their own. A competitive profile matrix is a helpful tool for analyzing competitors’ strengths and weaknesses.

Step 6. Create company goals and objectives. Goals are the broad, long-range attributes that the firm seeks to accomplish. Objectives are quantifiable and more precise; they should be specific, measurable, assignable, realistic, timely, and written down. The process works best when managers and employees are actively involved.

Step 7. Formulate strategic options and select the appropriate strategies. A strategy is the game plan the firm plans to use to achieve its objectives and mission. It must center on establishing for the firm the KSFs identified earlier.

Step 8. Translate strategic plans into action plans. No strategic plan is complete until the owner puts it into action.

Step 9. Establish accurate controls. Actual performance rarely, if ever, matches plans exactly. Operating data from the business assembled into a comprehensive scorecard serves as an important guidepost for determining how effective a company’s strategy is. This information is especially helpful when plotting future strategies.

The strategic planning process does not end with these nine steps; rather, it is an ongoing process that an entrepreneur will repeat.

                       4. Discuss the characteristics of three basic strategies: low cost, differentiation, and focus and know when and how to employ them.

Three basic strategic options are cost leadership, differentiation, and focus. A company pursuing a cost leadership strategy strives to be the lowest-cost producer relative to its competitors in the industry. A company following a differentiation strategy seeks to build customer loyalty by positioning its goods or services in a unique or different fashion. In other words, the firm strives to be better than its competitors at something that customers value. A focus strategy recognizes that not all markets are homogeneous. The principal idea of this strategy is to select one (or more) segment(s); identify customers’ special needs, wants, and interests; and approach them with a good or service designed to excel in meeting these needs, wants, and interests. Focus strategies build on differences among market segments.

5. Understand the importance of controls, such as the balanced scorecard, in the planning process.

Just as a pilot in command of a jet cannot fly safely by focusing on a single instrument, an entrepreneur cannot manage a company by concentrating on a single measurement. The balanced scorecard is a set of measurements unique to a company that includes both financial and operational measures and gives managers a quick yet comprehensive picture of the company’s total performance.

Self-Study Quiz

1. Which of the following are types of intellectual capital?

            A) Financial capital, land capital, and labor capital

            B) Human capital, creativity capital, and innovation capital

            C) Human resources capital, economic capital, and creativity capital

            D) Intelligence capital, innovation capital, and creativity capital

            E) Human capital, structural capital, and customer capital

Correct Answer:  E - See pages 87–88

2. Which answer is NOT a competitive advantage?

            A) A set of factors that gives a business a unique, superior position in the marketplace

            B) Maintain a positive net profit margin

            C) Create an image based on the lowest price

            D) Identify unique benefits of your products

            E) Produce reliable products

            Correct Answer:  B - See "Building a Competitive Advantage," pages 88–91

3. How can an entrepreneurial venture develop a sustainable competitive advantage?

            A) By consistently offering lower prices on goods than its rivals

            B) By developing core competencies that help it serve its customers better than its rivals

            C) By offering more product selection than its rivals

            D) By advertising in more media than its rivals

            E) By having later business hours than its rivals

Correct Answer:  B - See "Building a Competitive Advantage," pages 89–90.

4. Which of the following is NOT a good recommendation for approaching strategic management within a small business?

            A) Stick to the established strategic plan, no matter what changes may occur in the environment.

            B) Use a relatively short planning horizon - two years or less.

            C) Create a process that is informal and not overly structured.

            D) Refrain from creating too many objectives in the beginning.

            E) Make strategic thinking an ongoing process.

Correct Answer:  A - See "Building a Competitive Advantage," page 91.

5. Which of the following is the best process for a portion of the strategic management process?

            A) Analyze competition, scan the environment, and establish controls

            B) Develop a clear vision, assess strengths and weaknesses, scan environment for opportunities

            C) Establish controls, create goals and objectives, identify key factors

            D) Formulate strategic options, analyze the competition, create goals and objectives

            E) Analyze competition, create goals and objectives, and establish controls

            Correct Answer:  B - See "The Strategic Management Process," pages 92–101.

6. Which is NOT an important ingredient for a mission statement?

            A) Never change your mission statement

            B) Get a number of people involved

            C) Know what differentiates your organization

            D) Reflect values and beliefs

            E) Link statement with the future

            Correct Answer:  A - See "The Strategic Management Process," page 94–96. 

7. What are the differences between goals and objectives?

            A) Goals are where you want your company to arrive; objectives are how you will get there.

            B) Goals are for top management to use; objectives are for front-line management to use.

            C) Goals are more long-range than objectives.

            D) Goals are broad in scope; objectives are specific and measurable.

E) Goals are not linked to monetary rewards; objectives are reinforced through monetary rewards.

Correct Answer:  D - See "Step 6 - Create Company Goals and Objectives," pages 107–108.

8. Which is the best strategy to use in an environment wherein sellers are trying to differentiate themselves from the competition?

            A) Do not focus on the customer

            B) Increase price without improving the product

            C) Focus on profit margins

            D) Build customer loyalty

            E) Produce products for many categories

            Correct Answer:  D - See "Three Strategic Options," pages 110–115.

9. When beginning the implementation phase of strategic management, the plan should be divided into projects. Each project should be defined by ________.

            A) The purpose of the project

            B) The areas of the company to be involved

            C) The project's contribution to the strategic plan

            D) The resources needed to complete the project successfully

            E) All of the above

            Correct Answer:  E - See "Translate Strategic Plans into Action Plans," pages 116–117.

10. Which is NOT a perspective to consider in using a balanced scorecard for performance?

            A) Meeting responsibility to society

            B) Financial standards do not contribute to the overall review of a strategy

            C) Continue to innovate

            D) Goals for productivity and cycle time

            E) Goals for durability, service, and reliability

Correct Answer:  B - See "Step 9 - Establish Accurate Controls," pages 117–118.

Multiple Choice Questions:

1. A business plan should:

A) identify target customers,

B) show how your business will earn a profit,

C) detail who will run your business,

D) all of these.

2. Before lenders will loan money to a new business:

A) they will want to interview all potential employees

B) the new business must have at least two years’ worth of work already lined up

C) they need to be convinced that the people running the business have the necessary skills to succeed

D) all of these.

3. A business plan explains how your product or service:

A) will be produced

B) will be sold

C) is either new or better than existing products or services

D) all of these.

4. Long-term sales projections are

A) for two to four years after start up

B) for five years in the future

C) for ten years in the future

D) not included in a business plan.

5. Which of the following is not a purpose of a business plan?

A) To describe the backgrounds and experience of your suppliers

B) To explain the idea behind your business

C) To explain how you expect to achieve specific objectives

D) To describe the backgrounds and experience of the people who will be running the business.

6. Before they will consider financing a business, lenders require:

A) an organizational chart that lists all of your employees

B) a business plan

C) the history and background of your product

D) a retirement plan.

7. After it is completed, you can use your business plan to:

A) help manage your business

B) identify your product or service

C) identify your target customer

D) make short-term sales projections.

8. A business plan is important for all of the following reasons except:

A) it helps you communicate your ideas to others

B) it helps you decide what to sell

C) it can help you secure financing for your business

D) it makes you think about all aspects of your business.

9.      The introduction section of a business plan contains all of the following except:

A) a description of the business and its goals

B) the legal structure of the business

C) an identification of risks

D) the advantages your business has over your competitors.

10.  Information about necessary equipment for your business is included in the:

A) financial management section

B) concluding statement

C) marketing section

D) operations section.

11.  Your business plan should describe the location of your business because:

A) different forms of ownership have different types of locations

B) every industry has an ideal type of location

C) location is often a critical factor in a business’s success

D) all of these.

12.  The marketing section of your plan explains:

A) how you plan to enter the market

B) who your prospective customers are

C) your advantages over the competition

D) all of these.

13.  In the financial management section, a new business must include:

A) projected financial statements

B) copies of all rental agreements

C) current financial statements

D) all of these.

14.  Which of the following is not an element of the financial management section of your plan?

A) Identification of risks

B) Distribution of profits and losses

C) Financial statements

D) Funding request and return on investment.

15.  A letter that introduces and explains an accompanying document is called a________________.

A) cover letter

B) introductory letter

C) statement of purpose

D) letter of intent.

16.  An executive summary:

A) should be written before the business plan is completed

B) includes supporting documents that back up statements made in the body of the report

C) state the amount you want to borrow

D) must never be longer than two paragraphs.

17.  A business plan’s title page includes all of the following except:

A) a summary of the plan

B) the name of your company

C) the date

D) the owner’s name.

18.  The appendix of a business plan might include

A) tax returns of the business owner

B) letters of recommendation

C) a copy of required licenses

D) all of these.

19.  Assistance from an SBDC is available to:

A) anyone who cannot afford the services of a private consultant

B) existing business owners only

C) first-time business owners only

D) minority business owners only.

20.  The retired executives at SCORE:

A) provide advice for a small fee

B) hold inexpensive workshops

C) represent all areas of business

D) have offices at the SBA.

21.  Which of the following is an independent agency of the federal government that helps Americans start, build, and grow businesses?

A) SCORE

B) the SBA

C) local Chambers of Commerce

D) all of these.

22.  Trade associations provide all of the following to entrepreneurs except

A) useful information

B) education

C) networking opportunities

D) small loans.

23.  Which of the following is least likely to be a helpful resource for your business plan?

A) National Geographic

B) books on entrepreneurship

C) SBA publications

D) BusinessWeek magazine.

24.  Online business resources:

A) should not be used in a business plan

B) are not as reliable as print resources

C) can be found via search engines

D) are not available from the SBA.

25.  Financial projections in a business plan should be:

A) left out of your business plan if you could not locate reliable financial information

B) based on solid evidence

C) very optimistic, in order to impress investors

D) based on your best guess.

26.  Your business plan must:

A) clearly define your market

B) never overlook the competition

C) be consistent

D) all of these.

True or False

27.  A business plan provides financial information that shows how your business will earn a profit.

True

28.  How a business will get and keep customers is not a part of a business plan.

False

29.  A business plan does not give suppliers much confidence when it comes to extending credit.

False

30.  Businesses must have a completely new products or services to convince investors that the idea is solid.

False

31.  A good business plan includes sales projections for the short, medium, and long term and sets forth future business plans.

True

32.  The backgrounds and experience of the people who will be running the business help lenders make financing decisions.

True

33.  A business plan will not help you think about all the aspects of your business.

False

34.  Writing a business plan can help you identify problems you might encounter in the future.

 True

35.  Lenders require a business plan before they will consider financing a business.

True

36.  After your business is up and running, you will rarely use your business plan.

False

37.  All business plans have different purposes, so they do not all have the same basic elements.

True

38.  Describing how you came up with the idea for your business can help others understand how your business will operate.

True

39.  Writing a business plan can force entrepreneurs to think about their goals.

True

40.  A handwritten business plan is acceptable if it is neat, well organized, and inviting to read.

False

41.  Only corporations need to include a form of ownership section in a business plan.

False

42.  Copies of resumes help show that owners are qualified to manage a business.

True

43.  The marketing section of your business plan should describe the location of your business.

True

44.  A financial statement based on projected revenues is called an informal financial statement.

False

45.  The financial section of your business plan should state how much money you need to borrow and how much you are investing in the business.

True

46.  A brief explanation of why you are asking for a loan and what you plan to do with the money is called an executive summary.

False

47.  To convince readers that you have a practical business plan, you must include information and data from objective sources.

True

48.  Writing an effective business plan should only take 24 hours.

False

49.  Counselors from Small Business Development Centers and volunteers from SCORE can provide advice and workshops to help you develop your business plan.

True

50.  Entrepreneurs can hire experts from trade associations to help them prepare business plans.

False

51.  The Internet is not a trusted source of information on how to develop a business plan.

False

52.  A local Chamber of Commerce can provide information on trends affecting local businesses, local resources, and zoning and licensing information.

True

53.  Entrepreneurs should avoid seeking advice from bankers or accountants because doing so will make them appear inexperienced and unqualified to run a business.

False

54.  An undefined target market can ruin a business plan.

True

55.  Never reveal your competitors’ strengths in your business plan—focus only on what they are doing wrong.

False

56.  The only person who should read a business plan is the owner and potential investors.

False

Problem Solving

57.  In the marketing section of your business plan, you need to provide information in four areas.

a. What information should be included about your products or services?

The section should describe the products or services the business plans to produce and sell, explain how they differ from those already on the market, highlight any unique features, and explain the benefits customers will receive by purchasing from the business.

b. What information should be included about your market?

This section will explain who your prospective customers are, how large the market is for your product or service, how you plan to enter that market, and how you plan to deal with competition.

c. What information should be included about the industry you will operate in?

The industry section should include the growth potential and economic trends of the industry; technology that may affect the industry; forecasts for industry growth; and external factors that can affect the business, such as high competition or lack of suppliers.

d. How might the location of your business affect its success?

If the business is located too close to competing businesses, sales may suffer. If the business is located too far from the target customer or if parking is not available, people may not go there because they consider it inconvenient.

58. The financial management section of your business plan consists of three elements. List these elements, describe what is included in each, and explain why the information is necessary.

Identification of risks: This section should list the problems that could cause your business to lose sales and your plans to deal with the problems. Prospective lenders know that every business faces risks and will be reassured to see that you have considered these risks and have devised plans to deal with them.

Financial statements: This section should include current and/or projected financial statements. Prospective lenders want to know what you expect to earn in revenues and to pay in expenses. They can then analyze your figures to be sure they are reasonable.

Funding request and return on investment: This section should include how much money you are investing in the business, how much you need to borrow, and how you plan to use the money. Prospective lenders want to know whether the total amount of money involved will be sufficient and whether it will be used wisely. Investors want to know how much money they can expect to earn on their investment.

REVIEW

1) Which of the following is not one of the three components of intellectual capital?

A) Human

B) Structural

C) Competitor

D) Customer

Answer:  C - Diff: 2    Page Ref: 87

2) ________ involves developing a game plan to guide a company as it strives to accomplish its mission, goals, and objectives to keep it on its desired course.

A) Competitive advantage

B) Mission

C) Strategic management

D) Market segmentation

Answer:  C - Diff: 1    Page Ref: 88

3) The aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market, superior to its competition, is its:

A) mission statement.

B) competitive advantage.

C) competitive profile.

D) strategic plan.

Answer:  B - Diff: 1    Page Ref: 88-89

4) Which of the following was not identified as a way for the typical small business to establish a competitive advantage?

A) Lowering prices

B) Providing higher quality goods or services

C) Improving customer service

D) Doing whatever the company does for its customers better than its competitors

Answer:  A - Diff: 2    Page Ref: 89

5) ________ are a unique set of capabilities that a company develops in key operational areas-such as service, innovation, and others-that allow it to potentially vault past its competitors.

A) Core competencies

B) Opportunities

C) Key success factors

D) Mission statements

Answer:  A - Diff: 2    Page Ref: 89

6) The relationship between core competencies and competitive advantage is best described by which statement?

A) Strengthening a company's competitive advantage strengthens its core competencies.

B) A company's core competencies become the nucleus of its competitive advantage.

C) As a company's core competencies become stronger, its competitive advantage becomes weaker.

D) There is no relationship between core competencies and competitive advantage.

Answer:  B - Diff: 3    Page Ref: 89-80

7) The key to entrepreneurial success over time is to build a ________ competitive advantage.

A) defensible

B) sustainable

C) coherent

D) random

Answer:  B - Diff: 3    Page Ref: 90-91

8) A strategic plan serves as a blueprint to help a company to:

A) match their company's strengths and weaknesses to the environment's opportunities and threats.

B) accomplish its mission, goals, and objectives.

C) identify a company's competitive advantage and set it apart from its competition with a unique position in the market.

D) All of the above

Answer:  D - Diff: 2    Page Ref: 92

9) Which of the following is NOT a characteristic of the strategic management procedure for a small company?

A) It should use a relatively short planning horizon-two years or less, typically.

B) It should begin with an extensive objective-setting session.

C) It should encourage the participation of employees and even outsiders to improve the reliability and creativity of the resulting plan.

D) It should allow for flexibility and not be overly structured.

Answer:  B - Diff: 2    Page Ref: 91-92

10) A clearly defined vision helps a company in which of the following ways?

A) Provides direction

B) Determines decisions

C) Motivates people

D) All of the above

Answer:  D - Diff: 1    Page Ref: 92

11) A small company's mission statement:

A) establishes its purpose in writing.

B) gives the business and everyone in it a sense of direction.

C) defines what the company is, why it exists, and its reason for being.

D) All of the above

Answer:  D - Diff: 1    Page Ref: 93

12) When developing a company's mission statement, an entrepreneur should remember to:

A) write the statement alone without anyone else's interference.

B) omit statements about her values because they may turn some stakeholders off.

C) keep it short and simple.

D) All of the above

Answer:  C - Diff: 3    Page Ref: 93-94

13) Strengths and weaknesses are ________ to the organization.

A) internal factors

B) external factors

C) internal and/or external factors

D) factors not belonging

Answer:  A - Diff: 1    Page Ref: 95

14) ________ are positive internal factors that contribute toward accomplishing the company's mission, goals, and objectives, while ________ are negative internal factors that inhibit the accomplishment of a firm's mission, goals, and objectives.

A) Strengths; weaknesses

B) Weaknesses; strengths

C) Opportunities; threats

D) Threats; opportunities

Answer:  A - Diff: 1    Page Ref: 95

15) Kevin Abt noticed that people were cooking meals in their homes less often but wanted to avoid the hassle of going out to eat. They wanted to "eat in" without cooking. Abt launched a company, Takeout Taxi, that delivers restaurant-prepared food to his customers' homes and businesses. Takeout Taxi is the result of a(n):

A) strength.

B) weakness.

C) opportunity.

D) threat.

Answer:  C - Diff: 2    Page Ref: 95-96

16) Maria Sanchez is the owner of the Main Street Café and a new restaurant opens a few blocks away. From Maria's perspective, this new restaurant constitutes a(n):

A) strength.

B) weakness.

C) threat.

D) opportunity.

Answer:  C - Diff: 2    Page Ref: 97

17) Every business is characterized by a set of controllable variables that determines the relative success (or lack of it) of market participants called:

A) distinctive competencies.

B) key success factors.

C) opportunities and threats.

D) competitive edge.

Answer:  B - Diff: 1    Page Ref: 101

18) Gathering competitive intelligence, such as "dumpster diving" in a competitors trash, may raise questions regarding:

A) the integrity of the data.

B) the competitive profile matrix.

C) a cost benefit analysis.

D) ethical standards.

Answer:  D - Diff: 2    Page Ref: 105-106

19) Your ________ competitors offer the same products and services, and customers often compare prices, features, and deals from these competitors as they shop.

A) significant

B) direct

C) indirect

D) All of the above

Answer:  B - Diff: 1    Page Ref: 104

20) An ________ competitor offers the same or similar products of services only in a small number of areas, and their target customers seldom overlap yours.

A) indirect competitor

B) direct

C) parallel

D) divergent

Answer:  A - Diff: 1    Page Ref: 105

21) Which of the following is true about the information-gathering process in competitive analysis?

A) It is an expensive process which only large companies can afford.

B) It can be relatively inexpensive and easy for the small business owner to conduct.

C) It is a process closely regulated by various federal laws which prohibit doing things like purchasing competitive products and analyzing them.

D) It is a process that requires expert help and is relatively expensive.

Answer:  B - Diff: 3    Page Ref: 104-106

22) Which of the following is an effective method of collecting information about competitors?

A) Ask customers and suppliers what competitors are doing.

B) Talk to employees, especially sales representatives and purchasing agents, about competitors.

C) Attend trade shows and collect competitors' sales literature.

D) All of the above

Answer:  D - Diff: 1    Page Ref: 104-105

23) Which of the following is not a recommended method of collecting competitive intelligence?

A) Attend trade shows and collect competitors' sales literature.

B) Buy competitors' products or services and assess their quality and features, benchmarking their products and services against yours.

C) Pay competitors' employees to become informants about their companies' strategies, markets, and trade secrets.

D) Watch for employment ads from competitors to determine the types of workers they are hiring.

Answer:  C - Diff: 2    Page Ref: 104-105

For the question(s) below, consider the following competitive profile matrix:

Key Success                                                  Your Business            Competitor 1           Competitor 2

Factors                                                             Weighted                    Weighted                 Weighted

                                    Weight       Rating          Score     Rating         Score     Rating           Score

Quality                         .35                  4                1.40           2                .70             1                .35

Service                          .20                  4                 .80            2                .40             2                .40

Convenience                 .15                  2                 .30            4                .60             1                .15

On-Time Delivery        .20                  2                 .40            4                .80             2                .40

Location                       .10                  3                 .30            1                .10             2                .20

TOTAL                       1.00                                 3.20                              2.60                             1.50

24) Which of the following statements is true?

A) Overall, Competitor 2 is the strongest of these three companies.

B) Your company's most serious weakness is its poor quality.

C) Your company's most vulnerable point against these two competitors is in the area of on-time delivery.

D) The most important of the key success factors is location.

Answer:  C - Diff: 2    Page Ref: 107, Table 3.2

25) Which company has the strongest competitive position?

A) Your company

B) Competitor 1

C) Competitor 2

D) Impossible to tell from the information given

Answer:  A - Diff: 2    Page Ref: 107, Table 3.6

26) Which of the following statements is true?

A) Overall, Competitor 2 is the strongest of these three companies.

B) Your company's most serious weakness is its poor quality.

C) Your company's most vulnerable point against these two competitors is in the area of on-time delivery.

D) The most important of the key success factors is location.

Answer:  C - Diff: 2    Page Ref: 107, Table 3.6

27) Which company has the worst location?

A) Your company

B) Competitor 1

C) Competitor 2

D) Impossible to tell from the information given

Answer:  B

Diff: 2    Page Ref: 107, Table 3.6

28) In terms of quality, which company has the weakest competitive position?

A) Your company

B) Competitor 1

C) Competitor 2

D) Impossible to tell from the information given

Answer:  C

Diff: 2    Page Ref: 107, Table 3.6

29) Which key success factor does the entrepreneur who built this table believe is most important?

A) Quality

B) Service and on-time delivery

C) Convenience

D) Location

Answer:  A

Diff: 2    Page Ref: 107, Table 3.6

30) A competitive profile matrix:

A) identifies a firm's core competencies.

B) permits the small business owner to divide a mass market into smaller, more manageable segments.

C) allows the small business owner to evaluate her firm against competitors on the key success factors for the industry.

D) creates a road map of action for the entrepreneur in order to fulfill her company's mission, goals, and objectives.

Answer:  C

Diff: 3    Page Ref: 106-106

31) ________ are the broad, long-range attributes the small business seeks to accomplish; ________ are the more specific targets for performance.

A) Goals; objectives

B) Goals; strategies

C) Objectives; goals

D) Strategies; goals

Answer:  A

Diff: 1    Page Ref: 107

32) Which of the following is not a characteristic of a well-written objective?

A) Realistic, yet challenging

B) Measurable

C) General

D) Timely

Answer:  C

Diff: 2    Page Ref: 107-109

33) The focal point of any company's strategy, whatever it may be, should be:

A) its product or service.

B) its competition.

C) its customers.

D) its strengths and weaknesses.

Answer:  C

Diff: 2    Page Ref: 109-110

34) A ________ is a road map of the tactics and actions an entrepreneur draws up to fulfill the company's mission, goals, and objectives.

A) mission

B) strategy

C) competitive edge

D) core competency

Answer:  B

Diff: 1    Page Ref: 109-110

35)  ________ spell(s) out the "ends" an organization is to achieve; ________ define(s) the "means" for achieving the ends.

A) Mission, goals, and objectives; strategy

B) Key success factors; strategy

C) Strategy; mission, goals, and objectives

D) Strategy; vision

Answer:  A

Diff: 2    Page Ref: 107-108

36) The relationship between a company's mission, goals, and objectives and its strategy is best described by which of the following statements?

A) Developing a company's strategy lays the groundwork for creating its mission, goals, and objectives.

B) The mission, goals, and objectives spell out the ends the company wants to achieve, and the strategy defines the means for reaching them.

C) Although managers must change a company's mission, goals, and objectives as competitive conditions change, they should avoid adjusting the company's strategy to prevent the company from losing its focus and momentum.

D) There is no real link between a company's mission, goals, and objectives and its strategy.

Answer:  B

Diff: 3    Page Ref: 107-108

37) A strategy should:

A) be comprehensive and well integrated.

B) focus on establishing for the firm the key success factors in the industry.

C) identify how the firm will accomplish its mission, goals, and objectives.

D) All of the above

Answer:  D

Diff: 2    Page Ref: 109-110

38) A cost-leadership strategy:

A) enables companies to concentrate on a niche within the overall market.

B) is built on differences among market segments.

C) works best when buyers' primary purchase criterion is price.

D) All of the above

Answer:  C

Diff: 2    Page Ref: 110-111

Learning Obj.:  4

39) A cost-leadership strategy works well when:

A) buyers are sensitive to price changes.

B) competing firms sell the same commodity products.

C) a company can reap savings from economies of scale.

D) All of the above

Answer:  D

Diff: 2    Page Ref: 110

Learning Obj.:  4

40) Small firms pursuing a cost-leadership strategy have an advantage in reaching customers whose primary purchase criterion is:

A) quality.

B) constant innovation.

C) price.

D) customer service.

Answer:  C

Diff: 1    Page Ref: 110

Learning Obj.:  4

41) Skatell's, a small jewelry store with three locations, designs and manufactures much of its own jewelry while its competitors (many of them large department stores) sell standard, "off-the-shelf" jewelry. As a result, Skatell's has developed a loyal customer base of people who seek unique pieces of jewelry. Skatell's reputation for selling unique and custom-designed jewelry allows them to benefit from a:

A) cost-leadership strategy.

B) differentiation strategy.

C) focus strategy.

D) competitive strategy.

Answer:  A

Diff: 2    Page Ref: 110-111

Learning Obj.:  4

42) Cost-leadership may have which of the following inherent dangers?

A) What is chosen to distinguish the product does not boost its performance.

B) An over-focus on the physical characteristics of the product

C) The identified niche is not large enough to be profitable.

D) An overemphasis on costs to the elimination of other strategies

Answer:  D

Diff: 3    Page Ref: 111

Learning Obj.:  4

43) A differentiation strategy:

A) seeks to build customer loyalty by positioning goods or services in a unique fashion.

B) is built on a company's core competence.

C) must create the perception of value in the customer's eyes.

D) All of the above

Answer:  D

Diff: 2    Page Ref: 111

Learning Obj.:  4

44) A small company following a ________ strategy seeks to build customer loyalty by positioning its goods and services in a unique fashion.

A) differentiation

B) cost-leadership

C) focus

D) niche

Answer:  A

Diff: 1    Page Ref: 111

Learning Obj.:  4

45) A company that offers superior product quality, extra customer service, and fast delivery times is pursuing a:

A) cost-leadership strategy.

B) differentiation strategy.

C) concentration strategy.

D) strategic alliance.

Answer:  B

Diff: 2    Page Ref: 111-112

Learning Obj.:  4

46) Which of the following is a danger in choosing a differentiation strategy?

A) Focusing only on physical characteristics of a product or service and ignoring important psychological factors, such as status, prestige, image, and customer service

B) Choosing a market that is not large enough to be profitable

C) Misunderstanding the firm's true cost drivers

D) All of the above

Answer:  A

Diff: 3    Page Ref: 113

Learning Obj.:  4

47) The principle behind a ________ strategy is to select one or more market segments, identify customers' special needs, and approach them with a good or service designed to excel in meeting these needs.

A) cost-leadership

B) differentiation

C) focus

D) concentration

Answer:  C

Diff: 1    Page Ref: 113

Learning Obj.:  4

48) Rather than attempting to serve the total market, the small firm pursuing a ________ strategy specializes in serving a specific target segment.

A) cost-leadership

B) differentiation

C) focus

D) head-to-head

Answer:  C

Diff: 2    Page Ref: 113

Learning Obj.:  4

49) Shere Vincente operates a travel service that specializes in arranging trips for women, giving special attention to their needs and preferences, from security and comfort to activities and events designed to appeal to her target customers. Vincente is pursuing a ________ strategy.

A) cost-leadership

B) differentiation

C) focus

D) positioning

Answer:  C

Diff: 2    Page Ref: 114-115

Learning Obj.:  4

50) Small companies must develop strategies that exploit all of the competitive advantages of their size by:

A) responding quickly to customers' needs.

B) remaining flexible and willing to change.

C) constantly innovating.

D) All of the above

Answer:  D

Diff: 1    Page Ref: 114, 116

Learning Obj.:  4

51) In order for the control process to work, the business owner must:

A) make as few changes and modifications in the operational plans as possible.

B) concentrate on competitive information.

C) identify and track key performance indicators.

D) maintain control and delegate as little authority and responsibility as possible.

Answer:  C

Diff: 2    Page Ref: 117

Learning Obj.:  5

52) Which of the following is NOT one of the four important perspectives a balanced scorecard should look at a business from?

A) Competitor perspective

B) Internal business perspective

C) Innovation and learning perspective

D) Financial perspective

Answer:  A

Diff: 3    Page Ref: 118

Learning Obj.:  5

53) The balanced scorecard ideally looks at a business from four important perspectives relating to:

A) low-cost, differentiation, focus, and initiative.

B) customers, buyers, suppliers, and substitute products.

C) customers, internal factors, capital, and human resources.

D) customers, internal factors, innovation, and finances.

Answer:  D

Diff: 3    Page Ref: 118

Learning Obj.:  5

54) With the growth of the Internet, cloud computing, globalization, and increased competition, the business environment has become more turbulent and challenging.

Answer:  TRUE

Diff: 1    Page Ref: 87-88

AACSB:  Use of IT

Learning Obj.:  5

55) One of the biggest changes entrepreneurs face is the shift in the economy from a base of financial to intellectual capital.

Answer:  TRUE

Diff: 2    Page Ref: 87

56) The three components of intellectual capital are human, structural, and customer.

Answer:  TRUE

Diff: 2    Page Ref: 87

57) Narrower product lines, smaller customer bases, and more limited geographic areas give small companies a natural advantage over large businesses when preparing a strategic plan.

Answer:  TRUE

Diff: 2    Page Ref: 88-89

58) The most effective way for a small business to establish a competitive advantage is by offering lower prices.

Answer:  FALSE

Diff: 1    Page Ref: 89

59) Small companies' core competencies are often the result of benefits such as agility, speed, closeness to customers, superior service, and innovative ability-all of which are size advantages that allow them to do things that their larger competitors cannot.

Answer:  TRUE

Diff: 2    Page Ref: 89

60) Large companies have a natural advantage over small firms when it comes to preparing a strategic plan.

Answer:  FALSE

Diff: 2    Page Ref: 91

61) Although developing a strategic plan is important for large companies, it is not essential to managing a small company successfully because of its limited resources.

Answer:  FALSE

Diff: 1    Page Ref: 92

62) The ideal strategic planning process for a small company should start with setting objectives.

Answer:  FALSE

Diff: 2    Page Ref: 91-92

63) The ideal strategic planning procedure for a small company should be formal and highly structured.

Answer:  FALSE

Diff: 2    Page Ref: 92

64) The most effective way to communicate the values of a company to everyone it touches is to formulate an effective mission statement.

Answer:  TRUE

Diff: 2    Page Ref: 93-94

65) The mission statement addresses the first question of any business venture: "What business am I in?"

Answer:  TRUE

Diff: 1    Page Ref: 94

66) A company's mission statement defines what it stands for, why it exists, and its reason for being.

Answer:  TRUE

Diff: 1    Page Ref: 94

67) As business and competitive conditions change, so should a small company's mission statement.

Answer:  TRUE

Diff: 2    Page Ref: 94

68) A company's mission statement should be lengthy and use fancy jargon to impress outsiders.

Answer:  FALSE

Diff: 2    Page Ref: 93, Table 3.1

69) Conducting a SWOT analysis for her own business and for her key competitors allows an entrepreneur to gain a competitive edge by matching her company's strengths against her competitors' weaknesses.

Answer:  TRUE

Diff: 1    Page Ref: 95, 97

70) Strengths are positive internal factors that contribute towards accomplishing the company's mission, goals, and objectives.

Answer:  TRUE

Diff: 1    Page Ref: 95

71) Weaknesses are negative external forces that inhibit the firm's ability to achieve its mission, goals, and objectives.

Answer:  FALSE

Diff: 1    Page Ref: 95

72) After a company's strengths and weaknesses are assessed, the strategic planning process should identify opportunities and threats facing the company and should isolate the key factors for success in business.

Answer:  TRUE

Diff: 2    Page Ref: 95

73) Threats are negative external forces that inhibit a company's ability to achieve its mission, goals, and objectives.

Answer:  TRUE

Diff: 1    Page Ref: 97

74) "Big box retailers" present an opportunity for many small business owners.

Answer:  FALSE

Diff: 2    Page Ref: 97-99

75) To be effective, the small business owner should limit strategic analysis to only the two or three most significant opportunities facing the firm.

Answer:  TRUE

Diff: 2    Page Ref: 97-99

76) A firm's strategy must focus on establishing for the firm the key success factors the entrepreneur has identified for the industry.

Answer:  TRUE

Diff: 2    Page Ref: 101

77) A small business owner can collect a great deal of information about competitors through a number of low-cost competitive intelligence methods.

Answer:  TRUE

Diff: 1    Page Ref: 103-104

78) Experts estimate that 70 to 90 percent of the competitive information a company needs already resides with employees who collect it in their daily dealings with suppliers, customers, and other industry contacts.

Answer:  TRUE

Diff: 3    Page Ref: 104-105

79) A competitor analysis should include an analysis of direct competitors as well as significant and indirect competitors.

Answer:  TRUE

Diff: 2    Page Ref: 104-105

80) Significant competitors are those that offer the same products and services your company offers, and customers often compare prices, features, and deals from these competitors as they shop.

Answer:  FALSE

Diff: 2    Page Ref: 104-105

81) Conducting successful competitive intelligence on rivals' strategies and actions may include researching their Web sites, buying their products to assess their quality, and watching for employment ads to determine the type of employees they are hiring.

Answer:  TRUE

Diff: 1    Page Ref: 105-106

82) Performing competitive intelligence on rivals' strategies and actions does not mean that entrepreneurs must engage in unethical or illegal espionage activities.

Answer:  TRUE

Diff: 2    Page Ref: 105-106

83) It is unwise for entrepreneurs to monitor competitors' strategies and actions because such activities require them to engage in illegal or unethical behavior.

Answer:  FALSE

Diff: 2    Page Ref: 105-106

84) One of the goals of competitive analysis is to improve a firm's reaction time to competitor's actions.

Answer:  TRUE

Diff: 2    Page Ref: 107

85) A competitive profile matrix analyzes how well a company and its rivals match the key success factors in the industry.

Answer:  TRUE

Diff: 2    Page Ref: 107, Table 3.2

86) Goals are the broad, long-range attributes that a business seeks to accomplish; objectives are more specific targets of performance.

Answer:  TRUE

Diff: 1    Page Ref: 107

87) Before an entrepreneur can build a successful strategy, she must establish a clear mission, goals, and objectives in order to have appropriate targets at which to aim her strategy.

Answer:  TRUE

Diff: 2    Page Ref: 107

88) Goals and objectives provide targets to aim for and a basis for evaluating a company's performance.

Answer:  TRUE

Diff: 1    Page Ref: 107-108

89) "Improving the company's cash flow" is a good example of an effective objective.

Answer:  FALSE

Diff: 3    Page Ref: 107-108

90) A company's strategy spells out the ends the business wants to achieve, and its mission, goals, and objectives define the means for reaching them.

Answer:  FALSE

Diff: 2    Page Ref: 108-109

91) Setting seemingly impossible objectives, those outside of the likely reach of employees, helps managers to create and maintain a high motivation level.

Answer:  FALSE

Diff: 2    Page Ref: 108

92) "Increasing our market share from 8 percent to 10 percent by the end of the current fiscal year" is a good example of an effective objective.

Answer:  TRUE

Diff: 2    Page Ref: 107-108

93) Objectives should be as general as possible to permit flexibility in the business.

Answer:  FALSE

Diff: 2    Page Ref: 107-108

94) The strategic planning process works best when employees are actively involved with managers in setting company goals and objectives.

Answer:  TRUE

Diff: 1    Page Ref: 108-110

95) A strategy is a road map of action for fulfilling a firm's mission, goals, and objectives.

Answer:  TRUE

Diff: 1    Page Ref: 109

96) A company pursuing a cost-leadership strategy strives to be the lowest-cost producer relative to its competitors in the industry.

Answer:  TRUE

Diff: 1    Page Ref: 110

Learning Obj.:  4

97) A danger of cost-leadership is that a company may misunderstand what processes actually drive its true costs.

Answer:  TRUE

Diff: 2    Page Ref: 110

Learning Obj.:  4

98) Small firms pursuing a cost-leadership strategy have an advantage in reaching customers whose primary purchase criterion is high quality.

Answer:  FALSE

Diff: 2    Page Ref: 110-111

Learning Obj.:  4

99) The best way to build a cost-leadership competitive advantage is to focus entirely on manufacturing costs.

Answer:  FALSE

Diff: 1    Page Ref: 110-111

Learning Obj.:  4

100) One key to building a successful differentiation strategy is to be better than competitors at some characteristic that customers value.

Answer:  TRUE

Diff: 1    Page Ref: 111

Learning Obj.:  4

101) To be successful, a differentiation strategy must create the perception of value in the customer's eyes.

Answer:  TRUE

Diff: 2    Page Ref: 111-112

Learning Obj.:  4

102) The key to a successful differentiation strategy is to build it on a core competency, something the company is uniquely good at doing in comparison to its competitors.

Answer:  TRUE

Diff: 1    Page Ref: 111-112

Learning Obj.:  4

103) A differentiation strategy frequently allows the company the opportunity to charge a higher price for its products or services.

Answer:  TRUE

Diff: 2    Page Ref: 112

Learning Obj.:  4

104) One danger in choosing a differentiation strategy is trying to differentiate based on something that the customer does not perceive as valuable.

Answer:  TRUE

Diff: 2    Page Ref: 113

Learning Obj.:  4

105) A small business following a focus strategy attempts to serve its narrow target markets more effectively and efficiently than competitors trying to appeal to the broad market.

Answer:  TRUE

Diff: 2    Page Ref: 113

Learning Obj.:  4

106) A focus strategy recognizes that not all markets are homogeneous.

Answer:  TRUE

Diff: 2    Page Ref: 113

Learning Obj.:  4

107) Focus strategies build on differences among market segments.

Answer:  TRUE

Diff: 2    Page Ref: 113

Learning Obj.:  4

108) The secret to good control is identifying and tracking key performance indicators.

Answer:  TRUE

Diff: 2    Page Ref: 117

Learning Obj.:  5

109) To evaluate the effectiveness of their strategies, some companies are developing balanced scorecards, a set of measurements unique to a company that includes both financial and operational measures and gives managers a quick, comprehensive picture of the company's total performance.

Answer:  TRUE

Diff: 2    Page Ref: 118

Learning Obj.:  5

110) When creating a balanced scorecard for his or her company, an entrepreneur should establish goals for each critical indicator of company performance and create meaningful measures for each one.

Answer:  TRUE

Diff: 2    Page Ref: 118-119

Learning Obj.:  5

111) The focal point of the entire strategic plan and the competitive strategy chosen should be the customer.

Answer:  TRUE

Diff: 1    Page Ref: 119

Learning Obj.:  5

112) A balanced scorecard looks at a business from four important perspectives: competitor, internal, innovation and learning, and financial.

Answer:  FALSE

Diff: 3    Page Ref: 119

Learning Obj.:  5

113) Ideally, strategic planning is not an outcome but an ongoing process.

Answer:  TRUE

Diff: 1    Page Ref: 119

Learning Obj.:  5

114) What advice would you offer an entrepreneur on how to create a mission statement for his or her company?

Answer:  Tips for writing a powerful mission statement include:

•           Keep it short

•           Keep it simple

•           Get everyone in the company involved

•           Keep it current

•           Reflect your values and beliefs

•           Reflect concern for future

•           Keep tone positive and upbeat; use it to lay ethical foundation for company

•           Look at other companies' mission statements; make sure it is appropriate for company culture

•           Use it

Diff: 2    Page Ref: 92-95, Table 3.2

115) Define each of the following terms and give an example of each: strengths, weaknesses, opportunities, and threats.

Answer: 

Strengths are positive internal factors that a company can use to accomplish its mission, goals, and objectives

Examples:

•           special skills or knowledge

•           positive public image

•           experienced sales force

Weaknesses are negative internal factors that inhibit the accomplishment of a company's mission, goals, and objectives

Examples:

•           lack of capital

•           shortage of skilled labor

•           inferior location

Opportunities are positive external options that a firm can exploit to accomplish its mission, goals, and objectives

Examples:

•           proprietary technology

•           emergence of potentially new target market(s)

•           lower interest rates

Threats are negative external forces that inhibit a company's ability to achieve its mission, goals, and objectives

Examples:

•           new competitors

•           adverse legislation

•           economic recession

Diff: 2    Page Ref: 95-97, 99

116) Assume that you are a consultant to a small independent hardware store in a town where a retail giant such as Wal-Mart, Kmart, or Target is about to open. The large retailer sells many of the same items the small hardware store sells, but at lower prices. What advice would you offer the owner concerning the hardware store's strategy? Explain.

Answer:  To compete successfully against a larger competitor, the small business owner must develop a true competitive advantage and utilize those core competencies that set the small business apart from the giant conglomerates like Wal-Mart. Through the strategic management process, a concise plan could be developed. The typical small business has fewer product lines, a better-defined customer base, and a specific geographical area. Valuable information can be obtained through close customer contacts and a more flexible approach to meeting customer needs.

Diff: 3    Page Ref: 99, Hands On

117) What is strategic management? What role does a strategic plan play in a small company?

Answer:  Strategic management involves developing a game plan to guide a company as it strives to accomplish its vision, mission, goals, and objectives and to keep it from straying off its desired course. The strategic management process provides owners a blueprint for matching their companies' strengths and weaknesses to the opportunities and threats in the environment.

Diff: 3    Page Ref: 109-117

118) Assume you own a small print shop. Who are your competitors and why is it important for you to monitor your competitors' activities? Describe at least five techniques you might use to monitor competitors' strategies and actions ethically and inexpensively.

Answer:  A recent survey identified the greatest small business challenge as competition. Other studies suggest that monitoring rivals' movements through competitive intelligence programs is vital to strategic activity and survival.

Specific techniques you might use include:

•           Reading industry trade publications

•           Asking customers and suppliers

•           Regularly debrief employees

•           Attending trade shows

•           Monitor social media and online activity

•           Conduct patent searches

•           Check EPA reports

•           Learn about the kinds and amounts of equipment and raw materials that competitors are importing

•           Buying competitors' products (benchmarking)

•           Obtaining credit reports

•           Review SEC reports

•           Buying competitors' products (benchmarking)

•           Investigate UCC reports

•           Checking library resources

•           Visit competitors's Web sites periodically

•           Visiting competing businesses

•           Don't resort to unethical or illegal practices

Diff: 3    Page Ref: 104-106

119) Assume you own a small shoe store. Discuss the three different types of competition you might face and give examples of each.

Answer:  Direct competitors offer the same products and services, and customers often compare prices, features, and deals from these competitors as they shop. Other shoe stores would be direct competitors. Significant competitors offer some of the same products and services. Although their product or service lines may be somewhat different, there is competition with them in several key areas. Department stores and athletic stores would be examples of significant competitors. Indirect competitors offer the same or similar products or services only in a small number of areas, but their target customers seldom overlap yours. Discount stores and thrift stores may be examples of indirect competitors.

Diff: 2    Page Ref: 104-107

120) What is strategy? Describe the three basic strategies small companies can choose from: cost-leadership, differentiation, and focus. Explain the conditions under which each works, its benefits, and its pitfalls.

Answer:  Strategy is a road map of the actions an entrepreneur draws up to a company's mission, goals, and objectives. This master plan covers all of the major organizational parts and ties them together.

Cost-leadership: Strives to be the lowest-cost producer.

Best When: Primary purchase criterion is price, and the power to set industry's floor price and economies of scale are available.

Disadvantage: If cost drivers are unknown or other strategies are overlooked.

Differentiation: Seeks to build customer loyalty by positioning its product/service in a unique or different fashion.

Best When: Differentiation is in the form of a "true benefit" to the customer.

Disadvantage: Trying to differentiate based on something that does not boost performance or lower cost.

Focus: Select one or more customer(s)/market(s) to create a niche.

Best When: Creating real value for customer by differentiation or low cost in a narrow target segment.

Disadvantages: Includes not being able to capture enough of a market share to be profitable.

Diff: 3    Page Ref: 110-114

Learning Obj.:  4

121) Assume you own a small camera shop that sells and repairs cameras and equipment. Discuss some of the methods you might select to allow you to successfully compete against the many large retailers that are nearby.

Answer:  In most cases, small business owners will not be able to select a cost-leadership strategy to meet the larger competitors who have a size advantage over them. Therefore, this small business owner will probably have a greater chance of success utilizing a focus and/or differentiation strategy. One option is to use a focus strategy by concentrating on a specific market segment, identifying those consumers' special needs, wants, and interests, and approaching them with a mix of product offerings that excel in meeting those needs, wants, and interests. Another choice may be to use a differentiation strategy that would seek to build customer loyalty by positioning his goods and services in a unique or different way than the competition. For example, the camera shop may offer superior customer service, special product features, complete product lines, instantaneous parts availability, absolute product reliability, supreme product quality, and extensive product knowledge. They might also offer on-site repair of camera equipment.

Diff: 3    Page Ref: 110-114

Learning Obj.:  4

Mini-Case 3-1: Finding a Competitive Advantage

Copreneurs Ed and Yolanda recently opened a vintage used car lot called Cherry Lane. They sell antique and collectible cars on consignment for the owners at a fee of 30 percent of the selling price. The price is further reduced by 10 percent if a particular car is not sold within the first 30 days. One of the first customers convinced Yolanda that this was the only fair thing to do, and in an effort to provide something for "the cost conscious buyer," she provided what she thought was excellent customer service and implemented the idea.

Ed and Yolanda feel Cherry Lane has an ideal location. It is located adjacent to the city's baseball stadium, alongside the freeway in the center of all the other car dealerships. Although Cherry Lane has significant foot traffic, most people never make offers to buy.

In an effort to increase sales, Ed and Yolanda are working on a new marketing strategy that they believe should be quite different from the "shotgun" approach they had been using over the last few months.

122) What is a competitive advantage? Does Cherry Lane have one? If so, what is it?

Answer:  A competitive advantage is an aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market. No business can be everything to everyone. Developing a strategic plan allows the small business to differentiate itself from other companies-a common pitfall for many small firms. Cherry Lane has an advantage over regular car dealerships because they are well suited to concentrate on the collectible car enthusiast niche in their marketplace.

Diff: 2    Page Ref: 92-117

123) As Ed and Yolanda begin the strategic planning process, what steps should they take?

Answer:  The entrepreneurs should follow these nine steps:

Step 1: Develop a clear vision and translate it into a meaningful mission statement.

Step 2: Assess the company's strengths and weaknesses.

Step 3: Scan the environment for significant opportunities and threats facing the business.

Step 4: Identify the key factors for success in the business.

Step 5: Analyze the competition.

Step 6: Create company goals and objectives.

Step 7: Formulate strategic options and select the appropriate strategies.

Step 8: Translate strategic plans into action plans.

Step 9: Establish accurate controls.

The strategic planning process does not end with these ten steps; rather, it is an ongoing process that an entrepreneur will repeat.

Diff: 2    Page Ref: 92-118

124) Considering the three basic small business strategies identified in your textbook, which one would work best for Cherry Lane? Why might that strategy be successful?

Answer:  A cost-leadership strategy would not complement the higher price image that these collectible cars usually have.

Some students may identify the appropriate strategy as differentiation; however, the other car dealerships are not direct competitors, nor is their market the same. The focus strategy could be used to successfully position Cherry Lane with its ability to meet the needs of a special customer base-collectible car buffs. Rather than attempting to serve the total market, the focusing firm specializes in serving a specific target segment or niche. Lowering prices with this special target market is not as important as creating the perception of value in the customers' eyes.

Diff: 3    Page Ref: 110-111

Learning Obj.:  4