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Essentials of Entrepreneurship and Small Business Management, 9th Edition Solution Manual

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    Essentials of Entrepreneurship and Small Business Management Ninth Edition Norman M. Scarborough Jeffrey R. Cornwall Resource Manual for Essentials of Entrepreneurship and Small Business Management Ram Subramanian

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    Page 291 CASE AND CHAPTER MAT RIX Case # Company Name Related Topics Chapter Reference 1 United Apparel Liquidators Industry: Apparel  Business Model  Bootstrap Marketing and Social Media  Location & Layout 5 9 14 2 Bark & Co. Industry: Pet Products  Creativity & Innovation  Business Plan  Sources of Funds 1 3 5 15 3 Cousins Maine Lobster Industry: Food  Franchising  Global Business 8 15 4 ThinkImpact Industry: Philanthropy  Ethics & Social Responsibility  Strategic Planning  Forms of Business Ownership  Sources of Funds 2 5 6 15 5 Intertech Construction Corporation Industry: E-Commerce and Retail Yarn  Financial Plan  Cash Management  Venture Team 12 13 17 6 Bluffton Pharmacy – Part 1 Industry: Retail  Financial Analysis 12 7 Bluffton Pharmacy – Part 2 Industry: Retail  Managing Cash Flow 13 8 Gitman Brothers Industry: Apparel  Marketing Plan  E-Commerce 9 10

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    Page 292 9 Seabreeze Property Services Industry: Lawncare  Buying an Existing Business  Sources of Funding 7 15 10 The Newark Nut Company Industry: Retail  Strategic Planning  Marketing Plan  E-Commerce  New Venture Team 5 9 10 17

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    Case Solutions, Page 293 CASE SOLUTIONS Case 1: United Apparel Liquidators https://shopual.com/ Related Chapters:  Chapter 5: Crafting a Business Plan and Building a Solid Strategic Plan  Chapter 9: Building a Powerful Bootstrap Marketing Plan  Chapter 14: Choosing the Right Location & Layout 1. What steps should the Cohens take to find other locations for new U.A.L. stores? What criteria should they use to screen potential cities? (Chapter 14, LO 1) (AACSB: Application of knowledge) Location can be a source of competitive advantage. In the case of the Cohens and United Apparel Liquidators, theirs is a business where low costs matter. They are in the business of selling luxury apparel at bargain prices. This means that their locations must help them maintain a low-cost structure. The location decision follows the sequence: choosing the region, the state, the city, and the specific site. Their base is Mississippi. That’s where their first store is located (in Hattiesburg). Their other locations fit the general profile of a comparatively low cost small Southern town. They should follow the same logic in locating their future stores. In screening potential cities, the Cohens should use as criteria factors such as: population trends (given that what they sell requires a fair amount of income), competition, compatibility with the community, and local laws and regulations. The other factors mentioned in the chapters – clusters, appropriate infrastructure and utilities, and incentives – are less important to the type of business that the Cohens run. 2. Which of the three basic business strategies is U.A.L. using? Explain. How well are the Cohens executing their strategy? (Chapter 5, LO 7) (AACSB: Application of knowledge) Strategy is a road map of the actions an entrepreneur draws up to fu lfill the company’s mission, goals, and objectives. The chapter identifies three strategic options: cost leadership, differentiation, and focus. Given that UAL has only a limited number of stores at this point in time, it is following a focus strategy. However, in its selected market, UAL is pursuing a cost leadership strategy, albeit by selling luxury goods. For example, the case indicates that UAL sells at $224 a pair of Manolo Blahnik leopard-print heels that originally sells for a $1,000.

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    Case Solutions, Page 294 A cost leadership strategy (within a focused geographical market) requires having a low-cost operation that enables the firm to sell at low prices. Here, there is evidence that the Cohens are executing their strategy well. The following are key points:  Locating their stores in small southern cities such as Hattiesburg, Mississippi, and Metairie, Louisiana. The argument here is that the rental and other operating costs will be lower here as compared to the big cities.  Even in these small towns, the Cohens have been careful in their choice of store location. As the case notes, “with fluorescent lights hanging from chains and concrete floors, their stores resembled Goodwill stores than the luxurious stores in the big cities that originally sold their merchandise.” One o f their stores is in a strip mall in a building formerly used by a car dealership. 3. Develop an outline of a marketing strategy for U.A.L. How should the company promote itself? (Chapter 9, LO 1 and LO 4) (AACSB: Application of knowledge) This is a good question for a student team project. Chapter 9 talks about bootstrap marketing strategies that small firms can employ and this is a good project for such strategies. Students should first answer the seven questions in Table 9.1, A Seven-Sentence Bootstrap (Guerrilla) Marketing Strategy (page 338), to develop an outline of UAL ’s marketing plan. T hen they should refer to Table 9.2, Bootstrap Marketing Tactics (page 348) to choose the most effective initiatives for implementing UAL ’s marketing plan. 4. How should U.A.L. incorporate social media into its marketing strategy? Which social media tools should the Cohens use? What steps should they take to build a social media following? (Chapter 9, LO 4) (AACSB: Application of knowledge) The social media strategy that UAL should use would depend upon their marketing plan that was the subject of Question 3 above. It makes sense to have student teams address this also when they are developing a guerilla marketing plan for UAL. Social media has significant potential as a marketing tool and typically fits very well with a bootstrap marketing plan, particularly in terms of resources. Many of the bootstrap marketing tactics listed in Table 9.2 (page 348) involve social media. The students’ plan should address all three issues listed above: how should the Cohens incorporate social media, which specific tools they should use, and how should they develop a social media following.

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    Case Solutions, Page 295 Case 2: Bark &Co. bark.co Related Chapters:  Chapter 1: The Foundations of Entrepreneurship  Chapter 3: Creativity and Innovation: Keys to Entrepreneurial Success  Chapter 5: Crafting a Business Plan and Building a Solid Strategic Plan  Chapter 15: Sources of Financing: Equity and Debt 1. What advantages does a subscription pricing model offer a business? (Chapter 5, LO 2) (AACSB: Application of knowledge) A subscription model has the following advantages. First, from Bark & Co.’s point -of-view, it makes revenues and cash flows predictable. This means the company can manage its cash budget with actual data. The model has advantages from the customer’s perspective too. It lowers the one-time price that the customer would pay for the product and so it removes much of the “sticker shock” associated with purchase s. 2. Notice that several of Bark & Co.’s idea for new businesses have failed. Is this unusual? Why is it important for businesses to continue to innovate, even when their founders know that many of the innovations will fail? What steps can Meeker, Werdelin, and Strife take to encourage creativity in their company? (Chapter 1, LO 7; Chapter 3, LO 1) (AACSB: Application of knowledge) Matt Meeker, Henrik Werdelin, and Carly Strife are entrepreneurs. This means they are constantly identifying opportunities to exploit and profit from. In the case of Bark & Co., the founders have to continue to innovate even in the face of failure for a number of reasons. Key among them is competition. As the case indicates, they have competitors such as PetGiftBox and PawPack. This means that to hold on to their competitive advantage via a differentiation strategy, they have to constantly innovate. The second is the pressure to hit the revenue goals as mandated by the venture capital firms. For Bark & Co. to go from $100 million to $500 million in revenues, the BarkBox line alone wouldn’t do it. They have to launch new products and this comes via innovation. The founders can encourage creativity at Bark & Co. by creating the right climate. Perhaps, the 1 percent of revenues allotted for innovation may not be enough, but it looks like this is all what the company can afford. The key for the founders is to create a climate of creativity and lead by example. 3. Explain the advantages and disadvantages of using venture capital to finance a company’s growth. (Chapter 14, LO 2) (AACSB: Application of knowledge)

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    Case Solutions, Page 296 Venture capital companies are private, for-profit organizations that assemble pools of capital and use them to purchase equity positions in young businesses they believe have high-growth and high-profit potential, producing annual returns of 300 to 500 percent within five to seven years. One advantage of using venture capital to finance a company’s growth is that such firms are typically interested inequity ownership rather than debt, which would call for interest and loan repayments. This means the start- up doesn’t have to worry about interest and loan repayment that would adversely affect its cash flow. The second advantage is that such firms look at early stage investment and so a start-up can seek such funding early in its life. Venture capitalists also provide advice and mentoring which help the founders of the start-up. The principal disadvantage is the immense pressure that venture capital firms put on the start-up to deliver. They look for substantial returns – 300 to 500 percent – in 5-7 years which may be very difficult for many firms. 4. Because of the risks associated with their investments, venture capital firms, which become part owners of the companies in which they invest, demand big returns within relatively short time frames. What impact do these expectations have on business founders such as Meeker, Werdelin, and Strife? Do investors’ expectations affect entrepreneurs’ decisions about their businesses? Explain. (Chapter 14, LO 2) (AACSB: Application of knowledge) Venture capital firms expect returns of 300-500 percent (i.e., 3 to 5 times what they have invested) within a 5-7-year period. This has a tremendous impact on how a business is run. As Meeker, Werdelin, and Strife point out, Bark & Co. has to get to sales of around $500 million within the next 3-4 years; this from a current base of around $100 million in revenues. It took Bark & Co. 5 years, from its launch in 2011 to 2016 to hit the $100 million revenue mark. Now, they have to multiply it by 5 times in a short period. As the case indicates, Meeker, Werdelin, and Strife believe that the BarkBox line alone will not get them to the target. They need to develop additional lines of business. The challenge is that they have to do this in a highly competitive environment. 5. What strategies should Meeker, Werdelin, and Strife use to continue their company’s impressive growth rate? Are there other related businesses that they should enter? Explain. (Chapter 5, LO 7) (AACSB: Application of knowledge) Bark& Co. is using a differentiation strategy in the pet products (specifically dogs) business. They do this using a subscription-based model. The subscription model helps the company in a variety of ways and this is something that they should continue. The key to their growth, though, is a related product diversification strategy. While some of their product ventures have failed, the key is to continue to branch out into related areas so that they can generate more revenues.

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    Case Solutions, Page 297 Case 3: Cousins Maine Lobster https://www.cousinsmainelobster.com/ Related Chapters:  Chapter 8: Franchising and the Entrepreneur  Chapter 16: Global Aspects of Entrepreneurship 1. Suppose that your best friend is considering purchasing a franchise such as Cousins Maine Lobster. What advice would you give him or her about the right way to go about purchasing a franchise? (Chapter 8, LO 4) (AACSB: Reflective thinking) The friend should be advised to follow certain steps before deciding on purchasing a franchise such as Cousins Maine Lobster. The steps include:  Evaluating oneself. The would-be franchise has to evaluate his/her own traits, goals, experience, likes, dislikes, risk orientation, income requirements, time and family commitments, and other characteristics.  Research the market. Before deciding on a franchise, the friend should research the market in which he/she plans to open the franchise. Key areas include the macro and the competitive environments in the area.  Consider the franchise options. Before selecting the particular franchisor, the friend should consider the franchising options available. Instead of settling on the first available franchise, one should consider all the options.  Obtain a copy of the Franchisor’s Franchise Discl osure Document. The FDD is an important tool in one’s search for the right franchise.  Talk to existing franchisees. While the FDD is an important document, it should be supplemented by visits to franchise owners to get an understanding of their experiences.  Ask the franchisor relevant questions. Reading the FDD and talking to franchisees should lead to the friend asking the franchisor questions about the franchise relationship. Such questions should be aimed at clarifying any ambiguous areas.  As the final step, the friend should make the choice of the franchise to own. 2. What advantages do entrepreneurs who purchase a franchise get? What disadvantages do they encounter? (Chapter 8, LO 2A and 2B) (AACSB: Reflective thinking) The benefits of owning a franchise are the following:

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    Case Solutions, Page 298  A multitude of options  A business system  Management training and support  Brand-name appeal  Standardized quality of goods and services  National advertising programs and marketing assistance  Financial assistance  Proven products, processes, and business formats  Centralized buying power  Site selection and territorial protection  Greater chance of success However, there are also disadvantages associated with franchising, such as:  Franchise fees and ongoing royalties  Strict adherence to standardized operations  Restrictions on purchasing and prices  Limited product line  Contract terms involving termination, sale or buyback  Unsatisfactory training programs  Market saturation  Less freedom 3. What is the Franchise Disclosure Document? How can it help prospective franchisees evaluate the various franchise operations in which they are considering investing? (Chapter 8, LO 3) (AACSB: Reflective thinking) The Franchise Disclosure Document (FDD) is a document that every franchisor is required by law to give prospective franchisees before any offer or sale of a franchise. It outlines 23 important pieces of information about the franchisor and the franchise. The FDD helps prospective franchisees because since it is a disclosure document, all the relevant facts about the franchise can be obtained prior to making a decision. For example, it has information about the initial and ongoing franchise fees as well as the investment required to open a franchise.

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    Case Solutions, Page 299 4. Cousins Maine Lobster wants to expand its franchise internationally. How popular is franchising as an “export” to other nations? What steps should Tselikis and Lomac take to cultivate a successful international franchise operation? (Chapter 8, LO 5 and Chapter 16, LO 1) (AACSB: Application of knowledge) One of the major trends in franchising is the internationalization of American franchising systems. Franchising American businesses like Cousins Maine Lobster has become a major export industry as evidenced by the increasing number of international franchisees of companies such as McDonald’s, KFC, Pizza Hut, Taco Bell, and Subway. Tselikis and Lomac should be careful in attempting to create an international franchise operation for Cousins Maine Lobster. They should examine if adaptation is required for foreign markets. Adaption areas include business format as well as products because these may not suit foreign markets. Case 4: ThinkImpact http://www.thinkimpact.com/ Related Chapters:  Chapter 2: Ethics and Social Responsibility: Doing the Right Thing  Chapter 5: Crafting a Business Plan and building a Solid Strategic Plan  Chapter 6: Forms of Business Ownership  Chapter 15: Sources of Financing: Equity and Debt 1. Which organization structure should Garlick use for ThinkImpact? Explain. (Chapter 2, LO 4 and Chapter 6, LO 4) (AACSB: Application of knowledge) As the case indicates, Saul Garlick has three options when it comes to ThinkImpact’s organizational structure: remain a nonprofit organization, shut down the nonprofit organization and start a for-profit company, or develop a hybrid model. As students examine these three options, they have to keep in mind that Saul Garlick is a social entrepreneur, in that he finds resources to tackle challenging problems confronting, in this case, South Africa’s pove rty stricken population. Option 1, to remain as a nonprofit, makes sense because the market will not sense an ulterior, profit seeking motive to what Garlick is trying to do. The downside is that Garlick would spend much of his time raising money rather than in doing what the organization is supposed to do. While students may have different opinions on this, the hybrid model makes for the best option

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    Case Solutions, Page 300 because it takes care of the fund raising part via the for-profit business and yet the nonprofit part all ows Garlick to focus on the organization’s mission. 2. If Garlick chooses to create a for-profit entity, either to replace the current nonprofit organization or as a subsidiary, what potential sources of funding might he be able to tap? (Chapter 15, LO 2) (AACSB: Application of knowledge) Garlick has to first decide on whether r not he wants to fund the organization’s capital entirely via equity or as a combination of equity and debt. Given that ThinkImpact has a track record, it may not be considered purely as a start-up, although being an nonprofit organization for several years may not logically transfer to the for-profit world. Garlick should look at the following sources of equity funding:  Personal savings  Friends and family members. There are indications that friends and family members may be willing to invest in ThinkImpact if they can get financial returns.  Crowd funding. Given ThinkImpact’s social mission, crowd funding may be an attractive option.  Venture capitalists. There are venture capital firms that specialize in funding social ventures. Debt funding may be a more difficult option for Garlick at the start as, for example, commercial banks may be unwilling to lend to such an organization. This may be something that Garlick looks into at a later stage. 3. What steps should Garlick take before approaching some of the potential sources of funding you described in question 2? (Chapter 5, LO 1) (AACSB: Application of knowledge) Garlick should first develop a solid business plan for ThinkImpact. A business plan is a written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its manager’s skills and abilities. In the case of Garlick and ThinkImpact, the purpose of writing a business plan is to attract investors. His business plan should prove to investors that ThinkImpact will produce an attractive rate of return. A well-written business plan will help Garlick convince investors both of ThinkImpact’s social mission a s well as its financial prospects that will help him get funding. Case 5: Intertech Construction Corporation http://www.iccbuild.com/ Related Chapters:  Chapter 12: Creating a Successful Financial Plan  Chapter 13: Managing Cash Flow

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    Case Solutions, Page 301  Chapter 17: Building a New Venture Team and Planning for the Next Generation 1. Identify possible causes that could explain Intertech’s declining profitability. What steps can the Stadlens take to reverse this alarming trend? (Chapter 12, LO 3) The case indicates that Intertec h Construction Corporation’s profitability has declined following the Great Recession. While we don’t know the full story behind this, possible reasons could be the following:  The sales rebound after the Great Recession may not be adequate enough to cover the increased expenses that an organization the size of Intertech (27 full-time employees, around 25 projects a year) may have.  Intertech’s client base may be disproportionately in favor of large (size and revenues wise) customers who may have tremendous bargaining power when it comes to buildout contracts.  Competitive intensity (as reflected in bid prices) may be intensive as many firms try to remain afloat following the Great Recession. This may mean that Intertech is working on contracts with low margins. The Stadlens should do an analysis of Intertech’s various ratios to find out where the profitability problem is. This analysis could lead to corrective steps. 2. What can the Stadlens do to manage their company’s cash flow more effectively? (Chapter 13, LO 1) (AACSB: Application of knowledge) Cash management is the process of forecasting, collecting, disbursing, investing, and planning for cash a company needs to operate smoothly. Managing cash flow is an acute problem for a growing business such as Intertech. What is important for Intertech is understanding and managing the cash flow cycle: the time lag between paying suppliers for merchandise or materials and receiving payment from customers. To manage Intertech’s cash more effectively, the Stadlens have to work on both the disbursement part of the cash flow cycle as well as on the collection part. 3. What steps should the Stadlens take to avoid problems with the company’s accounts receivable? How dangerous is this threat? Explain. (Chapter 13, LO 4) (AACSB: Application of knowledge) Along with accounts payable and inventory, accounts receivable is one of the “big three” of cash management. Accounts receivable is the money owed Intertech for work done for its customers. The case indicates that Intertech has more than the normal share of customers who either do not pay their invoices on time or do not pay at all. This could have a devastating effect on Intertech’s cash flow and ability to survive as a going concern. The steps that the Stadlens should take to avoid problems with Intertech’s accounts receivable are:  Establish a credit and collection policy (if they have not done so already)

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    Case Solutions, Page 302  Use techniques (send invoices when job is completed, not a week or so later) to accelerate accounts receivable collection  Offer incentives (e.g., discounts) to incentivize early or on-time payments. 4. What should Art and Ilene Stadlen do to ensure a smooth transition in handing over the Intertech reins to their sons? What tools can they use to transfer ownership? What are the implications for waiting as long as they have to address management succession issues? (Chapter 17, LOs 4 and 5) (AACSB: Application of knowledge) Management succession is the act of passing the torch of leadership in an organization. The Stadlens, Art and Ilene, are now confronting succession as they get set to retire from Intertech. To ensure a smooth succession, they have to have a succession plan that encompasses the following:  Select the successor. The Stadlens have two sons and so this become an important issue.  Create a survival kit for the successor.  Groom the selected successor.  Promote an environment of trust and respect.  Cope with the financial realities of estate and gift taxes. The Stadlens have the following tools to transfer ownership:  Buy-sell agreement  Lifetime giving  Setting up a trust  Estate freeze  Family limited partnership The Stadlens may have waited too long to develop a succession plan. The implications of this may primarily be that they do it in a quick and slip-shod way that may result in the successor not being quite ready to take over. This may adversely affect the well-being of Intertech. Case 6: Bluffton Pharmacy Related Chapters:  Chapter 12: Creating a Successful Financial Plan

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    Case Solutions, Page 303 1. Calculate the twelve ratios for Bluffton Pharmacy for this year. (Chapter 12, LO 3) (AACSB: Application of knowledge) RATIO Liquidity Ratios Current Ratio 3.35 Quick Ratio 1.65 Leverage Ratios Debt Ratio 0.75 Debt-to-Net Worth Ratio 3.00 Times Interest Earned Ratio 2.68 Operating Ratios Average Inventory Turnover Ratio 9.55 Average Collection Period Ratio 21.7 Average Payable Period Ratio 5.6 Net Sales to Total Assets Ratio 4.53 Profitability Ratios Net Profit on Sales Ratio 1.74% Net Profit to Assets Ratio 7.89% Net Profit to Equity Ratio 31.59%

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    Case Solutions, Page 304 2. How do the ratios you calculated for this year compare to those for the pharmacy last year? What factors are most likely to account for those changes? (Chapter 12, LO 3) (AACSB: Application of knowledge) RATIO Bluffton Percent Pharmacy Pharmacy Variation Current Last Industry from Year Year Median* Ind. Median Liquidity Ratios Current Ratio 3.35 3.41 4.71 -28.9% Quick Ratio 1.65 1.72 2.42 -31.8% Leverage Ratios Debt Ratio 0.75 0.64 0.62 20.4% Debt-to-Net Worth Ratio 3.00 2.23 2.71 43.0% Times Interest Earned Ratio 2.68 3.04 3.9 -31.3% Operating Ratios Average Inventory Turnover Ratio 9.55 10.90 11.7 -18.4% Average Collection Period Ratio 21.7 14.0 15.0 days 44.9% Average Payable Period Ratio 5.6 5.0 14.0 days -60.2% Net Sales to Total Assets Ratio 4.53 4.75 4.68 -3.2% Profitability Ratios Net Profit on Sales Ratio 1.74% 1.94% 2.4% -27.4% Net Profit to Assets Ratio 7.89% 9.20% 8.2% -3.8% Net Profit to Equity Ratio 31.59% 29.21% 48.0% -34.2% * From Risk Management Association Annual Statement Studies

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