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

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Essentials ofEntrepreneurshipand Small BusinessManagementNinth EditionNorman M. ScarboroughJeffrey R. CornwallResource Manual forEssentials of Entrepreneurshipand Small Business ManagementRam Subramanian

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Page 291CASE AND CHAPTER MATRIXCase#CompanyNameRelated TopicsChapterReference1United ApparelLiquidatorsIndustry: ApparelBusiness ModelBootstrap Marketing and Social MediaLocation & Layout59142Bark & Co.Industry: Pet ProductsCreativity & InnovationBusiness PlanSources of Funds135153Cousins MaineLobsterIndustry: FoodFranchisingGlobal Business8154ThinkImpactIndustry: PhilanthropyEthics & Social ResponsibilityStrategic PlanningForms of Business OwnershipSources of Funds256155IntertechConstructionCorporationIndustry: E-Commerce and Retail YarnFinancial PlanCash ManagementVenture Team1213176BlufftonPharmacy–Part 1Industry: RetailFinancial Analysis127BlufftonPharmacy–Part 2Industry: RetailManaging Cash Flow138GitmanBrothersIndustry: ApparelMarketing PlanE-Commerce910

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Page 2929SeabreezePropertyServicesIndustry: LawncareBuying an Existing BusinessSources of Funding71510The NewarkNut CompanyIndustry: RetailStrategic PlanningMarketing PlanE-CommerceNew Venture Team591017

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Case Solutions, Page 293CASE SOLUTIONSCase 1: United Apparel Liquidatorshttps://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 & Layout1.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 ApparelLiquidators, theirs is a business where low costs matter. They are in the business of selling luxuryapparel at bargain prices. This means that their locations must help them maintain a low-coststructure.The location decision follows the sequence: choosing the region, the state, the city, and the specificsite. Their base is Mississippi. That’s where their first store is located (in Hattiesburg). Their otherlocations fit the general profile of a comparatively low cost small Southern town. They shouldfollow 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 thecommunity, 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 ofbusiness that the Cohens run.2.Which of the three basic business strategies is U.A.L. using? Explain. How well arethe Cohens executing their strategy? (Chapter 5, LO 7) (AACSB: Application ofknowledge)Strategy is a road map of the actions an entrepreneur draws up to fulfill 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 intime, it is following a focus strategy. However, in its selected market, UAL is pursuing a costleadership strategy, albeit by selling luxury goods. For example, the case indicates that UALsells at $224 a pair of Manolo Blahnik leopard-print heels that originally sells for a $1,000.

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Case Solutions, Page 294A cost leadership strategy (within a focused geographical market) requires having a low-costoperation that enables the firm to sell at low prices. Here, there is evidence that the Cohens areexecuting their strategy well. The following are key points:Locating their stores in small southern cities such as Hattiesburg, Mississippi, andMetairie, Louisiana. The argument here is that the rental and other operating costs willbe 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, theirstores resembled Goodwill stores than the luxurious stores in the big cities that originallysold their merchandise.” One of their stores is in a strip mall in a building formerly usedby a car dealership.3.Develop an outline of a marketing strategy for U.A.L. How should the companypromote 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 marketingstrategies that small firms can employ and this is a good project for such strategies. Studentsshould 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. Then they shouldrefer to Table 9.2, Bootstrap Marketing Tactics (page 348) to choose the most effective initiativesfor implementing UAL’s marketing plan.4.How should U.A.L. incorporate social media into its marketing strategy? Whichsocial media tools should the Cohens use? What steps should they take to build a socialmedia following? (Chapter 9, LO 4) (AACSB: Application of knowledge)The social media strategy that UAL should use would depend upon their marketing plan that wasthe subject of Question 3 above. It makes sense to have student teams address this also whenthey are developing a guerilla marketing plan for UAL. Social media has significant potential asa marketing tool and typically fits very well with a bootstrap marketing plan, particularly interms 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 issueslisted above: how shouldthe Cohens incorporate social media, which specific tools they should use, and how should theydevelop a social media following.

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Case Solutions, Page 295Case 2: Bark &Co.bark.coRelated 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 Debt1.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, itmakes revenues and cash flows predictable. This means the company can manage its cashbudget with actual data. The model has advantages from the customer’s perspective too. Itlowers the one-time price that the customer would pay for the product and so it removes much ofthe “sticker shock” associated with purchases.2.Notice that several of Bark & Co.’s idea for new businesses have failed. Is thisunusual? Why is it important for businesses to continue to innovate, even when theirfounders 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 constantlyidentifying opportunities to exploit and profit from. In the case of Bark & Co., the founders have tocontinue to innovate even in the face of failure for a number of reasons. Key among them iscompetition. As the case indicates, they have competitors such as PetGiftBox and PawPack. Thismeans that to hold on to their competitive advantage via a differentiation strategy, they have toconstantly innovate. The second is the pressure to hit the revenue goals as mandated by theventure capital firms. For Bark & Co. to go from $100 million to $500 million in revenues, theBarkBox line alone wouldn’t do it. They have to launch new products and this comes viainnovation. 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 thisis all what the company can afford. The key for the founders is to create a climate of creativity andlead by example.3.Explain the advantages and disadvantages of using venture capital to finance acompany’s growth.(Chapter 14, LO 2) (AACSB: Application of knowledge)

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Case Solutions, Page 296Venture capital companies are private, for-profit organizations that assemble pools of capital anduse them to purchase equity positions in young businesses they believe have high-growth andhigh-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 aretypically interested inequity ownership rather than debt, which would call for interest and loanrepayments. This means the start-up doesn’t have to worry about interest and loan repaymentthat would adversely affect its cash flow. The second advantage is that such firms look at earlystage investment and so a start-up can seek such funding early in its life. Venture capitalists alsoprovide advice and mentoring which help the founders of the start-up. The principaldisadvantage 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 difficultfor many firms.4.Because of the risks associated with their investments, venture capital firms, whichbecome part owners of the companies in which they invest, demand big returns withinrelatively short time frames. What impact do these expectations have on business founderssuch as Meeker, Werdelin, and Strife? Do investors’ expectations affect entrepreneurs’decisions about their businesses? Explain. (Chapter 14, LO 2) (AACSB: Application ofknowledge)Venture capital firms expect returns of 300-500 percent (i.e., 3 to 5 times what they haveinvested) within a 5-7-year period. This has a tremendous impact on how a business is run. AsMeeker, Werdelin, and Strife point out, Bark & Co. has to get to sales of around $500 millionwithin the next 3-4 years; this from a current base of around $100 million in revenues. It tookBark & 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 todevelop additional lines of business. The challenge is that they have to do this in a highlycompetitive environment.5.What strategies should Meeker, Werdelin, and Strife use to continue theircompany’s impressive growth rate? Are there other related businesses that they shouldenter? 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 avariety 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 297Case 3: Cousins Maine Lobsterhttps://www.cousinsmainelobster.com/Related Chapters:Chapter 8: Franchising and the EntrepreneurChapter 16: Global Aspects of Entrepreneurship1.Suppose that your best friend is considering purchasing a franchise such as CousinsMaine Lobster. What advice would you give him or her about the right way to go aboutpurchasing a franchise? (Chapter 8, LO 4) (AACSB: Reflective thinking)The friend should be advised to follow certain steps before deciding on purchasing a franchisesuch 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 familycommitments, and other characteristics.Research the market. Before deciding on a franchise, the friend should research themarket in which he/she plans to open the franchise. Key areas include the macro andthe competitive environments in the area.Consider the franchise options. Before selecting the particular franchisor, the friendshould consider the franchising options available. Instead of settling on the firstavailable franchise, one should consider all the options.Obtain a copy of the Franchisor’s Franchise Disclosure Document. The FDD is animportant tool in one’s search for the right franchise.Talk to existing franchisees. While the FDD is an important document, it should besupplemented by visits to franchise owners to get an understanding of theirexperiences.Ask the franchisor relevant questions. Reading the FDD and talking to franchiseesshould lead to the friend asking the franchisor questions about the franchiserelationship. 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? Whatdisadvantages do they encounter?(Chapter 8, LO 2A and 2B) (AACSB: Reflectivethinking)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 successHowever, 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 freedom3.What is the Franchise Disclosure Document? How can it help prospectivefranchisees evaluate the various franchise operations in which they are consideringinvesting? (Chapter 8, LO 3) (AACSB: Reflective thinking)The Franchise Disclosure Document (FDD) is a document that every franchisor is required bylaw to give prospective franchisees before any offer or sale of a franchise. It outlines 23important pieces of information about the franchisor and the franchise.The FDD helps prospective franchisees because since it is a disclosure document, all the relevantfacts about the franchise can be obtained prior to making a decision. For example, it hasinformation about the initial and ongoing franchise fees as well as the investment required toopen a franchise.

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Case Solutions, Page 2994.Cousins Maine Lobster wants to expand its franchise internationally. How popularis franchising as an “export” to other nations? What steps should Tselikis and Lomac taketo cultivate a successful international franchise operation? (Chapter 8, LO 5 and Chapter16, LO 1) (AACSB: Application of knowledge)One of the major trends in franchising is the internationalization of American franchisingsystems. Franchising American businesses like Cousins Maine Lobster has become a majorexport industry as evidenced by the increasing number of international franchisees of companiessuch as McDonald’s, KFC, Pizza Hut, Taco Bell, and Subway.Tselikis and Lomac should be careful in attempting to create an international franchise operationfor 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 foreignmarkets.Case 4: ThinkImpacthttp://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 Debt1.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’sorganizational structure: remain a nonprofit organization, shut down the nonprofit organizationand start a for-profit company, or develop a hybrid model. As students examine these threeoptions, they have to keep in mind that Saul Garlick is a social entrepreneur, in that he findsresources to tackle challenging problems confronting, in this case, South Africa’s povertystricken 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 spendmuch 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 300because it takes care of the fund raising part via the for-profit business and yet the nonprofit partallows Garlick to focus on the organization’s mission.2.If Garlick chooses to create a for-profit entity, either to replace the currentnonprofit organization or as a subsidiary, what potential sources of funding might he beable 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 entirelyvia equity or as a combination of equity and debt. Given that ThinkImpact has a track record, itmay not be considered purely as a start-up, although being an nonprofit organization for severalyears may not logically transfer to the for-profit world. Garlick should look at the followingsources of equity funding:Personal savingsFriends and family members. There are indications that friends and family members maybe willing to invest in ThinkImpact if they can get financial returns.Crowd funding. Given ThinkImpact’s social mission, crowd funding may be anattractive option.Venture capitalists. There are venture capital firms that specialize in funding socialventures.Debt funding may be a more difficult option for Garlick at the start as, for example, commercialbanks may be unwilling to lend to such an organization. This may be something that Garlicklooks into at a later stage.3.What steps should Garlick take before approaching some of the potential sources offunding 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 writtensummary of an entrepreneur’s proposed business venture, its operational and financial details, itsmarketing opportunities and strategy, and its manager’s skills and abilities. In the case of Garlickand ThinkImpact, the purpose of writing a business plan is to attract investors. His business planshould prove to investors that ThinkImpact will produce an attractive rate of return. A well-writtenbusiness plan will help Garlick convince investors both of ThinkImpact’s social mission as well asits 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 Generation1.Identify possible causes that could explain Intertech’s declining profitability. Whatsteps can the Stadlens take to reverse this alarming trend? (Chapter 12, LO 3)The case indicates that Intertech Construction Corporation’s profitability has declined followingthe Great Recession. While we don’t know the full story behind this, possible reasons could bethe following:The sales rebound after the Great Recession may not be adequate enough to cover theincreased 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 revenueswise) customers who may have tremendous bargaining power when it comes tobuildout contracts.Competitive intensity (as reflected in bid prices) may be intensive as many firms tryto remain afloat following the Great Recession. This may mean that Intertech isworking on contracts with low margins.The Stadlens should do an analysis of Intertech’s various ratios to find out where the profitabilityproblem 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 planningfor cash a company needs to operate smoothly. Managing cash flow is an acute problem for agrowing business such as Intertech. What is important for Intertech is understanding andmanaging the cash flow cycle: the time lag between paying suppliers for merchandise ormaterials 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 thecollection part.3.What steps should theStadlens take to avoid problems with the company’s accountsreceivable? 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 cashmanagement. 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 notpay their invoices on time or do not pay at all. This could have a devastating effect onIntertech’s cash flow and ability to survive as a going concern.The steps that the Stadlens should take toavoid problems with Intertech’s accounts receivableare: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) toaccelerate 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 overthe Intertech reins to their sons? What tools can they use to transfer ownership? What arethe 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. TheStadlens, Art and Ilene, are now confronting succession as they get set to retire from Intertech. Toensure 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 importantissue.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 partnershipThe Stadlens may have waited too long to develop a succession plan. The implications of this mayprimarily be that they do it in a quick and slip-shod way that may result in the successor not beingquite ready to take over. This may adversely affect the well-being of Intertech.Case 6: Bluffton PharmacyRelated Chapters:Chapter 12: Creating a Successful Financial Plan

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Case Solutions, Page 3031.Calculate the twelve ratios for Bluffton Pharmacy for this year. (Chapter 12, LO 3)(AACSB: Application of knowledge)RATIOLiquidity RatiosCurrent Ratio3.35Quick Ratio1.65Leverage RatiosDebt Ratio0.75Debt-to-Net Worth Ratio3.00Times Interest Earned Ratio2.68Operating RatiosAverage Inventory Turnover Ratio9.55Average Collection Period Ratio21.7Average Payable Period Ratio5.6Net Sales to Total Assets Ratio4.53Profitability RatiosNet Profit on Sales Ratio1.74%Net Profit to Assets Ratio7.89%Net Profit to Equity Ratio31.59%

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Case Solutions, Page 3042. How do the ratios you calculated for this year compare to those for the pharmacy lastyear? What factors are most likely to account for those changes? (Chapter 12, LO 3)(AACSB: Application of knowledge)RATIOBlufftonPercentPharmacyPharmacyVariationCurrentLastIndustryfromYearYearMedian*Ind.MedianLiquidity RatiosCurrent Ratio3.353.414.71-28.9%Quick Ratio1.651.722.42-31.8%Leverage RatiosDebt Ratio0.750.640.6220.4%Debt-to-Net Worth Ratio3.002.232.7143.0%Times Interest Earned Ratio2.683.043.9-31.3%Operating RatiosAverage Inventory Turnover Ratio9.5510.9011.7-18.4%Average Collection Period Ratio21.714.015.0 days44.9%Average Payable Period Ratio5.65.014.0 days-60.2%Net Sales to Total Assets Ratio4.534.754.68-3.2%Profitability RatiosNet Profit on Sales Ratio1.74%1.94%2.4%-27.4%Net Profit to Assets Ratio7.89%9.20%8.2%-3.8%Net Profit to Equity Ratio31.59%29.21%48.0%-34.2%*From Risk Management Association Annual Statement Studies

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