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Small Business Management, Sixth Canadian Edition Solution Manual

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    S olut i on Manual to accompany Sixth Canadian Edition prepared by Jay Krysler NAIT

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    Table of Contents Part 1: Entrepreneurial Opportunity Chapter 1: Entrepreneurs ........................................................................................................... 1-1 Chapter 2: Start-Up and the Need for Competitive Advantage ................................................. 2-1 Chapter 3: Family Enterprise ..................................................................................................... 3-1 Chapter 4: Franchising and Buyouts.......................................................................................... 4-1 Part 2: Planning and Marketing New Ventures Chapter 5: Developing an Effective Business Plan ................................................................... 5-1 Chapter 6: Small Business Marketing, Product, and Pricing Strategies .................................... 6-1 Chapter 7: Distribution and Promotional Strategies .................................................................. 7-1 Chapter 8 : Global Marketing ..................................................................................................... 8-1 Part 3: Managing New Venture Operations Chapter 9: The New Venture Team, Small Firm Management, and Managing Human Resources ................................................................................... 9-1 Chapter 10: Form of Organization and Legal Issues ................................................................. 10-1 Chapter 11: Selecting a Location and Planning the Facilities ................................................... 11-1 Chapter 12: Operations Management and Control Systems ...................................................... 12-1 Chapter 13: Understanding Financial Statements and Forecasting ........................................... 13-1 Chapter 14: Sources of Financing.............................................................................................. 14-1 Chapter 15: Managing Growing Firms and Exit Strategies....................................................... 15-1 Suggested Case Solutions Text Cases Case 1 Dori’s Diamonds.................................................................................................. C-1 Case 2 Dillon’s Small Batch Distillers ............................................................................ C-2 Case 3 Smitty’s Li’l Haulers ........................................................................................... C-3 Case 4 Two Men and a Truck ® / International, Inc. ........................................................ C-5 Case 5 The Ultimate Garage ........................................................................................... C-6 Case 6 Napier Enterprises ............................................................................................. C-10 Case 7 Rodgers Chevrolet ............................................................................................. C-11 Case 8 iYellow Wine Club ............................................................................................ C-13 Case 9 Noise Solutions Inc. .......................................................................................... C-14 Case 10 CitiStorage ....................................................................................................... C-15 Case 11 Prestige Dance Academy ................................................................................. C-16 Case 12 Numi Tea ......................................................................................................... C-17 Case 13 Ashley Palmer Clothing, Inc............................................................................ C-18 iii

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    Case 14 Moonworks ...................................................................................................... C-21 Case 15 D’Artagnan ...................................................................................................... C-22 Web Cases Case 01 My Own Money ............................................................................................... C-24 Case 02 Biolife LLC...................................................................................................... C-27 Case 04 Cardio-Core Boot Camp .................................................................................. C-29 Case 06 Louis Garneau Group ..................................................................................... C-32 Case 07 HubSpot, Inc. .................................................................................................. C-33 Case 08 Sunny Designs, Inc. ......................................................................................... C-35 Case 09 Jason Fried and Hiring Practices at 37signals ................................................. C-37 Case 10 Hydro-Mobile Inc. .......................................................................................... C-38 Case 12 Strauss Communications ................................................................................. C-39 Case 13 Stegmart ........................................................................................................... C-40 Case 14 Northern Lights Communications ................................................................... C-43 iv

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    Preface to the ’s Manual This ’s Manual is intended to complement Small Business Management: Launching and Growing New Ventures, Sixth Canadian Edition, by Justin G. Longenecker, Leo B. Donlevy, Terri Champion, J. William Petty, Leslie E. Palich, and Frank Hoy. The ’s Manual is part of an extensive teaching package that includes the following resources: • NETA Test Bank: The Test Bank was written by Richard Yip-Chuck of Humber College. It includes over 650 multiple-choice questions written according to NETA guidelines for effective construction and development of higher-order questions. Also included are true/false questions, essay, and short answer questions. Test Bank files are provided in Word format for easy editing and in PDF format for convenient printing whatever your system. • The NETA Test Bank is available in a new, cloud-based platform. Testing Powered by Cognero ® is a secure online testing system that allows you to author, edit, and manage test bank content from any place you have Internet access. No special installations or downloads are needed, and the desktop-inspired interface, with its drop-down menus and familiar, intuitive tools, allows you to create and manage tests with ease. You can create multiple test versions in an instant, and import or export content into other systems. Tests can be delivered from your learning management system, your classroom, or wherever you want. • NETA PowerPoint: Microsoft ® PowerPoint ® lecture slides have been adapted for every chapter. This collection is a basic outline of the chapter and contains key figures, tables, and photographs from the sixth Canadian edition of Small Business Management . NETA principles of clear design and engaging content have been incorporated throughout, making it simple for instructors to customize the deck for their courses. • Image Library: Exhibits and images from the text are provided, allowing instructors to create their own presentations. • LivePlan ® : Students can now learn how to use the award-winning, best-selling professional software LivePlan to create a business plan. This online resource provides all the essentials to create winning business plans, including step-by-step instructions for preparing each section of a plan. Ready-to-customize samples, advice, a detailed marketing analysis with links to demographic and marketing tools, and helpful financial tools make it easy to create a solid plan. Video and written tutorials from Palo Alto Software founder Tim Berry ensure that students fully understand how to maximize LivePlan ’s dynamic tools. v

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    • Video (0-17-659122-2) and Video Guide: A DVD has been prepared to accompany Small Business Management: Launching and Growing New Ventures . Designed to enrich and support chapter concepts, these new and exciting videos from the highly acclaimed CBC television show Dragons’ Den explore many of the issues relevant to small businesses in Canada and bring the real world of entrepreneurship into the classroom to let students learn from the experts. Each of the video segments presents entrepreneurs who pitch their concepts and products to a panel of Canadian businesspeople. The video segments were selected by the authors to challenge the student and to stimulate a lively discussion. And nothing helps students master the lessons of small business and entrepreneurship as much as seeing them put into practice. The videos are also supported by a video guide, which includes a synopsis of each video, teaching notes, and case study questions with solutions. • DayOne: Day One—Prof InClass is a PowerPoint presentation that instructors can customize to orient students to the class and their text at the beginning of the course. This manual was adapted by Jay Krysler of NAIT and contains lecture notes grouped by learning objective. It also contains answers to the “Discussion Questions” and “You Make the Call” situations, and teaching notes for the text and web cases. Student Ancillaries MindTap for Small Business Management is a personalized teaching experience with relevant assignments that guide students to analyze, apply, and elevate thinking, allowing instructors to measure skills and promote better outcomes with ease. A fully online learning solution, MindTap combines all student learning tools—readings, multimedia, activities, and assessments—into a single Learning Path that guides the student through the curriculum. Instructors personalize the experience by customizing the presentation of these learning tools to their students, even seamlessly introducing their own content into the Learning Path. Instructors can access MindTap for Small Business Management through http://www.nelson.com/instructor. vi

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    Chapter 1 Entrepreneurs 1-1 1 Entrepreneurs LECTURE NOTES 1. Discuss the availability of entrepreneurial opportunities. A. Entrepreneurial o pportunities (pp. 4 – 5) • An economically attractive and timely opportunity that creates value • Keys ‒ They must create value for customers. ‒ Opportunities are not equally attractive to or motivating for everyone. ‒ Entrepreneurs must have the interest, resources, and capabilities required to succeed. 2. Explain the nature of entrepreneurship and how it is related to small business. B. Entrepr eneurship and small business (pp. 5 – 6) 1. Who are the entrepreneurs? • People who launch, build, and/or operate a business are entrepreneurs. • Entrepreneur and small business manager are not synonymous: Some entrepreneurial ventures start as small businesses but grow into large businesses: ‒ Clive Beddoe, WestJet ‒ Chip Wilson, Lululemon • All active owner-managers are entrepreneurs. ‒ Entrepreneurs are not only founders of business firms; the term is applied to second- generation operators of family-owned firms and franchises and owner-managers who have bought out the founders of existing firms. • Small business managers receive specified compensation and do not assume ownership risks.

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    Part 1 Entrepreneurial Opportunity 1 - 2 3. Define small business and identify the importance of small business. C. Definition of small business (pp. 6 – 7) 1. What is a small business? • Compared with the biggest firms in the industry, the business is small; in most cases, the number of employees in the business is usually fewer than 100. • The entrepreneur/owner(s) is actively involved in the management of day-today business activities. • Financing of the business is provided by no more than a few individuals. • The business may begin with a single individual, but it has growth potential and may eventually grow to be a mid-sized or even a large company if the owner chooses to pursue growth. 2. Why is small business important? • In 2013, there were 1.08 million small businesses in Canada. – Over 98 percent of small businesses have fewer than 100 employees. – Small businesses with fewer than 100 employees contribute between 25 and 41 percent to Canada’s GDP. – Small businesses employ approximately 7.7 million Canadians or 69.7 percent of the total labour force in the private sector. – Between 2002 and 2012, over 100,000 jobs were created by small businesses, accounting for on average 78 percent of all new jobs created. – Small business is responsible for $87 billion in exports or about 23 percent of Canada’s total exports. 4. Identify rewards and drawbacks of entrepreneurial careers. D. The m otivators of e ntrepreneurship (pp. 7 – 1 0 ) • Point out today’s open door of opportunity: quality and customer service are keys to success. – Review Exhibit 1-2, Rewards of Entrepreneurship, page 10. 1. The reward of independence • Ask students to identify “employment constraints” entrepreneurs can avoid: – Inflexible schedule—no more time clock and 8-to-5 routine – Supervisory evaluation—no subjective performance review – Locked-in strategy—change direction if you have a better idea – Established policies—make your own policies, set vacations, and so on • Ask students to identify “employment constraints” that entrepreneurs cannot avoid: – Customer demands – Government taxes and regulations – Need for long hours, hard work – Employee expectations

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    Chapter 1 Entrepreneurs 1-3 • Key Small Business Statistics ( Entrepreneurial Experience s , p. 8) – Discuss why the number of establishments per 1000 population is so much higher in Saskatchewan (91.4) and Alberta (92) than in Quebec (60.3). 2. The reward of profit • Profit is a strong motivator, but it’s a mistake to assume that it is the only motivator. 3. The reward of personal satisfaction • Ask students for examples of the personal rewards of the entrepreneurial lifestyle based on their observations of the lifestyles of their parents or others . • Pride of ownership, self-esteem, and a sense of achievement • Chance to help the community in some way E. The drawbacks of entrepreneurship (pp. 10–13) • Hard work, long hours, emotional energy, personal stress • Risk of failure • What might accentuate drawbacks (e.g., lack of experience or resources)? • What types of ventures would present the greatest challenges (e.g., new ventures or innovative projects)? • The Lure of Small Business Ownership (Entrepreneurial Experiences, p. 11) Reasons for becoming small business owners, in order of importance: – I wanted to be my own boss. – I saw that it fit well with my lifestyle. – I wanted to make better use of my skills/knowledge. – I saw it as a path to financial freedom. – I had a great idea. – I could not find suitable job opportunities at the time. – I was committed to the family business. 1. Causes of business failure • Start-ups and early-stage failure are attributable to a lack of managerial and financial abilities. • Older firms fail to adapt to a competitive environment. • Failure rates vary by industry. • A broad-based study found the following causes: – 32% inadequate research and development – 23% lacked competitive advantage – 14% uncontrolled costs – 13% poorly developed marketing strategies – 10% poor market timing – 8% succumbed to competitor activities • Challenges and Rewards (Entrepreneurial Experiences, p. 12)

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    Part 1 Entrepreneurial Opportunity 1 - 4 5. Describe the various types of entrepreneurs and entrepreneurial ventures. F. The many varieties of entrepreneurship (pp. 1 3 – 1 6 ) 1. Founder entrepreneurs versus other business owners and franchisees • Founders (or nascent entrepreneurs) – “Pure entrepreneurs” – An entrepreneur who brings a new firm into existence – Typically the biggest risk takers, the most creative • Other business owners – “Second-stage” entrepreneurs – Innovative, typically preside over ongoing, successful businesses • Franchisees – Restricted in freedom but have invested money and time – Power limited by the contractual relationship with a franchising organization 2 . High - potential ventures versus attractive small firms and microbusiness es • High-potential ventures (gazelles) – A small firm that has great prospects for growth – Example: What is the next Facebook? • Attractive small firms – A small firm that provides substantial profits to its owner – A reasonable goal for most students • Microbusinesses – They provide minimal profits to owners. – They have a subset known as lifestyle businesses, which permit the owner to follow a desired pattern of living. – Mompreneur has become a major trend in lifestyle business in Canada. 3. Artisan versus opportunistic entrepreneurs • Entrepreneurs display differences in degrees of professionalism and in management styles. • Two basic patterns are artisan and opportunistic. • The artisan entrepreneur is a person with primarily technical skills and little business knowledge who starts a business. • The opportunistic entrepreneur is a person with both sophisticated managerial skills and technical knowledge who starts a business. • Ask students to discuss the differences between artisan and opportunistic entrepreneurs. 4. Entrepreneurial teams • Two or more people who work together as entrepreneurs • The value of combining resources • The danger of possible conflict 5. Four routes to entrepreneurship • Starting a new business • Entering a family business • Opening a franchised business • Buying an existing business • Ask students which path they would be most likely to follow. Why? • Summarize overall patterns for the class.

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    Chapter 1 Entrepreneurs 1-5 6. Discuss the changing face of entrepreneurship in Canada. G. The changing face of entrepreneurship (pp. 1 6‒19 ) 1. Younger and older entrepreneurs • Refer to Entrepreneurial Experiences (p. 17) for insight into the youth trend in entrepreneurship. – There is no specific age that is best to start a business. Opportunities exist for both younger and older entrepreneurs. 2. The corporate refugee • Other types of refugees: Put list on board and have students try to give an example of each: – Foreign refugee – Parental refugee – Feminist refugee – Housewife refugee – Society refugee – Educational refugee 3. The social entrepreneur • Refer to “Entrepreneurial Experiences,” Free The Children (p. 19). 4. The serial entrepreneur • Refer to “Entrepreneurial Experiences,” Profile of a Serial Entrepreneur (p. 20). • Give or solicit examples of serial entrepreneurs. 7. Describe some characteristics of successful entrepreneurs. H. Characteristics of successful entrepreneurs ( p p. 19 – 21) • Entrepreneurs do not give up easily. • They are typically confident of their ability to meet the challenges confronting them: – Known as internal locus of control—a feeling that success depends on one’s own efforts – Contrast: an external locus of control reflects an attitude of dependence on luck or fate for success • Select a specific entrepreneur, preferably a local one, and identify that person’s apparent entrepreneurial characteristics. Focus on the characteristics listed below: • Commitment and determination – Tenacious, decisive, and persistent in problem solving • Leadership – Self-starters and team builders who focus on honesty in their business relationships • Opportunity obsession – Aware of market and customer needs • Tolerance of risk, ambiguity, and uncertainty – Risk takers, risk minimizers, and uncertainty tolerators • Creativity, self-reliance, and adaptability – Open-minded, flexible, uncomfortable with the status quo, and quick learners • Motivation to excel – Goal oriented and aware of their weaknesses and strengths

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    Part 1 Entrepreneurial Opportunity 1 - 6 ANSWERS TO END-OF-CHAPTER DISCUSSION QUESTIONS 1. Why has there been an increased interest in small business and entrepreneurship? (p. 4) Over the past decade, the number of self-employed in Canada has grown by 17 percent. Furthermore, 11.2 percent of Canadians intend to start a business at some point in time. Three incentives can be distinguished: independence, profit, and personal fulfillment. 2. What is meant by the term entrepreneur ? (pp. 5–6) Entrepreneur is a French term that dates back to the early eighteenth century. It refers to an individual who founds or starts a business firm. (The term also includes partnerships and entrepreneurial teams.) In this book, we extend the definition to include owner-managers who operate firms started by others. The characteristics of risk taking and innovation are associated with the image of the entrepreneur. Definition : a person who launches, builds, and/or operates a business 3. Do you believe that all small business owners are entrepreneurs? (pp. 4–9) Answers will vary. When using a definition of entrepreneur that includes owner-managers, one can argue that small business owners are entrepreneurs; however, if one places emphasis on the risk- taking aspects of an entrepreneur, it might be argued that small business owners, once established with a survival goal, may limit their risk taking and reduce the number of entrepreneurial activities. 4. Discuss the importance of small business to the Canadian economy. (pp. 6–7) Canadian small businesses are very important to the economy. As Exhibit 1-1 on page 9 shows, over a 10-year period, over 77 percent of all private sector jobs were created by small business. Small businesses also drive innovation and are key factors of economic vitality. 5. Consider an entrepreneur you know personally. What was the most significant reason for his or her deciding to follow an independent business career? (pp. 7–12) Answers will vary. Some students should know some entrepreneurs—parents, friends, or employers—quite well. The instructor might ask students first to explain the basis of their relationship with the entrepreneur and then to discuss their perceptions of that person’s motivations. 6. What is the difference between an artisan entrepreneur and an opportunistic entrepreneur? (p. 15) An artisan entrepreneur is a person with technical job experience (e.g., a painter becomes a painting contractor) who lacks general abilities in business management. An opportunistic entrepreneur has a more general education than the artisan entrepreneur and thinks in broader terms of strategy and financial planning. 7. What would be your primary motivator for starting a venture? (p. 11) Discuss the results of the CFIB survey. Compare students’ answers with the survey results. COMMENTS ON CHAPTER “YOU MAKE THE CALL” SITUATIONS Situation 1 1. Should this venture be regarded as entrepreneurial? Is the owner a true entrepreneur? Whether this is entrepreneurial depends on the definition used. Whether the owner is a founder is the key issue in some definitions of a “true” entrepreneur. In this text, we use a

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    Chapter 1 Entrepreneurs 1-7 looser definition of entrepreneur, which includes this owner-manager regardless of whether he founded the business. The venture is apparently not the high-growth, high-potential type. It may well be what we have called an “attractive small company.” 2. Do you agree with the philosophy expressed here? Is the owner really doing what is best for his family? This question calls for opinions and permits some discussion of the conflicting values and rewards in business. Some may feel that the owner is insufficiently motivated to grow and even to serve his own family properly in that way. Others will see the family values and careful growth as appropriate. The question permits the instructor to discern the general orientation of students in a class. How many, after discussion, will give a vote of commendation to this owner? You might ask students to guess the owner’s age. 3. What kinds of problems is this owner trying to avoid? The owner is apparently avoiding or reducing problems related to inadequate customer service and product/service quality—areas of difficulty in a rapidly growing business. Also, the personnel and management functions (e.g., delegating, finding qualified key people) are simplified by slow growth. Slow growth may either postpone a transition to professional management or permit a more orderly transition to it. Situation 2 1. What type of venture could this potentially be? This would be an entrepreneurial venture with high potential (gazelle) (p. 14). 2. What type of entrepreneur would she be? Maria would be a young artisan entrepreneur (p. 15) and the founder (p. 13). 3. What are the benefits that Maria would anticipate by owning her own firm? What are the risks? Maria, as the inventor and owner-manager, could find rewards of profit, independence, personal satisfaction, and personal fulfillment as she sees her idea grow into a successful product. The risks could possibly be personal stress as the idea develops and moves into commercialization, hard work and long hours, and the danger of financial failure. Situation 3 1. Is work–life balance for everyone? No, it is not. Work–life balance is an individual preference and a value. People are spurred into action by what motivates them. Whatever that driving force is will chart the course for how they balance their passion (work, exercise, education) with their other life obligations. 2. Is work–life balance simply a preference, or is it a necessity when growing a business? Work–life balance needs to be considered as part of one’s personal goals at the beginning of the business. Many businesses may require greater care and nurturing to grow successful. The value given by the entrepreneur of work–life balance can have an impact on personal relationships of the entrepreneur as well as the growth of the business. Balance is always the best course of action.

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    Part 1 Entrepreneurial Opportunity 1 - 8 3. As an entrepreneur, would there be areas in your life that you would place at a higher priority than growing a business? Explain. Answers will vary as this is based on individual preferences. CLASS ACTIVITIES Paint the Profile As individuals (or teams), paint (describe) the profile of the entrepreneur who is starting up one of the following businesses: • flower shop • pet grooming • handyman service • chocolate-making retail store • comic book store • coffee shop • dry cleaning business The picture should be realistic and include the entrepreneur’s • name • age • sex • experience • family status • personality traits • net worth/financial resources Compare the results. Discuss each business, focusing on an area with wide variations and close similarities and suggesting reasons for these. Why Is Small Business Important? Break the class into groups of four to six. Have each group brainstorm and then present evidence from your local community, their personal lives, and popular culture that small business is important in Canada. This has traditionally been surprisingly difficult for students. Evidence examples include the following: • magazines ( Profit ) • Dragons’ Den television show (CBC) • small business centres • grants from government • this course/textbook • community sponsorships (sports teams/events) Scavenger Hunt One way to keep data fresh is to have student go on a data scavenger hunt. Students or student teams would set out to find the latest small business data. Included in the data to hunt would be job creation data or small business creation. Sources such Statistics Canada and Industry Canada can be included.

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    Chapter 2 Start-Up and the Need for Competitive Advantage 2-1 2 Start-Up and the Need for Competitive Advantage LECTURE NOTES 1. Distinguish among the different types and sources of start-up ideas. A. The start-up: creating a new business (p. 28) • Discuss the typical reasons for developing a start-up rather than pursuing the other alternatives: – Invention or development of a new product or service; major revision of an existing product or service – An existing advantage to exploit in the areas of location, employees, equipment, products and services, suppliers, and so on – Avoidance of undesirable precedents and commitments—that is, taking advantage of opportunities arising from the inadequacy of competitors B. Finding start-up ideas (pp. 30–32) 1. Kinds of start-up ideas • Discuss the three basic types of ideas that shed light on the entrepreneur’s search for a start- up opportunity . – New market ideas: providing customers with a product or service that is not in their market but already exists somewhere else – New technology ideas: using a technically new process that provides the basis for new product or service ideas – New benefit ideas: performing an old function for customers but in a new and improved way 2. Sources of start-up ideas • Discuss the circumstances that tend to spawn the kinds of ideas listed above. In other words, where do these ideas come from? – The origin of new product ideas was examined in a study by the National Federation of Independent Business Foundation. Prior job experience accounted for the largest percentage of ideas (45 percent). – Even though a new idea can come from virtually anywhere, the text has identified four categories:  Personal experience. Recall the text example of RiNGLEY or any personal experience that you may have (consulting, business ideas you would start if you had more time, etc.).  Hobbies. Use the story of Ted Catherwood, who used his hobby of motorcycling to form a business. Ask students if they have ever come up with an idea for a new product or service while pursuing their own hobbies.  Accidental discovery or serendipity. This is the phenomenon of making desirable discoveries by accident (e.g., Matthew Basan from the text).  Other idea leads. Discuss the two general avenues of deliberate search: (1) a survey of personal needs and (2) a survey of needs in the marketplace. Elaborate on the top

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    2-2 Part 1 Entrepreneurial Opportunity 10 sectors as covered in Profit magazine or Canadian Business or use the Hootsuite example from Chapter 1. 2. Describe external and internal analyses that can be used to identify and assess new venture opportunities and describe the factors that contribute to competitive advantage. C. Using internal and external analysis to identify and assess new business ideas (pp. 32–37) 1. Outside-in analysis • The general environment. Refer to Exhibit 2-3, Trends in the General Environment (p. 33). • The industry environment. Emphasize the five factors identified by Michael Porter as determining the nature and degree of competition in an industry: – Bargaining power of buyers – Threat of substitutes – Bargaining power of suppliers – Rivalry among existing competitors – Threat of new competitors 2. Inside-out analysis • Building on internal resources and capabilities • Core competencies and competitive advantage 3. Factors contributing to competitive advantage • Ask students to identify a small firm that has a competitive advantage . • Discuss how business strategy can identify a competitive advantage and provide direction for a small firm. • Price/value • Unique service features • Notable product attributes • Customer service • Accessibility • Discuss strategy and strategic decisions. Ensure that students have a good grasp of business level versus functional level strategies. 4. Integrating internal and external analyses. Refer to Exhibit 2-4, Examples of SWOT Factors (p. 37) 3. Identify and compare strategy options for building and sustaining competitive advantage. D . Selecting strategies to gain competitive advantage (pp. 37 – 40 ) 1. Cost-advantage strategy (e.g., Tangerine) 2. Differentiation-based strategy (e.g., Canada Goose) • Discuss use of the Internet to create a competitive advantage .

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