BUS 635 Study Guide
What is sustained growth? Why is it important?
growth in both revenues and profits over a sustained period of time • continuous growth was essential for the company to remain competitive • It is an important part of their ability to remain successful in the long run
What is a trademark? Give an example of one.
helps to identify the source of products or services and to distinguish those products or services from others • trademarks provide consumers with useful information • renewable every 10 years, as long as the mark remains in use Examples: *service mark* similar to trademarks; are used to identify the services or intangible activities of a business, rather than a business's physical products (Ex: Amazon.com or if every retail store used the name Macy's, it would be very confusing) Why it's important? • Business value this to build brand awareness, create customer loyalty, protect them from new businesses emerging in the market, protecting them from reselling fraud
What are three benefits of planning for growth?
(1) *Economies of scale* are generated when increasing production lowers the average cost of each unit produced (2) *Market Leadership* occurs when a firm holds the number one or the number two position in an industry or niche market in terms of sales volume (3) *Attract and retained talented employees*, in other words, it is natural for talented employee to want to work for a firm that can offer opportunities for promotion, higher salaries, and increased levels of responsibility
What are the two types of partnerships? Discuss the major differences between the two.
(1) *General Partnership* a form of business organization where two or more people pool their skills, abilities, and resources to run a business (all partners share in the profits, managerial responsibilities, and liability for debt equally) • *partnership agreement* details the responsibilities and the ownership shares of the partners involved with an organization • Advantage over sole proprietorship is that the business isn't dependent on a single person for its survival and success • Disadvantage is that all partners are liable for all the partnership's debts and obligations in other words joint liability (if one partner is negligent, all partners may be liable for damages) (2) *Limited Partnership* is a modified form of a general partnership • Major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners • *limited partnership agreement* sets forth the rights and duties of the general + limited partners, along with the details of how the partnership will be managed and eventually dissolved • general partners are liable for the debts and obligations of the partnership and also oversees/runs the business • limited partners are liable only up to the amount of their investment and do not partake in managing the business
What are the four main financial objectives of a firm? Discuss why each is important.
(1) *Profitability* is the ability to earn a profit • a firm must become profitable to remain viable and provide a return for its owners (2) *Liquidity* is a company's ability to meet its short-term financial obligations • *accounts receivable* • *inventory* • even if firm is profitable, it is often a challenge to keep enough money in the bank to meet obligations in a timely manner • if firm keeps A/R and inventory too high, it may not be able to sufficient cash on hand to meet its short-term obligations. (3) *Efficiency* is how productively a firm utilizes its assets relative to its revenue and its profits (4) *Stability* is the strength and vigor of the firm's overall financial posture • firm must keep its debt in check • if a firm continues to borrow from its lenders and its *debt-to-equity ratio* gets to high, it may have trouble meeting its obligations and securing the level of financing needed to fuel its growth
During early life, what are 3 reasons that most entrepreneurial ventures need to raise money? Elaborate on each.
(1) Cash Flow Challenges • inventory, equipment, employees payed and trained, and advertising must be paid for before cash is generated from sales • lag between spending to generate revenue and earning income from operation = cash flow problems • burn rate (2) Capital Investments • cost of real estate, building facilities, and purchasing equipment typically exceeds a firm's ability to provide funds for these needs on its own --> tends to be difficult for founders to fund on their own (3) Lengthy Product Development Cycles • some products are under development for years before they generate earnings • up-front costs exceed firm's ability to fund on their own • substantial up-front investment before anticipated payoff • electronic game (1 1/2 to 2 years)
List and briefly discuss the 3 actions founders can take to establish a strong ethical culture in their entrepreneurial venture?
(1) Lead by Example *entrepreneurs, managers, and supervisors* • Communicate ethics as a priority • Set a good example of ethical conduct • Keep commitments • Provide info about what is going on • Support the following organizational standards *employees* • consider ethics in making decisions • talk about ethics in the work (they) do • set a good example of ethical conduct (2) Establish a Code of Conduct *code of conduct* is a formal statement of an organization's values on certain ethical and social issues • provides specific guidance to entrepreneurs, managers, and employees regarding expectations of them in terms of ethical behavior (3) Implement an Ethics Training Program • *Ethics training programs* teach business ethics to help employees deal with ethical dilemmas and improve their overall ethical conduct • An *ethical dilemma* is a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical • ethical cultures are built through both strong and ethical leadership • building an ethical culture motivates employees to behave ethically and responsibly
What are two potential downsides to firm growth?
(1) Long hours and time away from family • Fast growth normally implies a quick pace of activity, a rapidly rising overhead, and a total commitment in terms of time and attention on the part of the business owners (2) Capital Constraints • Capital constraints are an ever-present problem for growing firms (3) Cash Flow Management • A firm requires an increasing amount of cash as it grows (4) Quality Control
Name three public relations techniques and provide an example for each
(1) Press release: An announcement made by a firm that is circulated to the press. Start-ups typically circulate a press release when something positive happens, such as the launch of a new product or the hiring of a new executive. (2) Traditional media coverage: Any coverage in print or broadcast media. In most cases, start-ups try to cultivate media coverage, as long as it is positive. (3) Social media coverage: Start-ups use social media (Facebook, Twitter, Instagram) as a way of communicating and building rapport with customers, and also covet positive mentions in the social media efforts of others. For example, a positive mention by someone who posts on Twitter and has a large number of followers can positively impact a start-up.
What are three issues United States citizens should consider before buying a franchise in a foreign country?
(1) consider the value of the franchisor's name in the foreign country (2) work with a knowledgeable lawyer (3) determine whether the product or service is salable in a foreign country
What are three potential pitfalls when starting a firm as a team rather than as a sole entrepreneur?
(1) team members *may not get along*. This is the reason investors favor teams consisting of people who have worked together before. It is simply more likely that people who have gotten along with one another in the past will continue to get along in the future. (2) if two or more people start a firm as "equals," *conflicts can arise* when the firm needs to establish a formal structure and designate one person as the chief executive officer (CEO). If the firm has investors, the investors will usually weigh in on who should be appointed CEO. In these instances, it is easy for the founder that wasn't chosen as the CEO to feel slighted. This problem is exacerbated if multiple founders are involved and they all stay with the firm. At some point, a hierarchy will have to be developed, and the founders will have to decide who reports to whom. Some of these problems can be avoided by developing a formal organizational chart from the beginning, which spells out the roles of each founder. (3) if the founders of a firm have *similar areas of expertise*, they may duplicate rather than complement one another
Compare and contrast debt financing versus equity financing.
*Debt Financing* is getting a loan • repaid in interest to bank • bankers are interested in minimizing risk, properly collateralizing loans, and repayment • ideal candidate consists of strong C/F, low leverage, audited financial statements, good management, and healthy B/S • Commercial Banks (banks are risk averse, interest in strong cash flow, low leverage, audited financials, good management, and healthy B/S) • SBA Guaranteed Loans (loans are for small businesses that are not able to obtain credit, almost all small business are eligible to apply) *Equity Financing* means exchanging partial ownership of a firm, usually in the form of stock, in return for funding • not a loan, instead equity investors become partial owners of the firm • dividend payments • liquidity event • VC (fund very few entrepreneurial firms, looking for "home runs", invest later in the life of a company, invest in stages, due diligence process) • Business Angels (invest their personal capital directly in start-ups, willing to invest in small investments, difficult to find, invest early in startup lifecycle) • IPOs (doesn't go public until the firm is viable and has bright future)
What is franchising and what are the two types?
*Franchising* is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchisees) in exchange for an initial franchise fee and an ongoing royalty. (1) *product and trademark franchise* is an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name (2) in *business format franchise*, the the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance
What is an LLC? Discuss how it differs from the other forms of business ownership.
*Limited Liability Company* is a form of business organization that is rapidly gaining popularity in the U.S. • defined as a business structure that protects its owners from personal responsibility for its debts or liabilities • combines the limited liability advantage of the corporation with the tax advantages of a partnership • LLC does not pay taxes • profits and losses are passed through to the tax returns of the owners • main advantage is that all partners enjoy limited liability • private business • shareholders = "members" • owning stock = "interest" • Unlimited liability and difficulty raising investment capital in sole proprietorship is why entrepreneurs move to LLCs
What is the simplest form of a business entity? List an advantage and a disadvantage.
*Sole Proprietorship* is a form of business organization involving one person, and the person and the business are essentially the same • cheap and relatively easy compare to other forms of business ownership Advantage • easy and inexpensive • Owner maintains complete control over the business • not a separate legal entity --> Business losses can be deducted against the owner's personal tax return Disadvantage • Raising capital can be difficult • responsible for all liabilities • The business relies on the skills and abilities of a single owner to be successful • liquidity is low
Briefly explain the difference between an inside director and outside director and discuss if it is better to have one or the other on a firms Board of Directors.
*board of directors* are a panel of individuals who are elected by a corporation's shareholders to oversee the management of the firm (a new venture is legally required to have a board of directors) • A board is typically made up of both inside and outside directors An *inside director* is a person on a firm's board of directors who is also an officer of the firm An *outside director* is someone who is not employed by the firm
What two categories do business consultants fall into and what is the best way to find them?
*consultant* is an individual who gives professional or expert advice (1) paid consultants • large international consulting firms (IBM Business Global Services) • firms provide a wide array of services but are beyond the reach of most start-ups because of budget limitations. • There are smaller, localized firms and the best way to find them is to ask around for a referral (2) consultants who are made available for free or at a reduced rate through a nonprofit • best way to find consultants is to ask around for a referral • consultants are also available through nonprofit or government agencies (SCORE) • SCORE is a nonprofit organization that provides free consulting services to small businesses
What is the difference between cost-based pricing and value-based pricing? Name a pro and con of each.
*cost-based pricing* list price is determined by adding a markup % to a product's cost • markup % could be standard of industry • pro is that its straightforward/easy to justify price of good • con is that it's not always easy to estimate what the costs of a product will be *value-based pricing* list price is determined by estimating what consumers are willing to pay for a product and then backing off a bit to provide a cushion • what customers are willing to pay is determined by perceived value of product & # of choices available in the market • positioning, branding, and marketing mix • pro since it hinges on the perceived value of a product rather than cost + markup which is a formula that ignores the customer • con is that perceived value is not always stable
When forming a team would you prefer to have a homogeneous or heterogeneous team? And why
*heterogeneous* team members are diverse in terms of their abilities and experiences • they are likely to have different points of view about technology, hiring decisions, competitive tactics, and other important activities. • these points of view generate debate and constructive conflict among the founders, reducing the likelihood that decisions will be made in haste *homogeneous* team members areas of expertise are very similar to one another • duplication
What are the three forms of franchise agreements and what's an example of each?
*individual franchise agreement* involves a sale of a single franchise for a specific location (Ex: an individual may purchase a Play It Again Sports franchise to be constructed and operated at 901 pearl street, Colorado) *area franchise agreement* allows a franchisee to own and operate a specific number of outlets in a particular geographic are (Ex: a franchisee may purchase the rights to open five Play It Again Sports franchises within the city limits of Sioux Falls, South Dakota - exclusive rights for a given area) *master franchise agreement* is similar to an area franchise agreement, with one major different. In addition to having the right to open and operate a specific number of locations in a particular area, also has the right to offer and sell the franchise to other people in its area (Ex: ProntoWash is a mobile car washing service sells master franchise agreements that provide a master franchisee the right to open a certain number of ProntoWash outlets in a defined area.)
Explain the difference between internal growth strategies and external growth strategies.
*internal growth strategies* involve efforts taken within the firm itself, such as new product development, other product-related strategies, and international expansion, for the purpose of increasing sales revenue and profitability • *organic growth* is internally generated growth that does not rely on outside intervention • sustaining growth strictly through internal means becomes more challenging *external growth strategies* rely on establishing relationships with third parties. • Mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising are examples • emphasis on external growth strategies typically results in more fast-paced collaborative approach toward growth than the slower-paced internal strategies such as new product development and expanding to foreign markets
What is licensing, and how can licensing be used to increase a firm's revenues?
*licensing* is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions. • the licensee pays the licensor an initial payment plus ongoing royalty for the right to use the intellectual property. • *Merchandize and character licensing* is the licensing of a recognized trademark or brand that the licensor typically controls through a registered trademark or copyright (Starbucks license their trademarks not only to earn licensing income, but also to promote their products or services to a host of current and potential customers
What are the four elements of a firm's marketing mix? Identify and explain each.
*marketing mix* is the set of controllable, tactical marketing tools that it uses to produce the response it wants in the target market (1) *product* is the good or service it offers to its target market • most important attribute of a product is that it adds value in the minds of its target customers • *Service* is an activity or benefit that is intangible and does not take on a physical form • investors prefer to fund firms that potentially have breakthrough products (pain reliever vs vitamins; pain reliever provides a much stronger value proposition because the need is felt more accurately, the benefit is greater and is perceived much more quickly) • quality level, features, design, a brand name, and packaging • *reference account* is an early user of a firm's product who is willing to give a testimonial regarding his or her experience with the product (2) *price* amount of money consumers pay to buy a product • price sends an important message to its target market (Oakley = innovative, state-of-the-art, high quality, visually appealing --> position suggest premium price) • extremely important element because it determines how much money a company can earn • one of two methods to set the price for products? *cost and value-based pricing* • *price-quality attribution* means that consumers naturally assume that the higher-priced product is also the better-quality product (low price sends a signal to its customers that product is low quality) (3) *promotion* refers to the activities the firm takes to communicate the merits of its product to its target market • goal is to persuade people to buy the product • *advertising* is making people away of a product in hopes of persuading them to buy it • many start-ups implement pay-per-click advertising (AdWords and AdSense) • social media sites • *public relations* refers to the efforts to establish and maintain a company's image with the public • PR over advertising since it is cheaper and helps build credibility • *trade show* (4) *place* encompasses all the activities that move a firm's product from its place of origin to the consumer • *distribution channel* is the route a product takes from the place it is made to the customer who is the end user • first choice --> is whether to sell its products directly to consumers or through intermediaries (wholesalers/retailers) • *disintermediation* is the process of eliminating layers of middlemen to sell directly to customers
What is one advantage and disadvantage to a multiple-unit franchisee?
*multiple-unit franchisee* a person who owns and operates more than one outlet of the same franchisor, whether through an area or a master franchisee agreement Advantage (1) can capture economies of scale (2) reduce its administrative overhead per unit sale Disadvantage (1) franchisor takes more risk and makes a deeper commitment to a single franchisee
How does a joint venture differ from a strategic alliance?
*strategic alliance* is a partnership between two or more firms that is developed to achieve a specific goal • alliances tend to be informal and do not involve the creation of a new entity (such as joint venture) • developing an alliance can be tricky *joint venture* is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization. • gaining access to a foreign market is a common reason to form a joint venture
What is one key advantage and disadvantage to buying a franchise?
Advantage (1) proven product or service with an established market (2) established trademark (3) typically franchisor provides training, technical expertise, and other forms of support Disadvantage (1) cost of the franchise (initial cost of purchasing and setting up operations can be high) (2) restrictions to creativity (3) duration of commitment to franchise
When discussing participating in strategic alliances and joint ventures list 3 advantages and 3 disadvantages
Advantages (1) *Gain access to a particular resource* (capital, employees with specialized skills) (2) *Economies of scale* (in industry of high fixed costs require firms to partner to expand production volume) (3) *Risk and cost sharing* Disadvantage (1) *Loss of proprietary information* (loss to a partner who is already a competitor or will eventually become one) (2) *Management complexities* (3) *Financial and organizational risks* (failure rate for strategic alliances and joint ventures are high)
What is "market leadership"? Why do firms work hard to obtain it?
Market leadership occurs when a firm holds the number one or the number two position in an industry or niche market in terms of sales volume. • Many firms work hard to achieve market leadership, to realize economies of scale and economies of scope, and to be recognized as the brand leader • Being the market leader also permits a firm to use slogans such as "Number 1 App in the Apple App Store" in its promotions, helping it win customers and attract talented employees as well as business partners.
Please list and describe the 3 steps in properly preparing to raise debt or equity financing?
Step 1: determine precisely how much money is needed • analyze cash flow statements and projections • company doesn't want to get caught short in money • poor impression on potential lender or investors Step 2: determine the type of financing or funding that is the most appropriate Equity or Debt Financing are two most common alternatives • Equity Financing: exchanging partial ownership of a firm in return for funding • long haul • dividend payments on stock • Angel investors, venture capital, and IPOs • liquidity event • Debt Financing: getting a loan • interest • bankers are interested in minimizing risks • ideal candidate --> strong cash flow, low leverage, audited financial statements, good management, healthy B/S Step 3: develop a strategy for engaging potential investors or bankers Steps to engage potential investors or bankers (1) elevator speech (2) identifying and contacting the best prospects (3) prepare to provide completed business plan and presentation
Explain the importance of market segmentation. Identify two ways to segment a market?
involves studying a firm's industry and determining the different target markets in that industry • market segmentation is important because a new firm typically has only enough resources to target one market segment, at least initially (1) psychographic variables (personality, lifestyle, values) (2) behavioral variables (benefits sought, loyalty) (3) demographic (age, gender, family size, income) (4) product type (varies by product) Ex: computer industry can be segmented by product type (tablets, laptops, PCs, minicomputers, work stations, mainframes, and super computers)
What is a skills profile and how does maintaining one help entrepreneurs prioritize their hiring needs?
is a chart that depicts the most important skills that are needed and where skills gaps exist • skills profile explain how current skill gaps are being dealt with • finding good employees is not an easy task • help prioritize hiring needs for entrepreneurs
What is a copyright? Give an example of something that can be protected by a copyright?
is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work • the work must be in tangible form (book, operating manual, magazine article, computer software) Computer Software or Literary works (books or characters i.e. Mickey Mouse)
What is a patent? Please give an example of one type of patent and its case
is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent Many inventions are improvements on existing inventions, and the system allows the improvements to be (patented) and sold, but only with the permission of the original inventors, who usually benefit by obtaining licensing income in exchange for their consent Example: Utility Patent • patents in this category (Utility Patent) may be granted to anyone who "invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof" • 20 years from date of initial application --> after 20 years becomes public domain • Pfizer Inc. produces a drug and pharmacists tells you there is "no generic equivalent available" --> means that there a patent owned by Pfizer protects the drug and that the 20-year term of the patent has not yet expired
As a business owner, what kind of value does a trade secret provide for you?
is any formula, pattern, physical device, idea, process, or other information that provides the owner of the information with a competitive advantage in the marketplace • aggressive protection of trade secrets is necessary to prevent intentional or unintentional disclosure. • companies protect trade secrets through physical measures and written agreements Some of this information is confidential and needs to be kept secret to help a firm maintain its competitive advantage. An example is a company's customer list. A company may have been extremely diligent over time tracking the preferences and buying habits of its customers, helping it fine-tune its marketing message and target past customers for future business. If this list fell into the hands of one or more of the company's competitors, its value would be largely lost, and it would no longer provide the firm a competitive advantage over its competitors
Describe an initial public offering and explain why a firm might choose to do so or why they might not.
is the first sale of stock by a firm to the public • important milestone for a firm • firms aren't able to go public until they demonstrate viable + bright future (1) way to raise equity capital to fund current and future operations (2) raises a firm's public profile, making it easier to attract high-quality customers, alliance partners, and employees (3) liquidity event that provides a mechanism for the company's shareholders to cash out their investment (4) a firm creates another form of currency that can be used to grow the company
Define a brand and explain three reasons why it is important to an entrepreneurial firm's marketing efforts.
is the set of attributes-positive or negative-that people associate with a company • customer loyalty a company creates through its brand is one of its most valuable assets • brand allows a company to charge a price for its products that is consistent with its image • a successful brand can also increase the value of a company by 50% to 75%
What are the keys to effective new product and service development, and what do these help to achieve?
• Find a niche and fill it. • Develop products that add value. • Get quality right and pricing right. • Focus on a specific target market. • Conduct ongoing feasibility analysis. To achieve healthy growth, a firm must sell a product or service that legitimately creates value and has the potential to generate profits along with sales
Who can apply for a patent?
• Only the inventory of a product can apply for a patent • If two or more people make an invention jointly, they must apply for the patent together • Someone who simply heard about the design of a product or is trying to patent something that is in the public domain may not apply for a patent • Exceptions (1) if an invention is made during the course of the inventor's employment, the employer typically is assigned the right to apply for the patent through an *assignment of invention agreement* signed by the employee as part of the employment agreement. (2) the rights to apply for an invention can be sold. This option can be an important source of revenue for entrepreneurial firms. If a firm has an invention that it doesn't want to pursue on its won, the rights to apply for a patent on the invention can be sold to another party
How do rapid growth firms deal with potential cash flow shortfalls?
• Some firms raise the cash needed to fund growth via investors or a line of credit at a bank. • Other firms deliberately restrict the pace of their growth to avoid cash flow challenges.
Describe what an elevator speech is and the steps in preparing one.
• be prepared to provide the investor or banker a completed business plan and make a presentation of the plan if requested • An elevator speech is a brief, carefully constructed statement that outlines the merits of a business opportunity. • Most elevator speeches are around 60 seconds long. Step 1: describe the problem that needs to be solved (20s) Step 2: describe how your product solves the problem (20s) Step 3: describe your qualifications (10s) Step 4: describe your market (10s)Total: 60s