Entrepreneurship and

Effective Small Business Management

11/e, Global Edition
by
Scarborough and Cornwall

Ch3

Creativity and Innovation: Keys to Entrepreneurial Success

1) The nation is rapidly moving from:

A) industrial to capitalism.

B) capitalism to industrial.

C) industrial to knowledge-based.

D) None of the above

C) industrial to knowledge-based

2) Which of the following corporate trends have contributed to the growth of entrepreneurship?

A) The acquisition and merging of mega corporations

B) The idea that "small is beautiful" in large companies, resulting in less hierarchy and layers of
management

C) The flood of venture capital being made available to small businesses

D) The downturn in international markets forcing a focus on the domestic market

B) The idea that "small is beautiful" in large companies, resulting in less hierarchy and layers of
management

3) The following is true regarding entrepreneurial education:

A) entrepreneurship has become an extremely popular course.

B) universities are not able to meet the demand for courses in entrepreneurship.

C) more courses are being offered in entrepreneurship.

D) All of the above

C) more courses are being offered in entrepreneurship.

6) Entrepreneurs seem to be characterized by:

A) a desire for money.

B) an inability to organize but strong conceptual skills.

C) a desire to work alone because of weak management skills and a need for control.

D) a high energy level.

D) a high energy level.

7) Juan is able to work well in a constantly changing atmosphere and has little concern for what
tomorrow will bring. Juan demonstrates which of the following characteristics of a typical entrepreneur?

A) The willingness to take extreme risks

B) A desire for immediate feedback

C) A tolerance for ambiguity

D) A future orientation

C) A tolerance for ambiguity

8) Entrepreneurs start businesses for a number of reasons including:

A) an opportunity to make a difference.

B) having to deal with less government regulation than as an executive of a large company.

C) a much lower risk of career failure due to layoff or acquisition than working for a large company.

D) the opportunity to get rich much quicker than if they work for a large company.

A) an opportunity to make a difference.

16) The growth of entrepreneurship is being fed by:

A) the return to a manufacturing-based economy.

B) technological advancements.

C) diminished opportunities in overseas markets for larger corporations.

D) the vilifying of large corporations in society.

B) technological advancements.

27) A major threat that family businesses face is:

A) having kids.

B) divorce.

C) management succession.

D) None of the above

C) management succession.

26) Successful copreneurs are marked by which of the following characteristics?

A) Distinct and different business and life goals

B) A clear delineation of who is the superior partner and who is the subordinate partner

C) A blending of responsibilities, roles, and authority

D) Mutual respect for each other's talents

D) Mutual respect for each other's talents

17) The international market:

A) has proven to be a tremendous opportunity for small business.

B) is being dominated by large corporations based in Europe and Japan.

C) is largely closed to small U.S.-based businesses because of the growth of international

entrepreneurship.

D) provides greater opportunities for women and minority entrepreneurs than U.S. domestic markets
do.

30) More businesses fail because of ________ than for any other reason.

A) incompetent management

B) theft by employees

C) insufficient capital
D) poor choice of location

A) incompetent management

39) U.S. economic structure is moving:

A) away from an agricultural economy to an industrial economy.

B) away from an industrial economy to a knowledge-based one.

C) back to an agricultural economy.

D) away from an agricultural economy to a knowledge-based one.

B) away from an industrial economy to a knowledge-based one.

40) A knowledge-based business economy favors small business because:

A) the cost of managing and transmitting knowledge is very low.

B) small businesses are more successful.

C) information technology is driving the cost of managing and transmitting knowledge lower.

D) Both A and C

D) Both A and C

41) Money driven and wild risk takers are both:

A) common characteristics of entrepreneurs.

B) entrepreneur's techniques to success.

C) common misconceptions of entrepreneurs.

D) None of the above

C) common misconceptions of entrepreneurs.

47) To avoid business failure, an entrepreneur should:

A) know the business in depth.

B) develop a solid business plan.

C) take entrepreneurship courses.

D) Both A and B
D) Both A and B

1) ________ are the various groups and individuals who affect and are affected by a business.

A) Consequentialists

B) Workers

C) Stakeholders

D) Objectivists

C) Stakeholders

2) ________ involves the moral values and behavioral standards that businesspeople draw on as they
make decisions and solve problems.

A) Business ethics

B) Social responsibility

C) Moral responsibility

D) Law

A) Business ethics

3) The concept of social responsibility has evolved from that of a nebulous "do-gooder" to one of:

A) "law follower."

B) "social steward."

C) "moral steward."

D) "law abider."

B) "social steward."

9) The various groups who affect and are affected by the decisions and actions of a small business are
called:

A) suppliers.

B) stakeholders.

C) minorities.
D) intermediaries.

B) stakeholders.

10) Over the past few decades, business leaders have, in general, become more proactive in terms of
implementing the organizational characteristics of:

A) moral management.

B) amoral management.

C) immoral management.

D) ethical norms.

D) ethical norms.

11) ________ dilemmas lurk in even the most mundane decisions that entrepreneurs make every day.

A) Legal

B) Ethical

C) Spiritual

D) Global

B) Ethical

19) Ethical lapses happen for a number of reasons. Joan made an unethical decision. When confronted
with it by her boss, she couldn't understand why he was upset because "Everyone does it." This is an
example of an ethical lapse due to:

A) a "bad apple."

B) a "bad barrel."

C) opportunity pressures.

D) competitive pressures.

A) a "bad apple."

21) There are a number of "tests" of ethical behavior in business. The one that prioritizes choosing the
option that results in the greatest good for the greatest number of people is known as:

A) the utilitarian principle.

B) the professional ethic.

C) the Golden Rule.

D) Kant's categorical imperative.

A) the utilitarian principle.

27) The entrepreneur can implement and maintain ethical standards by:

A) performing periodic ethical audits.

B) making examples of clearly visible violators.

C) handing down a strict code of ethics established by upper management.

D) doing all of these.

A) performing periodic ethical audits.

28) This term denotes the awareness of a company's management of the social, environmental, political,
human, and financial consequences that its actions produce.

A) Company policies and procedures

B) The corporate culture

C) Social responsibility

D) Business ethics

C) Social responsibility

39) What is an EAP?

A) It is a drug testing program for small businesses.

B) It is a program to help employees with substance abuse and other types of personal and family
problems.

C) It is an HIV screening process used in the recruiting process.

D) It is a type of diversity management program.

B) It is a program to help employees with substance abuse and other types of personal and family
problems.
40) ________ is any unwelcome sexual advance, request for sexual favors, and other verbal or physical
sexual conduct made explicitly or implicitly as a condition of employment.

A) Hostile harassment

B) Quid pro quo harassment

C) Non-employee sexual harassment

D) Sexual harassment

D) Sexual harassment

41) When dealing with AIDS in the workplace, small business owners should:

A) treat AIDS-positive employees as they would any other employees with life threatening illnesses.

B) make certain their employment policies comply with local regulations but not worry about federal
regulations.

C) require HIV screening as part of the hiring process.

D) inform all employees when someone tests HIV positive.

A) treat AIDS-positive employees as they would any other employees with life threatening illnesses.

42) A company's AIDS policy should include:

A) an open communication policy where all employees will be informed if someone becomes ill.

B) a continuation of employee benefits as any other employee would have.

C) process for dismissal of the affected employee.

D) All of these

57) Barker Industries makes an annual donation of $100,000 to local charities, and allows its top
managers leaves of absence to serve charities involved in community service. What area of social
responsibility is Barker demonstrating?

A) Customers

B) Environment

C) Employees

D) Community
D) Community

58) Leonard Stern, the chairman of Hartz Mountain, was concerned and outraged at the condition of
New York City's homeless living in shelters and welfare hotels, and was determined to help them. Hartz
Mountain backed loans for construction of clean, safe housing complexes, and helped create social
programs to help homeless families. These efforts by Hartz Mountain are an example of a company's
social responsibility to:

1) ________ is the ability to develop new ideas and to discover new ways of looking at problems and
opportunities.

A) Showboating

B) Commoditizing

C) Innovation

D) Creativity

D) Creativity

2) ________ is the ability to apply creative solutions to problems and opportunities to enhance or to
enrich people's lives.

A) Showboating

B) Commoditizing

C) Creativity

D) Innovation

D) Innovation

3) According to Ted Levitt, creativity is ________ new things.

A) thinking

B) doing

C) corroborating

D) emulating

A) thinking
7) Some small businesses create innovations ________ in response to customer feedback or changing
market conditions.

A) responsibly

B) compassionately

C) reactively

D) proactively

C) reactively

8) Some small businesses create innovations ________ by spotting opportunities on which to capitalize.

A) responsibly

B) compassionately

C) reactively

D) proactively

9) Innovation is ________ when it creates market-changing, disruptive breakthroughs that are the result
of generating something from nothing.

A) mandatory

B) perfunctory

C) evolutionary

D) revolutionary

D) revolutionary

10) More often, innovations are ________.

A) evolutionary

B) revolutionary

C) proactive

D) All of the above

?

11) The iPod is an example of a ________ innovation.

A) revolutionary

B) evolutionary

C) proactive

D) perfunctory

C) proactive

18) Which brain takes care of the body's emotional, intuitive, and spatial functions?

A) Left

B) Right

C) Front

D) Back

B) Right

19) Which one of the following is a barrier to creativity?

A) Searching for the one "right" answer

B) Focusing on being "logical"

C) Blindly following the rules

D) All of the above

20) According to research, creativity among both children and adults in the United States has declined
markedly since:

A) 1990.

B) 1995.

C) 2000.

D) 2005.
A) 1990.

21) ________ is (are) a valuable part of the creative process, especially when evaluating ideas and
implementing them.

A) Rules

B) Unequivocality

C) Logic

D) All of the above

C) Logic

22) Focusing too much effort on being logical also discourages the use of one of the mind's most
powerful creations: ________.

A) rationality

B) rigidity

C) credibility

D) intuition

D) intuition

33) The ________ environment in which people work has an impact on their level of creativity.

A) emotional

B) physical

C) national

D) All of the above

A) emotional

34) ________ are entrepreneurs who operate within the framework of an existing business.

A) Managers

B) Disruptors

C) Intrapreneurs
D) Challengers

C) Intrapreneurs

35) While working for iRobot, Jim Lynch came up with a new product while cleaning the gutters on his
house. Lynch is an example of a(n) ________.

A) entrepreneur

B) disruptor

C) intrapreneur

D) manager

C) intrapreneur

40) ________ is (are) the fuel that drive(s) creativity.

A) Rules

B) Imagination

C) Conformity

D) Rigidity

B) Imagination

41) ________ is finding something while looking for something else.

A) Tenacity

B) Ambiguity

C) Opportunity

D) Serendipity

D) Serendipity

42) "________ points" are missing products or services or flaws in existing products or services.

A) Opportunity

B) Opening

C) Pleasure
D) Pain

49) Often, ideas require a ________ period.

A) investigation

B) verification

C) gestation

D) preparation

50) The goal of the ________ stage in the creative process is to subject the innovative idea to the test of
cold, hard reality.

A) verification

B) gestation

C) investigation

D) transformation

A) verification

1) The strategic management process:

A) is especially difficult for the small business because of its limited resources.

B) divides mass markets into smaller, less homogeneous units.

C) provides the small business owner with the tools for managing the uncontrollable elements in the
external business environment.

D) helps a small business develop the game plan that guides it in creating its mission, vision, goals, and
objectives.

D) helps a small business develop the game plan that guides it in creating its mission, vision, goals, and
objectives.

2) The primary output of the strategic management process should be:

A) a matching of its strengths and weaknesses to the opportunities and threats in the environment.
B) an enticement to outside investors and lenders to put money into the business.

C) a complete explanation of the company's product or service.

D) a description of the company's competitive situation.

A) a matching of its strengths and weaknesses to the opportunities and threats in the environment.

3) A small business's "aggregation of factors that sets it apart from its competitors" is its:

A) strategic plan.

B) competitive advantage.

C) vision.

D) competitive strategy

B) competitive advantage.

8) Answering the question "What business am I in?" defines the company's:

A) mission.

B) assessment of its own strengths and weaknesses.

C) external opportunities and threats.

D) goals and objectives.

A) mission.

9) Which of the following best expresses the relationship of a company vision to its mission?

A) The company vision comes from the company mission.

B) The mission statement is the written expression of the company vision.

C) The company mission statement is the verbal expression of the written vision.

D) There is no relationship between the two.

B) The mission statement is the written expression of the company vision.

10) A mission statement should answer which of the following questions?

A) What are the needs and wants of the target customers?

B) How will we finance our growth and expansion?

C) Who are our competitors?

D) How much money will we make?

A) What are the needs and wants of the target customers?

11) Once the vision and mission are established, the entrepreneur needs to:

A) select the target market.

B) conduct market research.

C) choose a competitive strategy.

D) assess the firm's strengths and weaknesses.

D) assess the firm's strengths and weaknesses.

19) A small firm's ability to identify and manipulate the ________ in its business determines its ability to
compete effectively.

A) key success factors

B) corporate vision and mission

C) opportunities and threats

D) market environment

A) key success factors

20) ________ are relationships between a controllable variable—plant size, quality, packaging—and a
critical factor influencing the firm's ability to compete in the marketplace.

A) Core competencies

B) Competitive advantages

C) Key success factors

D) Goals and objectives

C) Key success factors

27) ________ are specific measurable targets to be accomplished in a defined time period.

A) Core competencies
B) Objectives

C) Goals

D) Key success factors

B) Objectives

28) The small firm's "master plan" is its:

A) objectives.

B) goals.

C) competitive edge.

D) strategy.

D) strategy.

29) The focal point of a firm's strategy is:

A) the firm's goals and objectives.

B) the firm's key success factors.

C) the customer.

D) the firm's strengths and weaknesses.

C) the customer.

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

A) cost-leadership

B) differentiation

C) focus

D) concentration

C) focus

39) An effective strategic plan does which of the following?

A) Identifies a complete set of success factors—financial, operating, and marketing, that yield a
competitive advantage for the company

B) Focuses on one generic strategy to the exclusion of all other strategies

C) Always seeks a high profile in the specific markets chosen

D) Is always cost based

A) Identifies a complete set of success factors—financial, operating, and marketing, that yield a
competitive advantage for the company

40) The most successful strategic plans make the ________ focal.

A) competitive analysis

B) customer

C) product

D) control process

B) customer

45) The ________ is (are) a set of measures unique to the company that gives managers a quick and
comprehensive view of how the business is doing and includes both financial and operational factors.

A) core competencies

B) key success factors

C) balanced scorecard

D) action plan

C) balanced scorecard

46) It is important for the small business owner to remember that the strategic planning process is:

A) an ongoing process that must be repeated.

B) a top management process completed only once every two years.

C) a process which involves all the employees once every five years.

D) one that should produce a detailed, elaborate plan for running the business over the next 3-5 years.

A) an ongoing process that must be repeated.

50) A company may have a powerful competitive advantage, but it is wasted unless:

A) the owner has communicated that advantage to workers.

B) the customers are recommending the company to their friends.

C) the workers communicate it to customers and potential customers.

D) All of the above

D) All of the above

51) ________ is not a primary goal of a competitive intelligence program.

A) Avoiding surprises from existing competitors' new strategies and tactics

B) Identifying potential new competitors

C) Improving reaction time to competitors' actions

D) All these are primary goals of a competitive intelligence program.

D) All these are primary goals of a competitive intelligence program.

1) The key to choosing the "right" form of ownership is:

A) knowing the cost factor in time and money.

B) understanding how each form affects both business and personal circumstances.

C) having an experienced attorney and accountant to advise you in the choice.

D) the fact you cannot change the form of ownership once your company is established.

B) understanding how each form affects both business and personal circumstances.

2) When choosing a form of ownership, the entrepreneur should realize that:

A) it is difficult if not impossible to change forms of ownership once the company is established.

B) the expense of changing forms of ownership makes it prohibitively expensive to change.

C) the most common form of ownership is the partnership and is the least expensive to establish.

D) he/she will most likely change the form of ownership as the company grows in size and revenues.

3) The most popular form of business ownership is the:

A) sole proprietorship.

B) partnership.

C) corporation.

D) S-corporation.

A) sole proprietorship.

17) In her partnership, Ana has unlimited liability for the partnership's debts. She would be the
________ partner.

A) limited

B) dormant

C) nominal

D) general

D) general

18) Partnerships have a number of advantages over other forms of ownership, such as:

A) a larger pool of capital and little government regulation.

B) very easy liquidation of owners' investment.

C) limited liability for all partners.

D) they may be easily formed by an individual.

19) A partnership is:

A) taxed like a corporation.

B) not subject to the double taxation of some other forms of business.

C) taxed at the lowest rate for an individual.

D) taxed under capital gains laws as all profits are considered to come from appreciated assets.

23) In a partnership, each partner acts as a(n) ________ for the business.
A) agent

B) manager

C) supporter

D) guarantor

A) agent

24) A limited partnership is a modification of a(n) ________ form of ownership.

A) sole proprietorship

B) general partnership

C) corporation

D) S-corporation

B) general partnership

32) Acme Corporation is chartered in Delaware, but its primary area of operation is in South Carolina. In
South Carolina, Acme would be considered a(n) ________ corporation.

A) alien

B) domestic

C) foreign

D) local

C) foreign

33) Which of the following generally is not required by a Certificate of Incorporation?

A) The names and the addresses of the incorporators

B) A statement of the corporation's purpose

C) A statement of how stock proceeds will be used

D) The corporation's bylaws

C) A statement of how stock proceeds will be used

39) This form of ownership is the same as a corporation in terms of legal characteristics even though
Congress is considering legislation that would further simplify its formation and running. Its distinction
from a corporation is made for federal income tax purposes only.

A) S-corporation

B) Master limited partnership

C) Sole proprietorship

D) Limited liability company

40) Jeff is forming a company. If he chooses a(n) ________ form of ownership, he can have no more
than 100 stockholders and must have only one class of stock.

A) partnership

B) corporation

C) S-corporation

D) master limited partnership

C) S-corporation

49) One major advantage of the ________ is that once the owner has paid all of the company's
expenses, he/she can keep the remaining profits (less taxes, of course).

A) partnership

B) corporation

C) sole proprietorship

D) limited liability company

C) sole proprietorship

50) The ________ is a document that states in writing all of the terms of operating the partnership for
the protection of each partner involved.

A) Certificate of Incorporation

B) Partnership Agreement

C) Certificate for Conducting Business as Partners

D) Partnership Document

B) Partnership Agreement

51) ________ partners are not active in a business but generally are known to be members of the
partnership.

A) Dormant

B) General

C) Silent

D) Limited

C) Silent

1) In franchising, a ________ pays fees and royalties to a ________ in return for the right to sell its
products or services under the franchiser's trade name and often to use its business format and system.

A) franchiser; franchisee

B) franchisee; franchiser

C) franchise; business owner

D) business owner; parent company

B) franchisee; franchiser

2) Franchising is currently dominated by:

A) auto dealers.

B) service-oriented franchises.

C) retail outlets.

D) fast food restaurants.

C) retail outlets.

3) ________ franchising exists when a franchisee is licensed to sell specific products under the
franchiser's brand name through a selective distribution system.

A) Trade name

B) Pure
C) Conversion

D) Product distribution

D) Product distribution

7) McDonald's is an example of a ________ franchise.

A) conversion

B) trade name

C) product distribution

D) pure

D) pure

8) The success of franchising is largely due to:

A) the economic growth of the United States and other developed nations, economies.

B) more college students choosing to go to work for themselves rather than for corporations.

C) the mutual benefits it provides to the franchiser and franchisee.

D) All of these factors

C) the mutual benefits it provides to the franchiser and franchisee.

29) Based on the principle of ________, the idea is to put a franchise's products or services directly in
the paths of potential customers, wherever that may be.

A) guerilla marketing

B) intercept marketing

C) franchise marketing

D) path marketing

B) intercept marketing

30) Another term for cobranding franchising is:

A) master franchising.

B) conversion franchising.
C) multiple-unit franchising.

D) piggybacking.

D) piggybacking.

41) When franchise contracts are renewed:

A) the existing contract is merely annotated and signed by both parties.

B) a new UFOC must be issued.

C) all terms of the previous contract may be renegotiated.

D) a new contract must be drawn up by the two parties.

42) The franchiser has the right to cancel a contract if a franchisee:

A) declares a bankruptcy.

B) fails to make required payments on time.

C) fails to maintain quality standards.

D) All of the above

43) The fastest growth rate in franchises is among:

A) traditional areas of franchising, where costs are from $2,500 to $250,000.

B) innovative, nontraditional franchisers with fresh approaches.

C) gas stations and fast foods.

D) hotel/motels and retail outlets.

B) innovative, nontraditional franchisers with fresh approaches.

51) What franchisee turnover rate is probably sound?

A) Less than 5 percent

B) Less than 15 percent

C) Less than 25 percent

D) Less than 35 percent

A) Less than 5 percent

52) The ________ requires all franchisers to disclose detailed information on their operations at the first
personal meeting or at least fourteen days before a franchise contract is signed or any money is paid.

A) FCC

B) FDD

C) Trade Regulations Rule

D) FDA

B) FDD

2) One advantage of buying an existing business is:

A) you always get the best location.

B) the opportunity to participate in a national advertising campaign.

C) equipment is installed and production capacity is known.

D) easy implementation of innovations and changes from past policies.

3) When it comes to buying an existing business, it is not uncommon to find it:

A) overpriced.

B) difficult to finance.

C) with accounts receivable worth more than face value.

D) bargain priced.

D) bargain priced.

14) Which of the following statements concerning the financing of a business purchase is true?

A) Often, the business seller is a poor source of financing.

B) The buyer should be able to make the payments on the loans out of the company's cash flow.
C) The buyer should begin arranging financing late in the purchasing process, to avoid the processing
expenses if the deal falls through.

D) Traditional lenders tend to be more eager to lend on an existing business than they are with a start-
up.

B) The buyer should be able to make the payments on the loans out of the company's cash flow.

15) Which of the following is a way to smooth the transition of leadership/management from the seller
of a business to the buyer?

A) Focus on the customer, offer new incentives, improve customer service.

B) Focus on the employees, listen to them, keep them informed.

C) Concentrate on operations, updating equipment and changing processes.

D) Visit your competitors and introduce yourself and get to know them.

B) Focus on the employees, listen to them, keep them informed.

16) Which of the following is not a critical area of business that is investigated during due diligence?

A) Motivation

B) Employee issues

C) Asset valuation

D) Legal issues

B) Employee issues

26) When the buyer is examining the income statements, tax returns, and balance sheets of the
business, he/she is seeking an answer to the basic question:

A) Is the business financially sound?

B) Why does the owner want to sell?

C) What is the physical condition of the business?

D) What legal aspects should be considered?

A) Is the business financially sound?

27) When seeking to evaluate the financial soundness of the company prior to purchase, the buyer
needs to examine:

A) sales tax records.

B) income tax returns.

C) financial statements.

D) all of the above.

D) all of the above.

49) Business valuation is partly an art and partly:

A) a craft.

B) a science.

C) a sale.

D) a purchase.

B) a science.

58) The bargaining zone is:

A) the area within the bargaining process in which an agreement can be reached.

B) where the buyer gets the best deal.

C) where the seller gets the best deal.

D) None of the above