Business Types and Market Structure – Questions from the textbook

Chapter 1
1. Define small business, discuss its importance to the U.S. economy, and explain
which types of small business are most likely to succeed.
 A small business is independently owned and managed and does not dominate its
market.
 The contribution of a small business can be measured by its effects on three aspects of
the economic system:
o Job-creation
o Innovation
o Importance to big businesses
 The major small-business industry groups are:
o Services
o Construction
o Finance and insurance
o Wholesaling
o Retailing
o Manufacturing

o Transportation
2. Explain entrepreneurship and describe some key characteristics of
entrepreneurial personalities and activities.
 Entrepreneurs assume the risk of business ownership with a primary goal of growth
and expansion. Many small-business owners like to think of themselves as
entrepreneurs, but a person may be a small-business owner only, an entrepreneur only,
or both. The basic distinction between small-business ownership and entrepreneurship
is aspiration – the entrepreneur’s desire to start a business and make it grow.
 Most successful entrepreneurs are resourceful and concerned for customer relations.
They have a strong desire to be their own bosses and they can handle ambiguity and
surprises. Today’s entrepreneur is often an open-minded leader who relies on
networks, business plans, and consensus, and is just as likely to be female as male.
 Although successful entrepreneurs understand the role of risk, they do not necessarily
regard what they do as risky. Whereas others may see possibilities for failure and balk
at gambling on a new venture, most entrepreneurs feel so strongly about their ideas
and plans that they see little or no likelihood of failure.
3. Describe the business plan and the start-up decisions made by small businesses
and identify sources of financial aid available to such enterprises.
 The starting point for virtually every new business is a business plan, in which the
entrepreneur summarizes business strategy for the new venture and shows how it will
be implemented.
 Business plans are extremely important because creditors and investors demand them
as tools for deciding whether to finance or invest.
 A business plan defines strategies for production and marketing, legal elements and
organization, and accounting and finance.
 Entrepreneurs must also decide whether to buy an existing business or to start from
scratch.
 Common funding sources include family and friends, savings, lenders, investors, and
governmental agencies. Lending institutions are more likely to finance an existing
business than a new business because the risks are better understood. Individuals
starting up a new business usually have to rely on personal resources.
4. Explain the main reasons why new business start-ups are increasing and identify
the main reasons for success and failure among small businesses.
 Five factors account for the fact that thousands of new businesses are started in the
United States every year:
o The emergence of e-commerce
o Entrepreneurs who cross over from big businesses
o Increased opportunities for minorities and women
o New opportunities in global enterprise
o Improved rates of survival among small businesses.
 Four factors contribute to small-business failure:
o Managerial incompetence and inexperience
o Neglect
o Weak control systems
o Insufficient capital
 Likewise, four basic factors explain most small-business success:
o Hard work, drive and dedication
o Market demand for the product or services being provided
o Managerial competence

o Luck
5. Explain sole proprietorships and partnerships and discuss the advantages and
disadvantages of each.
 The sole proprietorship is owned and usually operated by one person.
o There are tax benefits for new businesses that are likely to suffer losses in early
stages: because sole proprietors may treat revenues and expenses as part of
their personal finances, they can cut their taxes by deducting business losses
from income earned elsewhere.
o A major drawback is unlimited liability. Another disadvantage is a lack of
continuity. Finally, a sole proprietorship depends on the resources of a single
individual.
 The general partnership is a sole proprietorship multiplied by the number of partner-
owners.
o The biggest advantage is its ability to grow by adding new talent and money.
o A partnership is not a legal entity – it is just two or more people working
together.
 o Partners are taxed as individuals, and unlimited liability is a drawback. Each
partner may be liable or all partnership debt. Partnerships may lack continuity,
and transferring ownership may be hard. No partner may sell out without the
consent of the others.
6. Describe corporations, discuss their advantages and disadvantages, and identify
different kinds of corporations.
 All corporations share certain characteristics: legal status as separate entities, property
rights and obligations, and indefinite lifespans. They may sue and be sued; buy, hols,
and sell property; make and sell products; commit crimes and be tried and punished
for them.
 The biggest advantage of incorporation is limited liability: investor liability is limited
to one’s personal investments in the corporation. Another advantage is continuity.
Finally, corporations have advantages in raising money. By selling stock, they expand
the number of investors and the amount of available funds. Legal protections tend to
make lenders more willing to grant loans.
 One disadvantage is that by using a legal process called a tender offer a corporation
can be taken over against the will of its managers. Another disadvantage is start-up
cost. Corporations are heavily regulated and must meet complex legal requirements in
the states in which they are chartered. The greatest potential drawback to incorporation
is double taxation. A regular corporation pays income taxes on company profits, and
its stockholders pay taxes on income returned by their investments. Different kinds of
corporations help businesses take advantage of incorporation without assuming all of
the disadvantages.
7. Explain the basic issues involved in creating and managing a corporation and
identify recent trends and issues in corporate ownership.
 Corporations sell shares, called stock, to investors who then become stockholders (or
shareholders) and the real owners. Profits are distributed among stockholders in the
form of dividends, and managers serve at their discretion. Preferred stock offers
holders fixed dividends. Common stock usually pays dividends only if the corporation
makes a profit, and holders have the last claims to any assets.
 The governing body of a corporation is its board of directors. Most board members do
not participate in day-to-day management but rather hire a team of managers. This
team, called officers, is usually headed by a chief executive officer or CEO, who is
responsible for overall performance.
 In a strategic alliance, two or more organizations collaborate on a project for mutual
gain. When partners share ownership of a new enterprise, the arrangement is called a
joint venture.
 The employee stock ownership plan (ESOP) allows employees to own a significant
share of the corporation through trusts established on their behalf. More stock is now
being purchased by institutional investors. Because they control enormous resources,
these investors – especially mutual and pension funds – can buy huge blocks of stock
and thus exert influence on management.
 A merger occurs when two firms combine to create a new company. In an acquisition,
one firm buys another outright. When two firms are of roughly the same size, the
 combination is usually called a merger even if one firm assumes control over the
other. When the acquiring firm is substantially larger than the acquired firm, it is more
likely called an acquisition. M&As allow firms to increase product lines, expand
operations, go international, and create new enterprises. A divestiture occurs when a
corporation sells a part of its existing business operations or sets it up as a new and
independent corporation. When a firm sells part of itself to raise capital, it is called a
spin-off.

Chapter 2
1. Explain the importance of setting goals and formulating strategies as the starting
points of effective management.
 Effective management starts with setting goals – objectives that a business hopes (and
plans) to achieve. Goal setting has four specific purposes:
o Providing guidance for managers
o Helping allocate resources
o Helping define corporate culture
o Helping managers assess performance
 Firms set three types of goals:
o Long-term goals
o Intermediate goals
o Short-term goals
 Plans take place on three levels that constitute a hierarchy because implementing plans
is practical only when there is a logical flow from one level to the next.
o Determined by the board and top management, strategic plans reflect decisions
about resource allocations, company priorities, and strategic plans.
o Tactical plans, which involve upper and middle management, are shorter-range
plans for implementing specific aspects of strategic plans.
o Operational plans, which are developed by mid- and lower-level managers, set
short-term targets for daily, weekly, or monthly performance.
 Companies often develop alternative plans in case things go awry. There are two
common methods of dealing with the unforeseen.
2. Describe the four activities that constitute the management process.
 Management is the process of planning, organizing, directing, and controlling all of a
firm’s resources to achieve its goals.
 Planning is determining what the organization needs to do and how best to get it done.
 The process of arranging resources and activities into a coherent structure is called
organizing.
 When directing, a manager guides and motivates employees to meet a firm’s
objectives.
 Controlling is the process of monitoring performance to make sure that a firm is
meeting its goals.
3. Identify types of managers by level and area.
 Not all managers have the same degree of responsibility for all activities. Thus, it’s
helpful to classify managers according to levels and areas of responsibility. There are
three levels of management.
o The few executives who are responsible for the overall performance of large
companies are top managers.
o Just below top managers are middle managers, including plant, operations, and
division managers, who implement strategies, policies, and decisions made by
top managers.
o Supervisors and office managers are the first-line managers who work with and
supervise the employees who report to them.
 In any large company, most managers work in one of five areas.
o Human resource managers hire and train employees, assess performance, and
fix compensation.
o Operations managers are responsible for production, inventory, and quality
control.
o Marketing managers are responsible for getting products from producers to
consumers.
o Information managers design and implement systems to gather, organize, and
distribute information. Some firms have a top manager called Chief
Information Officer (CIO).
o Financial managers, including the Chief Financial Officer (CFO), division
controllers (middle) and accounting supervisors (first-line), oversee accounting
functions and financial resources.
4. Describe the five basic management skills.
 Effective managers must develop skills in five areas.
o Technical skills are needed to perform specialized tasks.
o Human relations skills are skills in understanding and getting along with other
people.
o Conceptual skills refer to the ability to think abstractly as well as diagnose and
analyse different situations.
o Decision-making skills include the ability to define problems and select the
best courses of action.
o Time-management skills refer to the productive use of time.
 In the 21st century, skills in two areas will be important:
o Global management skills

o Technology management skills

5. Describe the development and explain the importance of corporate culture.
 Every company has a unique identity called corporate culture: its shared experiences,
stories, beliefs, and norms. It helps define the work and business climate of an
organization. A strong corporate culture directs efforts and helps everyone work
toward the same goals.
 It also influences management style and behaviour. To use a firm’s culture to its
advantage, managers must accomplish several tasks, all of which hinge on
communication:
o Managers themselves must have a clear understanding of the culture.
o They must transmit the culture to others in the organization.
o They can maintain the culture by rewarding and promoting those who
understand it and work toward maintaining.
 If an organization must change its culture, it must communicate the nature of the
change to both employees and customers.
Chapter 3
1. Discuss the elements that influence a firm’s organizational structure.
 Common structural and operating components in all businesses include a series of jobs
to be done and a specific overall purpose. Each organization must develop the most
appropriate organizational structure – the specification of the jobs to be done and the
ways in which they relate to one another. Most organizations change structures almost
continuously.
 Firms prepare organization charts to clarify structure and to show employees where
they fit into a firm’s operations. Each box represents a job, and solid lines define the
chain of command, or reporting relationships. The charts of large firms are complex
and include individuals at many levels. Because size prevents them from charting
every manager, they may create single organization charts for overall corporate
structure and separate charts for divisions.
2. Explain specialization and departmentalization as the building blocks of
organizational structure.
 Two activities constitute the building blocks of all organizations.
 The process of identifying specific jobs and designating people to perform them leads
to job specialization.
 After they are specialized, jobs are grouped into logical units – the process of
departmentalization. Departmentalization follows one (or any combination) of five
forms:
o Customer departmentalization
o Product departmentalization
o Process departmentalization
o Geographic departmentalization
o Functional departmentalization

 Larger companies take advantage of different types of departmentalization for various

levels.
3. Distinguish among responsibility, authority, delegation, and accountability and
explain the differences between decision making in centralized and decentralized
organizations.
 After jobs have been specialized and departmentalized, firms establish decision-
making hierarchies. They define relationships, so everyone will know who has
responsibility for various decisions and operations.
 The development of this hierarchy results from a three-step process:
o Assigning tasks: determining who can make decisions and specifying how they
are to be made
o Performing tasks: implementing decisions that have been made
o Distributing authority: deciding whether the organization is to be centralized or
decentralized
4. Explain the differences among functional, divisional, matrix, and international
organizational structures and describe the most popular new forms of
organizational design.
 Most firms rely on one of four basic forms of organizational structure:
o Functional organization
o Divisional organization
o Matrix structure
o International structure
 As global competition becomes more complex, companies may experiment with ways
to respond. Some adopt truly global structures, acquiring resources and producing and
selling products in local markets without consideration of national boundaries.
 Organizations continue to seek new forms of organization that permit them to
compete: following are four of the most popular new forms:
o Boundaryless organization
o Team organization
o Virtual organization

o Learning organization
5. Describe the informal organization and discuss intrapreneuring.
 The formal organization is the part that can be represented in chart form.
 The informal organization – everyday social interactions among employees that
transcend formal jobs and job interrelationships – may alter formal structure. There are
two important elements in most informal organizations.
 Informal groups consist of people who decide to interact among themselves. Their
impact on a firm may be positive, negative, or irrelevant. The grapevine is an informal
communication network that can run through an entire organization. Because it can be
harnessed to improve productivity, some organizations encourage the informal
organization.
 Many firms support intrapreneuring – creating and maintaining the innovation and
flexibility of a small business within the confines of a large, bureaucratic one.