Verified Test Bank Ch3 Opportunity Recognition, Shaping, and

Questions for Chapter 3

True/False

1. Entrepreneurship is all about opportunity. (pg. 71)
2. Entrepreneurs need to conduct a series of tests called family-first tests to identify interesting ideas and then see whether they are viable opportunities by testing them on family members. (pg. 71)
3. Most successful ideas are driven by the entrepreneur’s personal experience. (pg. 71)
4. Starting a company in a sphere of business that you really enjoy is not the best idea, in terms of the chance of success. (pg. 71)
5. No one knows about your strengths better than you do. (pg. 72)
6. You will likely fail if you start a business in an area you have no experience in. (pg. 72)
7. For a successful idea multiplication and launching a venture, one should focus on becoming a “cocktail-party entrepreneur.” (pg. 73)
8. Cocktail-party entrepreneurs can provide you with invaluable advice about how to run a venture

(pg. 73)

1. New, entrepreneurial ideas frequently sprout from an entrepreneur’s desire for a product that he or she cannot currently find in the market. (pg. 75)
2. According to IDEO, the first step in the creation of a product is to make a set of assumptions.

(pg. 75)

1. Asking leading questions is the best method of discovering the appeal of a potential product or concept. (pg. 75)
2. During the “gathering stimuli” phase, one should just observe. (pg. 75)
3. The key to success in comedy improvisation is to always say, “Yes, but…” (pg. 75)
4. Saying, “That will not work because…” is important at later stages of business development.

(pg. 75)

1. Playing the role of devil’s advocate is important at the “optimize practicality” stage of concept development. (pg. 76)
2. Playing the role of devil’s advocate refers to building a simple mock-up of what the product will look like. (pg. 76)
3. An entrepreneur should try to broaden his or her customer base definition at the early stages of developing an idea. (pg. 77)
4. A company will make a better growth decision by identifying the most lucrative PTA. (pg. 77)
5. The three categories of customers are PTA, STA, and FPA. (pg. 77)
6. In aggregate, baby boomers create powerful trends for US businesses. (pg. 79)
7. The first domain name on the Web was assigned in 1986. (pg. 80)
8. To target goods and services specifically to Hispanic populations in the US is to focus one’s market too narrowly. (pg. 77)
9. Customer and market trends change too rapidly to be of any predictive use for an entrepreneur.

(pgs. 79-80)

1. The S-curve is a forecasting tool designed to measure the power of competition. (pg. 82)
2. The market enters a fast growth phase when customer awareness and demand exceed supply.

(pg. 82)

1. A penetration pricing strategy is one of the most simple and successful initial approaches for a new venture. (pg. 83)
2. A highly priced product will usually be perceived as better quality by the customer. (pg. 77)
3. The cost-plus pricing technique is the most reliable one as it sets the price equal to the product’s value. (pg. 84)
4. It is important to lower your gross margins early in the venture’s life (pg. 84)
5. It typically takes 1-2 years for a firm to reach stability and for operating costs to stabilize.

(pg. 85)

1. It is important to evaluate the value chain you are competing in and the different options there are to distribute your product.

(pg. 86)

1. Customers can assist you to determine direct competitors, indirect competitors, and substitutes. (pg. 87)
2. There is no need to worry about competitors in emerging markets, since they are recently emerging. (pgs. 87-88)
3. A venture whose vendors are primarily commodity suppliers, will retain a large portion of the value chains gross margin. (pg. 90)
4. Stringent government approval processes may not signal a poor opportunity if potential margins are still relatively high. (pg. 90)
5. A startup will likely fail if the entrepreneur ignores feedback from his or her customers.

(pg. 91)

1. Pre-launch analysis will determine the required variables of your business model and should be assumed to be true in the absence of contrary facts. (pg. 91)

Multiple Choice

1. According to the chapter, into what type of opportunity should a business idea translate? (pg.71)
   1. Realistic
   2. Easy to implement
   3. Attractive
   4. Unique
   5. Technologically advanced
2. What does moving a seed of an idea to a more concrete possibility require? (pg. 73)
3. Practical thinking
4. Market research
5. Input from others
6. A business plan
7. Maturity
8. Which of the following most typifies a “cocktail entrepreneur?” (pg. 73)
9. Fails to take action
10. Popular
11. Productive
12. Decisive
13. Possesses a predilection for cocktails
14. Which of the following is not a part of IDEO’s product design steps? (pg. 75)
15. Optimize practicality
16. Multiply stimuli
17. Gather stimuli
18. Create customer concepts
19. Create stimuli
20. What is the only action that the “gather stimuli” stage requires of the entrepreneur? (pg. 75)
21. Ask
22. Think
23. Do nothing
24. Observe
25. Research
26. An important technique in brainstorming is to say: (pg. 75)
27. “Yes and…”
28. “Yes, but…”
29. “That won’t work because…”
30. “We need to avoid…”
31. “Nice!”
32. What is the name of the process that is the equivalent of brainstorming, but with a focus on writing rather than verbal communication? (pg. 75)
    1. Paper-writing
    2. Brain-writing
    3. Mute-storming
    4. Brain-exploding
    5. Paper-storming
33. In which stage is it important to play devil’s advocate? (pg. 76)
    1. Optimize practicality
    2. Multiply stimuli
    3. Gather stimuli
    4. Create customer concepts
    5. Create stimuli
34. What are the three categories of customers? (pg. 77)
    1. STA, PTA, and TTA
    2. PTA, CTA, and ATA
    3. TTA, LTA, and OTA
    4. STA, PTA, and BTA
    5. ATA, BTA, and CTA
35. On what category of customers should a startup business focus most of its attention? (pg. 77)
    1. STA
    2. PTA
    3. TTA
    4. An even share of STA, PTA, and TTA
    5. None of the above
36. An understanding of your STA helps you to: (pg. 78)
    1. Train your employees
    2. Find better management
    3. Develop a penetration strategy
    4. Make better growth decisions
    5. Build your value chain
37. When analyzing an opportunity which trends should you focus on? (pg. 79)
    1. Historical micro trends
    2. Current Macro trends
    3. Present micro trends
    4. Future Macro trends
    5. A & B
    6. C & D
    7. None of the above
38. Which of the following is NOT one of the five areas you need to fully understand prior to your launch as enumerated in chapter 3? (pg. 76)
    1. The Government
    2. Customers
    3. Strategy
    4. Suppliers and Vendors
    5. Competitors
39. What is the approximate number of baby boomers in the US? (pg. 79)
    1. 55-60 million
    2. 60-65 million
    3. 65-70 million
    4. 70-75 million
    5. 75-80 million
40. According to the chapter, people of Hispanic descent will comprise 30% of the US population by what year? (pg. 80)
    1. 2020
    2. 2030
    3. 2035
    4. 2040
    5. 2050
41. To replace $70,000 of forgone salary and benefits, an entrepreneur will need the new venture to generate approximately how much in annual revenue? (pg. 80)
    1. $70,000
    2. $200,000
    3. $400,000
    4. $750,000
    5. $800,000
42. The graphical depiction that highlights the diffusion of product acceptance over time is: (pg. 82)
    1. S-Curve
    2. C-Curve
    3. U-Curve
    4. V-Curve
    5. J-Curve
43. When starting web business, which measure of effectiveness matters most? (pg. 84)
    1. The number of “eyeballs” looking at your site
    2. Profits
    3. Click thru rates
    4. Overhead expenses
    5. Revenue
44. What is an example of a relatively inelastic product? (pg. 83)
    1. Burgers
    2. Train tickets
    3. Gasoline
    4. DVD discs
    5. Notebooks
45. What is the short-sighted thinking behind the penetration-pricing strategy? (pg. 83)
    1. Pricing below competitors will lead to higher market share
    2. Gross margins should be very high for a new product.
    3. Loyal customers demand the lowest price.
    4. The simplest method of selective prices saves time.
    5. Prices should match the value of products.
46. Research suggests that a gross margin of what percent is a good benchmark for distinguishing more attractive opportunities from less attractive ones? (pg. 84)
    1. 5%
    2. 15%
    3. 40%
    4. 70%
    5. None of the above.
47. Based on existing research, how long in the life of a startup do operating costs take to stabilize?

(pg. 85)

• 1. 1-2 years
  2. 3-5 years
  3. 4-6 years
  4. 6-7 years
  5. 8 years

1. The weak link in Gourmet Stew’s business model was? (pg. 86)
   1. Value proposition
   2. Customer segments
   3. Distribution channels
   4. Cost structure
   5. Marketing
2. When markets are emerging, which factor matters most long term? (pgs. 87-88)
   1. Gross margins
   2. Number of new entrants annually
   3. Determining and securing the dominate product design
   4. Attracting a diverse pool of investors
   5. Distributors
3. What markets are characterized by “stealth” competition? (pg. 88)
   1. Growing
   2. Primitive
   3. Developed
   4. Speculative
   5. Emerging
4. How does the US Government support entrepreneurship? (pg. 90)
   1. Registration of a new business is a relatively short process
   2. The level of regulations is generally low
   3. US taxes are lower than those in most nations
   4. All of the above
   5. None of the above
5. Which of the following is NOT related to competitive profiling? (pg. 89)
   1. Net income margins
   2. Revenues
   3. Tax rates
   4. Pricing
   5. Gross margins
6. Which of the following is an example of a perfect business? (pg. 91)
   1. Intel
   2. Wal-Mart
   3. Amazon.com
   4. McDonalds
   5. There is no such thing as a perfect business
7. Better Opportunities tend to exist when: (pg. 92)
   1. The core customer group is small
   2. There is existing and strong competition
   3. The net margins are greater than 10%
   4. There are mature market structures
   5. There are high tax rates
8. When pre-launch analysis predicts unfavorable outcomes you should: (pg. 91)
   1. Abandon the venture
   2. Go forward strongly in spite of negative forecasts
   3. Seek to confirm/deny the variable that underpin outcomes during execution
   4. Seek to confirm/deny all variable prior to starting the venture
   5. Raise more money

Open ended

1. How does one turn a seed of idea into an actual idea? (pg. 73)

• Ask for input from others
• Brainstorm your idea
• Avoid becoming a “cocktail-party entrepreneur”

1. Why is it important to be passionate about your venture? (pg. 71)

• Passion gives you extra energy.
• Launching a venture is a demanding process that is made more difficult if the entrepreneur is apathetic about the business.
• Passionate entrepreneurs are the most successful ones.
• Your passion can influence your investors and partners.

1. Describe the process IDEO suggests an entrepreneur needs to go through to design a product. (pgs. 74 – 76)

• Gather stimuli (Beware the leading question)
• Multiply stimuli (Build upon the input of others)
• Create customer concepts (Build prototypes)
• Optimize practicality (Add/remove features)

1. What categories of customers exist? How do you prioritize and address them? (pg. 77-78)

• Primary Target Audience (PTA) – Focus on this group
• Secondary Target Audience (STA) – Use this segment to generate additional revenues.
• Tertiary Target Audience (TTA) – Keep an eye on this one. Though TTA may seem merely auxiliary, this group might have more potential than expected.

1. Give examples of some of the biggest trends in the recent history that have shaped business in the US. How did they influence business in general? (pgs. 79 – 81)

• Baby Boom Generation – shaped business for decades (Pampers, Rock & Roll, Television, Minivans, Real Estate, McMansions, etc.)
• Personal Computing - IT breakthrough (Internet, media on demand, electronic publishing, spreadsheets, electronic communication
• Obesity - Drain on healthcare system, growth of diet industry, changes in food industry, health clubs, home gyms
• Dual-Income households - Child care, Home services – landscaping, house cleaning, prepared foods

1. How can one best predict the acceptance of the product by the customer? (pg. 82)

• Use the S-curve tool
• Forecast, which stage your product is at (window of opportunity, new competitors enter, or obsolescence phase) and act accordingly

1. What are the ways of pricing a new product and what mistakes should entrepreneurs avoid? (pgs. 83 – 84)

• Cost-plus pricing – price your product based on its cost
• You may set a price based on what your competitors charge for the same/similar product
• You should avoid penetration pricing strategy unless you have virtually unlimited access to financial recourses

1. Why is the statement, “My startup has no competition,” always wrong? How can you find out about your competitors? (pg. 87)

• There is always competition, sometimes in the form of substitutes.
• One of the forms of competition is “stealth” competition
• You can use suppliers, VCs, Angels, databases, etc. to track down “stealth” competitors

1. What can an entrepreneur do when there are no business opportunities at all?

(pg. 91)

• There are always opportunities.
• Don’t be all negative about an idea; try to find positive sides in it.
• Modify your business model to eliminate its weaknesses.
• Don’t be rigid with your idea, constantly adjust it.

1. Give a brief checklist of information that an entrepreneur should investigate. (pg. 92)

• Customer, Market Size, Trends, Market growth Rate, Price/Frequency/Value, Distribution, Competition, Key Success Factors, Vendors.

1. Why can’t companies raise prices after using penetration pricing strategy? (pg. 83)

• First, attractive ventures are often launched in emerging markets where demand exceeds supply.
• Second, many new products are designed to be better than existing alternatives.
• Third, price sends a signal to the customer.
• Fourth, even if customers flock to the low-priced product, this rapid increase in demand can sometimes cause serious problems for a startup.
• Finally, these same customers may resist when companies try to recapture value by raising prices in the future.

1. Describe the importance of understanding the entire value chain for the industry you are competing in. (pgs. 85-86)

• Laying out the distribution of your product from raw materials to the consumer allows you to identify opportunities where you could make a profit
• Understanding the entire value chain gives you insight into the relative power of all stakeholder involved (e.g., distributors and vendors)

1. Give two examples showing vendor power, both strong and weak. (pg. 90)

• Referring back to the value chain we created for Gourmet Stew, we notice that suppliers are providing commodity goods such as beef, vegetables and other food products. These types of vendors usually have limited power, which means that more of the ultimate gross margin in the chain goes to Gourmet.
• Microsoft, as the dominant operating system and core software provider, and Intel, as the dominant microprocessor supplier, have considerable power over PC manufacturers. Microsoft has gross margins of 85% and Intel has gross margins of 70%, whereas average gross margins for PC manufacturers are between 8 and 25%. The fact that suppliers have so much power lessens the opportunity potential for entrepreneurs entering the PC market unless they find an innovation to supplant the Intel chip or the Microsoft operating system.

1. What other value chains, besides those of direct competitors, should be analyzed

(pgs. 89-90)

• Value chains of indirect competitors and substitutes need to be explored to determine the risk they may pose as entrants into your market.
• Value chains which share similar channels & production means, and have overlapping offering attributes to your own need to be explored to identify potential disruptors
• Example: Some handheld video game consoles (i.e. Nintendo 3DS) appeal to the everyday non-sophisticated gamers, but so do tablets and smartphones. Few customers purchase the iPad as a substitute for a gaming console. However once they own one, free app games (i.e. Angry Birds) can be viewed as a substitute. For many customers, the difference in the game experience is marginal, but the price difference is large, leading to the disruption of the hand-held video game industry.

1. What is the function of the government in the process of enterprise creation? (pg. 90)

• For the most part, the U.S. government is supportive of entrepreneurship. Taxes are lower than in most nations in the world, the time required to registrar a new business is shorter, and the level of regulations is generally lower.
• However, in certain industries, government regulation and involvement are significantly higher, such as in pharmaceuticals and medical devices.

1. How can a business separate its target customers into categories of importance?

(pgs. 77 – 78)

• Starting with initial definition, people usually break customers down into three categories: 1) Primary Target Audience (PTA), 2) Secondary Target Audience (STA) and 3) Tertiary Target Audience (TTA).
• Most of your attention should focus on the PTA. These are the customers you believe are most likely to buy at a price that preserves your margins, and with a frequency that reaches your target revenues.
• While you should focus most of your attention to your PTA, the STA group also deserves attention. The PTA may be your most frequent, loyal customers, but to increase your revenues you’ll want to bring in some of your STA as well.
• Finally, your TTA requires a little attention. During the investigation and launch stage, you shouldn’t spend much time on the TTA. However, once you begin operating, a TTA may emerge that has more potential then you originally realized.