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S m a l l B u s i n e s s I n s t i t u t e J o u r n a l , V o l . 6 

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SMALL BUSINESS INTITUTE® JOURNAL 

An Official Journal of the Small Business Institute® 

Don B. Bradley III, PhD 

Editor 

Small Business Advancement National Center 

University of Central Arkansas 

Small Business Institute® Information 

is published on the Small Business Institute® web page 

www.smallbusinessinstitute.biz 

Small Business Advancement National Center 

Information is published on 

http://saber.uca.edu 

501-450-5300 

ISSN 1944 - 1169 

The Small Business Institute® is the premier organization dedicated to fieldbased 

student consulting and outreach to small businesses. Our members are 

actively involved with small businesses and entrepreneurial firms in their 

communities and regions. 

October 2010


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LETTER FROM THE PRESIDENT 

2010 – Catch the Dream…Share the Vision! 

As awareness of the entrepreneurial spirit continues in our economies, drive for enhancing this field of 

knowledge remains paramount. This issue of the Small Business Institute® Journal continues to provide 

a focused approach to application in the field of research for small business and entrepreneurship. From 

this research, we learn, we teach, we bring awareness, and we follow the vision for future implications. 

Thinking “green,” The Small Business Institute® Journal is published electronically twice a year—April 

and October. It targets a wide range of research regarding small business and entrepreneurship issues. 

Pedagogical manuscripts enable scholars and practitioners to share findings and best practices in their 

disciplines through the SBIJ and allow such practitioners as business owners and policy makers to share 

insight and best practices. 

The Small Business Institute® offers a unique niche as the premier organization for pedagogical research 

using field-based student experiential learning. Research and presentation opportunities plus the 

student-consulting project competition (POY), our annual conference, professional development, and a 

valued network of members, best describes the association. With membership ever-increasing, it speaks 

volumes of the interest in this field. We invite you to learn more about SBI and join the network. Our 

web site provides additional information about its mission, membership benefits, and publishing 

opportunities. Please go to www.smallbusinessinstitute.biz to learn more. 

We hope you enjoy this issue of the SBIJ! We encourage you to submit your manuscript for review. All 

submissions are blind reviewed by three individuals. It is with continued attentiveness to small business 

and entrepreneurship that we can make a difference. 

Patti L. Wilber, Ph.D. 

Northwestern Oklahoma State 

President of the Small Business Institute® 

October 2010

LETTER FROM THE EDITOR 


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I personally would like to thank the Small Business Institute and its officers for their support of the Small 

Business Institute Journal. This journal is for the members and interested researchers in the field of 

small business and entrepreneurship. Also, without the support of the University of Central Arkansas it 

would be impossible to produce this journal. 

This journal should provoke expanded thought that would lead to greater research in the field. The 

authors have worked very hard to present some outstanding ideas and to promote better 

understanding. Raven Ambers and Meagan Dukes, the student interns are to be congratulated for their 

hard work on this journal. The reviewers are crucial to the success of any journal, and this one is no 

exception. My wholehearted thanks go out to all reviewers who have been very professional and 

responded in a timely manner. I also feel gratified in that we have a number of new reviewers added to 

our list for this issue. Please remember that this journal is only as good as the articles that you send to 

us. Your scholarly work is greatly appreciated. 

Don B. Bradley III, PhD 


Editor 

October 2010

2010 SMALL BUSINESS INSTITUTE 

President: 

Patti Wilber 

Northwestern Oklahoma State University 

pwilber@smallbusinessinstitute.biz 

President-Elect: 

Stephanie Bardwell 

Christopher Newport University 

sbardwell@smallbusinessinstitute.biz 

Vice President of Programs: 

Michael Harris 

East Carolina University 

mharris@smallbusinessinstitute.biz 

Vice President of Programs-Elect: 

Dianne H.B. Welsh 

University of North Carolina at Greensboro 

dwelsh@smallbusinessinstitute.biz 

Secretary/Treasurer: 

Jeff Shields 

University of Southern Maine 

jshields@smallbusinessinstitute.biz 

Vice President of Marketing and 

Communications: 

Paul Belliveau 

Rider University 

pbelliveau@smallbusinessinstitute.biz 

OFFICERS AND BOARD 


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Vice President of Research and Publications: 

Don Sciglimpaglia, 

San Diego State University 

dsciglim@smallbusinessinstitute.biz 

Immediate Past President: 

Ron Cook, 

Rider University 

rcook@smallbusinessinstitute.biz 

Board Members: 

Charles Matthews 

University of Cincinnati 

cmatthews@smallbusinessinstitute.biz 

Craig Zamzow 

Plymouth State University 

czamzow@smallbusinessinstitute.biz 

Howard VanAuken 

Iowa State University 

hvanauken@smallbusinessinstitute.biz 

Editor, Journal of Small Business Strategy: 

Ross Fink, Bradley University 

Editor, Small Business Institute Journal: 

Don Bradley, University of Central Arkansas 

October 2010

EDITIORIAL REVIEW BOARD 

Rick Baldwin 

Prarie View A&M University 

Texas 

Stephanie Bardwell 

Christopher Newport University 

Virginia 

Martina Battisti 

Massey University 

New Zealand 

Joe Bell 

University of Arkansas, Little Rock 

Arkansas 

Connie Bateman 

University at North Dakota 

North Dakota 

Paul Belliveau 

Rutgers University 

New Jersey 

Rik Berry 

University of Arkansas, Fort Smith 

Arkansas 

Naomi Birdthistle 

University of Limerick 

Ireland 

Anthony Borgese 

City University of New York 

New York 

Francois Brouard 

Carleton University 

Ontario, Canada 

Noel Burchell 

Unitec Business School 

New Zealand 

Shawn Carraher 

Cameron University 

Oklahoma 

Peggy Chaudhry 

Villanova University 

Pennsylvania 

Edward Cole 

St Mary’s University 

Texas 

Renee Foster 

Delta State University 

Mississippi 

Shanan Gibson 


North Carolina 

Michael Harris 


North Carolina 

Kirk Heriot 

Columbus State University 

Georgia 

Cecilia Hegarty 

University of Ulster 

United Kingdom 


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Theresa Hrncir 

Southeastern Oklahoma State University 

Oklahoma 

October 2010

John R. Hendon 

University of Arkansas, Little Rock 

Arkansas 

Thomas Henschel 

Edinburgh, Napier University 

Edinburgh 

Jamaluddin Husain 

Purdue University 

Indiana 

Colin Jones 

University of Tazmania 

Australia 

Jeanette Lemmergaard 

University of Southern Denmark 

Denmark 

Peter Lucash 

Northeastern University 

Massachusetts 

Patrick McCaskey 

Millersville University 

Pennsylvania 

Leila Messarra 

Lebanese American University 

Lebanon 

Abbas Nadim 

University of New Haven 

Connecticut 

Alberic Pater 

Triodos Facet 

The Netherlands 

Jean Raar 

Deakin University 

Australia 

David Resnik 

Johnson and Wales University 

Rhode Island 

Joseph Roberts 

Columbia College Chicago 

Illinois 

Michael Rubach 


mrubach@uca.edu 

Don Scimpaglia 


California 

Jeffrey Shields 

University of Southern Maine 

Maine 

Leo Simpson 

Seattle, University 

Washington 

Ken Simpson 

Unitec Business School 

New Zealand 

Matthew Sonfield 

Hofstra, University 

New York 

Anna Stankova 

University of Economics 

Prague, Czech Republic 

Harriet Stephenson 

Seattle University 

Washington 

Sherrill Taylor 

Texas Woman’s University 

Texas 


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October 2010

Howard Toole 


California 

David Tweed 

Massey, University 

New Zealand 

Howard Van Auken 


Iowa 

Lyndon Walker 

Unitec 

New Zealand 

Carol Wittmeyer 

St. Bonaventure University 

New York 

Darush Yazdanfar 

Mid Sweden University 

Sweden 


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October 2010


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SMALL BUSINESS INSTITUTE TABLE 

OF CONTENTS 

Biotechnology & Entrepreneurship: Active Innovation Learning Across 

Disciplines 

Shirley Kovacs 

California State University, Fresno 

Alice Wright 


Timothy M. Stearns 


George S. Vozikis 

California State University, Fresno………………………………………………………..…………1 

The Small Business Institute® Consulting Team’s: Ethical Dilemma 

David Lynn Hoffman 

Metropolitan State College of Denver 

Nina Radojevich-Kelley 


Elizabeth McVicker 


Debora Gilliard 


Judson Faurer 

Metropolitan State College of Denver……………………………………………………………..23 

October 2010

The Small Business Institute Consulting Team’s: Ethical Dilemma 









Judson Faurer 

Metropolitan State College of Denver……………………………………………………………..29 

The Impact of Trust and Dependency on Business Performance: A 

Study of SME Suppliers 

William C. McDowell, Assistant Professor 


Michael L. Harris, Associate Professor 


Shanan G. Gibson, Associate Professor 

East Carolina University………………………………………………………………………………....41 


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October 2010

Facilitating the Flow of Capital to Niche Agricultural Producers in Rural 

Markets 



Clyde Kenneth Walter, PhD 

Iowa State University……………………………………………………………………………..…..92 


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Evaluating the Impact of Federal Legislation on Small Businesses: An 

Exploratory Study of the New Minimum Wage Rate and the Health 

Insurance Tax 

Kirk Heriot, Ph.D. 

Columbus State 

Teresa Lang, Ph.D. 


Neal Thomson, Ph.D. 

Columbus State................................................................................................63 

October 2010

MANUSCRIPTS 


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October 2010


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Biotechnology & Entrepreneurship: Active Innovation Learning Across 

Disciplines 

By 

Shirley Kovacs 


shirleyk@csufresno.edu 

Alice Wright 


awright@csufresno.edu 

Timothy M. Stearns 


timothys@csufresno.edu 

George S. Vozikis 


gvozikis@csufresno.edu 

October 2010


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Key Search Words: Entrepreneurship, Entrepreneurship education, Interdisciplinary education, 

Interdisciplinary business degrees 

ABSTRACT 

The biotechnology industry represents one of the fastest growing business sectors of California 

which leads the nation in the number and success of biotechnology firms. The creation of an 

advanced interdisciplinary Professional Science Master’s (PSM) in biotechnology and business 

degree could creates graduates who are educated in scientific and technical skills with special 

emphasis on the agricultural biotechnology which is prominent in the region, as well as for 

leadership roles in business. Faculty from fourteen Departments in four different colleges of 

California State University, Fresno initially cooperated to create a comprehensive, 

interdisciplinary PSM in Biotechnology degree. The resulting PSM in Biotechnology degree not 

only allows students to explore specific areas of biotechnology interest and expertise within a 

30-unit Master of Science degree framework, but it also provides a curriculum that is industryresponsive 

by including 20% of formal coursework in entrepreneurship skills and devotes an 

additional 23% of the program to an industrial internship and a culminating experience, which 

includes substantial immersion into connections and contacts to regional biotechnology-related 

industries and agencies. The ultimate outcome of this degree development effort within the 

university is an enhanced level of interdisciplinary sophistication of the faculty in their research 

and service interests. 

INTRODUCTION 

A nation’s economic well-being directly reflects the innovation and growth of regional 

economies as units of critical mass of ideas, capital, technology, and skills. For many 

communities, focusing on regional economic governance, collaborative strategies and building 

new economic engines can make the difference between languishing and prospering. There is 

an increasing awareness that a region’s economic well-being is directly related to the 

innovation and growth associated with its distinctive strengths and heritage (Center for the 

Study of Rural America, 2004). Regions must nourish a sense of “place” and find a niche in a 

globalizing economy by playing to their distinct strengths. One method of achieving this 

outcome is growing a “grass roots” regional constituency of a new generation of entrepreneurs. 

Successful regional economic development should be dependent upon the educational and 

training programs that serve each region’s unique strengths and goals (Drabestoot, et al., 

2004). 

Colleges and universities are responding to that need by developing and offering more 

educational opportunities in innovation and entrepreneurship (Zacharakis, et al., 2002). 

Assessments of these programs in terms of entrepreneurship-team (e-team) satisfaction by 

many universities have demonstrated that students generally find them to be satisfying and 

beneficial (Mason, 2002; Bracken, 2002; Rzasa, 2004). Students usually enjoy the “real world” 

experience of product development, and student outcomes often go beyond what accrediting 

agencies and institutions require (Mason, 2002). It is clear that interdisciplinary programs have 

value, are challenging and informative, and offer a holistic view of the innovation process 

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(Vozikis & Cornell, 2006). Experiential and interdisciplinary learning, especially integrating 

scientific and engineering innovation with entrepreneurship, provides students with an asset 

that is highly valued in today’s job market and that will strongly differentiate these students 

from other college graduates. 

In academia, the rate of success of bringing professionally engineered products to 

market has been hindered by the lack of business expertise on the projects. Okudan and Zappe 

(2006) observed that recent college graduates are rarely prepared to effectively perform in 

such environments because of a lack of experience with multidisciplinary teams. In response to 

this concern, diverse multidisciplinary approaches in the educational setting have emerged to 

introduce engineering students to the basic business fundamentals and, in turn, confer nonengineering 

and non-technical students with a working knowledge of the design process 

(Crismond, 2001; Okudan and Zappe, 2006). These recent trends have contributed to the 

establishment of multidisciplinary instruction among marketing, finance, and legal topics with 

various technical, scientific, and engineering stages in the prototype development process. The 

multidisciplinary approaches also have contributed to building critical skills which can benefit 

technical and nontechnical entrepreneurial inventors, educators, consultants, and small 

business owner/managers, as well as those who are interested in applied research. 

Interdisciplinary collaboration between academic programs and a focus on opportunity 

creation are the two key drivers of innovation and problem solving. Interdisciplinary teams 

bring together business students who can develop distinctive “what if” scenarios and logistical 

concerns to prod technology students to consider issues they might otherwise delay or perceive 

as being minor. Likewise, technology students bring their problem solving skills, knowledge of 

materials and tools, and the “scientific method” to develop and test effective innovations. 

Interdisciplinary teams can combine the different experiences of their members through 

exposure to each other’s reading materials, conceptualizations, points of view, and life 

expectations, so that each member begins to appreciate a broader range of concerns. For 

example, in an interview with students after a project presentation, not one engineering 

student was subscribing to the free email newsletters from INC Magazine nor had ever heard of 

entreworld.org. Similarly, business students were unfamiliar with high-impact technology 

publications, and usually assumed that issues related to production costs “would somehow 

work out” or be lower than the technical proposal indicated. Neither group seemed to 

understand pricing and distribution costs or their impact on the potential venture’s success 

(Ballon, 1998). 

Entrepreneurship is widely regarded as instrumental in economic growth. Community 

institutions, colleges, and universities have an incentive to partner in outreach activities that 

promote economic development. Technology transfer activities serve as one important 

mechanism to achieve such engagement. Ideally, colleges and universities can foster new 

product and process technologies that might be converted into business startups with a 

business generating (BG) education and technology model (Laukkanen, 2000). According to 

Ronstadt’s (1988) terminology, a BG educational model should open a subjective 

entrepreneurial corridor, i.e., produce innovations as viable business concepts or at least as 

business launches within the university. Consequently, a second academic revolution is under 

way as universities combine teaching and research with technology transfer that seeks to 

transform academic science to entrepreneurial science (Etzkowitz, 2001). One of the most 

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significant arenas for this type of technology transfer is in the molecular life sciences, or 

biotechnology, where job opportunities for students blending science and business expertise 

continue to grow (Sheft, 2008). 

In response to the distinctive regional economic development needs of the San Joaquin 

Valley, the PSM in Biotechnology degree at California State University, Fresno (or Fresno State, 

as is commonly known in the region), was established in fall 2005. This multidisciplinary 

endeavor requires fluency and competency in both science and business to allow development 

of new technologies and products based on applications of the cellular and molecular life 

sciences, with special emphasis placed on agricultural biotechnology to align with the 

predominant commercial and governmental enterprises in the region. The PSM in 

Biotechnology degree offers students who are educated in various scientific disciplines, the 

opportunity to acquire the knowledge and skills necessary to comprehend and commercialize 

these emerging technologies and/or their products. Consequently, it is not a research-focused 

degree but rather a degree conceived through the Alfred P. Sloan Foundation to develop the 

competitiveness of science students for direct entry into corporate/public sector jobs and 

prepare them for entry into mid-level, industrial/agency careers (National Research Council, 

2008). The PSM in Biotechnology degree program provides a blend of components from 

science and business that truly distinguishes it both from a traditional Master of Science in 

Natural Science and from a Master of Business Administration. 

The PSM in Biotechnology degree program provides top-performing business and 

biotechnology graduate students the opportunity to interact with others having similar 

interests in innovation, invention, and entrepreneurship. The interdisciplinary curriculum and 

its faculty guide students through both high-level scientific thoughts and processes and the 

entrepreneurial evaluation, selection, development, management, funding, and, most 

importantly, the nurturing of promising technological developments that are critical for 

California’s San Joaquin Valley. Within the program are crucial entrepreneurship core courses 

designed to: 

1. Involve interdisciplinary teams in the principles necessary for development of patentable 

product innovations from the tools and processes of biotechnology that could lead to 

commercialization, and; 

2. “Sensitize” students from different colleges and disciplines to innovation tools from the 

legal, business, scientific, and liberal arts perspectives. 

For example, in the “New Ventures Creation” course, e-teams, with the help of internal 

and external mentors, brainstorm and collectively select their entrepreneurial ideas; apply 

innovative solutions to the technical and scientific feasibility; and apply in-depth market and 

entrepreneurial research in determining the target market feasibility. Next they defend the 

scientific rationale and its innovativeness at a presentation of their business plans to a panel of 

venture capitalists and entrepreneurs, who will be given the first opportunity for investing in 

any of the projects viewed as commercially viable and worthy. The program’s assessment 

process uses a qualitative methodology to obtain useful feedback for program improvement 

(Rzasa, et al., 2004). 

Our goal is to train students for the demanding interdisciplinary field of biotechnology 

and to prepare a workforce the developing biotechnology industry in central California. To 

accomplish this we developed a unique interdisciplinary degree concept designed for students 

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interested in entering the workforce, to promote the development and production of new 

products and processes from a practical understanding of the molecular and cellular life 

sciences. The degree program is designed to provide students with an appreciation of the 

breadth of biotechnology’s commercial potential and with a familiarity and working knowledge 

of all components of a business enterprise. This will, in turn, prepare graduates for leadership 

roles in the biotechnology industry. Communication and critical thinking skills are emphasized 

throughout the program providing students a greater applications-based experience than is 

traditional for a disciplinary Master of Science degree. 

The PSM in Biotechnology degree is administered through the College of Science and 

Mathematics. It is a two-year program allowing students to explore, in the context of 

entrepreneurship and commercialization, the molecular and cellular life processes that 

promote, for example, pharmaceuticals development, crop and livestock improvements, 

industrial processing, diagnostic and therapeutic medicine, forensic identification, genomics 

and bioinformatics.. The PSM in Biotechnology degree is considered a terminal graduate degree 

and is not recommended for students interested in continuing their graduate education with 

research doctoral programs. 

The PSM in Biotechnology degree at California State University, Fresno encompasses 

two key drivers: innovation and problem solving. The interdisciplinary nature of the program, as 

framed by the College of Science and Mathematics, the Jordan College of Agricultural Sciences 

and Technology and the Craig School of Business, constitutes a marriage between theory and 

practice, with a focus on the opportunities emerging from positive outcomes of interdisciplinary 

teams, and by taking into consideration the existing academic political realities, resources, and 

curricula, as well as real-world industry needs and practical necessities. 

DEMAND FOR A MASTER OF SCIENCE DEGREE IN BIOTECHNOLOGY 

Biotechnology represents one of the fastest growing economic sectors in the United 

States with 28 new biotech initial public offerings in 2007, while financing and partnering deals 

that collectively raised almost $45 billion for U.S. biotechnology companies. The 2008 report 

from the Biotechnology Industry Organization clearly details California’s preeminence in this 

industry as well as predicting that the convergence of genomics, information technology, and 

nanotechnologies will radically alter every aspect of the health care system. Additionally, the 

report confirmed that the demand for bioethanol, biodiesel, and other alternative energy 

sources is driving technological innovation in biotechnology and that biotech crop acreage grew 

12 percent, and 12 million farmers around the world are benefiting, especially in China and 

India (Burrill, 2008). The Ernst & Young Accounting report “Beyond Borders: Global 

Biotechnology Report 2008” presents the geographic distribution of the 386 public biotech 

companies in the United States distributed in 16 regions, three of which are metropolitan areas 

within California. California’s most notable cluster and the nation’s No. 1 biotechnology region 

in the country is the San Francisco Bay Area. In 2007, this region had 77 public companies, a 5% 

gain over 2006. San Diego is the nation’s No. 3 region with 42 companies, also a 5% increase 

over 2006. Los Angeles/Orange County is the nation’s No. 10 region with 21 companies, a 24% 

increase over 2006. That means that as of 2007, 140 (36.3%) of the nation’s 386 public 

biotechnology companies are located in California, representing some of the largest and most 

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successful in the nation. This is indicated by their market capitalization on December 31, 2007 

($230.6 billion), which represented 62.2% of the total national biotechnology industry market 

capitalization ($370.7 billion). In addition, there are other industrial entities, not solely 

identified as biotechnology companies, which operate biotechnology research and 

development activities within the state. This indicates that California has a large, and growing, 

interest and commitment to biotechnology. 

For more than 20 years, California has established a number of initiatives among its 

state-supported institutions of higher education to promote science and innovation for this 

important economic sector. Examples of these initiatives include: 

1) California State University Program for Education and Research in Biotechnology 

(CSUPERB), established in 1987 as a system wide program for the 23 campuses of 

the California State University (CSU); 

2) Biotechnology Education Consortium, established in 1995, led by the Community 

College system (110 campuses) in partnership with the CSU and the University of 

California (UC) programs (10 campuses); and 

3) UC Centers for Excellence. One example is the Institute for Bioengineering, 

Biotechnology and Quantitative Biomedical Research, which formed in 2001 as a 

consortium between UC Berkeley, UC Santa Cruz and UC San Francisco. 

The Community College programs offer certificates or associate in arts degrees that are 

largely oriented toward students entering the biotechnology industry as production 

technicians, particularly for the biopharmaceutical companies in the Bay Area and Southern 

California. Many of these students are re-entry professionals displaced from other careers. 

Within the UC, biotechnology pervades the curriculum; but formal degrees are scarce. At UC 

Irvine, the Master of Science in Biotechnology combines coursework with a research master’s 

degree through the Biology Department, and UC Davis offers an “emphasis” in biotechnology, 

i.e., a small number of formal biotechnology courses that accompany doctoral degrees in a 

variety of disciplines. 

BIOTECHNOLOGY AS AN ACADEMIC DISCIPLINE AT CSU, FRESNO 

Biotechnology certificate programs within the CSU began in 1983, both graduate (San 

Francisco State University) and undergraduate (San Diego State University). In 1988, Fresno 

State began offering a formal graduate program in biotechnology. The Certificate of Advanced 

Studies in Biotechnology (biotechnology certificate program) is a laboratory-intensive program 

and the fourth CSU biotechnology certificate program. Further, this biotechnology certificate 

program is the first to be interdisciplinary between multiple colleges of Fresno State, which 

include the College of Science and Mathematics (Biology and Chemistry departments), and the 

College of Agricultural Sciences and Technology (Plant Science Department). Students with 

undergraduate degrees in Biology, Chemistry, Plant Science and Animal Science have all 

completed the Fresno State biotechnology certificate program. 

As of May 2008, the Fresno State biotechnology certificate program has graduated 64 

students, 50% of which have entered private industrial or government agency careers. The 

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other half have entered professional training for health care (38.5%, medicine, pharmacy, 

dentistry) or education (34.5%, teaching at the community college or high-school level), while 

six (9.5%) went on to doctorate programs (three have entered the biotechnology industry 

rather than academia). Three certificate graduates entered Master of Business Administration 

programs (11.5%), while four entered law programs/careers (15.5%). Half of the certificate 

graduates also have completed a disciplinary master’s degree (91% through the Biology 

Department), especially those graduates who have entered the research side of the 

biotechnology industry. However, graduates of the certificate program/master’s program also 

have pursued industrial careers, as well, in development (e.g., Berlex Biosciences, Richmond, 

Calif.) and production (e.g., IDEC Pharmaceuticals [now Genentech], San Diego, Calif.). 

While several other CSU campuses have since instituted biotechnology certificate 

programs, mainly at the graduate level, the California State Polytechnic University, Pomona, 

became the first to offer an undergraduate degree through the Biological Sciences Department, 

which includes options in four sub disciplines—biology or biochemistry, agriculture, and 

business. A few CSU campuses offer undergraduate minors in biotechnology. In 1998, San 

Diego State University began offering a Master of Science in Regulatory Affairs, primarily 

directed at biotechnology industry professionals. San Jose State University became the first CSU 

campus to establish in 2003 a recognized PSM in Biotechnology degree with business collegeaffiliated 

components and funding by the Alfred P. Sloan Foundation. 

Origins of Fresno State’s PSM in Biotechnology Degree 

In 1997, the Alfred P. Sloan Foundation (Sloan), a charitable foundation with interests in 

science education, developed a special initiative (Sloan Initiative) to encourage the 

development of a relatively new degree concept—the Professional Science Master’s (PSM) 

degree. The PSM degree is expected to prepare students who have been educated in the 

sciences to enter industry careers directly rather than continuing their graduate education into 

more research-focused doctorate programs. The Sloan Initiative concept expects a strong 

industry-centered approach in the curriculum, including familiarity with business practices and 

culture. Most of the Sloan Initiative awards had been granted to Research 1 Universities. But in 

spring 2002, Sloan partnered with the Council of Graduate Schools (CGS) to explore establishing 

PSM degree programs at institutions that traditionally grant master’s degrees, such as Fresno 

State. Almost simultaneously, the CSUPERB organization offered special workforce initiative 

grants to develop curricula that more appropriately prepared CSU graduates for entry into the 

biotechnology workforce. The Biotechnology Program at Fresno State applied for and received 

funding from both CGS/Sloan Initiative and CSUPERB to conduct a feasibility study in 

spring/summer 2002 on the establishment of a Professional Science Master’s in Biotechnology 

degree (PSM in Biotechnology degree). The initial degree program developed was the product 

of those grants and is particularly distinctive by its inclusion of Master of Business 

Administration (MBA) curricula (taken with MBA students), as well as graduate level science 

(taken with the Master of Science students). By virtue of the award for the feasibility study, 

Fresno State was eligible to submit a proposal for an implementation award to CGS/Sloan 

Initiative in November 2002. Fresno State’s proposed PSM degree programs, including a 

forensic science degree as part of the package, were selected for an implementation award 

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(one of only eight universities in the nation from 70 applicants). The funds from this 

implementation award, plus some matching funding from the institution, supported 

development of a campus “presence” for these professional degrees and have sustained 

recruiting and development efforts directly connecting the science and technology components 

of the university with community business/service projects. The implementation funding was 

for two distinct PSM degrees in biotechnology and in forensic science that were separated 

because of the need for disparate non-science, courses—biotechnology required the business 

perspective, forensic science needed the legal perspective. The biotechnology degree was 

approved in 2005 and began accepting students in the fall 2005 semester. The forensic science 

degree did not have the benefit of a pre-existing certificate but was approved in 2006 and 

began accepting students the fall semester. 

Professional master’s degrees have been a component of academic curricula for some 

time, particularly in the health care, business, and special education disciplines. Frequently, 

these degrees require a larger number of course units than can be accommodated in a 

traditional 30-unit master’s program. These programs often function, however, under the 

auspices of national accreditation requirements, which can make these programs attractive to 

student clientele. The interdisciplinary nature of biotechnology does not have such an 

accreditation process. Therefore, the benefits of this new degree can seem more illusory to 

students while the feasibility of engaging sufficient students to support such a graduate 

program may often be less assured. The dilemma is finding a cadre of students adequately 

prepared, in what have traditionally been fairly divergent disciplines, to pursue a biotechnology 

program that is formatted within a master’s degree program model. The approach used in the 

Fresno State PSM in Biotechnology degree was to meet the spirit and skills requirements of a 

professional master’s degree within the parameters of a traditional 30-unit master’s degree. 

Also, to revisit the possibility of a more expanded degree, but only as the biotechnology 

discipline and industry developed and as our own program’s success became more defined. 

The dilemma, and also the caveat, of any biotechnology degree is its interdisciplinary 

nature (even without a business perspective). Students need opportunities to become familiar 

with the many facets of biotechnology; but they also need a chance to develop some 

specialization (as with the options of the undergraduate degree at California State Polytechnic 

University, Pomona), so flexibility within the curriculum is desirable. However, there are few 

graduate educational programs that are either funded or functionally assimilated outside the 

traditional disciplinary realm of the university, which can complicate both the degree’s 

sustenance and its approval process. In addition, to begin graduate level work with both the 

advanced science and business students, there is an expectation that student academic 

backgrounds should have provided appropriate foundations and breadth of experience for 

these advanced classes. 

The Fresno State program was developed to address these issues with an array of 

science prerequisites, provide the consistent foundation among the cohorts and, by utilizing 

existing university courses across the disciplines, draw on existing expertise in a breadth of 

biotechnology applications, and provide opportunities for some unique educational 

specializations. The PSM in Biotechnology degree program requires core courses for a cohesive 

structure, including formal courses in molecular biology, biotechnology and entrepreneurship. 

In addition, individual interests and expertise can be discovered and developed through both an 

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industrial/agency internship and an applied project or thesis, plus elective courses selected 

from not only the traditional natural science disciplines, e.g., biology or biochemistry, but also 

from those associated with the university’s science and technology professional schools and 

colleges, e.g., plant sciences, food sciences, health sciences, computer sciences, and 

engineering. The Fresno State program engages students with this diverse faculty and helps to 

build the sensitivity for the capabilities and contributions of distinct disciplines to specific 

problems among both the students and the faculty members. In comparison to the Fresno 

State biotechnology certificate program, the new PSM in Biotechnology degree: 1) provides 

familiarity with business culture; 2) strengthens team-building skills; 3) provides more direct 

application experiences; 4) includes an opportunity for a biotechnology specialty; 5) invigorates 

the program with elements most responsive to industry concerns; and 6) does more to enhance 

the student’s communication and critical thinking skills. 

THE PSM IN BIOTECHNOLOGY PROGRAM 

The PSM in Biotechnology degree program has an interdisciplinary curriculum contained 

in the following academic units: College of Science and Mathematics (CSM), College of 

Agricultural Sciences and Technology (CAST), College of Arts and Humanities (CAH), and the 

Craig School of Business (CSB). The primary departments participating in the program are: 

Biology, Chemistry, Computer Science, Plant Science, Food Science and Nutrition, Viticulture 

and Enology, Philosophy, and Management. The College of Science and Mathematics has the 

primary responsibility for this interdisciplinary degree; the Biology Department is the formal 

home of the degree. A program committee consisting of representatives from all participating 

departments makes recommendations about the program and selects the Program 

Director/Graduate Coordinator for the PSM in Biotechnology degree. An Advisory Board, 

consisting of university administrative representatives and, more importantly, regional industry 

and agency leaders from institutions incorporating biotechnology tools and processes in their 

operations, advises the Program Director. These Advisory Board’s industry/agency leaders 

provide crucial insights to keep the program current from the employer’s perspective and 

promote university-industry connections for developing student internships and applied 

projects. 

The program originally arose from a strong cross-disciplinary effort among campus 

faculty and the results of a biotechnology industry survey regarding the need for this degree in 

the region. In 2002, faculty collaborators from the departments of Management, Biology, Food 

Science and Nutrition, and Chemistry formed biotechnology working groups (e.g., Current 

Biotechnology, Business, Bioinformatics, Bioprocessing, Agriculture, and Forensics) to collect 

ideas about the skills and curricula that were available and desirable to prepare students for a 

professionally focused master’s degree in biotechnology. The extensive online survey of 250 

statewide and regional biotechnology industry and agency units was conducted in summer 

2002 to ascertain the appropriate required skills and knowledge for a professional 

biotechnology master’s degree education. The results were used for the formulation of the 

initial degree proposal. Despite an exhaustive attempt to secure survey results, only 32 

companies completed the entire survey; but the group responding represented a good diversity 

of business and specialization emphases (Appendix I or insert first two Pre-Degree survey 

October 2010


P a g e | 10 

Tables) Among the nearly 30 categories, the survey highlighted six types of skills and 

knowledge that were identified by nearly all responding companies or agencies as being either 

priority No.1 (“essential”) or priority No.2 (“highly desirable”) (Appendix Table 3 or insert Pre- 

Degree survey table 3) In late August 2002, the online survey was supplemented with a face-toface 

workshop/discussion between industry/agency representatives from the San Joaquin 

Valley region and the Fresno State faculty closely affiliated with biotechnology education. In 

this workshop, the six critical skills and knowledge sets identified in the survey were confirmed 

for their importance, with immunological skills (next highest category) also cited; flexibility in 

electives also was mentioned as key in preparing students for employment among the broad 

diversity of biotechnology businesses. These guidelines significantly shaped the curricular 

components and prerequisites for the overall program, ensuring these cited, employmentrelevant 

requirements would be included and reinforced throughout the program. 

Program Mission, Goals, and Objectives 

Biotechnology is a multidisciplinary endeavor that increasingly requires employees to be 

fluent in science and business, which enables the development of new technologies and 

products based on the unique applications of the cellular and molecular life sciences. 

Therefore, the Mission of the PSM in Biotechnology degree at Fresno State was stated as one 

that “offers students who are educated in various scientific disciplines the opportunities to 

acquire the knowledge and skills required to comprehend and commercialize emerging 

technologies and/or the products related to their field.” The corresponding PSM goals and 

objectives are as follows: 

1. To educate students in the current knowledge and skills of the cellular and molecular life 

sciences. Specifically: 

a. Comprehend current scientific literature presenting the concepts and technologies of 

molecular/cellular life sciences. 

b. Demonstrate knowledge of information resources for biotechnology including scientific 

journals, databases and biotechnology Internet resources. 

c. Demonstrate hands-on comprehension of scientific methodology and analysis. 

2. To develop student familiarity with business practices and culture. Specifically: 

a. Comprehend the broad aspects of business operations and development, from 

product/process conception to commercialization. 

b. Demonstrate the ability to work collaboratively on projects involving typical business 

time lines. 

c. Demonstrate ethics, leadership and consensus-building skills relevant to the scientific 

aspects of a business enterprise. 

October 2010


P a g e | 11 

3. To help students develop effective oral and written communication skills in both scientific 

and business settings. Specifically: 

a. Effectively disseminate technical information using written progress reports, strategic 

reports, formal scientific written communications, and operations and procedures 

manuals. 

b. Organize and give both informal summaries and professional written and oral 

presentations. 

c. Organize presentations and demonstrate listening/networking skills for unique 

professional situations, e.g., posters or equipment demonstrations. 

4. To develop student effectiveness as liaison between the research, development, and 

production staff of a biotechnology enterprise and/or the scientific components and the 

management and marketing components of a biotechnology enterprise. Specifically: 

a. Demonstrate comprehension of a breadth of biotechnology processes and applications. 

b. Develop expertise in a coherent area of biotechnology enterprise. 

5. To develop a master’s program that can promote biotechnology industry development 

within the Fresno State region. Specifically: 

a. Successfully engage regional representatives of the biotechnology industry sector in the 

ongoing development and evaluation of the program 

b. Develop and sustain project and internship collaborations with regional industries. 

Program Coursework 

The courses used to launch the PSM in Biotechnology degree were already available 

within the curriculum, except for the required courses of an Internship (BIOTC 275) and the 

Interdisciplinary Culminating Experience (BIOTC 298 or BIOTC 299). A concentration or 

emphasis is developed from the particular array of electives selected; but the volatility of 

biotechnology as a field of study argued against formal concentrations that may necessarily 

change in very short time frames. The realms of biotechnology that can be studied under this 

curriculum are extensive, but its areas of excellence in biotechnology include: Agricultural; 

Medical and Medical Diagnostics; Environmental and Industrial, including Biofuels; Regulatory, 

and Quality Control; International Business; and Forensics. The program coursework with the 

required and approved elective courses are presented in Table 1. 

(Insert Table 1 about here) 

Written and oral communication skills are emphasized throughout the program; assessments of 

these skills also serve as formative evaluation tools for the program’s components. Teambuilding 

components are a recurring theme within the program, as are completion of tasks 

meeting business-related time lines and performance standards. The unique properties of this 

professional degree include both the interdisciplinary nature of study and the strong 

applications approach expected in the thesis or project serving as the culminating experience. 

Current science disciplinary master’s programs at Fresno State, which can involve 

October 2010


P a g e | 12 

biotechnology skills, typically require a research thesis designed to prepare the student for 

further graduate study to pursue a doctorate program rather than for entry into the business 

world. The PSM in Biotechnology degree offers students the option to acquire advanced skills, 

but within the context of a program designed for direct career entry. 

Course Prerequisites and Admission Standards 

1. Completion of specific coursework requirements of equivalent courses at Fresno State (see 

listing below; courses are in parentheses). It should be noted that the industrial survey from 

regional biotech firms and the industry-faculty workshop revealed a strong interest in 

specific prospective employee qualifications: communication skills; application of the 

scientific method; laboratory/field instrumentation; laboratory/field management; business 

management; and molecular biology knowledge. The core courses met many of these goals 

but seemed lacking in laboratory instrumentation skills largely associated with analytical 

chemistry activities and statistical tools for interpretation of scientific data and 

experimental design. Thus, the new prerequisites were added to the list required for the 

Fresno State biotechnology certificate program to ensure all our graduates meet basic 

qualifications in these areas. Because the students entering the program come largely from 

classical disciplinary undergraduate degrees, admission to the program requires a minimum 

of three categories of prerequisites and requires that all six categories of courses be 

completed for a degree award: 

a. General Genetics (BIOL 102) 

b. Microbiology including a laboratory (BIOL 120) 

c. Biochemistry (CHEM 150 or 155) with a laboratory (CHEM 156) 

d. Immunology with a laboratory (BIOL 157 and 157L) 

e. Analytical Chemistry (CHEM 105 or CHEM 102) 

f. Statistics (MATH 101) 

2. Appropriate undergraduate science degree with a minimum 3.0 grade point average in 

science and math coursework. 

3. Graduate Division admission requirements, including satisfactory general exam of the 

Graduate Record Exam (GRE) and, when appropriate, the Test for English as a Foreign 

Language (TOEFL) exam scores. 

Suggested Program of Study 

The two-year program of study presented below represents a suggested pattern, including 

some opportunities for prerequisites. No specific program prerequisites were deemed 

necessary in business, but the rigor of graduate level business courses has prompted the 

suggested program of study to provide adequate time to assimilate business concepts. 

However, for entry into this curriculum model, students will need to have completed both the 

genetics and biochemistry prerequisites. The complete sequence of the two year program 

leading to this interdisciplinary Professional Science Master’s (PSM) in biotechnology/ business 

degree is presented in Table 2. 

October 2010

(Insert Table 2 about here) 


P a g e | 13 

Limiting the course load for the first year provides additional time to study research 

concepts and practices of biotechnology and business, as well as additional opportunities to 

fulfill any program prerequisites. In addition, by having all the students engage in the core 

courses in unison, a cohort of students is established to strengthen peer group networking. 

Such networking is expected both to reinforce the team approach to problem solving that 

dominates business organizational cultures and to provide the positive peer pressure that often 

helps students through the more rigorous elements of a program. Another advantage of the 

first-year program is that nearly all courses are offered in the evening to accommodate 

students with daytime employment or student assistantships, until the certainty of a specific 

career direction is established. 

A recent change in the suggested program’s sequencing has been a delay in the onset of 

the core MBA course sequence. This semester delay allows the students some time to identify 

scientific examples which might be ripe for commercialization. To heighten this awareness, the 

first installment of Biotechnology Seminar (BIOL/CHEM 248) now centers on presentations of 

individual biotechnology company “case studies” associated with a specific product and 

focusing on the positive and negative aspects, both scientific and commercial. This framework 

should improve the student’s understanding of what is required for an effective business plan, 

a main focus of Seminar in New Ventures (MBA 270). 

Industrial Experience (BIOTC 275), the internship segment of the program, was originally 

conceived for the first summer, when many industrial organizations offer specific internship 

programs. However, because the length of many industrial internships has grown from a few 

months to sometimes 6-12 months, and because of a desire to strengthen the student’s overall 

science and business skills before moving into the industrial setting, it is suggested the 

internship should occur nearer the end of the program of study. Flexibility is imperative, 

although the internship is listed at the very end of the program to meet opportunity availability 

and to make good student-industry matches. The enrollment listing in the last formal semester 

of the program represents the semester in which each student will participate in the 

“Internship Forum” event, showcasing their experiences through oral presentations before 

their industry partners, current and prospective biotechnology students, university faculty and 

administrators, and the interested public. 

Changes in fulfilling the Culminating Experience–Biotechnology Project (BIOTC 298) or 

Biotechnology Thesis (BIOTC 299) are also being considered. The biotechnology faculty now 

considers a team-based project as more relevant to a professional program, even if a thesis has 

an applications focus. A five-year program review, which may further resolve this concern, is 

currently under way. 

Status of the Program and the Program Graduates 

New student enrollments in the program have continued to climb from seven students in the 

inaugural 2005-2006 academic year to 17 students entering with the 2009-2010 academic year. 

The desired program size is 20 new students entering the program per year. There has been a 

strong interest in the program among international students (more than 100 applicants per 

October 2010


P a g e | 14 

year); consequently, the program has been composed of roughly one-third domestic students 

and two-thirds international students. Biotechnology program students have won 

entrepreneurship competitions through the Craig School of Business with teams of scientists 

and MBA students. Internship partnerships continue to grow, primarily with agricultural and 

health care organizations in the Central Valley or with biopharmaceutical companies across 

California and the nation. 

Industry satisfaction in the program’s students is demonstrable from the strong 

evaluations received by those completing their internship (see Appendix). In addition, the postgraduate 

employment of five of the 10 program graduates, either directly with the 

company/agency where the student served as an intern, or with a similar company or agency in 

a position secured through the direct recommendation of the supervisor of the internship, 

reveals the positive impact of our students on their industry supervisors. The industry/agency 

Advisory Board meets annually to receive updates and provide insights for program 

improvement. The biotechnology program faculty (from all eight campus departments) also 

meets annually to discuss logistical issues and implementation of industry-relevant components 

into the curriculum. In addition, numerous formal program assessment activities have been 

conducted, including the aforementioned evaluation of each student intern by the industry. 

Much of the assessment effort centers on evaluating communication skills, written and oral, as 

the most critical area identified prior to formation of the degree and continuing in citations 

from the industry evaluations. Two series of assessment outcomes, i.e. those with the greatest 

sample sizes to date, are shown in Tables X (Grad Writing Requirement) and Y (Internship 

Forum Presentation). These assessment activities have identified areas for improvement to 

enhance student success, e.g., by requesting inclusion of organizational charts and background 

information for the oral internship presentations and by incorporating stronger mentoring 

activities prior to the internship forum to improve comfort, enthusiasm and content scores. In 

addition, scrutiny of a wide variety of variables, e.g. GRE or GMAT scores, numbers and types of 

prerequisites completed, biotechnology faculty input on productivity, and the varied curricular 

(elective) pathways taken by the matriculated students, have identified some elements that 

seems to determine who will be successful or not in completing the program. This analysis has 

led to revisions in admissions decisions, i.e. requiring stronger writing scores for the 

standardized entrance exams for consideration, and prompting earlier connections between 

incoming students and prospective mentoring faculty for the Project or Thesis component of 

the program. Comments from the students in Exit Interviews prompted the need for additional 

networking opportunities with regional industries, both to improve appropriate social and 

communication skills and to expand the breadth of internship placements. Our efforts to press 

the students to complete the Graduate Writing Requirement early, has decreased the time to 

degree significantly from the onset of the program; students are now regularly finishing in the 

expected two-year time frame. In the rapidly changing world of biotechnology, continuous 

assessment and updating of the program are crucial. 

The program is still new but is beginning to work more extensively with local start-up 

industries, particularly in biofuel technologies. The nature of life sciences research, which lacks 

much of the mathematical predictability inherent in the physical sciences and engineering, can 

frustrate the classic approaches to the entrepreneurial process and time lines. But, the 

potential rewards of a unique, self-replicating manufacturing outcome ensure that adjustments 

October 2010


P a g e | 15 

in commercialization processes and time lines can be found, and the cooperative interactions 

between biotechnology and entrepreneurship faculty in a university setting can serve as a 

platform to negotiate those hurdles. 

CONCLUDING REMARKS 

Regional economic development strategy for the past several decades, until the early to 

mid-1990s, was often driven by a policy of incentives to attract new or retain existing ventures 

in an effort to expand the economic base or to add to it through import substitution. Small 

businesses and the processes that create them contribute greatly, both quantitatively and 

qualitatively, to the national economy. Entrepreneurship is the way the economy and society 

take advantage of new wealth-creating opportunities that arise from constant change. 

However, when change accelerates, as it does during periods of rapid technological change 

such as during the rise of the industrial revolution or the rise of the information or knowledge 

age, entrepreneurship and enterprise development also tend to increase (Stough, 2000). 

Therefore, technological change creates new, exploitable possibilities and opportunities; and 

one of the main reasons entrepreneurship and interdisciplinary entrepreneurship education has 

been increasing is rapid technology change and the associated increasing innovation rates. 

The Genetics and Biotechnology Revolution is an especially exemplary example such an 

opportunity, and it is critical for the universities to take steps to improve the chances that such 

opportunities come to fruition by integrating science and entrepreneurship mindsets. 

However, conflicts of interest and conflicts of values sometimes stand between universitybased 

research and commercialization of that knowledge, which can often delay or deter the 

commercial application of research (Bird, Hayward & Allen, 1993). Regardless of this inherent 

conflict, fostering entrepreneurial attitudes among university scientists creates a dynamic 

mental landscape within the university walls, in which application possibilities constantly 

respond to user needs to yield a stream of new product concepts by fostering a “what-couldyou-do-with-it?” 

attitude (Armstrong & Tomes, 2000). 

Within the context of the Professional Science Master’s Degree in Biotechnology at 

California State University, Fresno, there have been unique benefits not always enjoyed by 

other similar programs. The Management Department faculty have invited the biotechnology 

science graduate students into their regular classrooms, and students who were undergraduate 

business majors have found access through the program to the graduate science classes. 

Master’s Degree-granting institutions, such as Fresno State, tend to nurture more 

Teacher/Scholar and Service orientation among the faculty themselves than at traditional 

Research Universities, so the spirit to link programs was more easily attained even during the 

first visits between Science and Business faculty interested in considering an interdisciplinary 

program. The fact that the strong agricultural college and industry in the Fresno region is 

supportive, and that the industry and discipline routinely integrate both business and science, 

further nurtures this cooperative aspect of the Fresno State experience. 

Entrepreneurship programs across the United States have demonstrated that the 

appropriate intellectual environment can produce successful start-up companies, combining 

the best of university-developed technologies and student interests with competent and 

professional managerial and financial advice. A Technological Entrepreneurship Certificate 

October 2010


P a g e | 16 

program at the University of Iowa requires the completion of a minimum of six 

entrepreneurship courses. Its 1,200 engineering undergraduate students take at least one such 

course during their engineering program; otherwise, according to its College of Engineering 

Dean Richard K. Miller, “too many engineers will end up in a white coat in the back room of 

some organization” (Ballon, 1998). George Mason University also has implemented a new 

university wide curriculum that fuses entrepreneurship skills into Education, Arts, Engineering, 

Public Administration, Liberal Arts, and Health/Nursing programs of study that already exist. 

This establishes synergistic and cooperative networks challenging the resourcefulness of 

students (Stough, 2000). A similar successful program offered at Swinburne University of 

Technology in Melbourne, Australia, tracks the entrepreneurial performance and activities of 

graduates, over time (McMullan & Gillin, 1998). Even smaller colleges can develop creative 

entrepreneurial programs. Hope College in Holland, Mich., established a collaborative research, 

education, and entrepreneurship program in its chemistry curriculum that relies on an 

interactive, Web-based discussion board (Polik, 2000). As some universities have discovered, it 

takes creativity on the part of administrators to foster innovative thinking in students and to 

knock down the barriers between disciplines (Rae-Dupree, 2002). Furthermore, it takes more 

than technology to be successful. A Stanford Technology Ventures Co-Op Program quickly 

found a “doable” technology is intriguing but also needs to address a customer’s problems 

(Bellinger, 1996). 

The developing biotechnology industry needs entrepreneurial leaders. The industry is 

quickly changing and growing, without continuing entrepreneurial efforts businesses fail. The 

PSM in Biotechnology Program at Fresno State has been developed to meet this growing 

demand. Though most of our students have become employed by existing enterprises, their 

entrepreneurial and business skills are needed by these industries. Our program prepares 

students to take on the challenges of this demanding and exciting industry. 

REFERENCES 

Anonymous (2004), Center for the Study of Rural America, The Main Street Economist, Federal 

Reserve Bank of Kansas City. 

Armstrong, P. and Tomes, A. (2000, June), Entrepreneurship in Science: Case Studies from 

Liquid Crystal Applications, Prometheus, 18(2): 133-147. 

Bellinger, R. (1996, February 12), Entrepreneurial Program, Electronic Engineering Times, 888: 

82-83. 

Ballon, M. (1998, March), Breeding Technology Entrepreneurs in Iowa, Inc. Magazine, 20(3): 

46-47. 

Bird, B.J., Hayward, D.J., and Allen, D.N. (1993, Summer), The Conflicts of the 

Commercialization of Knowledge: Perspectives from Science and Entrepreneurship, 

Entrepreneurship Theory and Practice, 17(4): 57-77. 

October 2010


P a g e | 17 

Bracken, B. (2002, March), Team Skills and Individual Assessment in Team Settings: Beyond 

Boundaries, Proceedings of the National Collegiate Inventors and Innovators Alliance (NCIIA) 

6 th Annual Meeting, 14-16, 21-25. 

Burrill, S. (2008), Biotech 2008-Life Sciences: A 20/20 Vision to 2020, 22 nd annual report on the 

state of the biotech industry, San Francisco, CA: Burrill & Company. 

Crismond, D. (2001). Learning and Using Science Ideas When Doing Investigate-and-Redesign 

Tasks: A Study of Naive, Novice, and Expert Designers Doing Constrained and Scaffolded 

Design Work, Journal of Research in Science Teaching, 38(7): 791-820. 

Drabestoot, M., Novack, N., and Weiler, S. (2004, 4 th Quarter). New Governance for a New 

Rural Economy: Reinventing Public and Private Institutions, Economic Review, 89(4): 55-70. 

Ernst & Young (2008). Beyond Borders: Global Biotechnology Report 2008, Ernst & Young 

Global Biotechnology Center, www.ey.com/beyondborders. 

Etzkowitz, H. (2001, Summer). The Second Academic Revolution and the Rise of 

Entrepreneurial Science, IEEE Technology & Society Magazine, 20(2): 18-29. 

Laukkanen, M. (2000, January-March). Exploring Alternative Approaches in High-Level 

Entrepreneurship Education: Creating Micromechanisms for Endogenous Regional Growth, 

Entrepreneurship & Regional Development, 12(1): 25-47. 

McMullan, W.E. and Gillin, L.M. (1998, April). Industrial Viewpoint: Entrepreneurial 

Education, Technovation, 18(4): 275-286. 

Mason, T.W. and Berry, F.C. (2002). Assessing the Outcomes of E-Teams for Engineers. 

Beyond Boundaries, Proceedings of the National Collegiate Inventors and Innovators Alliance 

(NCIIA) 6 th Annual Meeting, 17-20. 

Committee on Enhancing the Master‟s Degree in the Natural Sciences, National Research 

Council (2008). Science Professionals: Master’s Education for a Competitive World, 

Washington, D.C.: The National Academies Press. 

Okudan, G.E., and Zappe, S.E. (2006). Teaching Product Design to Non-Engineers: A Review of 

Experience, Opportunities, and Problems, Technovation, 26(11): 1287-1293. 

Polik, W.F. (2000, April). The Keys to Innovation: Research, Education, and Entrepreneurship, 

Chemical Innovation, 30(4): 3-4. 

Rae-Dupree, J. (2002). Engineering. U.S. News & World Report, 131(11), 36-37. 

Ronstadt, R. (1988). The corridor principle. Journal of Business Venturing, 3(1): 31-40. 

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Rzasa, S.E., Wise, J.C. and Kisenwether, L. (2004). Evaluation of Entrepreneurial Endeavor in 

the Classroom: The Student Perspective in Education that Works, Proceedings of the National 

Collegiate Inventors and Innovators Alliance (NCIIA), 8 th Annual Meeting, 171-177. 

Sheft, Judith (2008). Technology Transfer and Idea Commercialization, Nature Biotechnology, 

26: 711-712. 

Stough, R. (2000, May). George Mason University Launches Entrepreneurial IT Programs”, PA 

Times, 23(5): 5-6. 

Vozikis, G. and Cornell, C.P. (2006). The Value of Participation in an Innovation Program: 

Student Experiences at University of Tulsa‟s Innovation Institute, Proceedings of the National 

Collegiate Inventors and Innovators Alliance (NCIIA) 10 th Annual Meeting, 235-242. 

Zacharakis, A.L., Neck, H.M., Bygrave, W.D. and Cox, L.W. (2002). Global Entrepreneurship 

Monitor: National Entrepreneurship Assessment-2001 Executive Report. Kauffman Center for 

Entrepreneurial Leadership. 

_______________________________________________________________ 

TABLE 1: PROGRAM COURSEWORK 

I. Core Curriculum 

Units Required 

A. Molecular Biology Lecture (BIOL/CHEM 241A-B) 3-3 6 

B. Biotechnology Seminar (BIOL/CHEM 248) 1 2 

C. Seminar in New Ventures (MBA 270) 3 3 

D. Seminar in New Venture Management (MBA 272) 3 3 

Or New Venture Creation (MBA 273) 

E. Industrial Experience (BIOTC 275) 3 3 

F. Culminating Experience with an Oral Defense Required 4 4 

1. Thesis (BIOTC 299) An Interdisciplinary Research Project 

OR 

2. Project (BIOTC 298) Written Report as a Science Leader for a 

Team-Based Project 

October 2010

II. Approved Additional Courses (Electives): 9 

(Elective courses could include a maximum of one undergraduate course) 

A. Protein Purification Techniques (BIOL/CHEM 242) 3 

B. Nucleic Acid Techniques (BIOL/CHEM 243) 3 

C. Cell Culture Techniques (BIOL/CHEM 244) 3 

D. Industrial Biotechnology (BIOL/CHEM 245) 3 

E. Biometric Statistics (AGRI 200 or BIOL 274) 3 

F. Bioethics (PHIL 123) 3 

G. Plant Micropropagation (PLANT 108) 3 

H. Computational Foundations Bioinformatics (CSCI 101) 3 

I. Analytical Instrumentation (CHEM 106) 4 

J. Quality Assurance in the Food Industry (FSC 120) 2 

K. Food Laws, Regs, Inspection & Grading (FSC 178) 3 

L. New Venture Management (MBA 272), 3 

And/or New Venture Creation (MBA 273), 

And/or Seminar in Business Ventures (MBA 270) 

M. Relevant Topics Courses, e.g. Computational 3 

Biophysical Chemistry (CHEM 2XX) or Unit 

Operations in Food/Bio Processing (FSC 2XX) 

TABLE 2: PROGRAM OF STUDY 

Total Program 30 

Fall Semester of First Year Spring Semester of First Year 

Molecular Biology I (BIOL/CHEM 241A) Molecular Biology II (BIOL/CHEM 241B) 

Biotech Seminar (BIOL/CHEM 248) Biotech Seminar (BIOL/CHEM 248) 

Prerequisite or Approved Elective Seminar in New Ventures (MBA 270) 

Identify Graduate Thesis/Project Advisor Prerequisite or Approved Elective 

First Summer 

Skills training for Thesis/Project 


3 

P a g e | 19 

October 2010

Thesis/Project Investigations and Activities; Complete Graduate Writing Requirement 

Fall Semester of Second Year Spring Semester of Second Year 

Seminar in New Venture Management or Approved Elective (if necessary) 

Creation (MBA 272 or 273) Internship (BIOTC 275) 

Approved Elective Culminating Experience (BIOTC 298 or 299) 

Approved Elective 

Advancement to Candidacy 

Skill/Knowledge 

Set (High 6 

categories of 29 

surveyed; Priority 

Score Range 1-5) 

Priority 1 & 2 

Respondents (%) 

Second Summer 

Final Completion of Internship/Culminating Experience Written and Oral Reports 

Industry 

Type 

Respondents 

(%) 

APPENDIX 

Pre-Degree Survey Results (Compiled Summer 2002): 

Respondents from the California Biotechnology Industry 

No. of Company 

Employees 

500 

Respondents (%) 28% 28% 28% 16% 

Communication 

100% 

Applying 

Scientific 

Method 

96.7% 

Lab/Field 

Instrumentation 

83.3% 

Business 

Managemen 

t 

76.7% 


P a g e | 20 

Agricultural Bioinformatics Biopharmaceutical Diagnostics Forensics Therapeutics 

15% 15% 33% 21% 21% 24% 

Molecular 

Biology 

71% 

Lab/Field 

Management 

70% 

October 2010

Assessments of Student Performances (Compiled Fall 2009) 


P a g e | 21 

Graduate Writing Requirement Submissions and Pass Rate 

Mon/Yr Apr 08 Jul 08 Sep 08 Oct 08 Nov 08 Apr 09 Aug 09 May 

10 

Aug 10 

# 1 st 

Submissions 

8 1 4 0 0 4 0 17 1 

% Passing 50% 0% 50% NA NA 75% NA 47% 100% 

# 

Resubmissions 

0 4 1 3 1 0 1 0 6 

% Passing NA 100% 0% 67% 100% NA 100% NA 67% 

Internship Forum Presentation (Scale range 1-4) 

Mon/Yr Oct 08 Feb 09 Oct 09 

# of Presenters 

Scored Category 

8 5 3 

Delivery 3.3 3.3 3.0 

Comfort 3.2 3.4 3.5 

Enthusiasm 3.1 3.3 3.5 

Content 3.3 3.5 3.7 

Work Experience 3.2 3.4 3.4 

Answer 

Questions 

3.1 3.2 3.6 

Overall Average 3.2 3.37 3.42 

October 2010


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Industry Evaluations of Internship Students (Quantitative Assessment; Scale 1-5) 

Internship Period Summer 2008 Fall 2008 Summer 2009 Fall 2009 

# of Interns 

Scored Category 

8 5 3 4 

General Skills for Work 4.4 4.6 4.5 4.25 

Knowledge of Organization 4.0 4.4 3 3.75 

Business Writing Skills 4.1 4.4 3.5 3.75 

Effective Oral 

4.1 4.8 3.5 4.5 

Communication 

Produced a Deliverable 4.4 4.4 4 4.25 

High Productivity 4.3 4.8 4.5 4.25 

Responsibility/Accountability 4.8 4.8 4.5 5 

Timeliness/Meets Deadlines 4.5 4.8 4.5 4.75 

Creativity/Originality 4.3 4.8 4 4.75 

Received Constructive 4.8 4.8 4.5 4 

Feedback 

Asked Questions 4.3 5 3.5 5 

Professional Behavior 4.9 5 4.5 4.75 

Dependable/Punctual 4.9 4.8 4.5 4.75 

Personal Appearance 4.9 5 4.5 4.75 

Overall Average Score 4.43 4.74 3.9 4.4 

October 2010


P a g e | 23 

THE SMALL BUSINESS INSTITUTE® CONSULTING TEAM’S 

ETHICAL DILEMMA 

BY 



dhoffm20@mscd.edu 



nradojev@mscd.edu 



emcvicke@mscd.edu 



gilliard@mscd.edu 

Judson Faurer 


faurerj@mscd.edu 

October 2010


P a g e | 24 

Key Search words: ethics, consulting, tax fraud, ethics in consulting, Small Business Institute®. 

ABSTRACT 

Professor Hucklebee did not know how to respond when his SBI ® consulting team informed 

him that their client admitted to cheating on his Federal and state income taxes. The client 

specifically said “I cheat on my taxes.” The semester long class was scheduled to end the 

following day with the team‟s final public presentation. The team presentation was a large 

portion of each student‟s overall grade. Up to this point, all other requirements for the course 

were complete, including the written report. 

All students were required to do an oral presentation because the professor believed that it met 

Bloom‟s highest level of learning- defense of one‟s recommendations. Answering questions from 

other faculty members, other students, and outside members in the public make the presentation 

and defense more realistic. 

If the Professor excuses one or more team members from the presentation requirement, he would 

violate other students‟ distributive justice – that all students be treated equally. If he forces the 

consulting team to present, he might violate individual moral codes. If the students tell the truth 

about their client in public are there any liability issues? What should the professor do? 

This case could be used in any class that covers ethics by first asking which groups cheat more 

on their taxes: young versus old, poor versus rich, or men versus women. The discussion can 

then evolve into small business ethics and the impact of cheating on the value of any small 

business. 

Background 

THE SMALL BUSINESS INSTITUTE® CONSULTING TEAM’S 


As Dr. Hucklebee sat and listened to his student team he was not sure how to respond. After 

hearing two team members talk at once, he asked them to stop, take a breath, think back, and tell 

him exactly what their small business client said. 

Although they stated the encounter in slightly different words, both members collaborated each 

other‟s version - their small business client blatantly admitted that he was cheating on his federal 

and state income taxes (Appendix 1). 

The students had almost finished a semester course on consulting with a small business 

client/owner. The course was a senior level class requiring students to determine the client‟s 

problems, develop alternatives, and recommend solutions. The last assignment was to orally 

October 2010


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present their report to the client, business faculty, and public. The students‟ grades depended on 

completion of all assignments including the written report, the oral report, and an assessment by 

the small business client. This was a capstone course and mandatory for the students to graduate 

The Small Business Consulting Class 

The Small Business Consulting Class was part of the University and College of Business‟s small 

business and entrepreneurship program. The class was part of a three course sequence. These 

classes were: fundamentals of entrepreneurship, new venture planning, and the consulting class. 

Many of the students had completed all three courses and were using the classes to gain 

necessary knowledge to start their own business. 

The University belonged to the Small Business Institute® 1 that was a national organization of 

schools dedicated to field based learning. The professor had been part of this national 

organization 20+ years and had never had an incident like this occur. 

The instructor found small business clients for the course from the local Small Business 

Development Center, the Chamber of Commerce, and the professor‟s contacts. The professor 

had personally used this client‟s business many times, made friends with the owner, told the 

owner about the class, and received the owner‟s request to be a client. 

Professor Huckelbee stated that the benefits to students were fourfold. The field based learning 

gave students a real world business in which to apply what they had learned. The students 

highlighted the class on their resumes and discovered that most recruiters asked about the 

experience. Several reported that it made them more comfortable going into interviews with the 

belief that they had something to offer their potential employers. Lastly, the course required the 

participants to not only use what they had learned but made them integrate all the areas of 

business from accounting, management, finance, strategy etc into the final recommendations. As 

a result of these “real world experiences” both student expectations and evaluations of the course 

were high. 

Program and Course Requirements 

All the clients were interviewed, screened by the instructor, and told the requirements of the 

class. The instructor required that all the small business clients/owners participating in the 

program meet the following requirements: 1) they had to be in business for more than two years, 

2) they had to meet with the students weekly, 3) provide enough information for the students to 

review, and 4) attend the oral report on campus. The client was personally asked by the 

professor if he wanted the students to review his business‟ financials. The provision of financial 

statements was not required for the clients to enter the program. Some clients agreed and some 

did not. This client wanted to provide his financial statements because he wanted the team to 

determine the business‟ value for a possible future sale. 

1 The Small Business Institute® is a national organization and the name is trademarked. 

October 2010


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The students were assigned to teams by the instructor to ensure that each team had marketing, 

management, finance, accounting and other expertise needed for the analysis of the client‟s 

situation. This team had one finance/accounting student, one marketing student and one 

management student. Each student had to sign a letter agreeing to maintain confidentiality of all 

the client‟s information. In exchange, the client signed a waiver forfeiting their right to sue 

based on any of the team‟s analysis, findings, or recommendations. The waiver included the 

students, university, and professor. 

The course required the students to establish rapport with the client, meet the client once a week, 

determine the business‟ major issues, develop alternative solutions to these issues, and 

recommend solutions. The team„s written report had been graded, edited, and rewritten several 

times. It had been copied and bound with one color copy for the client. Tomorrow the team 

needed to orally present their report to the class, the instructor, the client, and public visitors. 

The course was structured so that successive course requirements moved up Bloom‟s learning 

taxonomy to the highest level (Bloom‟s Taxonomy is in Appendix 2). At the lowest levels the 

students had to recall material from their accounting, finance, management, marketing, and other 

classes. Then they had to identify the clients‟ major business issues (Level 2). Once identified 

the team had to analyze the issues, determine alternatives, and determine the pros and cons of 

those alternatives (Level 4). They had to compose solutions to those issues that fit together and 

integrate finance, accounting, and marketing issues (Level 5). Then the students were required 

to orally defend their recommendations (top Level 6) and answer questions by the instructor, 

other class members, the client, and university guests. This oral presentation was worth two 

fifths of the final grade and was mandatory and necessary to pass the class. 

The high number of points reflected the difficulty and Bloom‟s Level 6. Not only did the team 

have to organize and complete an oral presentation they had to defend their analysis and 

recommendations. The requirement to face probing questions from unknown members of the 

public made the assignment more difficult, challenging, and worth more points than any other 

assignment. The instructor had on many past occasions resolutely refused to let the students 

present their conclusions to just him or the client and the professor. 

The Dilemma 

Once the team caught their breath, the professor asked them to repeat the small business client‟s 

exact words which were “I cheat (on my federal and state taxes).” The client further stated that 

he included personal expenses on his business‟s financial statements and regularly removed cash 

from the cash register. This inside knowledge created problems for the following individuals: 

the students, the client, the professor, the university, and the public visitors. 

The Students Perspectives 

Each of the students had a different perspective. The finance/accounting student was the most 

upset and was close to refusing to work with the client. He would do the oral report only if the 

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Professor “absolutely required him to do it.” The management student was the least upset and 

was motivated to finish the class so he could graduate. The marketing student was marginally 

concerned. 

The Professor’s Perspective 

The professor was concerned about liability because the oral presentation was open to the public. 

The professor had invited other faculty, the School of Business Dean, alumni, and SCORE 

(Service Core of Retired Executives). SCORE members are retired business professionals who 

dedicate their time and advice to small businesses in the local community. 

Should Professor Hucklebee require the team to finish the project by giving the oral presentation 

to the client and public tomorrow? If the purpose of the class was to provide “real world 

experiences” was not being exposed to “real world warts” part of the experience? If the team did 

not finish the oral report how would that be equitable to the other five student teams who had to 

do an oral report, defend their solutions, and answer tough questions from the public? How 

would this team fulfill the requirements for the class? What were the ethical and legal 

ramifications of any option? Did the confidentially statement apply? Should there be concern 

about the oral presentation being open to the public? What action should the professor take? 

Should the accounting/finance student who was the most upset inform the IRS? Is cheating on 

income taxes so rampant the students, the professor and the University should ignore it? 

Appendix 1 

Written Statement from the Accounting and Finance Student Team Member to the 

University President 

On November 28 I and Sam McClure met with our client at the Old Chicago‟s restaurant 

at approximately 6:20 pm for the purpose of engaging in conversation related to the small 

business counseling class assignment. The conversation began with a discussion of the financial 

condition of the firm for the purpose of valuing the business (per the request of the client). I 

stated, “in order to increase the value of the business you must lower your expenses.” To this, 

the client replied, “I cheat.” The conversation continued about the financial condition of his 

business, and he declared that there were all sorts of different expenses in there, including his car 

payment and others. Later in the discussion, the client stated that “I am fully vested in social 

security, therefore I never plan to pay social security tax again.” He also stated that he has not 

paid social security tax in the past few years. Furthermore, the client declared, “I run a cash 

business and who‟s going to know if I take cash out of the register.” After this point in the 

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conversation, the client’s daughter (whose name I do not know) arrived, and the conversation 

shifted to a more social subject matter, and at approximately 7:30 pm we ended the conversation 

and parted ways. My desire to terminate all business relations with this client is based on the 

personal belief that the business conduct of this client was unethical and I do not feel 

comfortable making any professional recommendations to the client. 

Sincerely, 

James VanArasdale, Sam McClure, and Sally Henderson 

*The names of the students, client, University and city were disguised or removed. The client‟s 

reference to social security is not completely clear – possibly he was upset about the amount of 

social security taxes he was paying. 

Bloom’s Levels- lowest to highest: 

Appendix 2 

Bloom’s Taxonomy 

Knowledge: arrange, define, duplicate, label, list, memorize, name, order, recognize, related, 

recall, repeat, reproduce state. 

Comprehension: classify, describe, discuss, explain, express, identify, indicate, locate, recognize 

report, restate, review, select, and translate. 

Application: apply, choose, demonstrate, dramatize, employ, illustrate, interpret, operate, 

practice, schedule, sketch, solve, use, write. 

Analysis: analyze, appraise, calculate, categorize, compare, contrast, criticize, differentiate, 

discriminate, distinguish, examine, experiment, question, and test. 

Synthesis: arrange, assemble, collect, compose, construct, create, design, develop formulate, 

manage, organize, plan, prepare, propose, set up, write. 

Evaluation: appraise, argue, assess, attach, choose, compare, defend, estimate, judge, predict, 

rate, core, select, support, value, evaluate. 

Source: Bloom, B. (1956). Bloom‟s Taxonomy. Available: 

www.officeport.com/edu/blooms.htm 

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THE SMALL BUSINESS INSTITUTE CONSULTING TEAM’S 


BY 



dhoffm20@mscd.edu 



nradojev@mscd.edu 



emcvicke@mscd.edu 



gilliard@mscd.edu 

Judson Faurer 


faurerj@mscd.edu 

October 2010

Key Search words: ethics, consulting, tax fraud, ethics in consulting, Small Business 

Critical Incident Synopsis 


P a g e | 30 

The Student Consulting Team’s Dilemma presented a real world ethical issue. The team’s small 

business client blatantly informed them that his financial records were not accurate. He 

admitted including non-business related expenses in his Federal and state income taxes to 

minimize tax payments. The semester course was almost completed with the written report 

ready for the client. The last remaining course requirement was to orally present and most 

importantly defend the report to the client, the class, the instructor, and university guests. 

To complicate the issue the accounting/finance student would perform the oral report only if 

“absolutely required by the instructor.” The remaining two students looked to the instructor for 

guidance. 

Learning Objectives 

The ethical case can be used in any number of courses such as management, strategy, 

entrepreneurship, small business, or other disciplines. The short case presented an ethical 

dilemma with which students and professors can identify. What do they do now that is ethical 

and equitable to the team, the client, and the other students? How do you change the grading 

scheme at the last minute and make it equitable to everyone? 

In addition, the dilemma could be used in any entrepreneurial or small business class. The case 

raises ethical issues that all small business owners/managers face. Especially poignant is that 

cheating affects the selling price of the business. After discussing questions 1-7, ask what this 

business is worth. Let the students experiment what the business is worth if the owner only 

showed a breakeven on their taxes, a $70,000 profit, or a $90,000 profit. The new owner told 

Professor Hucklebee that she was able to buy the business for a “smidgen” – basically nothing. 

Then ask the question if the owner wanted to sell this business for $100,000 and got very little 

was his cheating worth it based on strictly a financial or economic analysis? 

The authors have had good success by starting the class with the first discussion question- 

which groups are more likely to cheat: young versus the elderly, rich versus the poor versus the 

middle class, or men versus women. Then present the answers to question 1 and ask them why 

these groups are more likely to cheat. This teases out some good explanations by the students. 

After engaging their interest, begin with the other discussion questions. 

October 2010

The students should be able to: 


P a g e | 31 

1. Identify the ethical issues on the part of the client, the team and the instructor (Level 1). 

2. Identify some alternatives for the instructor (Level 2). 

3. Analyze the ethical and equitable results of those alternatives (Level 3). 

4. Synthesize and apply a result that meets competing ethical objectives for the team, the 

other students, the instructor, and the client (Level 4). 

Discussion Questions 

1. According to the IRS, tax fraud cost the U.S. $113 billion in 1991. Some groups cheat 

more than others. Ask the class which group they think cheat the most: rich versus the 

poor versus the middle class, young versus the elderly, service corporations versus 

manufacturing etc. 

2. Does that fact that many corporations and individuals cheat on their income taxes 

exonerate the client? 

3. What is the dilemma in the critical incident? 

4. How should the instructor deal with the following: 1) the client, 2) the students, and 3) 

protect the university? 

5. If one student leaves the group due to moral self-obligation how will it affect the rest of 

the group? How will it affect the grades? What is equitable for the rest of the group and 

for the rest of the class? 

6. Does the fact that the professor would never let previous or current students miss the 

oral presentation to the public complicate the situation? What are some alternatives 

and their pros and cons? 

7. Discuss the implications of each decision the team has made and will make. 

8. For small business or entrepreneurial classes, the question is what is this business worth 

if the owner reports no net profit? 

Answers to the Discussion Questions 



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The figure of $113 billion in 1991 is very large and as one author pointed out 

would cover the U.S. deficit in 3-4 years. No they are not exonerated. 



According to the IRS, tax fraud cost the U.S. $113 billion in 1991. Some groups 

cheat more than others (Smith, 1991). Ask the class which groups they think 

cheat the most: rich versus the poor, young versus the elderly, service 

corporations versus manufacturing etc. A Money poll in January 1991 found that 

the public voted the following as the most likely to cheat: men regardless of 

income (52%), and the young (50%). Those voted the least likely: the elderly 

(71%), the poor (61%) and women (56%) (Smith, 1991). 

Smith (1991) found that there is a surprising amount of underreporting by the 

poor and elderly. The former live on cash revenues and can understate it. Many 

elderly use cash to underreport because they are on fixed incomes. Both the 

rich and the poor are the most active under-reporters. 

Individuals and organizations in the service industry under-report up to 84% of 

their tips. The author concludes that those groups that are the least likely to get 

caught do the most thus the service workers and those individuals and 

organizations dealing in cash. The article also reports that men are much more 

likely than women to report incorrectly. 

The least likely to cheat are those wage earners whose wages are reported by 

their employers. Also the middle income taxpayers are the least likely (Smith, 

1991). 

3. What is the ethical dilemma in the critical incident? Students may identify a number of 

dilemmas facing the participants in the case. 

The professor faces the primary dilemma and must decide whether to continue 

with the class presentations and embarrass the business owner in front of the 

review group including business leaders who may know the client. His dilemma 

is compounded by having to decide whether to confront the client or ignore the 

client’s comments. He also must decide how to grade the accounting/finance 

student without violating distributive justice by treating him differently from the 

other students. Conversely if he forces the student to present in front of the 

client he violates the student’s moral rights- the student’s conscience. 

The students involved in the project face the ethical dilemma of going against 

their ethical principles by continuing the presentation disclosing the client’s 

statement. Do they delete the statement from the presentation or fail to inform 

the IRS? The marketing and management students’ dilemma is the desire to get 

a grade and finish their education versus standing on principle and creating 

dissension within the group. 

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The accounting finance student is the most upset. Why? Accountants are held to 

ethical obligations and a CPA must comply with the Code of Professional 

Conduct. Accountants must take an ethics course offered by the Accounting 

Society before he/she can become a licensed CPA. Although the student is 

majoring in accounting is he/she obliged to adhere to the Professional Code of 

Conduct since he/she is not a CPA? The Professional Code provides guidance to 

the conduct of the professional when preparing accounting reports/tax returns 

for clients but does not provide guidance about actions to take when a client 

acts in an unethical manner. It is not unusual for small business owners to have 

a company car. For example, the owner’s car may be listed in the name of the 

company and the company makes the car payments and insurance payments. 

Does the student really have full information to make a judgment? Many 

individuals may say they “cheat” on a tax return, yet are conforming to tax 

codes- many parts of the tax code are open to interpretation and there have 

been reported instances of IRS employees not being consistent when providing 

advice to taxpayers. 

Does an accountant or professional tax prepare the business owner’s taxes? If 

so, then it should be assumed that the tax forms were prepared appropriately. 

It is stated clearly in the syllabus that all students must participate. At most 

universities a syllabus is considered a contract. Should the professor change the 

course requirements at the end of the semester? Is the issue such that 

inequitable treatment of students can be supported (specifically requiring all 

other students to make an oral presentation)? 

Is there any legal contract between the students/professor and the business 

client? Each entered into a verbal agreement to provide something. Students 

signed a confidentiality agreement and the business owners signed a waiver. 

4. How should the instructor deal with the following: 1) the client, 2) the students, and 3) 

protect the university? 

The client: Since the professor knows the client personally, he must decide 

whether to tactfully inform the client of the awkward situation and suggest the 

student project be terminated while leaving it up to the client to “right his 

wrong” actions. Since he is only dealing with “hearsay” from the students, he 

may also caution the client about possible repercussions if any of the students 

forward his comments to other authorities. At any rate, the professor has to 

contact the client and hear the client’s story. In this critical incident, the 

professor only has information provided by the students. 

The students: The professor has heard the students’ story of what happened. Is 

there more information he needs? Without any other information, the professor 

should not coerce the students to take any action deemed unethical. He should 

have a discussion with the students and entertain their recommendations and 

evaluation of the alternatives. He could bring in the University’s legal counsel to 

October 2010


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advise them of potential courses of action and the ramifications. Those students 

who vehemently oppose any further contact with the client should be given an 

optional or supplemental assignment for grade purposes. This student’s grade 

could also be based on his work to the present. Those who want to finish the 

assignment could give their presentation but without the outside business 

people or the client present. The instructor should discuss the incident with the 

entire class so all would know why the separate grading took place. 

The university: The professor should contact the Dean and the University 

attorney to obtain their input. At a minimum the professor could protect the 

university by not having the team present to the client especially with the public 

present. This action would create a legal liability for alleged libel by the 

students, the professor, and the university. 

5. If one student leaves the group due to moral self-obligation how will it affect the rest of 

the group? How will it affect the grades? What is equitable for the rest of the group and 

for the rest of the class? 

Should one student’s concerns about a client’s behavior be more important than 

equitable treatment for all the students? To void the syllabus is to void a 

contract between the student and the University. 

Does one student have the right to judge the client especially if it is detrimental 

to the group and to the class? 

The rest of the consulting team should not be adversely affected by the loss of a 

member. Those remaining in the group can certainly complete the preparation 

for the presentation. At worse the group will have a topic for discussion in 

developing their own ethical values. 

6. Does the fact that the professor has never let any students miss the oral presentation to 

the public complicate the issue? What are some alternatives and their pros and cons? 

The professor calls the client and terminates the consulting agreement. 

Pro –it keeps the students, professor and University from public 

embarrassment 

Pro- it signals to the client that the behavior is unacceptable 

Con- it violates distributive justice because the other students have to 

face public questions. 

The professor forces the team to present to the client and public. 

Pro- the team faces the same grading scale as the other students 

Pro- most of the team just want to finish the class and graduate. 

Con- it is forcing one student to go against his morals which would violate 

his moral rights. 

The professor leaves out the accounting student and has the rest of the team 

present to the public and the client. 

October 2010


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Pro- the other team members can finish and graduate. 

Pro- the professor can give the accounting finance student the grade he 

has earned to date. 

Con – the accounting student is not held to the same standards as the 

rest of the class. This violates the other students’ distributive and 

procedural justice. 

The professor can relent and let the students present the case to just him. 

Pro- it keeps the students, the university and the client out of public 

disclosure. 

Pro- it allows the students to finish the class 

Con- it is violates the other students’ distributive justice – all students are 

not treated fairly. 

The professor should do one of the above and notify the IRS. 

Pro- a tax cheater is exposed. 

Con- the professor is only relying on the students’ word and this is 

hearsay. 

The accounting/finance student should notify the IRS. 

Pro- it is in keeping with his moral structure. 

Pro- he is close to graduating and close to being held to accounting 

standards. 

Con-it could involve him in discussions with the IRS. 

7. There are three possible ways to value a business: 1) net asset value, the value of 

comparable businesses, and some form of financial performance based on earnings or 

net profitability. 

Net asset value. The potential buyer found out from the landlord that the 

lease was expiring. The tenant had installed tubs and plumbing what were 

single use items. Since the lease was expiring the potential buyer asked the 

landlord to leave the fixtures in place because she wanted to take over. Thus 

the value of the fixed assets was essentially zero. (The seller would have to 

remove them and leave holes in the walls so the landlord was eager to not 

have them removed.) 

To determine value for a residential house, appraisers use a composite or 

average of comparable houses in the neighbor. There were no businesses 

providing this service with 30 miles so comparables did not exist. 

One method the authors use is to approach the value of the business from 

the viewpoint of the potential buyer. This method attempts to put a value 

October 2010


P a g e | 36 

on the intangibles or good will. The method takes the time it would take for 

the potential owner to build a comparable business from scratch in years. 

This is used as the “multiplier.” The amount the buyer could earn from 

investing their down payment in some other investment is added to a 

comparable salary that they could earn if they did not do this business- they 

left a job making $30,000 to pursue this business plus they would “lose” the 

opportunity to earn $3,000 from investing their down payment in some 

other investment. 

Start with the following assumptions: 

The value of the assets is essentially zero 

The new buyer thinks that they could build a comparable business from scratch 

in three years so 3 is the “multiplier.” 

Assume that if the seller had been honest the net profit should have been 

$70,000 or $90,000 

The buyer will have to leave a “safe” corporate job making $30,000 a year. 

The buyer would forfeit making $3,000 interest on some other investment. 

No Item Zero Net $70,000ne $90,000 net 

r 

profit t profit Profit 

1 Adjusted value of tangible net worth 0 0 0 

2 Buyer’s potential earnings if the down 

payment was invested in safe or other 

investment 

3,000 3,000 3,000 

3 Reasonable salary for owner 30,000 30,000 30,000 

4 Average annual net earnings of the 

business for the past 5 years 

0 70,000 90,000 

5 Extra earning power of potential 

business over salary lost to buyer and 

profit from not investing down 

payment in some other investment: 

Line 4-line2-line 3 

-33,000 37,000 57,000 

6 Value of the intangibles Multiplier of 

3 times line 5 

-99,000 111,000 $171,000 

7 Final offer price 0 111,000 $171,000 

October 2010


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The conclusion is that if the owner had been honest and not cheating on his taxes, the business 

value would have been $111,000 if $70,000 net profit had been reported or $171,000 if 

$90,000 net profit had been reported. The conclusion is that buyers, bankers, or other 

investors will value a business less when the seller under reports net income. 

Research 

The material for this critical incident was collected by interviewing the instructor and 

subsequent interviews to determine accuracy. 

Relevant Literature 

Suggested material for this case would be the framework for the study of business ethics 

presented in Ferrell, O.C., Fraedrich, J., and Ferrell, L (2008). Business Ethics: Ethical Decision 

Making and Cases. 7 th ed. Boston: Houghton Mifflin. 

See also: 

Beauchamp, T.L., Bowie, N. (2004). Ethical Theory and Business. 7 th ed. Upper Saddle River, NJ: 

Pearson/Prentice Hall. 

Velasquez, M.G. (2006). Business Ethics Concepts and Cases. 6 th ed. Upper Saddle River, NJ: 

Pearson/Prentice Hall. 

Cascio, W.F. (2010). Managing Human Resources: Productivity, Quality of Work Life, Profits. 8 th 

ed. Boston: McGraw-Hill, Irwin. 

Daft, R.L. (2008). Management, 8 th ed. Mason, Ohio: Thompson-South-Western. 

Smith, M.T. (1991). Who Cheats on Their Income Taxes: men more than women? Money 

20(April 1991)100. 

Timmons, J.A. & Spinelli, S. (2009), New Venture Creation: Entrepreneurship for the 21 st Century, 

8 th ed. Boston: McGraw-Hill, Irwin. 

Epilogue 

The instructor turned the dilemma into a teaching situation and asked the students what the 

options were and their ethical pros and cons. When the accounting/finance student became 

more emphatic that he would not do the oral report, the instructor asked him for an equitable 

alternative that would fulfill the oral requirement. It was pointed out that the other teams had 

this requirement. 

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After some discussion the students asked the instructor to “fire” the client and take the client’s 

place for the oral report. The instructor always attended and therefore agreed to act like the 

“client”. 

The instructor called the client, confronted him with his statement, and informed him that the 

program was terminating his case. The client became livid, displayed a colorful and thorough 

grasp of foul language, and hung up. 

The instructor immediately informed the Dean of the College of Business who concurred with 

the conclusion. The instructor suggested to the Dean that he brief the University President 

upon the remote possibility the client would escalate the issue. . Upon arriving at the 

President’s office and before he could say anything both the President and the Vice President 

for Academic Affairs immediately questioned the Dean about the incident- the client had called 

both their offices to complain. The instructor and the Dean fully briefed the President who 

concurred with the conclusion. Having been legally trained, the President was certain that the 

university would prevail in any lawsuit. 

When the client called the Dean, the Dean told him that he agreed with the termination, he had 

the support of the President and Vice President for Academic Affairs, and that if the client 

wished to pursue the situation he would have to do so legally. A university lawyer remarked 

that the client would have been “crazy” to sue because he would have to admit in court that he 

cheated on his taxes. Fortunately, the client did not pursue the matter further and within a year 

sold the business. 

The instructor was told by the university attorney to not call the IRS because he would be 

engaging in hearsay. Only the students who heard the comment would have standing in court. 

The accounting/finance student threatened to call the IRS but the professor was not aware if 

that happened. The instructor now goes back to the business which is under new ownership. 

The client tried to sell his business for $100,000 but his financials indicated that the firm was 

not making any profit. The potential buyer called the landlord who leased the space to the 

client and found that the lease was expiring. The potential buyer then suggested that the 

landlord not remove any of the equipment (mostly fixed plumbing) and furnishings and they 

would take them over. When the seller called the buyer, the buyer informed him that he knew 

his lease was expiring and the buyer could obtain all of the furnishings and equipment for 

nothing. After exploding and yelling at the buyer, the seller hung up. Subsequently the seller 

called back in two days and accepted a “minimal” (smidgen in the owner’s words) payment for 

the business. 

Appendix 1 Overview of Ethics and the Importance of Ethics 

Business ethics comprises the principles and standards that guide behavior in the world of 

business. Investors, employees, customers, interests groups, the legal system, and the 

October 2010


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community determine whether a specific action is right or wrong, ethical or unethical. The 

judgments of these groups influence society’s acceptance or rejection of a business and its 

activities. Accounting fraud, such as that presented by the key issue in the client’s statement 

about cheating on taxes, is evidence of declining ethical standards in business, a clear indication 

of how a business can be rejected by relevant stakeholders. Professionals in any field—just like 

the students and professor in this case--must deal with individuals’ personal moral dilemmas 

because these issues affect everyone’s ability to function on the job. It is important to recognize 

the relationship between legal and ethical decisions. By studying business ethics, a student will 

begin to understand how to cope with conflicts between personal values and those of the 

organization with which the student works. 

The case of the ethical dilemma with this client would allow the team to extrapolate to a larger 

scenario and offer an opportunity to review the progression of the study of business ethics, 

particularly the institutionalization of business ethics in the 1990s when the Federal Sentencing 

Guidelines for Organizations (FSGO) was approved by Congress in November of 1991 and with 

the passage of the Sarbanes-Oxley Act (SOX) in 2002. 

The FSGO set the tone for organizational ethical compliance programs in the 1990s; the 

Guidelines codified into law incentives to reward organizations for taking action to prevent 

misconduct such as developing effective internal legal and ethical compliance programs and 

providing provisions to mitigate penalties for businesses that strive to root out misconduct and 

establish high ethical and legal standards. 

Likewise, if a company lacks an effective ethical compliance program and its employees violate 

the law (such as the case client), it will incur penalties. The FSGO establishes the approach that 

by taking preventive action against misconduct, a company can avoid penalties if a violation 

occurs. A company must develop corporate values, enforce it own code of ethics and strive to 

prevent misconduct—even one as small as that of the case-client. The case of the ethical 

dilemma with this client would allow the team to extrapolate to a larger scenario and discuss 

what such a code would entail. The 2004 amendment to the FSGO requires that a business’s 

governing authority be informed about its ethics program with respect to content, 

implementation and effectiveness. This places the responsibility on the company’s leadership. 

In this case, leadership is lacking. 

The accounting fraud of this client in this case is not totally dissimilar to the accounting scandals 

of the Twenty-First century such as WorldCom, Global Crossing, Qwest and Enron –and that of 

this case client—evidenced that falsifying financial reports had become part of the culture of 

many companies. The accounting/finance student’s response was particularly strong and shows 

that this student was aware of the recent history of similar situations. Such abuses increased 

demands to improve ethical standards in business and, thus, in 2002, Congress passed the 

Sarbanes-Oxley Act (SOX) which established broad change in organizational control and 

accounting regulations. SOX created an accounting oversight board that requires corporations 

to establish codes of ethics for financial reporting and to develop greater transparency in 

financial reports to investors and other interested parties. Although this company is small and 

October 2010


P a g e | 40 

private and outside the reach of SOX, the team of students could make comparisons and point 

out that the law requires top executives to sign off on their firms’ financial reports and risk fines 

and prison sentences if they misrepresent their companies’ financial position. 

SOX and FSGO, therefore, have institutionalized the need to discover and address ethical and 

legal risk. The ethical dilemma and accounting fraud at issue in the case provide a perfect 

illustration for the students’ team to discuss the importance of the importance of developing 

formal and informal mechanisms to have transparency about issues associated with the risk of 

misconduct—be it in a small, private company or a large, public company. 

The importance of developing an organizational ethical culture and a discussion of the benefits 

of business ethics should ensue. For example, discussion could take place about the future sale 

of the client’s business a year after the scenario and the fact that the sale of the business was 

most assuredly lower due to the accounting fraud. Also, the students could expand the 

discussion of stakeholder orientation to include the future buyer/investor in this business. 

A survey of business ethics literature would allow the students to extrapolate questions to a 

larger firm: how did this ethical conduct contribute to employee commitment? To investor 

loyalty? To customer satisfaction? To increasing profits? To a profitable sale of the business? 

The catalyst for the student’s response to the client’s admission of tax fraud was based on their 

individual moral philosophies and values. Although an investigation into these individual 

factors is a basis of ethical inquiry, in this case scenario, it would be more useful to briefly 

recognize the moral philosophies upon which an ethical inquiry is based, and then move the 

discussion to a framework of inquiry that includes a different analysis. A comparison of moral 

philosophies such as teleology, egoism, utilitarianism, deontology, virtue ethics and justice is 

usually part of a business ethics class and a review of the literature and studies is part of most 

business ethics text books. This team of students would benefit by expanding their ethical 

discussions from the moral and philosophical discussion to one that embraces stakeholder 

relationships, social responsibility and corporate governance. 

If the owner takes money out of the cash register does this not transmit the owner’s values to 

his employees and establish a corporate culture of theft? If the owner/manager cheats how 

this does affect their customers and other owners or investors? 

October 2010

The Impact of Trust and Dependency on Business 

Performance: 

A Study of SME Suppliers 

BY 

William C. McDowell, Assistant Professor 


mcdowellw@ecu.edu 

Michael L. Harris, Associate Professor 


harrismi@ecu.edu 

Shanan G. Gibson, Associate Professor 


gibsons@ecu.edu 


P a g e | 41 

October 2010

Keywords: performance, SMEs, trust, dependence 


P a g e | 42 

Abstract 

The purpose of this study is to examine the extent to which trust and dependence are 

predictive of performance for small and medium sized vendors. Using a sample of 134 

university vendors in the southwest region of the U.S., regression was used to test hypotheses 

related to both constructs while controlling for the organizational attributes of size, years 

working as a supplier to the buyer, and years working with the existing company. Results 

indicate that both trust and dependence are significant predictors of supplier performance for 

SMEs in the supply chain relationship. 

Introduction 

Although small business owners often face challenges in their supply chain relationships, 

their size allows them to be well suited for logistical integration with a key number of suppliers 

(Gélinas & Bigras, 2004). Some advantages for effective supply chain practices in small firms 

include centralized decision making, organizational flexibility with limited layers of bureaucratic 

structure, and a focus on customer service and business growth. In addition, small business 

owners often search for greater access to resources and learning opportunities that make them 

more open to strategic relationships (Beekman & Robinson, 2004). Research has shown that 

long-term relationships with other organizations can increase the growth and survival for small 

businesses (Aldrich & Auster, 1986), while the absence of these types of relationships may 

contribute to higher failure rates (Baum, Calabrese, and Silverman, 2000). 

While the streamlined structure and customer service focus of most small businesses 

promote effective supply chain integration, there are also challenges that can limit the 

effectiveness of such relationships. Among these challenges are less access to information 

October 2010

technologies, limited long range planning capabilities, and a lack of efficiency and size to 


P a g e | 43 

achieve economies of scale. Due to these limitations, Gélinas and Bigras (2004) suggest that 

small businesses must be willing to invest in strategic relationships with key suppliers in order 

to achieve success in today’s ultra competitive business environment. 

If small businesses are to be successful in logistical integration they must rely on a 

strategic approach that allows them to be viable partners with larger firms. Much of the supply 

chain management literature has focused on models and practices that work best for large 

multinational firms. In situations where organizational size and resources can vary 

dramatically, small business owners must adopt practices that allow them to be viewed as 

legitimate business partners. The opportunities for successful partnership must be weighed 

against the unique challenges faced by small business in order to create working relationships 

that are mutually beneficial for all parties involved. Additional research is needed to better 

understand the supply chain management strategies and processes used by small businesses 

that result in success. 

The purpose of this study is to examine organizational performance of small businesses 

and the role of trust and dependence in the supply chain management function. Our specific 

aim is to examine the relationship that trust and dependence have with the performance of 

small and medium-sized enterprise from a supplier’s perspective. Prior research by Redondo & 

Fierro (2007) examined the relationship of trust and commitment in supply chain integration 

based on the buyer’s role. Our study will expand on their findings and offer a different 

perspective from the role of small business supplier. A model of the relationships can be found 

in Figure 1. 

October 2010

Figure 1 

The Relationship of Trust and Dependence with Performance in SMEs 

Trust 

Dependence 

Small Business 

Literature Review 

Performance 


P a g e | 44 

Supply chain management can serve as a critical function for small and medium-size 

enterprises, and there has been a call for more focus on its impact within the small business 

context (Gélinas & Bigras, 2004; Nelson & Ratliff, 2005; Morrissey & Pittaway, 2006; Redondo & 

Fierro, 2007). Past studies have shown that business size has a direct impact on the power 

dependency with the distribution channel (Gélinas & Bigras, 2004; Redondo & Fierro, 2007), 

and that larger companies are often able to control the relationship with smaller customers or 

suppliers (Mudambi, Schruender, & Mongar, 2004). As suggested by Gélinas & Bigras (2004), 

this can lead small businesses to have a subordinate relationship to larger companies. 

Since small businesses can be vulnerable to the demands of larger companies, Saunders 

(1997) and Fuller and Lewis (2002) propose that small business owners identify organizations in 

which they can develop mutually beneficial relationships. Similarly, Beekman and Robinson 

(2004) urge small business owners to selectively identify businesses poised for growth and to 

focus on finding partners interested in long-term relationships. When size differences exist, 

smaller firms can focus on using business strategies that emphasize strategic relationships and 

customer service. If done correctly, small businesses can use supply chain management 

practices to develop a competitive advantage for sustainable growth (Ahuja 2000). 

October 2010


P a g e | 45 

In addition to size differences, most large companies have a supply chain management 

function, whereas small businesses often lack a formal supply chain system (Quayle, 2000). In 

fact, supply chain management is generally not addressed in the business plan of most new 

ventures. This creates a situation where suppliers with limited resources are forced to provide 

substantial accommodations to larger organizations while also facing intense price pressure and 

customer service expectations (Kasouf & Celuch, 1997). Many small business owners, 

particularly micro businesses, tend to prefer a more informal managerial style and are 

responsible for collecting information and making final decisions (Matlay, 1999). As their 

businesses grow, they may adopt a more formal approach to supply chain management, but 

still the resources available to small ventures pale in comparison to the purchasing 

departments found in most large companies. As suggested by Morrissey and Pittaway (2006), 

once a business gets to a certain size, generally 26 to 50 employees, it will often identify a 

purchasing agent responsible for managing supplier relationships. Even then, however, there is 

limited information processing abilities and resources. 

Research by Redondo & Fierro (2007) produced interesting findings when comparing 

the buyer relationships within micro businesses and small and medium-sized enterprises. 

Among their findings was that trust and commitment had a greater impact on the long-term 

orientation of supplier relationships. In addition, communication was found to be important 

for both types of small businesses. Other key components in relationship development included 

frequent inter-firm contact, firm flexibility, and a willingness to adapt to the changing external 

environment. 

October 2010


P a g e | 46 

No matter the organizational size, supply chain management is an important area of 

research and practice in interorganizational relationships. Organizations are constantly 

searching for ways to lower costs, increase efficiency and productivity, and develop a 

competitive advantage through the supply chain function (Mentzer, DeWitt, Keebler, Min, Nix, 

& Smith, 2001). As such, researchers continue to examine variables that may impact 

organizational performance. In terms of relational variables, trust (Nooteboom, 2000; Johnston 

et al., 2004) and dependence (Pfeffer & Salancik, 1978) are two of the more important aspects 

of interorganizational relationships that can affect firm performance. 

Trust 

Trust, defined as the expectation that another party will perform as expected and treat 

you in a fair and reasonable manner, remains an area of continued interest in small business 

research. Within the scope of this definition, trust can be divided into two areas of focus, the 

cognitive and affective aspects. The cognitive aspect refers to the perception, by the actors, 

that expected performance has been achieved (Deutsch, 1958; McAllister, 1995). The affective 

aspect is explained as the intrinsic value, ascribed by the actors, of the genuine care or concern 

demonstrated within interactions (Lewis & Weigart, 1985; McAllister. 1995). 

A widely examined relationship exists between trust and performance within 

organizations (McAllister, 1995). In interorganizational relationships, trust has been identified 

as one of the most “fragile and tenuous” components of relationship management, given the 

likelihood for conflict among collaborating parties (Handfield & Nichols, 1999: p. 10). 

Consequently, there is a sharp focus on how trust affects, not only performance, but also the 

relationship between actors from different organizations (Johnston et al., 2004). 

October 2010

Trust is an important aspect of interorganizational networks. Organizations that 


P a g e | 47 

maintain trusting relationships with strategic partners cooperate efficiently and effectively to 

produce success, making trust an important predictor of behavior within organizations 

(Johnston, McCutcheon, Stuart, & Kerwood, 2004). Increased trust leads to concern for the 

relationship itself, and this emphasis on building and maintaining the relationship further 

influences performance and satisfaction among organizational members (Benton and Maloni, 

2005) Strong connections, built upon trust, enable organizations to maximize synergy and more 

quickly respond to changes and solve interorganizational problems (Uzzi, 1997). 

Prior research suggests that higher levels of trust will lead to greater performance in the 

supply chain management function. Within the small business context, it can be argued that 

smaller sized suppliers will place an even greater emphasis on trust to ensure customer service 

and satisfaction. Unlike larger companies with a significant customer base, small businesses are 

often more closely connected to their customers since they generally rely heavily on fewer 

clients. Thus, when trust on the part of the supplier is higher, the supplier will be more 

confident that the buyer will act in an expected manner. This will allow the supplier to be more 

secure in its ability to work with and perform as expected for the buyer. 

Literary review also suggests that higher levels of trust in small business relationships 

are an effective predictor of improved performance. The willingness to participate in the 

assumption of risk to improve relationships is greater among organizations that realize higher 

levels of trust. Procedural justice theory lends credibility to this result. The foundation of which 

is that organizations, which perceive equity in a relationship, are more likely to achieve 

October 2010


P a g e | 48 

desirable outcomes such as performance (Greenburg, 1990; Moorman, 1991; Gilliland & Chan, 

2001). 

The example of a supplier and a buyer can be used to illustrate the effect of trust within 

the confines of small business relationships. The development of trust in the relationship 

reduces the supplier’s concern with respect to the uncertainty of the buyer’s actions and/or 

tendencies to engage in opportunistic behavior (Williamson, 1975). This increased confidence 

on behalf of the supplier enhances their willingness to service the requirements of the buyer. 

Thus, the following hypothesis is given: 

H1: Supplier trust is positively correlated with supplier performance in small 

to medium sized enterprises. 

Dependence 

Dependence, defined as the scale of investment one organization makes in its 

relationship with another organization (Emerson, 1962), also receives considerable attention as 

it relates to interorganizational relationships. This extent of dependence can be divided into 

four elements, which better explain the composition of the investment a firm makes in its 

relationships (Heide & John, 1988; Pfeffer & Salancik, 1978). First, the organization considers 

the outcomes produced from the relationship to be important. Second, those outcomes are 

considered more productive than those available from alternate relationships. Third, few 

alternate sources exist that could provide those outcomes making the loss of the relationship 

costly to the organization. Finally, few alternatives for exchange exist making replacement of 

the relationship difficult (Pfeffer & Salancik, 1978; Lusch & Brown, 1996). 

When applying dependence theory to interorganizational relationships, Heide and John 

(1988) found that the organization that perceives greater dependence will utilize offsetting 

investments that will balance the dependent relationship. These investments can include 

October 2010


P a g e | 49 

specialized processes, value-added product developments, or other complementary activities 

to provide greater overall value. When applied to the small business context, it can be 

suggested that higher dependence on the part of the supplier will lead to greater performance 

and customer satisfaction. Based on the four elements of dependency in organizational 

relationships, it is very likely that small businesses will have greater dependence in the 

distribution process, regardless of their role as the buyer or supplier. The good news is that this 

dependency can lead to a more focused strategic approach and higher performance standards. 

Dependence theory, when applied to performance within interorganizational 

relationships, suggests that suppliers who perceive a higher level of dependence in their small 

business relationships will experience improved internal performance. Heide and John (1988), 

in applying dependence theory (Emerson, 1962; Beier & Stern, 1969) to vertical 

interorganizational relationships, found actors perceiving high levels of dependence in their 

relationships will balance this dependency through the development of alternate investments. 

This can manifest in a commitment to improving services, creating value added processes, 

expanding product offerings, or diversifying their business to improve confidence and efficacy. 

Thus, the following hypothesis is presented to explain the relationship between dependence 

and organizational efficacy. 

H2: A positive relationship exists, in small to medium enterprises, between the 

extent of a supplier’s level of dependence and their subsequent level of 

performance. 

October 2010


P a g e | 50 

Methodology 

Utilizing email, an electronic survey was administered to the approved vendors of a 

large university located in the southwestern United States. Given that most of the 

communication between the vendors and the university is through email, this approach was 

deemed appropriate. Survey respondents were the vendor’s primary contact person with 

respect to the university. The survey completion rate was 31%, representing 156 completed 

surveys out of 498 administered. A total of 134 surveys were selected from the responses, 

under the criteria they represented an SME. After removing samples with a low response rate, 

the average firm in the sample employed 34 individuals. 

Measures 

Given that both organizational and employee attributes can affect the relationship 

between a vendor and supplier, participants were asked to provide information including their 

organizational size, years of service to the university, and years the primary contact had worked 

with the vendor. Organizational size, according to Redondo and Fierro (2007) can impact 

relationships between vendors and suppliers. In this study, the average size of the organization 

was 34 employees. Years of service provides insight into the degree of institutionalization the 

vendor/supplier relationship exhibits. The duration of the relationship can affect the vendor’s 

ability to meet customer demand (DiMaggio & Powell, 1983). On average, the vendors selected 

had worked with the university for 6.39 years. Length of service within the vendor’s 

organization can help predict the employee’s willingness to identify, accept, and embrace the 

firm’s values and norms (Chao, O’Leary-Kelly, Wolf, Klein & Gardner, 1994). Primary vendor 

contacts, in this study, averaged 9.49 years of employment with the vendor firm. 

October 2010

Organizational trust was measured using Morgan and Hunt’s (1994) six item scale 


P a g e | 51 

examining the confidence of the vendor in the university as the buyer. This measure reflects 

the reliability of the buyer to the supplier in this vendor relationship. Trust (previous α = .949) 

is examined using a seven point Likert type scale with responses ranging from strongly disagree 

(1) to strongly agree (7). These items include “In our relationship with this buyer, our major 

buyer is always honest and truthful… our buyer can be counted on to do what is right…we have 

confidence in our buyer…we can count on them to have high integrity…we can count on them 

to be reliable…we can count on them to be trustworthy.” 

The level of organizational dependence is measured using an adapted scale by Lusch 

and Brown (1996) and items developed for this study. This study used three previous questions 

on dependence (previous α = .881) and two new items for a total of five items. Previous items 

included the statements “We are dependent on our major buyer,” “Our major buyer would be 

difficult to replace,” and “This buyer would be costly to lose as a buyer.” The two new items 

included “Our business with this buyer is extremely important to our company” and 

“Continuing the working relationship with this buyer is much more valuable for our company 

than finding another buyer.” These were measured using a seven point Likert type scale with 

responses ranging from strongly disagree (1) to strongly agree (7). 

The performance measurement items were designed specifically for this study through 

thorough examination of the literature and based on the expectations that buyers have for 

their suppliers. These seven items assessed performance across six major performance areas as 

well as a general overall performance item. Scale items include on time delivery, full 

completion of work orders, corrective action on the part of the supplier, ensuring necessary 

October 2010

time and resources are committed to completing the job correctly, and utilizing approved 


P a g e | 52 

products and procedures. These items were measured using a seven point Likert type scale 

ranging from strongly disagree (1) to strongly agree (7). 

Data and Scale Analysis 

Kline’s (1997) recommended procedures for evaluating and preparing data were used. 

Surveys with missing data points and responses indicating a selection of standard scores were 

removed upon full analysis. Assessment of univariate normality was performed to examine 

variables for skewness and kurtosis. Results showed a normal distribution and the reliability of 

the scales were affirmed using Cronbach’s alpha ( Nunnally & Bernstein, 1994; Henson, 2001). 

Coefficient alphas for the variables studied were well above Nunnally and Berstein’s suggested 

level of .70. Table 1 lists the reliability estimates obtained in this study. 

Table 1. Factor Patterns / Structure Constructs 

Trust Dependence Performance 

Variable Item # Factor h² Factor h² Factor h² 

1 0.931 ,866 0.836 0.699 0.786 0.617 

2 0.964 ,929 0.902 0.814 0.791 0.626 

3 0.966 ,932 0.884 0.782 0.869 0.756 

4 0.965 ,930 0.825 0.681 0.834 0.696 

5 0.958 ,919 0.800 0.640 0.870 0.756 

6 0.976 ,953 N/A N/A 0.771 0.595 

7 

Total Variance 

N/A N/A N/A N/A 0.860 0.740 

Explained 92.156 72.300 68.364 

Initial Eigenvalue 5.529 3.615 4.786 

Second Eigenvalue 0.181 0.707 0.604 

Cronbach's Alpha α= 0.983 α= 0.904 α= 0.922 

October 2010

Item scores were evaluated to determine consistency with construct validity. A 


P a g e | 53 

confirmatory factor analysis, per Ahire & Deveraj (2001), was performed using LISREL to explore 

the relationship between the latent variable and corresponding items. Principle component 

factor analysis was employed to analyze the latent constructs and identify the analysis pattern. 

One unique factor remained for each item when the K1 rule (Kaiser, 1960) was employed; 

therefore, only one latent construct exists per variable list (Hattie, 1985). Table 1, shown 

above, provides factor pattern/structure coefficients, communalities, eigenvalues, and 

Cronbach’s alphas for the variables examined. LISREL was again employed to determine the 

relationships between the latent construct and individual items. Discriminate validity can be 

tested through examination of the fit indices. Table 2 provides the results of this testing, which 

indicates a strong fit between the variables and latent construct. As shown, scale reliabilities 

are significantly larger than correlation averages with remaining constructs. Examination also 

shows that interscale correlations do not correlate perfectly, and squared intercorrelations of 

the latent variable do not exceed the extracted variance. Overall means, standard deviations, 

Cronbach’s alphas, and latent variable correlations are provided in Table 3. 

Table 2: Construct Fit Indices 

Construct Χ² d.f. CFI GFI 

Trust 46.58 9 0.97 0.91 

Dependence 64.50 5 0.9 0.85 

Performance 37.69 14 0.98 0.93 

Table 3: Means, Standard Deviations, Cronbach’s Alphas, and Correlations 

Construct Means S.D. 1 2 3 

Trust 6.012 1.193 0.983 

Dependence 6.202 0.817 .465* 0.904 

Performance 4.178 1.536 .482* 0.499* 0.922 

Note * - Correlations are significant at the 0.01 level using a two-tailed test. Reliability 

coefficients are highlighted along the diagonal. 

October 2010

Results 


P a g e | 54 

The purpose of this paper is to examine the relationship between performance and trust 

and dependence among small and medium-sized enterprises. Hypothesis one (H1) stated that 

there is a positive relationship between trust and performance in SMEs. Hypothesis two (H2) 

was similar in that it stated that there is a positive relationship between dependence and 

performance in SMEs. Utilizing regression to test these hypotheses, we first controlled for the 

attributes of organizational size, years working as a supplier to the buyer, and years working 

with the existing company. Second, we entered the independent variables trust and 

performance in the regression model. 

The first model, consisting only of the control variables and performance resulted in an 

ANOVA with an F statistic of .182 that was not statistically significant (p > .05). The second 

model that included these previous variables plus the constructs of interest, trust and 

dependence, resulted in an ANOVA with an F statistic of 13.435 that was significant at the p < 

.01 level. Trust and dependence improved the fit of the control variable only model from an R 2 

of .004 to an R 2 of .344 with an adjusted R 2 of .319. The outcome of model 2 results in an ∆R 2 

of .340 that is statistically significant at the p < .05 level. 

As can be seen in Table 4, the results of the regression analysis indicate that both trust 

and dependence are statistically related to performance in SMEs (p < 01), thus supporting 

hypotheses one and two. 

October 2010


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Table 4: Results of Simultaneous Regression Analysis for Prediction of Performance in SMEs 

Variable B SE B β 95% CI 

Lower 

95% 

CI 

Upper 

Step 1: 

# of Employees .000 .001 .000 -.003 .003 1.044 

Comp Years .006 .010 .051 -.014 .025 1.062 

Manager Years .003 .009 .031 -.014 .020 1.087 

Step 2: 

# of Employees .001 .001 .055 -.001 .003 1.054 

Company Years -.010 .008 -.089 -.027 .007 1.130 

Manager Years .005 .007 .048 -.010 .019 1.092 

Trust .222 .053 .336* .116 .328 1.278 

Dependence .188 .043 .366* .104 .272 1.334 

Note. R 2 for first model = .004 R 2 for second model = .344 ΔR 2 = .340 

*p < .01 N = 134 Two-tailed tests. 

Discussion and Practical Implications 

As suggested by Hong and Jeong (2006), although large companies may exert more 

influence on the supply chain process, smaller firms are more flexible and often use this 

function as a specialized niche strategy. Our results seem to support this conclusion and 

indicate that trust and dependence are important in determining supplier performance for 

SMEs. These findings are also consistent with prior research by Hoffmann and Schlosser (2001) 

and Redondo and Fierro (2007) which indicated trust, commitment, and reciprocity play a 

critical role in relationship development and business performance. This is not surprising as 

SMEs generally have fewer resources and rely more heavily on personalized relationships with 

customers. Large companies often have a more extensive customer base and are not 

dependent on any one customer. Conversely, SMEs are generally more focused on a smaller 

VIF 

October 2010

number of customers, and place a great deal of value on developing long-term, mutually 

beneficial relationships (Gélinas & Bigras, 2004; Hong & Jeong, 2006). 


P a g e | 56 

Research has shown that the supply chain management can be affected by numerous 

variables, regardless of organizational size and resources. Beekman and Robinson (2004) 

suggest that SMEs focus on developing strategic relationships to ensure sustainability and 

growth, and our results indicate that trust and dependence are significant factors in 

determining the performance of SME suppliers. These findings offer important practical 

implications and avenues for future research. 

Often the owner-manager of a small business is more likely to use social factors to build 

trust and manage relationships (Morrissey & Pittaway, 2006) rather than rely on more 

formalized technologies or processes. SMEs will generally rely on trust, collaboration, and 

communication to reinforce commitment level and customer satisfaction (Redondo & Fierro, 

2007). Since smaller suppliers often do not need as much information to establish business 

relationships, it is likely that their decision making processes will be more informal and 

personalized (Matlay, 1999). Multinational companies with dedicated purchasing departments 

invest a great deal of resources to develop formalized processes that gather large amounts of 

information to make strategic supply chain decisions. While these technologies can lead to 

greater efficiency and economies of scale, perhaps the more informal approach of small 

businesses is better suited for customer service and interorganizational trust. If this is indeed 

the case, then large companies can learn something about relationship development from 

SMEs. 

October 2010


P a g e | 57 

All organizations, regardless of size, must be flexible and adaptable in their business 

relationships. While large companies expend significant resources to efficiently manage the 

supply chain function, these systems tend to focus more heavily on complex information 

processing rather than individualized customer service. This can be a very effective practice, as 

it allows for rational and efficient decision making based on detailed data analysis. In addition, 

larger companies often use the supply chain function as a means to accomplish multiple 

performance objectives, while SMEs are more focused on fewer performance outcomes (Hong 

& Jeong, 2006). SMEs can learn from their larger counterparts and continue to refine their own 

supply chain management process. The survival and growth of smaller firms is often dedicated 

by their ability to use their resources to effectively negotiate through the supply chain. 

While the supply chain practices of SMEs are much less sophisticated and based more 

on personalized connections rather than superior technologies (Devins, Gold, Johnson, & 

Holden, 2005; Morrissey & Pittaway, 2006), they, too, can be quite effective in developing 

strategic relationships and improving innovation (Hong & Jeong, 2006). As such, large 

companies might consider adopting some of the more personalized and innovative practices of 

SMEs to strengthen the dependence and trust in their supply chain relationships. Even though a 

reliance on data-driven decision making is efficient, a balance of information processing and 

human interaction may lead to better performance given the constraints of the current 

economic conditions. As suggested by Bordonaba-Juste and Cambra-Fierro (2009), no matter 

the firm size, the purchasing process is managed best when suppliers and buyers are able to 

develop a strategic fit in regards to business approach, aptitude, and shared values. 

October 2010

Future Research 


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Researchers must continue to examine additional variables that impact supply chain 

management practices and performance. While our study focused more on relational factors, 

other studies should examine operational variables, perhaps in conjunction with relation 

variables. Also, since the communication process is so vital in relationship development it needs 

additional examination as it relates to the growth and development of supply chain practices in 

SMEs. The supply chain function can lead to a strategic advantage for both large and small 

businesses; hence we need to have a more thorough understanding of the best practices that 

promote successful buyer-supplier relationships. 

Conclusion 

In conclusion, research has shown that performance within the supply chain has many 

influences. This study has taken steps to examine two of these influences, trust and 

dependence, within the context of SMEs. What we found is that both trust and dependence 

are important influences for performance within the buyer/supplier relationship. Suppliers 

have the ability to build relationships with buyers, and this relationship, when examined within 

SMEs, can lead to greater performance on the part of the supplier. Suppliers should continue 

to build on these capabilities as well as others in order to continue to see greater performance 

levels that can benefit all within the collaborative arrangement. 

October 2010


P a g e | 59 

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Evaluating the Impact of Federal Legislation on Small 

Businesses: An Exploratory Study of the New Minimum Wage 

Rate and the Health Insurance Tax 

By 

Kirk Heriot 


heriot_kirk@colstate.edu 

and 

Teresa Lang 


Lang_Teresa@colstate.edu 

and 

Neal Thomson 


Thomson_Neal@colstate.edu 

October 2010

Abstract 


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In 2010, Congress passed a Health Care bill that was widely criticized due to concerns of the 

impact it would have on small businesses. The proposed legislation originally included a 

provision to charge an insurance premium tax for firms with payrolls greater than $250,000. 

The final version of the bill greatly modified the provisions that would have charged an 

insurance tax to small firms with over fifty employees. This study evaluates the impact on 

labors costs of the proposed health insurance tax as well as recent increases in the minimum 

wage rate. We address the health insurance tax provisions because Congress has suggested new 

provisions may reduce the fifty-employee threshold. 

We offer a discursive assessment of the impact of the federal legislation with regard to 

minimum wage and the proposed health insurance surcharge on small businesses with 

$250,000 in labor costs that do not carry health insurance for their employees. We use a 

modified case study to evaluate the financial impact of federal legislation on a typical firm in the 

restaurant industry. This industry is particularly important because it contains small businesses 

with many employees earning minimum wage and working part-time. 

The paper concludes that a firm with as few as 20 employees would have as much as a 50-55 

percent decrease in net income as a result of the two federal labor laws discussed in this 

research. The costs identified in this study are not insignificant because they may become a 

reality for firms with fewer than 50 employees if the bill is modified. The change in the 

minimum wage law alone can have a severe impact on the labor costs and net income of a small 

firm for companies with as few as 5 employees. 

Introduction 

External laws and regulations can have a serious impact on small business performance 

(Robinson, et al, 1998). Wage rates and the taxes on those wages affect the total labor costs 

incurred by all businesses. Small firms are especially challenged by changes in their labor costs 

because the burden is often not shared by multiple shareholders, but rather by a sole 

proprietor or a few shareholders in a closely held firm. On July 24, 2009, the national minimum 

wage increased by $0.70 per hour for all employees. In 2009, Congress proposed new health 

insurance legislation that would charge an eight percent premium to firms with total labor costs 

exceeding $250,000 if those businesses did not provide health insurance for their employees. 

October 2010


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When it was originally proposed, the Health Care Bill was questioned by a variety of 

individuals and organizations. Following a great deal of debate, the provisions that would 

charge an eight percent premium to firms without health insurance were eliminated from the 

bill, except for firms with over 50 employees (We use the term “Health Care Bill” for simplicity). 

Yet, one can’t help but wonder just how much affect this health insurance premium would have 

had on small firms. What kind of impact might this provision of the bill have had on a small 

business or its owner? Was it reasonable for Congress to ignore societal concerns that small 

firms do not provide health health insurance coverage to their employees (Kaiser/ HRET, 2009)? 

This question is not merely academic because the House of Representatives is also considering 

amendments to the bill that could impose a burden on small firms that are not presently in the 

version of the bill passed by both the House and the Senate (deMause, 2010). For example, 

one possible change would count part-time employees toward the 50-employee minimum 

(deMause, 2010). 

Thus, the purpose of this paper is assess the impact changes in minimum wage as well 

as the proposed changes the health insurance premium would have on small businesses. These 

issues are not trivial. They can be especially significant to entrepreneurs and small business 

owners for four reasons. First, while the U.S. Small Business Administration notes that the vast 

majority of firms have fewer than fifty employees, there are at least 216,760 that have between 

fifty-one and five hundred employees (Small Business Administration, 2009a). Second, small 

businesses generally do not have human resource expertise in place to manage the impact of 

such changes. Third, an increase in labor costs will have a direct impact on the net income of a 

small business, many of which are operated as sole proprietorships or closely owned business 

October 2010

entities. Lastly, the health care bill that was passed in March 21, 2010 is subject to 

amendments that may further impact small firms with fewer than 50 full-time employees 

(deMause, 2010). 

Background Literature 


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Numerous articles advise a small business owner about how to handle everything from 

AIDS in the workplace (Franklin and Gresham, 1992; Hoffman and Clinebell, 2000) to sexual 

harassment (Robinson, et. al. 1998) and taxes. Compliance with tax regulations, environmental 

regulations, employment regulations, accessibility regulations, industrial and safety regulations, 

and the impact of federal laws on business are just a few of the myriad of legal topics addressed 

by the literature. When examining industry-specific topics, the review of specialized standards 

for performance and operations, quality and control, and industry-wide guidelines may also be 

determinative of how a firm channels its legal resources. Other opportunities for detailed 

review of legal concerns include the ownership of land and facilities and the impact of the 

locality on zoning and planning regulations that affect the business. 

Nonetheless, both the human resource literature and the small business literature is 

largely mute about minimum wage and the proposed new health insurance tax on small 

businesses with $250,000 in labor costs that do not carry health insurance for their employees. 

Of course, these two issues are literally new topics for analysis and discussion. The new 

minimum wage rate went into effect on July 24, 2009. Most of the provisions of the Health 

Care Bill will not go into effect for approximately 12-18 months. 

In the next section we discuss both the minimum wage and the proposed new health 

insurance tax on labor costs above $250,000. In the third section, we evaluate the impact of 

October 2010

these two increases in labor costs on both the small business owner’s perspective using 


P a g e | 67 

financial analysis. In the fourth section, we address the potential response a small business 

owner may have to these two changes. In the final section, we suggest possible directions for 

future research. 

Minimum Wage 

In 1938, the Fair Labor Standards Act was passed, which was a sweeping piece of 

employment-related legislation. One provision of this act was the creation of a “minimum 

wage”. This wage was originally set at $0.25 an hour. Over the years, the U.S. government has 

increased this amount, most recently from $6.55 an hour to $7.25 an hour, the third 

consecutive annual increase. As recently as June 30 th , 2007 the minimum wage was $5.15 an 

hour. On July 1, 2007, it was increased to $5.85 an hour, a 13.6 percent increase. The following 

year, it was increased to $6.55, a 12 percent increase and then most recently to $7.25, and 

increase of 10.7 percent. The total jump of $2.10 an hour over the 2 year period is a 40.8 

percent increase in minimum wages (US DOL, 2009). Such a large increase in minimum wage 

sparks concerns about the potential to decrease demand for minimum wage labor, particularly 

in an environment of rising unemployment and economic distress. Several recent analyses of 

the relationship between minimum wage rates and unemployment find a positive relationship 

between minimum wage rates and unemployment, particularly among small businesses, retail 

employment and most strikingly among teenage workers, the largest pool of minimum wage 

workers (Neumark and Wascher, 2009; and Sabia, 2006). A 2009 study by David Neumark of the 

National Bureau of Economic Research and William Wascher, a member of the Board of 

Governors of the Federal Reserve System - Division of Research and Statistics, reviewed the 

October 2010

past studies examining minimum wage and unemployment. They found that increases in 

minimum wages consistently caused declines in employment, particularly among the least 


P a g e | 68 

skilled workers. A 2006 study by Joseph Sabia sheds further light on this relationship. His study 

looked specifically at employment in the retail and small business sectors. He found that 

increases in minimum wage fairly consistently related to decreases in employment in those 

sectors. Specifically, he found that a 10 percent increase in minimum wage translated to 

approximately a 1 percent decline in employment in the retail and small business sectors. Using 

his numbers, the recent 40 percent increase in US minimum wage would be expected to have a 

4 percent disemployment effect on workers in retail and small businesses. He also found that 

this effect was amplified for low-skilled employees. Teenaged workers were the most affected 

by such a change. Specifically he found, “A 10 percent increase in the minimum wage is 

associated with a 2.7 to 4.3 percent decline in teen employment in the retail sector, a 5 percent 

decline in average retail hours worked by all teenagers, and a 2.8 percent decline in retail hours 

worked by teenagers who remain employed in retail jobs” (Sabia, 2006, p. 5). This would 

contribute to recent reports that the unemployment rate for black teenage males is fifty 

percent and the rate for white teenage males is 26.5 percent (Bartlett, 2009). Furthermore, 

Bartlett cites Bureau of Labor Statistics data that indicate that, “Well over half of those paid at 

the minimum wage are under the age of 24 and two-thirds of them are teenagers. Almost 60 

percent work part-time and more than half work in food preparation and serving-related 

occupations. Minimum wage workers are not well educated. About 40 percent don't have a 

high school diploma, and a third have only a high school education. Just 3 percent of those 

working at the minimum wage have graduated from college.” He also points out that among 

October 2010


P a g e | 69 

the US workforce of 155 million, only 95 thousand work full time at minimum wage in 2008. In 

short, the impact of the minimum wage increase was largely upon part-time, teenaged workers, 

not the elusive starving family surviving on minimum wage. 

Health Insurance 

Before we can understand the implications of health insurance for small businesses, we 

must first understand the health care system in the U.S. In a monograph prepared by Louis 

Rossiter, he makes the following statement, based upon his analysis of the place healthcare has 

within our overall economy: 

The basic problem is not simply that we are spending more on healthcare in terms of 

how much we use and the price of that care. The problem is the accelerated rate of the 

increase when compared to other components of the economy. As each year passes, 

healthcare consumes an ever-larger share of expenditures, increasing from 9.4 percent 

in 1981 to 16 percent in 2006. Today, that figure is higher (Rossiter), 2009, p. 4). 

Health insurance among small businesses is an important issue. According to a research 

study by the National Federation of Independent Businesses (Phillips and Wade, 2008), the 

rising costs of health insurance are the number one problem faced by small business owners. 

Their study of 3,530 small business owners in 2008 identified problems and priorities the 

business owners believed to be the most critical to them from among a list of 75 potential 

items. Health insurance was identified as the number one small business problem for the 

twentieth consecutive year that this series of research studies has been conducted. The 

magnitude of this particular problem is quite alarming. Fifty six percent of the respondents of 

this study indicated it was a “critical’ problem while the second most cited problem, “Energy 

Costs, Except Electricity,” was rated critical by only fourteen percent of the respondents. 

October 2010


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The issue of health insurance has reached extreme levels according to some studies. 

According to research conducted annually by the Henry J. Kaiser Family Foundation between 

1999 – 2009, the percentage of firms offering health benefits has declined from 69 percent in 

2000 to 59 percent in 2009 (Kaiser/ HRET, 2009). As one might expect, their research also 

found “The smallest firms are least likely to offer health insurance. Only forty-six percent of 

firms with 3 to 9 workers offer coverage, compared to 72 percent of firms with 10 to 24 

workers, 87 percent of firms with 25 to 49 workers and over 95 percent of firms with 50 or 

more employees” (Kaiser/ HRET, 2009, p. 34). Figure 1 shows the data from the 2009 

Kaiser/HRET study. Costs were cited as the primary reason in the 2009 Kaiser/ HRET survey by 

41 percent of the firms that did not offer health insurance. 

Figure 1. Percentage of Firms Offering Health Benefits, by Firm Size, 1999 – 2009 

Firm Size 

(Workers) 

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 

3 – 9 56% 57% 58% 58% 58% 52% 47% 48% 45% 49% 46% 

10 – 24 74 80 77 70* 76 74 72 73 76 78 72 

25 – 49 86 91 90 86 84 87 87 87 83 90* 87 

50 – 199 97 97 96 95 95 92 93 92 94 94 95 

All Small 

Firms 

(3 – 199) 

65% 68% 68% 66% 65% 63% 59% 60% 59% 62% 59% 

All Large 

Firms 

(200 or 

more) 

99% 99% 99% 99% 98% 99% 98% 98% 99% 99% 99% 

ALL 

FIRMS 

66% 69% 68% 66% 66% 63% 60% 61% 60% 63% 60% 

* Estimate is statistically different from estimate for the previous year shown (p


P a g e | 71 

The academic literature on health insurance and small businesses is limited at best. 

Some of the topics in the literature include studies that confirm the extent of health insurance 

coverage among small firms (Robinson, 2008), recommendations regarding managed care 

(Bradley and Hobbs, 2008), the perceptions of small business owners of the cost of health 

insurance, and several studies about the costs of health insurance (Robinson, 2008; Opiela, 

2008). This last issue is the primary topic in the academic literature when health insurance has 

been covered. These studies reach the same conclusion: the cost of health insurance is 

prohibitive for small firms (Opiela, 2008; Kathawal, Elmuti & Roszkowski, 1993; and Morrisey, 

2003). Small firms are simply not able to negotiate health insurance contracts (Cebula, 

Gubenko, & McGrath, 2007). Benoit points out that rising health care costs explains why 

employers are “choosing looser managed care products in response to the managed care 

backlash…” (Benoit et al., 2007, p. 66). In a Government Accounting Office (GAO) study, Allen 

(2001) finds that small firms tended to have higher average cost-sharing requirements and did 

not offer certain benefits such as psychiatric and chiropractic coverage (Allen, 2001). Yet, it is 

hard to gauge the magnitude of health insurance costs in small firms because the literature 

provides absolute values among a sample of firms (see, for example, Kaiser/ HRET, 2009). 

Survey research has been used previously, but it has not captured the relative magnitude of 

health insurance, especially relative to other expenses of a profitably operating small business. 

Thus, before public policy on health insurance can be properly enacted, government policy 

makers must understand the relative magnitude of these costs. It is this gap in the extant 

literature that we address in this study. 

October 2010

Research Method 


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This study employs a modified case study to evaluate the affect of the new minimum 

wage standard and proposed health insurance tax on small firms. The challenge of conducting 

research about these two subjects and small businesses is that the literature on either subject is 

rather limited. Thus, a more traditional empirical study would not be appropriate. The 

emphasis in this study is on the affects of the new minimum wage and health insurance tax at 

the firm level which does not lend itself to survey methodology. Hence, we employed a more 

exploratory stage of research (Gorman and Hanlon, 1997). In such a situation, it is appropriate 

to use a qualitative research method in order to gather the necessary information (Eisenhardt, 

1989; Yin, 1994). The current research necessitated that we observe the affects of the new 

minimum wage standard and the proposed health insurance tax on the financial performance 

of a single small business. Thus, we adopted a qualitative research method described by Audet 

and d’Amboise (1998) in their study which was broad-minded and flexible. Like their study, our 

aim was “to combine rigor, flexibility and structure without unduly restricting our research 

endeavor” (Audet and d’Amboise, 1998, p. 11 of 24). 

In order to focus on the financial impact at the firm level, we first look at minimum wage 

and health insurance for firms ranging in employment size of five or fewer employees to firms 

with as many as forty employees. These numbers of employees are consistent with what we 

know from the Kaiser/ HRET series of studies. Next, we use the financial statement from a 

single firm with a high percentage of minimum wage workers to assess the impact of the new 

minimum wage rate, with adjustments for firm size. Finally, we summarize these affects to gain 

October 2010


P a g e | 73 

a perspective on the overall impact of the new minimum wage standard and proposed health 

insurance tax on the financial performance of a small business. 

Labor Costs 

We evaluate the cost of raising the minimum wage rate to $7.25 for small businesses 

based upon sizes of 5 employees, 10 employees, 20 employees, and 40 employees. Our 

evaluation holds other factors constant. Table 1 shows our findings. 

Since many minimum wage earners work part-time (DOL, 2009a), which can vary from 1 – 34 

hours (DOL, 2009b), we used 25 hours as a base number of hours. 

Health Insurance Tax Costs 

The bill will charge small businesses with more than 50 employees a penalty of 8 

percent per employee. According to the Small Business Administration, approximately 284,286 

firms have between 50 and 500 employees (SBA, 2009c). Thus, it would not appear that many 

very small firms will be affected. However, this conclusion may be spurious. As noted earlier, 

provisions may count part-time employees on a pro-rated basis toward the 50-employee 

minimum (deMause, 2010). Thus, smaller firms could easily be impacted. For example, a 

company with 40 full-time employees and 20 part-time workers could be counted as a firm with 

50 full-time employees. Should the bill be more costly than anticipated, then even more 

modifications may be made in order to cover the increased expenses. Hence, we maintain it is 

a valuable process to consider the impact of health insurance penalties on firms with fewer 

than 50 employees. 

October 2010


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As the literature review points out, of discussions of health insurance for employees of 

small business is very recent. More importantly, the literature that does address health 

insurance focuses on a macro-economic perspective. We choose to consider the implications 

of this proposed legislation solely on the financial performance of a typical small business with 

employees. Table 2 shows our calculations for firms differing in size by employment, starting at 

5 employees and increasing to 10 employees, 20 employees, and lastly, to 40 employees. Each 

of these levels of employment are consistent with the criteria used to define a small business in 

the United States (Small Business Administration, 2009b). 

Total Change in Costs to the Small Business 

To this point, our analysis has separately addressed the impact of the new minimum 

wage rate and the proposed health insurance tax. We now combine these two analyses to 

determine the total change in payroll costs to the small business. For this study we selected a 

relatively small, publicly traded, food service business. Food service businesses commonly 

employ a high percentage of part-time, minimum wage employees (DOL, 2009). Buffalo Wild 

Wings, Inc. went public in 2003, operates 197 restaurants and has 363 franchise units. The 

company has 12,000 employees; 1,000 full-time, 10,800 part-time and 200 employees based in 

the home office or field support management positions. Assuming all part-time employees 

work in the restaurant operations, there are approximately 55 part-time employees per 

restaurant. The corporation’s 2008 Consolidated Earnings Statement is presented in Table 4 

(from the company’s 10-K report). 

We wanted to analyze the effects of the current change in minimum wage and proposed 

health insurance tax on a single restaurant. The consolidated financial statement numbers 

October 2010


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were divided by 197 restaurants to approximate the earnings of a single restaurant. Ideally the 

franchise royalties and fees and related general and administrative costs and expenses would 

have been eliminated from the analysis to better isolate the restaurant activity. The franchise 

royalties and fees are easily identifiable; however, the portion of general and administrative 

costs and expenses related to the royalties cannot be determined from the information 

provided in the corporation’s 10-K report. Therefore, we did not eliminate the revenue or the 

related expenses from the analysis. 

As noted, part-time employment is defined as working between 1 and 34 hours per 

week. For this analysis we used 25 hours per week as the average part-time employment. In 

order to estimate the effect of the increase in minimum wage, we used 25 hours, 55 

employees, for 50 weeks, times the seventy cent increase in minimum wage, plus the increase 

in social security tax on this incremental increase at the 7.65% rate. The effect of the eight 

percent insurance increase was computed on the total estimated part-time payroll using the 

new minimum wage. Buffalo Wild Wings is currently self-insured. We applied the eight percent 

increase in labor costs only to the part-time employment because the originally reported 

earnings statement would have included an insurance cost for full-time employees. 

The results reveal that the effects of the minimum wage and insurance tax are not 

immaterial. The combination of these two changes decreases net income by approximately 

one-half. Net income decreases from 5.3 percent to 2.4 percent. When comparing the return 

on investment from running this successful restaurant to the return from investing in a treasury 

bond, the restaurant becomes even less appealing financially. 

October 2010


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Taking the analysis for the change in the unemployment rate and the proposed health 

insurance tax into account we gain an appreciation for the total change in costs to the small 

business. We used the financial statements of the Buffalo Wild Wings, Inc. restaurant chain for 

this step. We chose this restaurant for two reasons. First, the Department of Labor maintains 

records of employment across all sectors of the economy. The restaurant industry has the 

highest percentage of workers that are paid minimum wage. Thus, a firm in this industry serves 

as a reasonable basis for analysis of changes in minimum wage. Secondly, we were reasonably 

confident in the reliability and external validity of Buffalo Wild Wings, Inc.’s financial 

statements. A perusal of Yahoo!® Finance provided a list of sixty-two companies in the 

restaurant industry with summary financial ratios for each of them which included Buffalo Wild 

Wings, Inc. Their profit margin of 5.3 percent was similar to the 7.7 percent profit margin for all 

firms in the Yahoo! Finance database. 

Discussion 

This study employed a modified case study method to evaluate the impact of the new 

minimum wage standard and proposed health insurance tax on the financial performance of a 

small business. Previous research focused attention on the macro-economic impact changes in 

minimum wage have on the American economy. Similarly, research on health insurance has 

focused on the absolute costs to the small firms or the macroeconomic impact changes to our 

system would have on the country. This study asked the simple question, “To what extent do 

these two factors affect the financial performance of a small business?” Our goal was to 

observe the relative magnitude of these factors on the financial performance of a single small 

October 2010

usiness. Since the original analysis of this issue, Congress has modified the bill that was 


P a g e | 77 

proposed and passed legislation that does not impose the 8 percent tax premium on employers 

with smaller than 50 employees. However, members of Congress have indicated the Health 

Care Bill is not complete (deMause, 2010). Additional modifications are likely such as small 

business provisions that begin to count part-time employees against the 50-employee 

minimum on a pro-rated basis (deMause, 2010). This type of change can be instituted through 

the reconciliation process (Rovner, 2010) which only requires a majority vote. Barnes (2010) 

points out that forecasts of the cost of the Health Care Bill have been underestimated. More 

importantly, if the Medicare Act is a predictor of the Health Care Bill, then it will cost 

considerably more. More recently, the Congressional Budget Office indicated the new bill 

would cost $115 billion more than originally forecasted (Tapper, 2010). Clearly, if the bill costs 

more than planned, Congress will have to pay for it in some way. 

As part of our research design, we selected a relatively small, publicly traded, food 

service business. Food service businesses commonly employ a high percentage of part-time, 

minimum wage employees (DOL, 2009). In addition, depending upon employment figures, they 

may be impacted by the proposed health insurance legislation. Thirdly, this particular 

restaurant chain reported net earnings that were near the mean of a sample of 62 similar 

companies evaluated by Yahoo! Finance. The results of our financial analysis reveal that the 

effects of the minimum wage and insurance tax are material. The combination of these two 

changes decreases net income for a single franchisee restaurant by approximately one-half. 

Net income decreases from 5.3 percent to 2.4 percent. 

October 2010

Implications for Future Research and Small Businesses 


P a g e | 78 

In this section we address the implications for future research as well as the practical 

implications for small businesses. It is clear that the change in the minimum wage rate will 

have a profound effect on the labor costs of many small firms. The Health Care Bill will only 

have an effect if the legislation is modified to lower the 50-employee threshold. This study 

addresses just such a scenario. When both health insurance tax and the new minimum wage 

rate are taken into account, their impact is rather startling. In our example, the restaurant’s 

profit margin falls by a factor of one-half from 5.3 percent to 2.4 percent, solely due to the 

impact on labor costs. 

Such a drastic change in the financial position of a company could not be ignored. Faced 

with such a drastic decline in profit margin, a small business owner has some options available 

to them. Some of these options are rather predictable, while other options are plausible, but 

less predictable. Thus, we consider how a small business owner may respond to increases in 

their cost of labor due to the new minimum wage rate and/or the proposed health insurance 

tax. 

One option available to the owner is rather predictable. According to studies by 

Morrow, Johnson, and Busenitz (2004) and Pearce and Robbins (1994), the typical response by 

companies faced by this type of situation is to seek cost-cutting measures, which typically 

include layoffs. Thus, one possible outcome is that small firms faced with increases in minimum 

wage and health insurance penalties would layoff employees. In fact, the literature on 

minimum wage earners points out an increase in the minimum wage has a negative 

October 2010


P a g e | 79 

employment effect among teenagers and low-skilled workers (Neumark and Wascher, 2007). It 

remains an empirical question whether small firms would layoff workers 

A second option we might label “1B” as a small business may layoff workers solely due 

to the health insurance penalty. While the minimum wage law may not raise wages on their 

existing employees, the new health insurance penalty may impact a firm. Table 4 shows how 

few full-time workers are required for a firm to reach $250,000 in annual payroll costs. 

Consider a firm with payroll of $250,286.25 as shown in Table 4, based upon a mix of eight full- 

time employees and eight part-time employees. Congress is still debating the fine details of the 

proposed legislation, but cutting hours for a worker or simply laying off an employee will lower 

payroll below the ‘magical’ threshold of the current legislation proposed in Congress. 

Another variation of this option would be to manipulate the ownership of the 

organization. A closely held firm with multiple locations could simply spin off the locations as 

separate companies. So long as a holding company is not involved this option may be rather 

novel, effective yet unethical. 

A third option is the traditional human resources choice of capital vs. labor. In a 

situation of escalating labor costs, businesses frequently opt for the choice of buying machinery 

that makes labor unnecessary. Both the increase in the minimum wage and the proposed 

health insurance tax will raise the labor costs for many small businesses. In this case, the dual 

jeopardy introduced by an increase in the minimum wage accompanied by a forced insurance 

program is a significant enough change to the cost of labor to greatly impact the labor versus 

capital decision. Companies that were comfortable with a labor intensive manual process may 

be willing to invest in significant capital equipment that would have previously been cost 

October 2010


P a g e | 80 

prohibitive. As is always the case, a business owner must choose the option that provides the 

customer with the best product or service at the lowest cost. If it becomes cheaper to purchase 

a mechanized process to complete the product or service, companies will have no choice but to 

accede to the economic reality. 

A fourth option a small business owner may make is to relocate their labor intensive 

processes outside the US. For the past several decades, US businesses have found themselves 

in the unfortunate and uncomfortable position of having to close US plants to relocate the 

manufacturing or services to a location in a low labor cost location. Locations such as China, 

India, Korea and Mexico are often chosen due to low labor costs (Longenecker, et al., 2008) and 

less restrictive legal requirements. 

Mark Wilson (2009) argues that in response to an 8% health insurance penalty, some 

small firms may drop coverage for their employees. Why would they do so? Quite simply these 

small business owners would do so if the product of eight percent times their payroll expense is 

less than the amount they presently pay in premiums for the employee’s health coverage. The 

Bureau of Labor Statistics reports that the average cost of health insurance to a business is 11.6 

percent of wages and salaries which is clearly higher than the proposed tax of 8% (2009). The 

Congressional Budget Office (CBO, 2009) points out a flaw in this portion of the proposed 

legislation is that employees that have their employer-sponsored health insurance dropped 

would then have to look elsewhere for health insurance as the 8 percent penalty has not been 

directed to make a contribution to the employee’s insurance costs. 

A final option related to health insurance costs that may be considered by the small 

business owner has been addressed in previous studies discussed in this research. Allen (2001) 

October 2010

pointed out that some small firms simply reduce the benefits to their employees as their 


P a g e | 81 

portion of the insurance premium rises from year-to-year. Thus, the company would continue 

to offer health insurance to its employees, but the scope of that coverage would shrink. The 

employees would receive fewer services for what would most likely be a higher premium as 

health care costs rise (Rossiter, 2009; Kaiser/HRET, 2009). 

We cannot say with certainty that a small firm will choose any of the aforementioned 

courses of action. Yet, any of these courses of action is plausible. Some of them, such as 

layoffs or reduced benefits for health insurance, have been identified in the literature. Thus, 

we can be relatively confident that some small businesses will choose those alternatives. In the 

event they do, then the very people these government policies are intended to benefit may 

very well be harmed. 

The findings of this study demonstrate the possible unintended consequences of well 

intentioned government policies. The intent behind minimum wage is to provide a “decent” 

wage for working Americans. Similarly, the proposed health insurance legislation is noble 

because it attempts to address the gap (Rossiter, 2009) between the number of Americans that 

are insured versus those that are not. Most people would agree that one role of government is 

to care for its citizens. However, we demonstrate that several possible outcomes may occur, 

depending upon the individual choices small business owners make as minimum wage rates 

and health insurance tax evolve over the next several months, that are simply not beneficial for 

employees. 

Small businesses frequently begin with little net income. The restaurant business in our 

study is small for a publicly traded business. The estimated effects of the increase in minimum 

October 2010


P a g e | 82 

wage and insurance tax cuts net income to just over two percent. As an investor exploring new 

business and investment possibilities, one must question whether this return is enough to 

encourage investment in small business. Investors can earn similar returns or better with a 

bond fund with little to no risk. 

At the same time, banks have tightened credit lines and are less willing to lend money. 

So the increase in minimum wage and insurance tax may add to the credit crisis, by further 

decreasing the investment capital available for new startup businesses and small businesses. 

More importantly, a decrease of net income to two percent may force drastic a reaction 

by the owner(s). Cost cutting measures will likely occur. These measures generally involve 

manipulation of labor costs (Morrow, Johnson, and Busenitz, 2004; Pearce and Robbins, 1994; 

and Allen, 2001) which would not bode well for the firm’s employees. 

The recent change in the minimum wage provides new opportunities to explore the 

relationship between a change in minimum wage and employment in the US that can further 

improve our understanding of this important issue. It represents a natural experiment that can 

contrast the impact in states without a state level minimum wage with states that have a state 

mandated minimum wage that is higher than the federal rate. 

Yet, a macroeconomic view of national unemployment rates does not always provide 

the clearest perspective of this issue or other issues related to employment or changes in total 

labor costs. Joseph Stalin once said, “A single death is a tragedy; a million deaths is a statistic.” 

We might paraphrase this logic as it applies to the plight of small businesses, “The death of a 

single small business is a tragedy; the death of hundreds of thousands is a statistic.” 

October 2010


P a g e | 83 

The impact of changes in minimum wage on employment is a statistic that affects many 

people. When observing or discussing these values in research studies (e.g., 6.2 percent 

unemployment rate), one can easily ignore the impact that an increase in labor costs has on a 

single small business, its owner, and its employees. Thus, it may be worthwhile for future 

research to focus attention on firm-specific financial performance issues as they relate to the 

minimum wage and the prospect of a health insurance tax on businesses with payrolls over 

$250,000 that do not insure their employees. Our research is an introductory effort to shed 

light on this critical topic. The options we suggested small business owners may choose in 

response to minimum wage and a health insurance lend themselves to simple hypothesis 

testing on a future sample of small firms should both issues materialize. They are clearly 

plausible alternatives to the small business owner that is concerned about rising labor costs, 

although researchers may want to identify other alternatives as well. It can be stated with 

relative certainty that most small business owners are not simply going to sit back idly while 

their labor costs go up without any real improvement in quality or productivity. The real 

question that remains is exactly what they will do. That is an empirical question that should be 

considered in future research. 

Conclusion 

This research provides a discursive assessment of the impact of the federal legislation with 

regard to minimum wage and the proposed health insurance surcharge on small businesses 

with $250,000 in labor costs that do not carry health insurance for their employees. We address 

this original health insurance tax provision because Congress has recently suggested new 

October 2010

provisions may reduce the fifty-employee threshold. We use a typical company in the 


P a g e | 84 

restaurant industry to evaluate the impact on labor costs. This industry is particularly relevant 

because it contains a large number of small businesses. These companies have many 

employees earning minimum wage and working part-time. 

We conclude that a firm with as few as 20 employees would have as much as a 50-55 

percent decrease in net income as a result of the two federal labor laws discussed in this 

research. The costs identified in this study are not insignificant because they may become a 

reality for firms with fewer than 50 employees if the Health Care Bill is modified. The change in 

the minimum wage law alone can raise labor expenses between $4,709 and $37,677 for firms 

with between 5 and 40 employees, respectively, according to our findings. 

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October 2010

Table 1 

Impact of New Minimum Wage Rate on Payroll Costs 


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5 employees 10 

employees 

20 employees 40 employees 

25 hours per week x 50 1250 1250 1250 1250 

Number of Employees 5 10 20 40 

FICA, Medicare .0765 .0765 .0765 .0765 

Increase in Minimum Wage $0.70 $0.70 $0.70 $0.70 

Total Payroll Increase $4,709.69 $9,419.38 $18,838,75 $37,677.50 

Table 2 

Impact of Original Medical Insurance Tax on Payroll Costs* 


employees 


25 hours per week x 50 1250 1250 1250 1250 

Number of Employees 5 10 20 40 

FICA, Medicare .0765 .0765 .0765 .0765 

Minimum Wage $7.25 $7.25 $7.25 $7.25 

Total Payroll $48,778.91 $97,557.81 $195,115.63 $309,231.25 

8% Medical Insurance n/a n/a n/a 0.08 

Total Medical Insurance 

Impact 

n/a n/a n/a $31,218.50 

Total Change in Labor Costs $8,612.00 $17,224.00 $34,448.00 $68,896.00 

* The medical insurance penalty (tax) will only affect companies with payrolls that exceed 

$250,000 in the current proposals before both houses of Congress. Reaching the threshold of 

$250,000 depends on the total number of employees, the mix of full- and part-time and their 

respective hourly wages or salaries. If a firm with 20 employees has 10 full-time workers and 

10 part-time employees (25 hours per week), then they will have employee payroll of over 

$250,000. However, we use a conservative estimate of hours per week and number part-time 

workers. 

October 2010

Table 3 

Impact on Total Payroll Costs 


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employees 


Total Payroll Increase $4,709.69 $9,419.38 $18,838.75 $37,677.50 

Total Medical Insurance n/a n/a n/a $31,218.50 

Total Change in Labor Costs $4,709.69 $9,419.38 $18,838.75 $68,896.00 

Table 4 

Total Labor Costs with both Full and Part-time Employees 

Part-Time Full-Time 

Part-Time Labor 

25 hrs / week @$7.25/hr 

Full-Time Labor @ 40 hrs/ 

8 

26 

week @ $10.00/hr 

8 

0 

Total Number of Employees 16 26 

Total Payroll including FICA 

** 

$250,286.25 $253,650.31 

** A firm with as few as ten full-time employees earning $12.50 per hour would have a total 

payroll of $ 269,125, including FICA and Medicare. 

October 2010

BUFFALO WILD WINGS, INC. AND 

SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF EARNINGS 

Fiscal year ended December 28, 2008 

Consolidated 

December 

28, 2008 

Revenue: in thousands 

One store 

before 

change 

adjusted 

for 1000s 

Percent of 

Sales 

One store 

after change 

adjusted for 

1000s 


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Percent 

of Sales 

Restaurant sales 379,686 $1,927,340 89.9% $1,927,340 89.9% 

Franchise royalties and fees 42,731 $216,909 10.1% $216,909 10.1% 

Total revenue 422,417 $2,144,249 100.0% $2,144,249 100.0% 

Costs and expenses: 

Restaurant operating costs: 

Cost of sales 113,266 $574,954 26.8% $574,954 26.8% 

Labor 114,609 $581,772 27.1% $676,504 31.5% 

Operating 60,205 $305,609 14.3% $305,609 14.3% 

Occupancy 25,157 $127,701 6.0% $127,701 6.0% 

Depreciation and amortization 23,622 $119,909 5.6% $119,909 5.6% 

General and administrative (1) 40,151 $203,812 9.5% $203,812 9.5% 

Preopening 7,930 $40,254 1.9% $40,254 1.9% 

Loss on asset disposals and impairment 2,083 $10,574 0.5% $10,574 0.5% 

Total costs and expenses 387,023 $1,964,584 91.6% $2,059,316 96.0% 

Income from operations 35,394 $179,665 8.4% $84,933 4.0% 

Investment income 970 $4,924 0.2% $4,924 0.2% 

Earnings before income taxes 36,364 $174,741 8.1% $80,009 3.7% 

Income tax expense 11,929 $60,553 2.8% $28,344 1.3% 

Net earnings 24,435 $114,188 5.3% $51,665 2.4% 

Source: Buffalo Wild Wings, Inc. Form 10-K 

October 2010

Facilitating the Flow of Capital to 

Niche Agricultural Producers in 

Rural Markets 

BY 



vanauken@iastate.edu 

and 

Clyde Kenneth Walter, PhD 


cwalter@iastate.edu 

Keywords: Finance, Agriculture, Capital Acquisition, Rural Markets 


P a g e | 91 

___________________________________________________________________________ 

This study was funded through a grant from the Leopold Center for Sustainable Agriculture at 

Iowa State University. 

October 2010

Abstract 


P a g e | 92 

Availability of capital has historically been a challenge in rural markets. Niche agricultural 

producers face a daunting task when trying to raise capital because they commonly have 

business models that are not well understood by providers of capital and, thus, they are 

considered high risk. As a consequence, traditional lenders are often apprehensive about 

providing financing because of this perceived risk. The successful flow of capital is a common 

challenge both for small firms seeking to acquire capital and for providers of capital. The ability 

to obtain funding is predicated on a matching of applicant’s characteristics, as documented 

according to the funder’s requirements. Niche agricultural producers may be representative of 

a group of potential capital users who view the loan application process is a barrier, rather than 

an opportunity, to growth of their business. Technical assistance can help overcome these 

barriers by educating the applicant about the process and requirements associated with capital 

acquisition. Government programs attempt to fill the financing gap by providing technical 

assistance that lowers perceived risk and expanding the borrowers’ business networks. 

Understanding the alternatives in the capital acquisition process can help niche agricultural 

producers in their search for capital and assist governments and communities in developing 

policies that can facilitate the flow of capital. 

Introduction 

Availability of capital has historically been a challenge in rural markets (Sherrick, 1998). 

The successful flow of capital is a common challenge both for small firms that want to acquire 

capital and funders who are in the business of providing capital. Small firms often struggle with 

the process through which capital is raised because of a lack of business and financial skills 

(Timmons and Spinelli, 2004). Better information about how to develop capital acquisition 

strategies, information about the availability of capital, and criteria that must be met before 

capital can be obtained would assist small firms’ capital acquisition efforts (Cassar, 2004). 

While providers of capital want to extend financing, they face challenges from applicants who 

are unprepared. Small firms and providers of capital alike would benefit from a method of 

furnishing information about how to prepare funding requests, identifying institutions that 

October 2010


P a g e | 93 

provide capital for particular purposes, and criteria that must be met before funds are extended 

to applicants. The object of this study of published empirical findings is to synthesize them into 

a step-by-step decision model that would assist smaller, rural firms, especially, and others in 

their quest to acquire capital. 

Accessing capital can be especially challenging for niche agricultural firms as their 

business model is often so different from others evaluated by providers of capital (Paulson and 

Sherrick, 2009; Richards and Bulkley, 2007; Pirog et al, 2006). Van Auken (2008) found that 

funding requests by niche agricultural producers were most often rejected because of weak 

business plan, lack of collateral, and failure to meet the funding agency criteria. The lack of 

coordination between funding agencies, gaps in the availability of technical assistance, and 

poor dissemination of information were other significant obstacles to capital acquisition. 

Wheatley (2001) emphasized that owners of specialized agricultural firms often lack business 

skills and may not fully understand the process through which capital is acquired, thus 

contributing to their difficulty in acquiring funding. The resulting lack of operating capital can 

place niche agricultural producers at a disadvantage in competitive markets. 

The remainder of the paper is organized as follows. The background section presents 

the issues related to the financing of niche agricultural firms. A discussion of financial 

constraints describes the needs associated with niche agricultural firms, and leads to 

development of the model offered to facilitate the flow of capital to these firms. 

October 2010

Agricultural demographics 

Background 


P a g e | 94 

The U.S. has 2.1 million farms on approximately 1 billion acres of land. Almost 1 million 

people claim farming as their primary occupation, and about the same number claim another 

principal occupation, but the total of these farmer categories is less than 1% of the U.S. 

population. About 2% of the population lives on farms, with the balance employed elsewhere. 

About 25% of the farms and 15% of the total acres are located in the Midwestern part of the 

US. The concentration in agricultural production is shown by the fact that 50% of the sales of 

agricultural products come from only 46,000 acres of farmland. From 2002 to 2007, nearly 75% 

of U.S. agricultural products were produced by 5% of the farms. U.S. agricultural production is 

capital intensive and often produces undifferentiated (i.e., commodity) products (US EPA, 

2010). 

In contrast to the statistics on large farm operations, a sizable majority (90%) of U.S. 

farms are owned and operated by individuals or families, and a similar portion have gross 

revenues of less than $250,000 (US EPA, 2010). About 60% of the farms and 29% of agricultural 

land held by U.S. farmers were considered to be “small” farms, and 65% of farmers 

supplemented their income with off-farm jobs. Family farms are important because they 

contribute to local communities through job creation and their support of local businesses. 

Farms with gross incomes of less than $100,000 make almost 95% of farm-related purchases 

from their local community. Family farms also serve as responsible stewards of the land, help 

preserve community green space, and commonly use sustainable farming techniques 

(http://www.sustainabletable.org/home.php). 

October 2010

Between 2002 and 2007, the number of farms increased by 4%, with most of the 

increase in small and part-time operations (US EPA, 2010). One growing sector of the U.S. 


P a g e | 95 

agricultural industry receiving attention currently is the U.S. organic industry, which increased 

its sales from $20 billion in 2007 to $24.6 billion in 2008. Sales of organic food products 

comprised about 2.8% of the total US food sales in 2006, and are growing about 20% per year 

(Organic Trade Association, 2007; 2009). 

Entrepreneurial growth and capital availability 

Richards and Bulkely (2007) and Steele (1997) argue that the entrepreneurial attributes 

associated with niche farm ownership are very similar to those for other businesses and that an 

entrepreneurial approach to operations can be a competitive advantage for modern farms. In 

fact, Smit (3004) contents that entrepreneurship has become the more important aspect of 

niche farming. Various programs through U.S. government, state and local economic 

development, and private agencies work to foster entrepreneurship in farming and to improve 

the flow of capital to the niche agricultural sector. States couple a variety of loan and/or grant 

programs with technical assistance to improve the financial capabilities of niche farming 

operations. Additionally, states offer many promotion and labeling, directories, market 

research, training and legal assistance program to help niche producers (Kilkenny and Schluter, 

2001). Despite the number and expansion of programs aimed at providing financial as well as 

other resources to the agricultural sector, Goreham (2005) reports that many sectors remain 

poorly served. Similarly, Korsching and Jacobs (2005) maintained that agencies need to 

facilitate the flow of capital to small agricultural firms. 

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A number of programs are available to assist small farms, but information about those 

programs is not widely disseminated, thus limited their possible impacts (Richards and Bulkley, 

2007). Inadequate information about the required criteria, contacts, and documentation, for 

example, might be especially limited in rural areas, where potential users are fewer and more 

widely dispersed. Without ready access to financial information and opportunities for 

developing business skills, their relative isolation may complicate their acquisition of capital. 

While the internet provides more opportunities for information flow, owners still must navigate 

the disconnected and difficult to understand information (Van Auken, 2001). 

Niche agricultural producer business models are often not well understood by providers 

of capital. Issues such as non-traditional access to markets (e.g., direct sales to consumers, 

farmers markets, and cooperatives), the associated uncertainty of market forecasts, weather, 

unusual nature of some products (e.g., flowers or specialty grains) are typically not commonly 

evaluated by providers of capital. The business models from production to marketing present a 

new set of unusual and uncertain market dynamics. As a result, the producer requests for 

capital may be evaluated as being too risky to fund (Richards and Bulkley, 2007). Government 

programs are often designed to help fill gaps in capital availability through either direct 

financing programs, technical assistance that lowers funder risk exposure, or business network 

expansion that can facilitate capital acquisition (Beck, 2006). 

Information 

Financing Constraints 

Much of finance theory is based on the premise that financing decisions should be 

determined by the combination of debt and equity that minimizes the cost of capital 

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(Modigliani and Miller, 1958). Several studies (Kuratko, Hornsby, and Naffiziger, 1997; Gibson, 

1992; Landstrom, 1992), however, argued that lack of information may be an obstacle to small 

firm capital acquisition because owners aren’t aware of the sources of capital, the relationship 

between the business characteristics and appropriate capital, and the capital acquisition 

process (Ang, 1992; Landstrom, 1992). 

Gibson (1992) believed that owners' search for capital is often inefficient, unorganized, 

and unsuccessful as a result of their lack of information about the alternative sources of 

funding. This may be especially valid for niche agricultural producers because their expertise is 

likely associated with agricultural production rather than business financing. Additionally, 

niche agricultural producers have limited information about funding alternatives due to their 

location and inexperience (Drabenstott and Meeker, 1997). Busenitz et al (2003) suggest that 

the availability of information about alternative sources of capital as well as the process 

through which capital is acquired impacts the success of capital acquisition strategies. 

Providers of capital can play an important role in dissemination of information about funding 

alternatives, criteria to qualify, and the process to follow in order to be successful in acquiring 

capital, but still they are limited in their ability to effectively evaluate request for funding (Fries 

and Akin, 2004). 

Van Auken and Jing (2009) found that niche agricultural producers’ acquisition of capital 

was associated with their familiarity with providers of capital. Greater familiarity with a 

provider of capital leads to capital acquisition from the provider; conversely, less familiarity 

leads to less capital acquisition. Being familiar with sources of capital probably helps owners 

better understand the process through which capital is acquired as well as a better 

October 2010

understanding of alternative sources. A higher comfort level would most likely lead to a 

perceived ease of capital acquisition. 

Technical Assistance 


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Rural areas possess environmental attributes that are not conducive to the success of 

small firms (Chrisman et al 2002). A study of rural niche agricultural producers found that few 

agencies offer them assistance (Van Auken, 2008). The most common forms of assistance were 

help with opportunity recognition and business plans, but even these forms were provided by 

less than 25% of the surveyed agencies. Additionally, agencies reported that funding 

applications often were not funded due to weak business plans. This finding was supported by 

previous research studies (Mason and Stark, 2004; Hustedde and Pulver, 1992). 

External assistance can help business owners become more knowledgeable about all 

aspects of business operations, but can be especially useful when firms are attempting to 

acquire capital (Audet and St-Jean, 2007; Chrisman and McMullan, 2004; Chrisman, 1999; Lang, 

Calantone and Gudmundson, 1997). Berger and Udell (1998) suggested that the relationship 

between the small firm and its provider of capital impacts the flow of information, terms of 

funding, and success in acquiring capital. 

The primary provider of financial assistance to niche agricultural producers came from 

community banks. Financial assistance included financial advice in addition to the acquired 

capital. To emphasize that relationship, firms that did not receive advice from a community 

bank did not acquire capital from it. Community banks are one of the major sources of advice 

for niche agricultural producers, thus they were well positioned to then provide funding (Zhang 

and Van Auken, 2010). 

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Facilitating the Flow of Capital 

Improving the Flow of Information 


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The traditional theory associated with capital acquisition assumes that information is 

free and widely available. This assumption is likely not valid in the context of the small firm 

environment—and especially in the rural environment--because of challenges associated with 

the dissemination of information (Zinych and Odening, 2009). In fact, the lack of information 

about capital acquisition acts as an obstacle to small firm capital acquisition (Kuratko, Hornsby, 

and Naffiziger, 1997; Paulson and Sherrick, 2009). Inaccurate information and the inability to 

gain access to capital markets could result in small firms either having a sub-optimal capital 

structure or being under-capitalized (Van Auken, 2001). This observation is supported by 

Chaganit, DeCarlis, and Deeds (1995), who emphasized that capital that is easier to obtain is 

used more often while capital that is difficult to acquire is used less often. 

Van Auken and Carraher (2009) found greater flow of information through more 

technical assistance programs would be quite valuable in niche agricultural producers’ search 

for capital. Their results demonstrate that technical assistance is needed, but not provided. 

Technical assistance commonly includes advising in the areas of business planning, financial 

advice, and marketing. Their study found that private sector assistance was preferred to 

greater government involvement. 

A Facilitating Flow Chart 

Capital acquisition can be a confusing and difficult process, especially because owners of 

small firms are often better at technical issues associated with the business (e.g., agricultural 

October 2010


P a g e | 100 

production) rather than having strong financial skills. Lack of financial skills would include not 

comprehending the capital acquisition process, knowing where to find assistance, 

understanding metrics used to evaluate funding requests, and having the needed knowledge of 

finance. A step-by-step flow chart of the capital acquisition process, showing the roles of 

technical assistance and information constraints, is depicted in Figure 1. 

The process originates when the firm makes the strategic decision to seek capital. The 

success of the process can hinge on the degree of deficiencies in any of these required areas. 

For example, niche farm operations likely are confronted with resource and business expertise 

constraints that limit the potential of their operations. These deficiencies can be overcome, 

however, with technical assistance from consultants or other service providers with expertise in 

capital acquisition. As shown in Figure 1, some firms seek assistance while others don’t seek 

assistance. Firms that seek assistance receive help with identifying the appropriate target 

funder and preparation of documents. The needed documents are submitted to the 

appropriate funder for review and a decision. Funders could subsequently decide to fund, 

reject, or request more information. This type of technical assistance can be important to 

eventual success with acquiring the needed capital. 

Firms pursuing capital without technical or financial assistance have a much higher 

chance of their funding request being denied or delayed. These firms (i.e., those following the 

right-hand path) may be nearly clueless about where to locate appropriate funders and what 

types of documents must be prepared in a formal request. While these incomplete requests 

will more likely be denied, Figure 1 provides the left-hand feedback path as an alternative 

outcome for requests that are midway between approval and denial. This path directs the firm 

October 2010


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to actively seek assistance with its capital search, rather than directly seeking capital without 

sufficient guidance. Providing an easily accessible way to facilitate contacts with providers of 

technical and financial assistance could improve the flow of capital to niche agricultural 

producers. A visible network of these facilitators could reduce the frustration of delays and 

outright rejections of funding requests. 

Conclusions 

The ability to obtain funding is predicated on a matching of applicant’s characteristics 

and documents with the funder’s information requirements. Technical assistance can 

overcome funding barriers by helping the applicant understand the process and requirements 

associated with capital acquisition. Niche agricultural producers especially face a daunting task 

when trying to raise capital because they commonly have business models that are not well 

understood by providers of capital and, thus, are considered high risk. As a consequence, 

traditional lenders are often apprehensive about providing financing because of the perceived 

high risk. Government programs attempt to fill the financing gap by providing technical 

assistance that attempts to lower the perceived risk, through direct financing programs, and by 

providing opportunities to expand business networks associated with raising capital (Beck, 

2006). 

Many of the possible providers of capital have a local community connection or are 

government programs directed at economic development initiatives in general or agricultural 

firms specifically (Richards and Bulkley, 2007). These funders are often not well understood or 

visible and are thus not fully utilized. Greater technical assistance that can help niche 

agricultural producers prepare documents (especially business plan development) and navigate 

October 2010


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the maze of possible funders will significantly facilitate capital flows. Government agencies and 

other providers of technical assistance may consider improving the flow of information to niche 

agricultural producers so their understanding of capital alternatives will be better and more 

comprehensive. 

Anecdotal evidence and previous research have stressed the importance of technical 

assistance and the role of information in improving the flow of capital to niche agricultural 

producers. This paper has integrated previous findings into a facilitating flow chart that 

explains the dependence of capital acquisition upon technical assistance and information. This 

model makes several contributions: (1) it outlines the steps that firms needing capital should 

follow; (2) it stresses the importance of obtaining technical assistance in the capital acquisition 

process, as well as the importance of providing appropriate information to potential funding 

decision-makers, and (3) it identifies an alternative decision of “redirect” for those capital 

seeking firms that did not obtain assistance in their capital search. Capital-intensive producers 

with growth potential but without extensive financial experience, such as niche agricultural 

markets, may be helped by government and community policies that facilitate the flow of 

technical assistance, information, and, ultimately, the capital that they seek. 

No easy or quick solution will likely be identified or implemented to achieve better flow 

of resources to niche agriculture producers. However, the liabilities associated with a niche 

farming operation, especially if the farm is small, and lack of business skills of the owner, can be 

addressed through better flows of information and technical assistance. For example, a single 

website that provides easy-to-understand and navigate information sources could be 

developed that contained links and descriptions of various assistance programs. This could be 

October 2010


P a g e | 103 

coupled with print information available at the traditional assistance access points, such as 

government extension offices and community banks. Technical workshops might ultimately 

facilitate the flow of resources, but the niche farm owners would still need to participate. The 

challenge will likely continue for niche producers, providers of capital, and government support 

agencies. A key aspect of confronting the challenge is to achieve greater cooperation and 

information sharing among all stakeholders. 

October 2010

Seeks Technical 

Assistance 

Assistance with 

Capital Search 

Figure 1 

Process of Capital Acquisition: 

Role of Technical Assistance and Information 

Firm Needing Capital 

Funder 

Decision 

Does Not Seek 

Technical Assistance 

No Assistance with 

Capital Search 

Appropriate Information Limited Information 

Firm Request Redirected 

to Provider of Technical 

Assistance 

Funding Request 

Denied 

Funding Request 

Approved 

S m a l l B u s i nNo e s Funding 

s I n s t i t u t e J o u r n a l , V o l . 6 

P a g e | 104 

October 2010

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