business, sixth canadian edition, by griffin, ebert & starke copyright © 2008 pearson education...

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada

CHAPTER 4CHAPTER 4

Understanding Entrepreneurship,

Small Business and New Venture Creation

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Learning Objectives

Explain the meaning of and inter-relationship among the terms small

business, new venture creation, and entrepreneurship

Describe the role of small and new businesses in the Canadian

economy

Explain the entrepreneurial process and describe its three key

elements

Describe two alternative strategies for becoming a business owner –

buying an existing business and buying a franchise

Describe four forms of legal organization for a business and discuss

the advantages and disadvantages of each.

Identify four key reasons for the success or failure of small businesses

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Small Business

Small Business - An owner-managed business with less than 100 employees Definitions vary Some statistics do not include unincorporated

businesses with one owner and no employees

New Venture – recently formed commercial organization Opened within last 12 months Sells goods or services

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Entrepreneurship

Entrepreneurship process of identifying an opportunity in the

marketplace and capitalizing on it

Entrepreneur person who

recognizes and seizes opportunitiesIn all kinds of companies, not just small or new

Intrapreneur creates something new within an existing large

organization

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Role of New Ventures

Main source of job creation

Leaders in innovation and new technology Service sector

High-knowledge industries

high-technology and biotechnology

> 800,000 women entrepreneurs and growing

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The Entrepreneurial Process

Entrepreneur(s)Entrepreneur(s)

Identifying Identifying OpportunitiesOpportunities

GrowthGrowth

Accessing Accessing ResourcesResources

New Venture New Venture Start-upStart-up

StabilityStability

DeclineDecline

DemiseDemise

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The Entrepreneur

Profiles from research show lack of consensus

Entrepreneurs are not “born”

Could be anyone

Based on what they do rather than who they are Identify opportunities

Access resources

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Identifying Opportunities

Generating ideas

Screening ideas

Developing the opportunity

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Identifying OpportunitiesIdea Generation

Seeing what others do not

Sources: Work experience (45-85%)

Interest/hobby (16%)

Chance happening (11%)

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Identifying OpportunitiesScreening

Check to see if the idea Creates or adds value

Provides a sustainable competitive advantage

Is marketable and financially viable

Has low exit costs

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Identifying OpportunitiesDeveloping the Opportunity

Entry StrategiesNew product or service

Existing product or service with new twist

Franchise

Research and planningBusiness plan

•Describe proposed venture•Explain why an opportunity•Outline marketing plan•Operational & financial details•Managers’ skills and abilities

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Accessing Resources

Bootstrapping – doing more with less Preferably use others’ resources

Financial Resources Debt

Equity

Other resources Team members with complementary skills

•Financial institutions

•Suppliers•Personal savings•Love money (friends, family)•Private investors (angels)•Venture capitalists

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Assessing the “Fit” Between Elements in the Entrepreneurial Process

Entrepreneur – Opportunity FitSomething the entrepreneur

can do and wants to do?Realistic self-assessment

Opportunity – Resources FitCan resources required be acquired?

Entrepreneur-Resources FitCapacity to meet requirements?

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Starting and Operating a Small Business

Buying a franchise Franchisee purchases right to sell

product/service of franchiser

Franchising agreement lays out duties and responsibilities

Usually initial payment, royalties (% of revenue) & advertising fee

Start a business from scratch

Buy an existing enterprise Clearer expectations, proven ability, better odds of success

Take over a family businessDisagreements over control

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Buying an Existing Enterprise

Pros established clientele

ease of financing

experienced employees

established lines of

credit and supply

less risky than starting

from scratch

Cons uncertainty about

actual financial health

of the firm

location, reputation

may be poor

pricing strategy may

need revisiting

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Family-Owned Business Challenges

Ongoing Management:

Succession:

•Which family members have control?

•Price to be paid?

•Family members rights to a job?

•Future of the business?

•Selecting a successor

•Timing succession

•Training the successor

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Benefits of Franchising for the Franchiser

Attain rapid growth

Share advertising cost

Increased investment money

More efficient advertising delivery

Development of a motivated sales team

Increased revenue

No need to deal with local business issues (managed by franchise owners)

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Benefits of Franchising for the Franchisee

Access to management expertise

No need to build a business from scratch

Lower failure rates

Well-developed brand

Training provided

Expert advice Economies of scale in buying suppliesFinancial assistanceHelp with getting external financingBe your own bossKeep most of the profits

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Is Franchising For You?

Willing to work hard?

Consider areas of cost franchise sales price

start-up expenses

training expenses

operational expenses

personal financial needs

emergency needs

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Franchise Problems

Franchisers may impose policy changes without consulting franchiseesLocal market may be saturatedPayments to franchiser are required even if profits are lowFranchiser controls how business is run and how product is madeFranchiser could be financially strapped and unable to help individual franchisee

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Forms of Business Organizations

Sole Proprietorship

Owned and operated by one person

Partnership

Two or more individuals combine resources

Corporation

Separate legal entity, liable for own debts

Cooperatives

Organized owned and controlled by users of its

products/services

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Sole Proprietorships

Advantages

freedom

simplicity

low start-up costs

tax benefits

Disadvantages

unlimited liability

lack of continuity

difficult to raise money

reliance on one individual

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The Partnership

Frequently used by professionalTwo basic typesGeneral partners

actively involved in managementhave unlimited liabilitymust be at least one

Limited partnersnot actively involved in managementliability limited to their investment

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Partnerships

Advantages

Larger talent pool

Larger money pool

Ease of Formation

Tax Benefits

Disadvantages

Unlimited Liability

Lack of continuity

Ownership transfer

difficult

Potential Conflict

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Corporations

Regardless of the size or industry corporations have the following rights and characteristics

Legal status as a separate entityLiable for own debtsOwner’s liability limited to investment

Property rights and obligations

Indefinite lifespan

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Corporations

Stockholders Investors who buy shares of ownerships (stocks) Real owners of the corporation May share in profits through dividends

Board of Directors Governing body of the corporation Responsible for interests of shareholders Appoint management, set policy, make major decisions

Inside directors are employeesOutside directors are not employees

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Types of Corporations

Public Corporation Stock is widely held and available for sale to public

Private Corporation Stock held by only a few, restrictions on sale Most corporations are privately held May become public to raise money

Initial Public Offering (IPO)

Income Trust Avoid tax by distributing most of their earnings to

investorsGovernment announced will begin taxing them in 2011

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Formation of the Corporation

Canadian Business Corporation Act

If operating in more than one province

Draw up articles of incorporation

Provincial Corporation Acts

If operating in only one province

Must use Limited (Ltd.), Incorporated (Inc.) or

Corporation (Corp.) in name

British firms use PLC, Germans use AG

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Corporations

Advantages

Limited Liability

Continuity

Professional

Management

Easier to raise money

Disadvantages

Start-up costs

Double taxation

Regulations

Stockholder revolts

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Cooperatives

Types of Cooperatives Consumer Financial Insurance

An organization formed to benefit its owners in the form of reduced prices and the distribution of surpluses

Each member has one vote

MarketingServiceHousing

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Comparison of Forms of Ownership

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Reasons for Success

Hard work, drive and dedication

Market demand

Managerial competence

Luck High growth businessesHigh growth businesses more likely to more likely to•use professional advisorsuse professional advisors•have formally educated ownershave formally educated owners•incorporateincorporate•use the internetuse the internet

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Reasons for Failure

Poor management skills

Inadequate marketing capabilities

Inadequate financial capabilities

Inadequate production capabilities

Personal reasons

Disasters

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Information Sources

Small Business Textbooks

Magazines and Journals

Small Business Centres or Institutes

Organizations (such as the Canadian Federation of Independent Business)

Government & Private Agencies

business, sixth canadian edition, by griffin, ebert & starke copyright © 2008 pearson education...

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