p a rt t w o - pearson · seagrams, bata shoes, ... entrepreneurs develop or recognize new ......

P A R T T W O

The Business of Managing

Seagrams, Bata Shoes, and Cuddy International are three of the business firms you will read about

in the opening cases of Chapter 5 to 7. Each of these companies must be managed effectively if they

a re to grow and pro s p e r. Regardless of the size of the business, managers in all companies—indeed,

in any kind of organization—must carry out the basic management functions of planning, org a n i z i n g ,

leading, and controlling.

P a rt Two, The Business of Managing, provides an overview of business management today. It in-

cludes a look at the various types of managers that business firms need, the special concerns of man-

aging small businesses, the ways in which managers set goals for their companies, and how a

business’s structure affects its management and goals.

■ We begin in Chapter 5, Managing the Business Enterprise, by describing how managers set goals

and choose corporate strategies. The basic functions of management—planning, organizing,

leading, and contro l l i n g — a re examined, as are the diff e rent types and levels of managers that

are found in business firms, and the corporate culture that is created in each firm.

■ In Chapter 6, Organizing the Business Enterprise, we look at the basic organizational struc-

t u res that companies have adopted, and the diff e rent kinds of authority that managers can

have. The impact of the informal organization is also analyzed.

■ F i n a l l y, in Chapter 7, Understanding Entre p reneurship and Small Business, we explore the

role of small business and franchises in the Canadian economy—what they do, why they suc-

ceed or fail, and how they are owned and managed.

A Div ided FamilyCuddy International Corp. is the largest turkey breedingand hatching company in Canada, with revenues ofmore than $350 million annually. It also holds the lu-crative contract to supply chicken products toMcDonald’s. The company’s founder, Mac Cuddy, isknown as “the turkey king of Canada.” The saga ofCuddy International is a rags-to-riches story of a brilliantentrepreneur who created a great company, but thencouldn’t manage it. Mac Cuddy also experienced diffi-culty getting along with his five sons and one daughter.

In spite of the success of the business, the Cuddyfamily is badly divided. Gordon Pitts, the author of Inthe Blood, a book about family businesses, says that theCuddy case is a classic example of all the things thatcan go wrong in a family business—a control-orientedfounding father, no succession plan, untrained chil-dren who have worked only in the business, and a lackof trained and talented managers from outside the fam-ily. As a result of these problems, Cuddy Internationalhas been suffering. The company had five CEOs be-tween 1994 and 1999, and sales have declined sharplyfrom their former level of $500 million annually.

Mac Cuddy’s sons have all worked in the businessat one time or another, but Mac was always doubtfulabout their capabilities. He decided to bring in out-siders for the top management positions in the com-pany because he felt that his sons did not have the

management skills to run a large company. Three of hissons—Peter, Bruce, and Brian—made several attemptsto take control of the business, but failed. Eventually,Mac fired Peter and Brian, and demoted Bruce. Brucequit the business and is now a competitor to his father.

In 1997, Peter Cuddy sued the company for$11.5 million, claiming that he was not being pro-vided with the financial information to which he wasentitled. He also alleged that his father and one ofhis brothers were misspending company funds. Heeventually dropped his lawsuit, but was then sued byCuddy International for allegedly making defama-tory comments at a press conference. Oddly enough,his father is helping him set up a new snack foodcompany.

Numerous other upheavals have occurred at CuddyInternational over the years. While the specific thingsthat have happened may be unusually severe, the factis that many family businesses experience the samegeneral kinds of problems as those the Cuddy familyhas suffered through. ◆

*Data on various aspects of small business in Canada were provided by Robert W. Sexty of Memorial University.

UNDERSTANDING

ENTREPRENEURSHIP

AND SMALL BUSINESS* 7C

HA

PT

ER

Cuddy International Corp.www.cuddyfarms.com

Every year, thousands of Canadians launch new business ventures. Theseindividuals, called entrepreneurs, are essential to the growth and vitality ofthe Canadian economic system. Entrepreneurs develop or recognize newproducts or business opportunities, secure the necessary capital, and organizeand operate businesses.

In this chapter we first define the term small business, describe the roleof the entrepreneur, and note the advantages and disadvantages of owning asmall business. Alternative approaches to becoming a small business owner(including franchising) are noted, as are the challenges facing entrepreneurs.The chapter concludes with a description of the various sources of assis-tance that are available to small business owners.

If you are aware of the challenges you will encounter as an entrepreneur,you are more likely to avoid the classic problems that small business ownersface. It is easy to start a business, but to operate one at a profit over a periodof years requires the knowledge and application of the fundamentals of man-agement. This chapter is designed to give you realistic expectations aboutsmall business management.

When you have completed this chapter, you should be able to:

1. Define small business and explain its importance to the Canadian economy.

2. Define entrepreneurship and describe some basic entrepreneurial characteristics.

3. Describe the start-up decisions made by small businesses.

4. Identify the advantages and disadvantages of franchising.

5. Identify the key reasons for the success and failure of small businesses.

6. Describe the sources of financial and management advice that areavailable to small businesses.

SMALL BUSINESS IN CANADA

What Is a Small Business?The term small business is not easy to define. Locally owned and operatedrestaurants, hair salons, service stations, and accounting firms are obviouslysmall businesses, while giant corporations such as Canadian NationalRailways and Noranda are obviously big businesses. Between these two ex-tremes fall thousands of companies that cannot be easily categorized.

In terms of form of business ownership, a small business may be a cor-poration, a sole proprietorship, or a partnership. Small businesses can befound in every industry and are particularly prominent in the retail trade.In terms of numbers, small business is the dominant type of business inCanada. Of the approximately 2.2 million businesses in Canada, 58 percentconsist of self-employed individuals, while 41 percent employ fewer than 50persons. Less than 1 percent of all businesses have between 50 and 499 em-ployees, and less than 0.1 percent employ more than 500.1

The degree of small business varies across different industries. As shownin Figure 7.1, small business firms are dominant in the construction and re-tailing industries, but not as dominant in manufacturing. About 6 of every 10Canadians employed in the private sector work in a firm with fewer than500 employees.

194 P A R T T W O The Business of Managing

LEARNING OBJECTIVES

There are almost as many definitions of small business as there arebooks on the topic. Two approaches will be used here to define a small busi-ness: one based on characteristics and the other based on size. A small busi-ness is one that is independently owned and operated and is not dominant inits field of operations. It possesses most of the following characteristics:

■ Management of the firm is independent. Usually the managers are alsothe owners.

■ An individual or a small group supplies the capital and holds the ownership.

■ The area of operations is usually local, and the workers and owners livein the same community. However, the markets are not always local.

■ The enterprise is smaller than others in the industry. This measure canbe in terms of sales volume, number of employees, or other criteria. Itis free of legal or financial ties to large business enterprises.

■ The enterprise qualifies for the small business income tax rate underthe Canada Income Tax Act.

The size of a small business and how the size should be measured arematters of debate. Two common measures are sales revenues and the num-ber of employees. The Canadian government’s Small Business Office in con-junction with Statistics Canada defines a small business as having less than$2 million in annual sales. Various government agencies also use numbers ofemployees to define small business. However, this number differs widelyamong government agencies: the federal Ministry of State for Small Businessstipulates 50 or fewer, the Federal Business Development Bank says 75 orfewer, and Statistics Canada uses numbers ranging from 100 to 1500 formanufacturing industries, and 50 for service industries.

For our purposes, a small business is one that is independent and smallerthan the main enterprises in an industry, generally employing 1 to 1500 people.

Chapter 7 Understanding Entrepreneurship and Small Business 195

small businessAn independently owned and operated busi-ness not dominant in its field of operations.

Less than 20 employees

20–99

100–499

More than 500

Manufacturing Construction Retailing All Firms

16

33

26

25

7

11

27

5542

33

718

31

15

36

18

Figure 7.1Employment distribution by enterprise size.

The Importance of Small Business in the Canadian EconomyOn the basis of numbers alone, then, small business is a strong presence inthe Canadian economy. And the situation in Canada is not unique. InGermany, for example, companies with fewer than 500 employees producetwo-thirds of the nation’s gross national product, train 9 out of 10 apprentices,and employ 4 of every 5 workers. Small businesses also play major roles inthe economies of Italy, France, and Brazil. In addition, experts agree thatsmall businesses will be quite important in the emerging economies of coun-tries such as Russia and Vietnam. The contribution of small business canbe measured in terms of its effects on key aspects of an economic system.These aspects include job creation, innovation, and importance to big business.


A common type of small businessin Canada is the convenience store.It attracts customers from itsimmediate area with its long hoursof operation and the product linesit carries.

InGenuity is a Winnipeg-based small business thatwas started by Lisa Bako andSigfrid Froese, two marketinggraduates from the Universityof Manitoba. The companyhas developed content-filter-ing software for the Internetand for private intranets thatallows information to be cus-tomized to user needs.InGenuity has just signed amajor integration deal withthe Boston-based subsidiaryof a Swiss technology firm.Visit InGenuity at:

www.ingenuity.com

WEBCONNEXION

Job CreationIn the early 1980s, a widely circulated study proposed that small businessescreate 8 of every 10 new jobs. This contention initiated considerable in-terest in the fostering of small business as a matter of public policy. As wewill see, relative job growth among businesses of different sizes is not easyto determine. It is clear, however, that small business—especially in cer-tain industries—is an important source of new (and often well-paid) jobs inthis country.

Although small businesses certainly create many new jobs each year, theimportance of big businesses in job creation should not be overlooked. Whilebig businesses eliminated thousands of jobs in the late 1980s and early 1990s,the booming Canadian economy resulted in large-scale job creation in manylarger businesses beginning in the mid-1990s. Figure 7.2 details the changesin the number of jobs at 16 large U.S. companies during the 10-year period of1990 to 1999. As you can see, General Motors eliminated 181 100 jobs andGeneral Mills and Kmart eliminated over 86 000 jobs each. Wal-Mart alone,however, created 639 000 new jobs during the same period and Dayton Hudson(which operates Target stores) created an additional 100 000.

But even these data have to be interpreted with care. PepsiCo, for ex-ample, “officially” eliminated 116 000 jobs. However, most of those lossescame in 1997, when the firm sold its restaurant chains (KFC, Pizza Hut, andTaco Bell) to Tricon. In reality, therefore, many of the jobs were not eliminatedbut simply “transferred” to another employer. Likewise, while most of Wal-Mart’s 639 000 new jobs are indeed “new,” some were added when the com-pany acquired other businesses and thus were not net new jobs.

At least one message is clear: Business success, more than business size,accounts for most new job creation. Whereas successful retailers such asWal-Mart have been adding thousands of new jobs, struggling chains such asKmart have been eliminating thousands. At the same time, flourishing high-tech giants such as Nortel Networks, Dell, Intel, and Microsoft continue to addjobs at a constant pace. It is also essential to take a long-term view when analyzing job growth. Figure 7.2, for example, shows that IBM has eliminated92 153 jobs. However, the firm actually cut a total of 163 381 jobs between1990 and 1994. Since 1995, it has created 71 228 new jobs as it has recoveredfrom an economic slump that caused the original job cuts to be so severe.


Wal-Mart–181 100

–116 100

–92 153

–86 578

–86 475

–21 100

–16 340

–3 400

+639 000

+100 000

+45 000

+36 270

+29 000

+22 900

+21 631

+12 100

General Motors

Dayton Hudson

Alberton's

Circuit City

Barnes and Noble

Dell Computer

ConAgra

America Online

Pepsi Co

IBM

KMart

National Semiconductor

Quaker Oats

Toys "R" Us

General Mills

Losses Gains

Figure 7.2Big business: Jobs created and lost.

KMartwww.kmart.com

Wal-Martwww.walmart.com

Target Corp.www.targetcorp.com

The reality, then, is that jobs are created by companies of all sizes, all ofwhich hire workers and lay them off. Although small firms often hire at afaster rate than large ones, they are also likely to eliminate jobs at a far higherrate. Small firms are also the first to hire in times of economic recovery;large firms are the last to hire. Conversely, however, big companies are alsothe last to lay off workers during economic downswings.

InnovationHistory has shown that major innovations are as likely to come from smallbusinesses (or individuals) as from big businesses. For example, small firmsand individuals invented the personal computer, the stainless-steel razor blade,the transistor radio, the photocopying machine, the jet engine, and the self-de-veloping photograph. They also gave us the helicopter, power steering, auto-matic transmissions, air conditioning, cellophane, and the ballpoint pen.

Not surprisingly, history is repeating itself infinitely more rapidly in theage of computers and high-tech communication. For example, much of today’smost innovative software is being written at new start-up companies such asTrilogy Software Inc. Trilogy’s products help optimize and streamline compli-cated sales and marketing processes for big-business customers such as IBM.Yahoo! and Netscape brought the Internet into the average Canadian livingroom, and online companies such as Chapters are using it to redefine ourshopping habits. Each of these firms started out as a small business. So did AlainRossmann’s Phone.com, a new but growing enterprise that helps big compa-nies provide wireless access to the Internet. Similarly, eToys, Inc., another dot-com start-up, is also making major inroads in the toy retailing business.

Importance to Big BusinessMost of the products made by big manufacturers are sold to consumers bysmall businesses. For example, the majority of dealerships selling Fords,Chevrolets, Toyotas, and Volvos are independently owned and operated.Moreover, small businesses provide big businesses with many of the services,supplies, and raw materials they need. As we noted, for example, TrilogySoftware has become an important supplier to big businesses. Likewise,Microsoft relies heavily on small businesses in the course of its routine operations. For example, the software giant outsources much of its code-writing functions to hundreds of sole proprietorships and other small firms.It also outsources much of its packaging, delivery, and distribution to smallercompanies. Dell Computer uses this same strategy, buying most of the partsand components used in its computers from small suppliers around the world.

The value of small business to Canada’s economy has been recognizedby the federal and provincial governments with the establishment of smallbusiness departments and lending institutions catering to these enterprises.Government agencies sponsor awards to recognize entrepreneurs or enter-prises that have performed in an outstanding manner. An example of onesuch award is the Canada Awards for Business Excellence. Begun in 1984by the federal government, these awards were created to acknowledge ex-ceptional business achievements, ones that contribute to Canada’s compet-itiveness in national and international business. The awards are given eachyear to honour extraordinary performance in various categories of businessactivity, including entrepreneurship and small business.

ENTREPRENEURSHIPAlthough the concepts of entrepreneurship and small business are closely related,there are some important, though often subtle, differences between them.


Dell Computerwww.dell.com

The Distinction Between Entrepreneurship and Small BusinessEntrepreneurs are individuals who assume the risk of business ownershipwith the primary goal of growth and expansion. A study by the GlobalEntrepreneurship Monitor (GEM) rated Canada as sixth out of 21 countriesfor entrepreneurial activity. Brazil ranked first. About 1 in 16 Canadians triedto start a new business in 2000.2

There is a distinction between entrepreneurship and small business. Aperson may be a small business person only, an entrepreneur only, or both.Consider an individual who starts a small pizza parlour with no plans otherthan to earn enough money from the restaurant to lead a comfortable lifestyle.That individual is clearly a small business person. With no plans to growand expand, however, the person is not really an entrepreneur. In contrast, anentrepreneur may start with one pizza parlour and turn it into a nationalchain. Although this individual may have started with a small business, thegrowth of the firm resulted from entrepreneurial vision and activity.

Describing the EntrepreneurIn general, most successful entrepreneurs have characteristics that set themapart from most other business owners—for example, resourcefulness and a con-cern for good, often personal, customer relations. Most successful entrepre-neurs also have a strong desire to be their own bosses. Many express a need togain control over their lives or build for their families, and believe that build-ing successful businesses will help them do that. They can also handle ambiguityand deal with surprises. Table 7.1 provides an interesting contrast betweensome of the characteristics and stereotypes that typified entrepreneurs in thepast and those that describe many of today’s most successful entrepreneurs.

Yesterday’s entrepreneur was stereotyped as “the boss”—someone whowas self-reliant and male and who made snap decisions. In contrast, today’sentrepreneur is seen more as an inquisitive, open-minded leader who relieson networks, business plans, and consensus. While today’s entrepreneur maybe male, there is an almost equal likelihood that she will be female. Past andpresent entrepreneurs also have fundamentally different views as to whythey succeeded, the role of automation in business, and the importance oftrade versus business knowledge.3

The typical entrepreneur is about 42 years old, as compared with the typ-ical employee, who is about 34 years old. An increasing number of women arebecoming entrepreneurs. A Royal Bank of Canada study estimates that one-uar-ter to one-third of all businesses worldwide are owned by women, and thatwomen now account for half the increase in new businesses each year. Between1991 and 1994, firms led by women created jobs four times faster than the av-erage of all Canadian companies. Women are more conservative than men inrunning a small business, and their failure rate is lower than that of men.4

Dozens of studies have identified common traits among entrepreneurs.A researcher at the University of Western Ontario compiled a list of manyof the characteristics identified by these studies, including assertiveness,challenge seeking, charismatic, coping, creative, improvising, opportunistic,preserving, risk taking, self-confident, tenacious, venturesome, and orientedtowards achievement and action.5

An Ontario government report, The State of Small Business, found thatthe main reasons entrepreneurs started businesses were:

■ The need to achieve or the sense of accomplishment. Entrepreneurs be-lieve that they can make a direct contribution to the success of the enterprise.


entrepreneurA business person who accepts both therisks and the opportunities involved in cre-ating and operating a new business venture.

Women Business Owners ofManitobawww.wbom.mb.ca


Table 7.1 Entrepreneurs: Past and Present

Then

Small business founderBossLone rangerSecretiveSelf-reliantSeat-of-the-pantsSnap decisionsMale ownership

IdeaIn 1982, 80% of Inc. 500 CEOsbelieved their companies’ success wasbased on novel, unique, or proprietaryideas

Knows the TradeEastern, one of the first airlines in theUnited States, was founded by pilotEddie Rickenbacker

AutomationTechnology lets business automate thework that people had always done

Now

True entrepreneurLeaderNetworkerOpenInquisitiveLetter of the business planConsensus decisionsMixed ownership

ExecutionIn 1992, 80% of Inc. 500 CEOs saidthat the ideas for their companies wereordinary and that they owed their success to superior execution

Knows the BusinessFederal Express, an overnight deliveryservice using airplanes, was developedfrom a business plan written by FredSmith while he was studying for hisM.B.A.

InnovationTechnology lets people do things thatthey’ve never done before

More and more women are startingand successfully operating their ownsmall businesses; they now accountfor half of all new businesses thatare formed.

■ The need to be their own boss and to control their time.

■ The perceived opportunity in the marketplace to provide a product orservice.

■ The wish to act in their own way or have the freedom to adapt theirown approach to work.

■ The desire to experience the adventure of independence and a variety ofchallenges.

■ The desire to make money.

■ The need to make a living.6

The motivations of successful en-trepreneurs include having fun, buildingan organization, making money, winningin business, earning recognition, and re-alizing a sense of accomplishment.7 The“Business Today” box describes the career of one of Canada’s best-known entrepreneurs.

Costs and Benefits ofEntrepreneurshipEntrepreneurship has both benefits andcosts. On the positive side, entrepre-neurs get a tremendous sense of satis-faction from being their own boss. Theyalso enjoy successfully bringing to-gether the factors of production (land,

labour, and capital) to make a profit. Perhaps the greatest benefit, however,is that entrepreneurs can make a fortune if they have carefully planned whatthe business will do and how it will operate.

On the negative side, entrepreneurs can go bankrupt if their businessfails. Customers can demand all sorts of services or inventory that small busi-nesses cannot profitably supply. Entrepreneurs must work long hours andoften get little in return in the first few years of operation. An entrepreneurmay find that he or she is very good at one particular aspect of the busi-ness—for example, marketing—but knows little about managing the overallbusiness. This imbalance can cause serious problems. In fact, poor man-agement is the main reason that businesses fail.

STARTING AND OPERATING A SMALL BUSINESSThe Internet is rewriting virtually all of the rules for starting and operating asmall business. Getting into business is easier and faster than ever before,there are many more potential opportunities than at any time in history, andthe ability to gather and assimilate information is at an all-time high. Evenso, would-be entrepreneurs must still make the right decisions when theystart. They must decide, for example, precisely how to get into business.Should they buy an existing business or build from the ground up? In


Most 65-year-old Vancouverites like to have a relaxedbreakfast and read the newspaper. Not Jimmy Pattison,one of Canada’s most famous entrepreneurs. It’s 9 a.m.,and he has been in his office since 6 a.m. He has al-ready gone through his mail and phone messages, solveda potential crisis, and talked to a businessman fromThailand who wants to do a deal. In spite of his greatwealth, Pattison has no intention of slowing down.

The Jim Pattison Group, one of Canada’s largest soleproprietorships, employs 15 000 people and has salesin excess of $3 billion. Jimmy Pattison started out in the1950s selling pots and pans door to door. He knew hecould make enough money to live on if he sold just oneset of pots and pans each day. He also learned that hecould sell one set if he could just get three evening ap-pointments to make his sales pitch. To get those threeevening appointments, he had to knock on about 30doors. Then he discovered that if he whistled while goingdoor to door, he only had to make 22 house calls to getthree appointments. So that’s what he did.

In 1961, he began selling cars. Over the years he be-came involved in numerous other ventures. Now his one-man conglomerate owns 12 car franchises, a Caribbeanbank, Ripley’s Believe-It-Or-Not, Overwaitea food stores,outdoor signs, Gold Seal fishery products, and Westar

Group Ltd., to name just a few. The company’s biggest in-vestments in the next few years will be in B.C. and Alberta.Expansion into the U.S. is also planned. In the 1980s, thecompany did no business in the U.S., but now the U.S.accounts for 20 percent of company sales. He is alsothinking of expanding into Mexico.

Pattison is obviously in charge of the company. Hisinner circle includes six executives specializing in law,tax, accounting, insurance/administration, cash manage-ment, and deal making. He says that being a private com-pany allows him to take a long-run perspective. He says thatas long as he keeps his banker happy, things run smoothly.One of Pattison’s biggest recent challenges has been to“renew” the company by recruiting a younger generationto replace his colleagues. Most of the new top executivescome from the operating divisions. One is only 29 years old.

Pattison says he has only sales skills, but those haveserved him well throughout his career. He notes that salesrequires hard work, and it forces you to relate to people.Those two elements are crucial for success. He alsolearned in selling that having the door slammed in yourface teaches you to handle setbacks and disappoint-ments. He learned not to take no for an answer.

Like many entrepreneurs, Pattison is an incurable op-timist. He is a devout Pentecostal Christian, and he isalso very generous. In May 1999, he donated $20 millionto Vancouver General Hospital, and he funded the pri-vate Christian Pacific Academy.

Jimmy Pattison—CanadianEntrepreneur Extraordinaire

BUSINESS TODAY

addition, would-be entrepreneurs must find appropriate sources of financingand decide when and how to seek the advice of experts.

An old Chinese proverb suggests that a journey of a thousand miles be-gins with a single step. This is also true of a new business. The first step is theindividual’s commitment to becoming a business owner. Next comes choos-ing the goods or services to be offered—a process that means investigatingone’s chosen industry and market. Making this choice also requires would-beentrepreneurs to assess not only industry trends but also their own skills.Like the managers of big businesses, small business owners must be surethat they understand the true nature of their enterprises.

Most people become involved in a small business in one of four ways:they take over a family business, they buy out an existing firm, they starttheir own firm, or they buy a franchise. There are pros and cons to each approach.

Taking Over a Family BusinessTaking over and operating one’s own family business poses many chal-lenges. There may be disagreement over which family member assumescontrol. If the parent sells his or her interest in the business, the pricepaid may be an issue. The expectation of other family members is typi-cal of how managing such an organization can be difficult. Some mayconsider a job, promotion, and impressive title their birthright, regard-less of their talent or training. Choosing an appropriate successor and en-suring that he or she receives adequate training, and disagreements amongfamily members about the future of the business are two problem areas.Sometimes the interests of the family and those of the enterprise conflict.As a result, family enterprises often fail to respond to changing marketconditions. The challenges faced in running such an organization are sum-marized in Figure 7.3.

A family business also has some strengths. It can provide otherwiseunobtainable financial and management resources because of the personalsacrifices of family members; family businesses often have a valuable rep-utation or goodwill that can result in important community and business re-lationships; employee loyalty is often high; and an interested, unified familymanagement and shareholders group may emerge.

Buying an Existing EnterpriseBecause a family-run business and other established firms are already op-erating, they have certain advantages for the purchaser: the clientele is es-

tablished, financing might beeasier because past performanceand existing assets can be evalu-ated, experienced employees mayalready be in place, and lines ofcredit and supply have been es-tablished. An entrepreneur whobuys someone else’s business,however, faces more uncertaintyabout the exact conditions of theorganization than does a personwho takes over his or her family’soperation.


Canadian Tirewww.canadiantire.ca

Martha Billes, president of CanadianTire. Billes’ father and uncle co-founded Canadian Tire in 1927.

The acquisition of an existing enterprise may have other drawbacks:the business may have a poor reputation, the location may be poor, and an ap-propriate price may be difficult to ascertain.

Starting a Business from ScratchSome people seek the satisfaction that comes from planting an idea, nur-turing it, and making it grow into a strong and sturdy business. There are


Managing and recognizingyour spouse's contribution

Managing the siblings—children, grandchildren

Managing the in-laws

Managing key non-familymember managers

Managing theboard of d irectors

Managing outside advisers—bankers, lawyers, insurance

specialists, tax accountants

Successor selection

Timing the succession

Training the successor

Assuring economic securityfor the retiring leader

and spouse

Ongoingmanagementof variousresources/constituencies

Succession

Figure 7.3Family-owned business leader’s key challenges.

also practical reasons to start a business from scratch. A new business doesnot suffer the ill effects of a prior owner’s errors. The start-up owner is alsofree to choose lenders, equipment, inventories, locations, suppliers, andworkers, unbound by a predecessor’s commitments and policies. A goodbusiness plan is essential for those individuals who wish to start a smallbusiness. The contents of such a plan are shown in Table 7.2.

Not surprisingly, the risks of starting a business from scratch are greaterthan those of buying an existing firm. Founders of new businesses can onlymake predictions and projections about their prospects. Success or failure thusdepends heavily on identifying a genuine business opportunity—a product for


Table 7.2 A Business Plan

The contents of a business plan vary depending upon the information required by thefinancial institutions or government agencies. Some entrepreneurs develop plans as apersonal guide to check on where they are or want to be. The following are thecomponents that might be included in such a plan:

Cover PageContains the enterprise’s name, address, telephone numbers, and key contacts.

Table of Contents

Executive SummaryA brief statement, usually about one page long, summarizing the plan’s contents.

Background/History of the EnterpriseA concise outline of when and how the enterprise got started, the goods or services itsells, and its major suppliers and customers.

ManagementBackground information on the entrepreneur and other employees, especially othermanagers (if there are any).

Marketing AssessmentDescriptions of the products or a service profile, the results of any market research, amarket description and analysis, an identification of competition, and an account of themarketing strategy.

Production AssessmentA brief description of the production process, the technological process employed,quality requirements, location and physical plant, and details of machinery andequipment.

Financial AssessmentA review of the capital structure and the money needed to finance the business. Usuallyincludes a projected balance sheet, profit and loss statement, and a cash flow forecast.Lenders may also require details of loan collateral and a repayment proposal.

Research and Development (R&D)For many enterprises, R&D is important and a statement of what is planned would beincluded. There may also be an assessment of the risks anticipated with any newproducts or ventures.

Basic DataData on the enterprise’s bankers, accountants, lawyers, shareholders (if any), and detailsof incorporation (if applicable).

AppendicesThe following might be attached to a plan: detailed management biographies, productliterature, evaluation of assets, detailed financial statements and cash flow forecast, anda list of major contracts.

which many customers will pay well but that is currently unavailable tothem. To find openings, entrepreneurs must study markets and answer the fol-lowing questions:

■ Who are my customers?

■ Where are they?

■ At what price will they buy my product?

■ In what quantities will they buy?

■ Who are my competitors?

■ How will my product differ from those of my competitors?

Finding answers to these questions is a difficult task even for large,well-established firms. But where can the small business owner get the nec-essary information? Other sources of assistance are discussed later in thischapter, but we briefly describe three of the most accessible here:

■ The best way to gain knowledge about a market is to work in it beforegoing into business in it. For example, if you once worked in a book-store and now plan to open one of your own, you probably already havesome idea about the kinds of books people buy.

■ A quick scan of the local Yellow Pages or an Internet search will revealmany potential competitors, as will advertisements in trade journals.Personal visits to these establishments and Web sites can give you in-sights into their strengths and weaknesses.

■ Studying magazines, books, and Web sites aimed specifically at smallbusinesses can also be of help, as can hiring professionals to survey themarket for you.


Amsdell Inc. is an Ontario-based company that has developed an innovativepower protection system thatprotects personal computersfrom damage or loss of infor-mation. Amsdell’s productwas touted as “best newtechnology” at the PC WeekComdex 97 trade show.Amsdell’s System INtegrationDivision financed the re-search and development necessary to come up withthe new product. VisitAmsdell at:

www.amsdell.com

WEBCONNEXION

Many new businesses start as microenterprises—enterprises operatedfrom the home part-time while the entrepreneur continues to work as a reg-ular employee of another organization. Sometimes such a business is operatedin partnership with others. The obvious advantage of beginning as a mi-croenterprise is that the entrepreneur can test his or her idea before quittingregular employment. This approach is being used increasingly by Canadians.

An example of a microenterprise or home office business is Lori MConsulting in Toronto. It was formed by Lori Molmar, an executive with theFederation of Women Teachers’ Association of Ontario. She left that job to setup a business in her home as an interior designer and environmental geron-tologist. The cost of operating from her home is lower than renting office space.

Buying a FranchiseWhen you drive or walk around any Canadian town, you will notice retailoutlets with names like McDonald’s, Pizza Pizza, Swiss Chalet, Yogenfruz,7-Eleven, Re/Max, Comfort Inn, Blockbuster Video, Sylvan Learning Centre,and Super Lube. What do all these businesses have in common? They areall franchises, operating under licences issued by parent companies to localentrepreneurs who own and manage them.

Franchising became very visible in the 1950s with fast-food franchiserslike McDonald’s, but it actually started in the early 1800s. In 1898, GeneralMotors began franchising retail dealerships, and similar systems were createdby Rexall (pharmacies) in 1902, and by Howard Johnson (restaurants and mo-tels) in 1926. Franchising continues to increase in importance as we begin thetwenty-first century. Depending on how it is defined, franchising now ac-counts for up to 50 percent of retail sales in Canada. There are thousandsof franchise establishments in Canada, and they generate approximately $30billion in annual sales revenue.

A franchise is an arrangement that gives franchisees (buyers) the rightto sell the product of the franchiser (the seller). A franchising agreement stip-ulates the amount and type of payment that franchisees must make to thefranchiser. Franchisees usually make an initial payment for the right to op-erate a local outlet of the franchise; they also make royalty payments to thefranchiser ranging from 2 to 30 percent of the franchisee’s annual revenuesor profits. The franchisee also pays an advertising fee so that the franchisercan advertise in the franchisee’s local area. At Burger King, for example, theoriginal franchise fee might be as much as $1 million, with the royalty feebeing 3.5 percent and the advertising fee 4 percent.

The Benefits of FranchisingBoth franchisers and franchisees benefit from the franchising way of doingbusiness (see Table 7.3). However, franchising is not without problems, par-ticularly from the franchisee’s perspective. Over the years, certain problemshave been noted with some frequency:

■ franchisers may impose policy changes without consulting with theirfranchisees

■ the local market may be saturated with too many outlets of one fran-chise; this reduces the profits that each franchisee is able to make

■ payments must be made to the franchiser even if profits are low

■ the franchisee has little room to develop a unique identity in the localcommunity because the head office of the franchise stipulates how thebusiness must be run and how the product must be made

■ the franchiser might be financially strapped and unable to help individ-ual franchisees


microenterpriseAn enterprise that the owner operates part-time from the home while continuing regu-lar employment elsewhere.

franchise An arrangement that gives franchisees(buyers) the right to sell the product of thefranchiser (the seller).

franchising agreement Stipulates the amount and type of paymentthat franchisees must make to the fran-chiser.

■ bad behaviour of some franchisees may damage the image of the entirefranchise

■ start-up cost can be large for well-known franchises

■ franchise agreements can be difficult to terminate, or they can be termi-nated by the franchiser even if the franchisee wants to continue

■ there is no guarantee of success for the particular outlet that the fran-chisee operates, or for the chain as a whole

■ published failure rates for franchises may be understated

Is Franchising for You?Do you think you would be happy being a franchisee? The answer depends ona number of factors, including your willingness to work hard, your abilityto find a good franchise to buy, and the financial resources you possess. If youare thinking seriously of going into franchising, you should consider severalareas of costs that you will incur:

■ the franchise sales price

■ expenses that will be incurred before the business opens

■ training expenses

■ operational expenses for the first six months

■ personal financial needs for the first six months

■ emergency needs


For the Franchiser

• the franchisor can attain rapid growth forthe chain by signing up many franchiseesin many different locations

• franchisees share in the cost of advertising

• the franchisor benefits from the investmentmoney provided by franchisees

• advertising money is spent more efficiently(the franchisor teams up with local fran-chisees to advertise only in the local area)

• the franchiser benefits because franchiseesare motivated to work hard for themselves;the more revenue the franchisee generates,the more money the franchiser makes

• the franchiser is freed from all details of alocal operation, which are handled by thefranchisee

For the Franchisee

• franchisees own a small business that hasaccess to big business management skills

• the franchisee does not have to build up abusiness from scratch

• franchisee failure rates are lower than whenstarting one’s own business

• a well-advertised brand name comes withthe franchise and the franchisee’s outlet isrecognizable because it looks like all otheroutlets in the chain

• the franchiser may send the franchisee toa training program run by the franchiser(e.g., the Canadian Institute ofHamburgerology run by McDonald’s)

• the franchiser may visit the franchisee andprovide expert advice on how to run the busi-ness

• economies in buying allow franchisees toget lower prices for the raw materials theymust purchase

• financial assistance is provided by the fran-chiser in the form of loans; the franchisermay also help the franchisee obtain loansfrom local sources

• franchisees are their own bosses and get tokeep most of the profit they make

Table 7.3 The Benefits of Franchising

For further information about franchising, consult the CanadianFranchising Association at www.cfa.ca. Concluding Case 7.1 also containsmore information on franchising.

CHALLENGES FOR THE ENTREPRENEURStarting and operating a business enterprise is challenging. The enterprisemust be carefully managed, financing must be obtained, and transitions inmanagement must be planned.

Managing the Small EnterpriseInformation on Small BusinessMany sources of information on small business are available. The followingrepresent the main resources.

Small Business Textbooks. There are several Canadian textbooks onsmall business and entrepreneurship.8 And, of course, many others are writ-ten in other countries, especially the United States.

Books Profiling Canadian Entrepreneurs. Many books have beenpublished on successful (and some unsuccessful) Canadian entrepreneurs.Examples include Gould’s The New Entrepreneurs: 80 Canadian SuccessStories, Barnes and Banning’s Money Makers: The Secrets of Canada’s MostSuccessful Entrepreneurs, and Fraser’s Quebec Inc.: French CanadianEntrepreneurs and the New Business Elite.9

Magazines. Two Canadian publications are devoted to small business andentrepreneurship. Profit: The Magazine for Canadian Entrepreneurs, pub-lished nine times a year by CB Media Ltd., is a practical magazine orientedtowards business people. A more academic publication is the Journal ofSmall Business and Entrepreneurship, published quarterly by the Centre forEntrepreneurship, Faculty of Management, University of Toronto, for theInternational Council for Small Business Canada. In addition, many maga-zines and journals are published in the United States.


Franchising is very popular inCanada. It offers individuals whowant to run their own business anopportunity to establish themselvesquickly in a local market.


Canadian Federation ofIndependent Business (CFIB)A non-profit, nonpartisan lobby group representing small and medium-sized businesses.

Small Business Centres or Institutes. Dozens of centres and institutes,usually located at colleges or universities, provide assistance to small busi-nesses. Examples are the P.J. Gardiner Small Business Institute at MemorialUniversity of Newfoundland, the Centre for Entrepreneurship at the Universityof Toronto, and Business Consulting Services at the University of Saskatchewan.

Small Business Organizations. Several organizations have been formedto represent the interests of small business. The largest is the CanadianFederation of Independent Business (CFIB), a non-profit, nonpartisanpolitical action group, or lobby, representing the interests of small andmedium-sized business to governments. The CFIB has about 75 000 members.Its stated objectives are to promote and protect a system of free competitiveenterprise in Canada and to give the independent entrepreneur a voice inlaws governing business and the nation. A similar organization is the CanadianOrganization for Small Business, operating in western Canada. Numerousprovincial groups also exist.

Government and Private Agencies. Information is also available fromgovernment and private bodies including small business departments in provin-cial governments, the “Small Business Network’’ in Willowdale, Ontario, andthe Business Information Centre of the Federal Business Development Bank. TheCanadian Youth Business Foundation (CYBF) is a non-profit, private-sectorinitiative to provide mentoring, business support, and loans to young entre-preneurs ages 18 to 29 who are interested in starting a business. Many char-tered banks have booklets and brochures on various topics related to smallbusiness.

Assistance for Entrepreneurs and Small Business EnterprisesIn the Canadian economic system, the existence of small enterprises is con-sidered desirable for a number of reasons, including the employment it pro-vides, the innovations it introduces, and the competition it ensures. To helpentrepreneurs through the hazards of starting up and operating a new busi-ness, substantial assistance is available. Government is the main source of as-sistance, but other sources are also available. Various sources of assistance aresummarized in Table 7.4.

In spite of the numerous government assistance programs, small busi-ness owners are not happy with government involvement in small business.A Financial Post survey revealed that just 5 percent of small business ownersfelt that a government program had helped them start their business. Bycontrast, 46 percent felt that government policies and regulations (e.g., ex-cessive paper work requirements and red tape) have caused them to cut backtheir business operations. Small business owners also said that governmentassistance programs are not as effective as they used to be. Small businessowners rank managerial competence as most important in promoting growth.Government assistance is ranked last.10

Financing the Small EnterpriseThe amount of capital needed to start a small business prevents some peo-ple from becoming entrepreneurs. However, sources of funding are available(see the list in Table 7.5). It should be noted that some sources are morelikely than others to provide money. Lenders may or may not lend moneyto entrepreneurs, depending on whether the enterprise is just beginningor is ongoing.

The Financial Postwww.canoe.ca/FP

Funds for Starting a BusinessThe most likely sources of financing are the personal funds of individuals, inparticular, the entrepreneurs themselves. Some government agencies mayprovide assistance funds for start-up and so may chartered banks if theythink that the proposed business has promise.

Funds for an Ongoing BusinessAfter the enterprise has operated for some time, other services are morelikely to be used, if a good financial reputation has been established. Sourcesinclude trade credit (that is, the delayed payment terms offered by suppliers),chartered banks, trust companies, and venture capitalists. Another sourceof funds is profits from the business. Entrepreneurs seldom pay themselvesall the profits generated by the enterprise. Some profits are reinvested in theenterprise and are called retained earnings.


Government Assistance

Industry Canada is the department in the federal governmentresponsible for small business and has many programs topromote entrepreneurship. Provincial governments also havenumerous programs.

The National Entrepreneurship Development Institute wasestablished as a non-profit organization to serve as a clearinghouse for information about entrepreneurship.

Taxation policy allows small business to pay lower levels of taxesthan other enterprises.

The Federal Business Development Bank (FBDB) administersthe Counselling Assistance for Small Enterprises (CASE)program, which offers one-on-one counselling by experiencedpeople to thousands of entrepreneurs each year.

The Small Business Loans Act (SBLA) encourages the provisionof term loan financing to small enterprises by private sectorinstitutions by guaranteeing the loans.

The Program for Export Market Development shares the cost ofefforts by business to develop export markets.

Incubators and technology centres operate across Canada.Incubators are centres where entrepreneurs can start theirbusinesses with the assistance of shared secretarial staff,counselling services, office equipment, legal advice, andfinancial contact. The Industry Partnership Facility (IPF) is agovernment-run incubator at the National Research Council ofCanada. When it opened in 1998, it housed 13 tenants with atotal of 25 employees. In 2000, those same companiesemployed a total of 130 people.

Schools for entrepreneurs funded by government but operatedby the private sector prepare prospective entrepreneurs bytraining them in all aspects of small business. An example is theRegina Business and Technology Centre.

Private Sector

The Canada Opportunities Investment Network (COIN) is acomputerized national investment match making service operatedthrough Chambers of Commerce. This service brings potentialentrepreneurs together with people who might be willing to supplythem with capital.

Banks and other financial institutions not only lend money but alsoprovide advice to entrepreneurs.

Venture capital companies are groups of small investors seeking tomake profits on companies with rapid growth potential. Most of thesefirms do not lend money, but rather invest it, supplying capital inreturn for stock. Venture capital companies may also demand arepresentative on the board of directors. In some cases, managersmay even need approval from venture capital companies beforemaking major decisions. Business angels are a special category ofprivate venture capitalists. They invest in new, high-risk enterprisesthat they feel should be supported even though no one else will lendsupport. For example, Dr. Drew Pinsky, co-host of MTV’s Loveline,recently received venture capital funding to extend his program tothe Internet from a group of investors collectively known asGarage.com. Garage.com is composed of several individuals andother investors who specialize in financing Internet start-ups.

All companies, even those that do not legally need boards ofdirectors, can benefit from the problem-solving abilities of advisoryboards. Thus, some small businesses create boards to provideadvice and assistance. For example, an advisory board might helpan entrepreneur determine the best way to finance a plantexpansion or to start exporting products to foreign markets.

Management consultants are experts who charge fees to helpmanagers solve problems. They often specialize in one area, suchas international business, small business, or manufacturing. Thus,they can bring an objective and trained outlook to problems andprovide logical recommendations. They can be quite expensive,however, as some consultants charge $1000 or more for a day ofassistance. Like other professionals, consultants should be chosenwith care. They can be found through major corporations that haveused their services and can provide references and reports on theirwork. Not surprisingly, they are most effective when the clienthelps (for instance, by providing schedules and written proposalsfor work to be done).

The Canadian Federation of Independent Business (CFIB) is thelargest of the organizations formed to protect the interests of smallbusiness. It is a non-profit, nonpartisan group, or lobby, thatrepresents the interests of about 75 000 small and medium-sizedenterprises.

Table 7.4 Summary of Assistance for Small Business

retained earningsProfits reinvested in an enterprise.


debtBorrowed funds that require interest pay-ments and must be repaid.

equityMoney invested in the enterprise by individ-uals or companies who become owners.

Debt Sources

These are funds borrowed by the enterprise. They may come from:

The entrepreneur, who may loan money to the enterprise

Private lenders, that is, individuals or corporations

Financial institutions such as banks, credit unions, trust companies, and financecompanies. Such borrowing may be by the enterprise but guaranteed by theentrepreneur or secured against other nonbusiness assets of the entrepreneur

Trade credit, that is, the delayed payment terms offered by suppliers

Government agencies, for example, the Federal Business Development Bank

The selling of bonds or debentures (usually only done when the enterprise is larger)

Equity Sources

This money is invested in the enterprise and represents an ownership interest. It comesfrom:

The entrepreneur’s personal funds

Partners, either individuals or corporations

Family and friends

Venture capitalists

Governments

The selling of shares to the public (usually only done when the enterprise is larger)

Employees who may participate in a stock purchase plan or simply invest in theenterprise.

Retained Earnings

Profits, that is, funds generated from the operation of the business, can be either paid tothe owners in dividends or reinvested in the enterprise. If retained or reinvested, profitsare a source of funds.

Table 7.5 Principal Sources of Funds for Small Business Enterprises

Managing FundsIn Table 7.5, each source is identified as debt or equity. Debt refers to borrowedfunds that require interest payments and must be repaid. Equity refers tothe money, or capital, invested in the enterprise by individuals or companieswho become owners, and to profits reinvested. In the case of small enter-prises, the entrepreneur is often the sole owner. The challenge for entrepreneursis to keep the amount of funds borrowed and funds invested in ownership inbalance. If an enterprise relies on debt too heavily, interest payments might be-come burdensome and could lead to the failure of the enterprise.

Investors who invest equity obtain ownership and have some influenceon the firm’s operations. If investors own 51 percent or more of the firm’sequity, they could control the enterprise. As enterprises require funds togrow, this diminishing of control frequently cannot be avoided.

Transitions in ManagementChanges in how a business is managed occur as the enterprise grows. Modelsof small business growth have been developed that help explain these changesin management.11 Table 7.6 gives examples of the shift in management ap-proaches necessary as a small enterprise develops.

The launch stage covers the preparatory activities as well as the actualstart-up, while the survival stage is the initial period of operation (up to five

years) in which many enterprises fail. During expansion, the organizationpasses the break-even point, and success appears to be more likely. Finally, thematurity stage involves slowed or slight growth and might be referred to asa “comfort’’ stage during which success is assured. Maturity is not neces-sarily the end of growth for a business. Expansion opportunities are stillsought and diversification is considered, sometimes through taking over ormerging with other enterprises.

During these stages, the firm changes from being entrepreneurial tobeing professionally managed. This change usually happens once the businessemploys between 50 and 100 people. That is, the entrepreneurial approach tomanagement in which one individual dominates shifts to a professional man-agement style with several top, middle, and supervisory managers necessaryto operate the enterprise.

THE SURVIVAL OF SMALL BUSINESSNumerous statistics on the survival rate of small businesses have been com-piled. The following data are representative:

■ About 13 to 15 percent of all business enterprises disappear each year.

■ One-half of new businesses fail in the first three years. After that thefailure rate levels off.

■ After 10 years, only 25 percent of businesses are still in existence.

■ The average lifespan of small enterprises is 7.25 years.

■ Female entrepreneurs have a survival rate about twice as high as that ofmales.12

The low survival rate need not be viewed as a serious problem, sincefailures are natural in a competitive economic system. In some cases, en-terprises are poorly managed and are replaced by more efficient and innov-ative ones. In recent years, more enterprises have started than have failed,indicating the resiliency of small business and entrepreneurs.


Characteristics Launch Survival Expansion Maturity

Key Issues

Management Style

OrganizationalStructure

Product/Market

Main Sources of Funds

Development ofbusiness “idea”

Raising funds

Obtaining customers

Entrepreneurial,individualistic, directsupervision

Unstructured

Single line and singlemarket

Owners, friends, andrelatives

Generating revenues

Breaking even

Entrepreneurial, allowsothers to administerbut supervisesclosely

Simple

Single line and marketbut increasingdiversity

Owners, suppliers(trade credit), banks

Managing and fundinggrowth

Obtaining resources

Maintaining control

Delegation,coordinative but stillentrepreneurial

Monitoring

Functional, centralized

Wider product rangeand multiplemarkets

Banks, new partners,retained earnings,secured long-termdebt

Expense control

Productivity

Consideration ofdiversification andother expansion

Decentralization,reliance on others

Decentralizedfunctional/product

Several product lines,multimarket andchannels

Retained earnings,long-term debt,shareholders

Table 7.6 Growth Model for Small Enterprises

Reasons for SuccessFour factors are typically cited to explain the success of small business owners:

1. Hard work, drive, and dedication. Small business owners must be commit-ted to succeeding and be willing to put in the time and effort to make ithappen. Long hours and few vacations generally characterize the first fewyears of new business ownership.

2. Market demand for the product or service. If the area around a college hasonly one pizza parlour, a new pizzeria is more likely to succeed than if thereare already 10 in operation. Careful analysis of market conditions can helpsmall business people assess the reception of their products in the marketplace.

3. Managerial competence. Successful small business people have a solid un-derstanding of how to manage a business firm. They may acquire compe-tence through training (by taking courses in small business management ata local college), experience (by learning the ropes in another business), orby using the expertise of others.

4. Luck. Luck also plays a role in the success of some firms. For example,after one entrepreneur started an environmental clean-up firm, he struggledto keep his business afloat. Then the government committed a large sum ofmoney for toxic waste clean-up. He was able to get several large contracts,and his business is now thriving.

Reasons for FailureSmall businesses collapse for a number of reasons (see Table 7.7). The en-trepreneur may have no control over some of these factors (for example,weather, fraud, accidents), but he or she can influence most items on thelist. This is the main reason an entrepreneur should learn as much as possi-ble about management.


How do you keep track of your appointments and “to-do”lists? There are two basic alternatives, one old-fashionedand the other high-tech. The six-ring Filofax binder, one ofthe many legendary products to come out of Britain, typ-ifies the old-fashioned approach. It was a “must-have” forBritish vicars and army officers during the 1920s and thena status symbol for yuppies during the 1980s. Now, itsusers are typically women who are trying to cope with abusy schedule of family and work.

Filofax grew slowly over many years. Sales were lessthan $200 000 per year in the early 1980s, when DavidCollischon bought the company. Soon the company wasoffering a wide array of new binders. When Filofax bindersbecame popular among yuppies, Collischon found that hecould raise prices and still increase sales. At one point,Filofax binders were selling for twice as much as other

functionally equivalent binders. By the mid-1990s, an-nual sales revenue had jumped to $40 million.

The Palm Pilot is the high-tech alternative to the Filofax.Introduced in the mid-1990s, the hand-held electronicdevice keeps track of meetings, expenses, addresses, andbilling hours. A foldable keyboard can be attached so theuser can type documents. Many software programs havebeen written for use with the Palm Pilot, and users canexchange information through the air on infrared waveswith the “beaming” future. Many people originally wereattracted to the product because it is a high-tech toy, butmost find that it is actually very useful.

Sales of Palm Pilot and its clones jumped 70 percentbetween 1999 and 2000. Many companies are now buy-ing them for their employees, and some employees considerthem to be important perks. Glaxo Wellcome Inc., for ex-ample, purchased Palm Pilots for its sales staff and lawfirms such as McCarthy Tetrault and Lang Michener havealso bought them for their employees.

Palm Pilot or Filofax?

IT’S A WIRED WORLD

SUMMARY OF

1. Define small business and explain its importance to the Canadianeconomy. A small business is independently owned and managed and doesnot dominate its market. Small businesses are crucial to the economy be-cause they create new jobs, foster entrepreneurship and innovation, and sup-ply goods and services needed by larger businesses.

2. Define entrepreneurship and describe some basic entrepreneurial char-acteristics. Entrepreneurs are small business owners who assume the riskof business ownership. Unlike small business owners, growth and expan-sion are their primary goals. Most successful entrepreneurs share a strongdesire to be their own bosses and believe that building businesses will helpthem gain control over their lives and build for their families. Many alsoenjoy taking risks and committing themselves to the necessary time andwork. Finally, most report that freedom and creative expression are im-portant factors in the decision to own and operate their own businesses.

3. Describe the start-up decisions made by small businesses. The Internet isrewriting the rules of business start-up. But in deciding to go into business, theentrepreneur must still first choose between buying an existing business andstarting from scratch. Both approaches involve practical advantages and dis-advantages. A successful existing business has working relationships withother businesses and has already proved its ability to make a profit. New busi-nesses, on the other hand, allow owners to plan and work with clean slates, butit is hard to make projections about the business’s prospects.


Poor management skills

• poor delegation and organizational ability

• lack of depth in management team

• entrepreneurial incompetence, such as a poorunderstanding of finances and business markets

• lack of experience

Inadequate marketing capabilities

• difficulty in marketing product

• market too small, nonexistent, or declines

• too much competition

• problems with distribution systems

Inadequate financial capabilities

• weak skills in accounting and finance

• lack of budgetary control

• inadequate costing systems

• incorrect valuation of assets

• unable to obtain financial backing

Inadequate production capabilities

• poorly designed production systems

• old and inefficient production facilities andequipment

• inadequate control over quality

• problems with inventory control

Personal reasons

• lost interest in business

• accident, illness

• death

• family problems

Disasters

• fire

• weather

• strikes

• fraud by entrepreneur or others

Other

• mishandling of large project

• excessive standard of living

• lack of time to devote to business

• difficulties with associates or partners

• government policies change

Table 7.7 Causes of Small Business Failure

4. Identify the advantages and disadvantages of franchising. Franchisinghas become a popular form of small business ownership because the fran-chisor (parent company) supplies the financial, managerial, and market-ing assistance to the franchisee, who buys the right to sell the franchisor’sproduct. Franchising also enables small businesses to grow rapidly. Finally,the risks in franchising are lower than those involved in opening a newbusiness from scratch. However, the costs of purchasing a franchise canbe quite high, and the franchisee sacrifices independence and creativity.In addition, franchises offer no guarantee of success.

5. Identify the key reasons for the success and failure of small busi-nesses. There are four key factors that contribute to small business fail-ure: managerial incompetence or inexperience; neglect; weak control systems;and insufficient capital. Similarly, four key factors contribute to small busi-ness success: hard work, drive, and dedication; market demand for the prod-ucts or services being provided; managerial competence; and luck. Amongthe entrepreneurial characteristics that are also important are resourcefulness,a concern for positive customer relations, a willingness to take risks, and astrong need for personal freedom and opportunity for the type of creativeexpression that goes with running one’s own company.

6. Describe the sources of financial and management advice that areavailable to small businesses. Financial and management advice for smallbusinesses is available from several private and government sources. The pri-vate sources include The Canada Opportunities Investment Network, banks,venture capitalists, the Federation of Independent Businesses, and theCanadian Youth Business Foundation. Government sources include IndustryCanada, The Federal Business Development Bank, and incubators andtechnology centres.


small business, 195entrepreneur, 199microenterprise, 206franchise, 206

franchising agreement,206

Canadian Federation ofIndependent Business(CFIB), 208

retained earnings, 211debt, 211

equity, 211

KEY TERMS

STUDY QUESTIONS AND EXERCISESReview Questions

1. Why are small businesses important to the Canadianeconomy?

2. What are the characteristics of a small business?3. What are the characteristics of an entrepreneur?4. What are the advantages and disadvantages of the

following ways of becoming involved in a small busi-ness: taking over a family business, buying out an ex-isting business, starting a business from scratch, andbuying a franchise?

5. What are the causes of small business failure?

Analysis Questions6. Do you think you would be a successful entrepre-

neur? Why or why not?7. Why would a person want to become involved in a mi-

croenterprise instead of going into business full-time?

8. Why do small businesses fail despite all the assis-tance available? Should we be concerned about thesefailures?

Application Exercises9. Interview a person who is involved in a family busi-

ness to identify the management challenges he or shefaces. Check your findings against the key challengesidentified in Figure 7.3 (see page 205). Write theCanadian Association of Family Enterprises for moreinformation at 10 Prince Street, 3rd Floor, Toronto,ON, M4W 1Z4.

10. Research a business that you are interested in andprepare a plan for starting it. Use the contents of abusiness plan listed in Table 7.2 (see page 206).


Working the Internet

GoalTo encourage students to define opportunities and prob-lems for small companies doing business on the Internet.

SituationSuppose you and two partners own a gift basket store,specializing in special occasion baskets for individualand corporate clients. Your business is doing well in yourcommunity, but you believe there may be opportunityfor growth through a virtual storefront on the Internet.

Method

Step 1:Join with two other students and assume the role ofbusiness partners. Start by researching Internet busi-nesses. Look at books and articles at the library andcontact the following Web sites for help:

• Federal government resources for small business:www.cbsc.org

• Small Business Administration: www.sba.gov

• IBM Small Business Center:www.businesscenter.ibm.com

• Apple Small Business Home Page: www.smallbusiness.apple.com

These sites may lead you to other sites, so keep an openmind.

Step 2:Based on your research, determine the importance ofthe following small business issues:

• An analysis of changing company finances as a re-sult of expansion to the Internet

• An analysis of your new competitive marketplace(the world) and how it affects your current marketingapproach, which focuses on your local community

• Identification of sources of management advice asthe expansion proceeds

• The role of technology consultants in launching andmaintaining the Web site

• Customer service policies in your virtual environment

Follow-Up Questions1. Do you think your business would be successful on

the Internet? Why or why not?

2. Based on your analysis, how will Internet expansionaffect your current business practices? What spe-cific changes are you likely to make?

3. Do you think that operating a virtual storefront willbe harder or easier than doing business in your localcommunity? Explain your answer.

Building Your Business Skills

1. Review the outline of a business plan in the text. Within the Web site, where would you find the informationto help you complete a business plan? For example, where in the Web site would you find information ortools to assist you in completing the market assessment section of a business plan?

2. Write down a type of business you’d like to start. In the “Financing Your Business” section of the Web site, in-vestigate small business loan opportunities for your new business. List the loans you qualify for because of thenature of your proposed business, your geographic region, or other criteria.

3. Review the possible ups and downs of starting your own small business as described in the “PlanningFundamentals” section. Assess your own weaknesses in possible areas that are controllable (e.g., a weather dis-aster is beyond your control). What resources could help you overcome these shortcomings?

4. Evaluate the usefulness of the “Sample Business Plan.”

A valuable information source for small businesspersons is the Online Small Business Workshop. You canreach the Web site at the following address:

http://www.cbsc.org/osbw/workshop.html

Exploring the Net


Franchising is a very popular form of business inCanada. But in the last few years, a recurring themehas been evident: conflict between franchisees andfranchisers. Consider the difficulties at three fran-chises: Subway, Grower Direct, and Pizza Pizza.

Subway. Chris Downer, the owner of a Subway fran-chise in Etobicoke, Ontario, arrived one day at hisstore and found the locks changed and a securityguard inside. Subway Franchise Systems had re-possessed his store because he had missed a roy-alty payment of $4800. Downer broke a window toget in and sent the security guard home. He paidthe money four days later, but was then hit with a$4600 legal bill from Subway to cover costs theyhad incurred when trying to get him to pay up.

Some analysts feel that Subway has opened somany new outlets that existing franchisees are goingto suffer. John Sotos, a Toronto franchise lawyer,fears that Subway’s all-out expansion drive is puttingfranchisees at risk. He wonders what basis theSubway chain is using to reach the conclusion thatit can sustain so many franchises. Ned Levitt, also afranchise lawyer, notes that the chain’s low fran-chising fee ($10 000) may allow undercapitalizedfranchisees into the business. If they run into diffi-culty, these franchisees are more likely to be unableto keep up the necessary payments. Fred DeLuca,Subway’s CEO, says the chain does not open newstores without taking current franchisees’ well-beinginto account. If the chain determines that the open-ing of a new outlet will have severe impact on an ex-isting franchisee, the new outlet will not be opened.He notes that about one-third of proposed new out-lets are not opened because of objections from ex-isting franchisees.

Grower Direct. This company is Canada’s largest im-porter of roses, with sales of $25 million. It sellsroses for $9.99 per dozen in stores across Canada.Owner Skip Kerr is able to sell roses at this low pricebecause the firm is vertically integrated all the wayback to the farm where the roses are grown. Thecompany has grown rapidly by selling franchises for$20 000. In return, franchisees receive an exclu-sive territory.

While the franchising concept has allowed GrowerDirect to rapidly increase its sales, there are prob-lems. In Toronto and Vancouver, for example, sev-eral franchisees broke away from the company,claiming that they had to pay too much for their flow-ers from the franchiser and could buy them morecheaply in Toronto. But, as long as they were part ofthe franchise, they were forced to buy their flowersfrom Grower Direct.

Kerr agrees that franchisees can get flowerscheaper elsewhere, but he says these flowers are ofmuch lower quality. One Toronto franchisee discoveredthat she could buy flowers on the local market forabout half the price that Grower Direct was charg-ing her as a franchisee. She now owns a non-fran-chised store.

One franchisee who owns 11 Grower Direct fran-chise outlets says that being a franchisee is very re-stricting. Franchisees often have ideas about how toimprove the business, but they must operate the waythe franchiser dictates. Other franchisees accept therestrictions because they want to run a business out-let where they can be their own bosses.

Pizza Pizza. Darlene Thiele owned two Pizza Pizzafranchises. Because she had an outstanding balanceof $28 000 with the franchiser, she was fearful thather stores would be taken away. To prevent a situationlike the one facing Chris Downer, she hired a lock-smith to change the locks on her store, and she sleptin the store overnight. The next morning the police ar-rived at the front door, accompanied by two man-agers from Pizza Pizza headquarters. Soon after, thechain filed a lawsuit against Thiele, alleging breachof the franchise agreement. Then they stopped de-liveries to her store.

Thiele was not alone in her run-ins with the fran-chiser. In 1992, several franchisees who had expe-rienced difficulties with Pizza Pizza formed theSouthern Ontario Pizza Franchisee Association(SOPFA). The franchisees began to grow bolder asthey recognized that others had the same concernsthey had. They eventually hired a lawyer who filed a$7.5 million lawsuit against Pizza Pizza, demand-ing that it produce certain financial statements, stop

The Ever-Changing World of Franchising

Concluding Case 7-1


interfering with the regular operations of franchisees,and stop terminating franchise agreements withoutcause.

The case was eventually turned over to an arbitra-tor in the spring of 1994. He handed down a decisionthat supported some of the franchisees’ claims, butdidn’t go as far as they would have liked. Pizza Pizzawas told it owed the franchisees a total of $821 495.It paid this out in the summer of 1995. But morethan one-third of the franchisees involved in the law-suit were eventually terminated or bought out.

New Legislation. In the fall of 2000, new legislationcame into effect in Ontario that governs the rela-tionships between franchisers and franchisees. Thenew law is the culmination of a 29-year effort to reg-ulate the franchise sector. The final version of thelegislation was weaker than franchisees wanted, butstronger than franchisers wanted. The new law:

• requires franchisers to disclose basic informationto franchisees at least two weeks before the fran-chisee agreement is signed

• prohibits franchisers from punishing franchiseeswho participate in franchisee associations

• imposes a “duty of fair dealing” on both fran-chisees and franchisers

Critics of the new legislation point out that it ad-dresses only the “bottom feeders” in the business(those who lie, swindle, and intimidate) and does-n’t deal at all with the numerous business issuesthat have caused so many problems in the industry.These business issues were raised in public hear-ings that featured numerous tales of franchisee woessuch as cannibalization, anti-competitive practices,kickbacks, arbitrary termination of franchises, andforfeiture of deposits.

However, the new law does require franchise agree-ments to include many statements that will makenew franchisees aware of the realities of the fran-chising industry. For example, franchisees will now bemade aware that they may not get the best priceavailable on the goods and services they buy fromthe franchiser.

The wording of the new legislation is based onregulations set by the U.S. Federal Trade Commission.If recent U.S. court interpretations are any indication,some business operators who do not consider them-selves to be franchisers may find, to their dismay,

that the new law applies to them. The new law’s de-finition of a franchise contains three elements:

• direct or indirect payments of a fee to engage in abusiness

• the right to sell goods that are “substantially as-sociated” with the franchiser’s trademark

• the franchiser’s exercise of “significant control”over the franchisee’s operations

Companies particularly at risk are those whoseagents, dealers, or distributors use the organization’strademarks or advertising. For example, consider thesituation in which a company gets involved in a dis-pute with one of its distributors. Might the distribu-tor claim that the relationship falls under thefranchise law and that the “franchiser” hasn’t met thenew disclosure requirements? Might the distributorthen rescind the distributorship agreement and de-mand compensation for everything the distributorhas paid the company over and above the wholesalecost of the goods?

This possibility has many business owners seekinglegal advice on whether they fall under the new law.Unfortunately, the answer is not clear. For example,does supplying a distributor with promotional give-aways for customers mean that the company is afranchiser? Franchise lawyer Paul Jones says that ifa company is simply teaching its dealers how itsproduct works or how to repair the product, that likelywould not make the company a franchiser under thelaw. But if the company is training dealers to sellthe product and do point-of-purchase displays, theremay be a problem.

CASE QUESTIONS

1. Do franchisees really own their own businesses?

2. What difficulties in franchising have led to theformulation of new legislation in Ontario? (Lookat the source notes for this case and read aboutspecific problems that franchisees have iden-tified.)

3. “In a free society, we should not have laws govern-ing the way that franchises can operate. Everyonewho gets involved in a franchise is responsible forassessing the reasonableness of the deal.Government interference simply inhibits efficientbusiness practices.” Do you agree or disagree withthis statement? Defend your answer. ◆


Sebastian Yoon is an artist who runs a high-end glassart gallery in Calgary. He is successful in galleryterms, but now he has taken a big financial risk be-cause he wants to grow. He has over $500 000 tiedup at the site formerly occupied by Coconut Joe’son Electric Avenue in Calgary. Yoon bought the prop-erty with a loan from a relative that must be repaidin eight months. He says people think he’s nuts whenthey hear what he wants to do with the place—turnit into a fancy restaurant that surrounds a glassed-inglass-blowing studio. He wants to provide food withliving art for entertainment.

Yoon’s projected budget is $1 million, with $500 000 for the purchase of the building, and an-other $500 000 to renovate it. His original plan wasto borrow the money from a bank, but every bankhe visited said no. He’s now trying to drum up privateinvestors. At the moment, he’s trying to get $100000 from Brad, a friend who operates a bar and whohas indicated an interest in Yoon’s project. Yoonbadly needs this infusion of cash because his bills arepiling up. Architect fees alone will soon reach $30 000.

The grand opening is scheduled for November,and the longer Yoon delays, the more the projectwill cost. So he is making a concerted effort to getBrad on the phone to close the deal. He has calledBrad many times in a single day, but has still beenunable to reach him. Finally, Yoon goes to Brad’sbar in the hopes of finding him. No luck. Yoon thengoes to Brad’s home, but Brad is not there, either.Eventually, Yoon does receive a cheque from Brad,but it bounces. Brad is out of the picture.

During his busy day, Yoon visits his father, whoruns an art school. They talk, but not about busi-ness. Yoon’s parents know generally what he is doingand that he is trying to raise money, but that’s aboutit. Yoon thinks his parents don’t understand whathe is trying to do.

Yoon has reduced his budget to $800 000 be-cause of his inability to raise money. He is becomingexhausted and his energy level is way down. Ontoday’s schedule, Yoon has lunch with a friend whosays he wants in on the deal. Yoon receives $5000,with a promise for an additional $5000. With themoney, Yoon pays his lawyer and accountant first.

He has now found a bank that is willing to at least dis-cuss a loan. A few days later, he meets with thebanker, explains his idea, and asks for $200 000.The banker grills Yoon on his cash flow projectionsand his estimated costs (banks aren’t eager to fundrestaurants). The banker wants to use the buildingas collateral for the loan, but Sebastian’s wealthyrelative won’t allow him to borrow against the build-ing. The banker then wonders whether Yoon’s back-ers would be willing to put up their personal assets ascollateral. Yoon doesn’t think this will work, but re-assures himself with the fact that the banker didn’tgive him a flat refusal on the loan request.

It is now August and the building renovations areunderway. Yoon has just three months to pay off theloan from his relative. Because he has been giving somuch attention to this new project, his art gallerybusiness has gone downhill, and the bills keep com-ing in. His lawyer is a friend, but he doesn’t workfor nothing.

Yoon is about ready to throw in the towel. It isnow October and the grand opening is supposed to bein two weeks. Just when all seems lost, out of theblue a buyer expresses interest in buying the build-ing from Yoon for $875 000. Luck has just rescuedYoon from his dilemma. He accepts the deal andpockets a $300 000 capital gain on the sale of thebuilding. He still plans to build a glass-blowing stu-dio sometime.

CASE QUESTIONS

1. Is Sebastian Yoon a small business owner, an en-trepreneur, or both? Explain your answer.

2. Describe the costs and benefits of entrepreneurshipfrom Yoon’s perspective.

3. What are the various ways in which a person canget involved in a small business? Which alternativehas Yoon chosen? Why might he have chosen thisroute?

4. Would Yoon be happy as a franchisee? Why or whynot?

5. What are the main debt and equity sources ofmoney for small business owners? To what extenthave these sources been used by Yoon? ◆

Concluding Case 7-2

Financing a Small Business

Some people are no longer satisfied with traditional va-cations. Today’s baby boomers have “been there, donethat.” They want new adventures and adrenalin-pumpingactivities in an environmentally friendly context. Adventuretravel is “in,” and Gap Adventures is trying to satisfy thisdemand. If you go on one of their trips, you will stay indown-to-earth hotels and ride old buses to out-of-the-waydestinations. Gap Adventures says, “If you want the com-forts of home, stay home.”

Gap operates tours in Central and South America thatmix adventure with environmentalism. In 10 years, it hasgrown from a two-person operation to one that employsmore than 70 people and has $12 million in annual sales.The company has won awards for its ethical sensibilitiesand is dedicated to the notion that tourism and conser-vation can go hand in hand.

Gap Adventures’ CEO is Bruce Poon Tip. To date, hehas run the company more like a family than a corporation.He is a self-described builder, not a maintainer. He wantsto ensure that the corporate culture is consistent with hisdesire for growth and success. Expansion, diversification,and leveraging are ideas that get Bruce motivated.

Because Bruce is concerned that Gap is not putting enoughemphasis on the customer, he wants to shake up the com-pany’s culture. To achieve this, he has hired Dave Bowenaway from Gap’s largest competitor. Dave is a combination ofNew York marketing savvy and southern U.S. charm (he grewup in Louisiana). Dave will be the new marketing director;his challenge is to instill some corporate discipline in Gap’semployees without squashing their enthusiasm.

Bruce is counting on Dave to give Gap an entrepre-neurial jolt, and he realizes that Dave may ruffle a fewfeathers in the process. Bruce tells Dave to do what comesnaturally. In fact, the employees are a bit concerned, andfind Dave to be quite aggressive. “It all seems a little mer-cenary,” says one employee.

Dave’s first assignment is to revamp Gap’s publicitybrochure. This is a critical element in Gap’s strategy sincesales flow from it. The brochure must contain the proper mixof enticing action photos and tantalizing activity descrip-tions. The brochure needs to be rewritten, but there areonly a few months to accomplish this. For the first time,Bruce is handing this important job over to someone else.

Dave is reviewing trip descriptions and thinks that they’retoo negative (e.g., reference to uncomfortable bus rides). Hethinks that Gap should hook the customer first, then fillin some of the details such as uncomfortable bus rides.Other employees think it is important to inform customersup front about the nature of the trips Gap is selling. Thereare other problems, too: the Australian and New Zealand

dollars have dropped sharply in value, so prices on thebrochure have to be changed. An argument ensues aboutwho will bear the cost of the change.

There are still other problems. For one thing, the bigtravel companies are now competing in the adventuretravel business. Gap Adventures has an alliance with aU.K. firm called Exodus. Because their product linesdon’t match exactly, Gap and Exodus each sell the other’sproduct. However, Exodus has just been bought out by abigger firm, and Gap is concerned that it might bedumped as a partner because it is not big enough to at-tract the attention of the new owner. What’s worse, whenthe new Exodus brochure arrives, Gap personnel quicklydiscover that it contains a competitor’s Web address—andGap is expected to distribute this brochure. Someonewill have to pay to have the competitor’s Web address“stickered over.” This situation has caused a strain on thealliance with Exodus. Gap employees end up doing thestickering.

A few weeks later, Exodus and Gap are still in busi-ness together, but several other problems have arisen.There are kinks in the new registration system, the newphone system isn’t up to speed yet, new policies are stillbeing explained to people in the field, travel services can’tkeep up with demand, and there are only four weeks untilthe deadline for the brochure. With corporate growth comesincreased stress for employees.

A few months after Dave arrives, it is obvious that thecorporate culture at Gap Adventures is changing. Brucenotes that activities are more formalized and better con-trolled. Overall, the company looks more “corporate” (butthat makes people feel less relaxed). Bruce goes to Ecuadorfor a few days to get married. He leaves things to his hiredgun, but will he get more than he bargained for? Dave is justgetting started on remaking Gap Adventures’ culture. He willtell employees more about his future plans as time goeson. The staff at Gap Adventures may rest a little less easyknowing that the corporate adventure is just beginning.

STUDY QUESTIONS

1. What are the three levels of strategies that businessesmust pay attention to? What business-level strategyhas Gap Adventures been pursuing?

2. What sorts of contingency plans should Bruce developfor his company?

3. What are the basic management skills that Bruce andDave must possess? Explain how the emphasis on theseskills might vary given their respective positions at GapAdventures.

Gap Adventures

CBC Video Case II-1

4. What does the term “corporate culture” refer to? Whatsteps are necessary to introduce a change in a corporateculture? How closely has Bruce followed these steps?

5. How should Dave deal with the informal organization as

he introduces changes at Gap Adventures?

6. What sorts of transitions are evident at Gap Adventures?Make recommendations to Bruce for dealing effectivelywith these transitions.

Video Resource: “Mind the Gap” Venture, November 7, 2000.

In 1993, Anton Rabie and a couple of friends from busi-ness school began manufacturing the Earth Buddy—a saw-dust and grass-seed filled novelty that competed withproducts like Chia Pet. The firm had some early successesselling Earth Buddies to large Canadian retail operationslike Zellers. Then the U.S. retail giant Kmart indicatedthat they would like to place an order for half a millionunits. Although Anton did not have a firm purchase orderin hand, he decided to take the risk and began manufac-turing hundreds of thousands of Earth Buddies in the hopethat Kmart would actually send in an order. To achievethe production volume that was required, Anton had tohire an additional 140 people and had to manage a pro-duction system that was producing at a far higher levelthan anything the company had experienced before.

What has happened to Anton’s company since 1993?Well, the news is very positive. The company eventually gotthe Kmart order and made $500 000 profit from it. By theend of 1998, the company—now called Spinmaster Toys—was selling several different lines of toys, and its annualsales had reached the $10 million mark. During December1998, Spinmaster had another mega Christmas hit toy on itshands, and Anton was scrambling to try to fill orders from re-tailers across North America who were desperate to stock theproduct on their shelves. The product was Air Hogs, a toyplane powered by compressed air that is manufactured inChina. Spinmaster never planned for a toy that would beso in demand, so the company has had to dramatically in-crease output at the Chinese factory where it is made.

In February 1999 Spinmaster took part in the Toy Fairin New York City. The idea was to push the toys thatSpinmaster was selling, and to look for new toy ideas. Thelatest product (an obvious extension of Air Hogs) is an airpressure-powered toy car, which Spinmaster demonstratedto retailers at the Toy Fair. Wal-Mart, Toys ‘R’ Us, and

Price-Costco all expressed a lot of interest in the various air-powered toys that Spinmaster has available.

Yet another twist has developed. Spinmaster is nowlooking at a water-powered rocket that uses the same basicpropulsion idea as the air-powered cars and airplanes.Toys ‘R’ Us thinks it can sell a couple million units of thewater-powered rocket. It wants a partnership withSpinmaster, and will commit to an Air-Hogs toy sectionin its retail outlets. Sales for these products could reach$50 to $60 million. That scale would be far greater thananything Spinmaster has seen so far. Anton’s dream is tohave an Air Hogs section in every toy store.

In December 1999, Spinmaster produced yet anotherhit toy. This one was called finger bikes, which are minia-ture (collectible) models of real bikes. Anton Rabie is al-ways looking for that next hit toy product. So far, he hasbeen very successful.

STUDY QUESTIONS

1. What things would Anton Rabie have to do to carry outeach of the three steps that are required in strategyformulation?

2. There are several corporate-level strategies that firms canpursue. Which one is Spinmaster pursuing?

3. What business-level strategy is Spinmaster pursuing?

4. What are the functions that all managers must per-form? Explain what is required to carry out each func-tion as Anton Rabie goes about his daily activities atSpinmaster Toys.

5. Is Anton Rabie a small business owner, an entrepre-neur, or both? Explain.

6. Read the material on the product life cycle in Chapter16 and then explain how the product life cycle con-cept is relevant for Spinmaster Toys

Video Resources: “High Flyers,” Venture #739 (February 15, 2000).

Spinmaster Toys

CBC Video Case II-2

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