Transcript Business ch 4 - Entrepreneurship

CHAPTER 4
Understanding
Entrepreneurship,
Small Business and
New Venture Creation
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Learning Objectives
Explain the meaning of and inter-relationship among the terms small
business, new venture creation, and entrepreneurship
Describe the role of small and new businesses in the Canadian
economy
Explain the entrepreneurial process and describe its three key
elements
Describe two alternative strategies for becoming a business owner –
buying an existing business and buying a franchise
Describe four forms of legal organization for a business and discuss
the advantages and disadvantages of each.
Identify four key reasons for the success or failure of small
businesses
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Small Business
Small Business - An owner-managed business
with less than 100 employees
Definitions vary
Some statistics do not include unincorporated
businesses with one owner and no employees
New Venture – recently formed commercial
organization
Opened within last 12 months
Sells goods or services
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Entrepreneurship
Entrepreneurship
 process of identifying an opportunity in the
marketplace and capitalizing on it
Entrepreneur
person who
recognizes and seizes opportunities
In all kinds of companies, not just small or new
Intrapreneur
creates something new within an existing large
organization
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Role of New Ventures
Main source of job creation
Leaders in innovation and new technology
Service sector
High-knowledge industries
high-technology and biotechnology
> 800,000 women entrepreneurs and growing
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The Entrepreneurial Process
Growth
Identifying
Opportunities
Stability
New Venture
Start-up
Entrepreneur(s)
Decline
Accessing
Resources
Demise
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The Entrepreneur
Profiles from research show lack of consensus
Entrepreneurs are not “born”
Could be anyone
Based on what they do rather than who they are
 Identify opportunities
 Access resources
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Copyright © 2008 Pearson Education Canada
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Identifying Opportunities
Generating ideas
Screening ideas
Developing the opportunity
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Identifying Opportunities
Idea Generation
Seeing what others do not
Sources:
 Work experience (45-85%)
 Interest/hobby (16%)
 Chance happening (11%)
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Identifying Opportunities
Screening
Check to see if the idea
 Creates or adds value
 Provides a sustainable competitive advantage
 Is marketable and financially viable
 Has low exit costs
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Identifying Opportunities
Developing the Opportunity
Entry Strategies
New product or service
Existing product or service
with new twist
Franchise
Research and planning
Business plan
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
•Describe proposed venture
•Explain why an opportunity
•Outline marketing plan
•Operational & financial details
•Managers’ skills and abilities
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Accessing Resources
Bootstrapping – doing more with less
 Preferably use others’ resources
Financial Resources
 Debt
 Equity
•Financial institutions
•Suppliers
•Personal savings
•Love money (friends, family)
•Private investors (angels)
•Venture capitalists
Other resources
 Team members with complementary skills
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Copyright © 2008 Pearson Education Canada
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Assessing the “Fit” Between Elements
in the Entrepreneurial Process
Entrepreneur – Opportunity Fit
Something the entrepreneur
can do and wants to do?
Realistic self-assessment
Opportunity – Resources Fit
Can resources required be acquired?
Entrepreneur-Resources Fit
Capacity to meet requirements?
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Starting and Operating
a Small Business
Start a business from scratch
Buy an existing enterprise
 Clearer expectations, proven ability, better odds of success
 Take over a family business
 Disagreements over control
Buying a franchise
 Franchisee purchases right to sell
product/service of franchiser
 Franchising agreement lays out duties and responsibilities
 Usually initial payment, royalties (% of revenue) & advertising fee
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Buying an Existing Enterprise
Pros
 established clientele
Cons
 experienced employees
 uncertainty about
actual financial health
of the firm
 established lines of
credit and supply
 location, reputation
may be poor
 less risky than starting
from scratch
 pricing strategy may
need revisiting
 ease of financing
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Copyright © 2008 Pearson Education Canada
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Family-Owned Business Challenges
Ongoing Management:
•Which family members have control?
•Price to be paid?
•Family members rights to a job?
•Future of the business?
Succession:
•Selecting a successor
•Timing succession
•Training the successor
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Benefits of Franchising for
the Franchiser
Attain rapid growth
Share advertising cost
Increased investment
money
More efficient
advertising delivery
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Development of a
motivated sales team
Increased revenue
No need to deal with
local business issues
(managed by
franchise owners)
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Benefits of Franchising
for the Franchisee
Access to
management
expertise
No need to build a
business from scratch
Lower failure rates
Well-developed brand
Training provided
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Expert advice
Economies of scale in
buying supplies
Financial assistance
Help with getting
external financing
Be your own boss
Keep most of the
profits
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Is Franchising For You?
Willing to work hard?
Consider areas of cost
 franchise sales price
 start-up expenses
 training expenses
 operational expenses
 personal financial needs
 emergency needs
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Franchise Problems
Franchisers may impose policy changes without
consulting franchisees
Local market may be saturated
Payments to franchiser are required even if
profits are low
Franchiser controls how business is run and how
product is made
Franchiser could be financially strapped and
unable to help individual franchisee
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Forms of Business Organizations
Sole Proprietorship
 Owned and operated by one person
Partnership
 Two or more individuals combine resources
Corporation
 Separate legal entity, liable for own debts
Cooperatives
 Organized owned and controlled by users of its
products/services
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Sole Proprietorships
Advantages
Disadvantages
 freedom
 unlimited liability
 simplicity
 lack of continuity
 low start-up costs
 difficult to raise money
 tax benefits
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
 reliance on one individual
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The Partnership
Frequently used by professional
Two basic types
General partners
actively involved in management
have unlimited liability
must be at least one
Limited partners
not actively involved in management
liability limited to their investment
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Partnerships
Advantages
Disadvantages
 Larger talent pool
 Unlimited Liability
 Larger money pool
 Lack of continuity
 Ease of Formation
 Ownership transfer
 Tax Benefits
difficult
 Potential Conflict
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Corporations
Regardless of the size or industry corporations
have the following rights and characteristics
 Legal status as a separate entity
 Liable for own debts
 Owner’s liability limited to investment
 Property rights and obligations
 Indefinite lifespan
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Corporations
Stockholders
 Investors who buy shares of ownerships (stocks)
 Real owners of the corporation
 May share in profits through dividends
Board of Directors
 Governing body of the corporation
 Responsible for interests of shareholders
 Appoint management, set policy, make major decisions
 Inside directors are employees
 Outside directors are not employees
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Types of Corporations
Public Corporation
 Stock is widely held and available for sale to public
Private Corporation
 Stock held by only a few, restrictions on sale
 Most corporations are privately held
 May become public to raise money
 Initial Public Offering (IPO)
Income Trust
 Avoid tax by distributing most of their earnings to
investors
 Government announced will begin taxing them in 2011
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Formation of the Corporation
Canadian Business Corporation Act
 If operating in more than one province
 Draw up articles of incorporation
Provincial Corporation Acts
 If operating in only one province
Must use Limited (Ltd.), Incorporated (Inc.) or
Corporation (Corp.) in name
 British firms use PLC, Germans use AG
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Corporations
Advantages
Disadvantages
 Limited Liability
 Start-up costs
 Continuity
 Double taxation
 Professional
 Regulations
Management
 Stockholder revolts
 Easier to raise money
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Cooperatives
An organization formed to benefit its owners in the
form of reduced prices and the distribution of
surpluses
Each member has one vote
Types of Cooperatives
 Consumer
 Financial
 Insurance
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Marketing
Service
Housing
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Comparison of Forms of Ownership
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Reasons for Success
Hard work, drive and dedication
Market demand
Managerial competence
High growth businesses
Luck
more likely to
•use professional advisors
•have formally educated owners
•incorporate
•use the internet
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Reasons for Failure
Poor management skills
Inadequate marketing capabilities
Inadequate financial capabilities
Inadequate production capabilities
Personal reasons
Disasters
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada
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Information Sources
Small Business Textbooks
Magazines and Journals
Small Business Centres or Institutes
Organizations (such as the Canadian
Federation of Independent Business)
Government & Private Agencies
Business, Sixth Canadian Edition, by Griffin, Ebert & Starke
Copyright © 2008 Pearson Education Canada