Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada CHAPTER 4 Understanding Entrepreneurship, Small Business and New Venture Creation

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-2 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 4-3 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 4-4 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

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-5 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

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-6 The Entrepreneurial Process Entrepreneur(s) Identifying Opportunities Growth Accessing Resources New Venture Start-up Stability Decline Demise

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-7 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

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-8 Identifying Opportunities Generating ideas Screening ideas Developing the opportunity

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-9 Identifying Opportunities Idea Generation Seeing what others do not Sources:  Work experience (45-85%)  Interest/hobby (16%)  Chance happening (11%)

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-10 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 4-11 Identifying Opportunities Developing the Opportunity Entry Strategies  New product or service  Existing product or service with new twist  Franchise Research and planning  Business plan Describe proposed venture Explain why an opportunity Outline marketing plan Operational & financial details Managers’ skills and abilities

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-12 Accessing Resources Bootstrapping – doing more with less  Preferably use others’ resources Financial Resources  Debt  Equity Other resources  Team members with complementary skills Financial institutions Suppliers Personal savings Love money (friends, family) Private investors (angels) Venture capitalists

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-13 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 4-14 Starting and Operating a Small Business Buying a franchise  Franchisee purchases right to sell product/service of franchiser  Franchising agreement lays out duties and responsibilities  Usually initial payment, royalties (% of revenue) & advertising fee Start a business from scratch Buy an existing enterprise  Clearer expectations, proven ability, better odds of success  Take over a family business  Disagreements over control

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-15 Buying an Existing Enterprise Pros  established clientele  ease of financing  experienced employees  established lines of credit and supply  less risky than starting from scratch Cons  uncertainty about actual financial health of the firm  location, reputation may be poor  pricing strategy may need revisiting

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-16 Family-Owned Business Challenges Ongoing Management: Succession: Which family members have control? Price to be paid? Family members rights to a job? Future of the business? Selecting a successor Timing succession Training the successor

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-17 Benefits of Franchising for the Franchiser Attain rapid growth Share advertising cost Increased investment money More efficient advertising delivery Development of a motivated sales team Increased revenue No need to deal with local business issues (managed by franchise owners)

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-18 Benefits of Franchising for the Franchisee Access to management expertise No need to build a business from scratch Lower failure rates Well-developed brand Training provided Expert advice Economies of scale in buying supplies Financial assistance Help with getting external financing Be your own boss Keep most of the profits

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-19 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 4-20 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 4-21 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 4-22 Sole Proprietorships Advantages  freedom  simplicity  low start-up costs  tax benefits Disadvantages  unlimited liability  lack of continuity  difficult to raise money  reliance on one individual

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-23 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 4-24 Partnerships Advantages  Larger talent pool  Larger money pool  Ease of Formation  Tax Benefits Disadvantages  Unlimited Liability  Lack of continuity  Ownership transfer difficult  Potential Conflict

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-25 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 4-26 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 4-27 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 4-28 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 4-29 Corporations Advantages  Limited Liability  Continuity  Professional Management  Easier to raise money Disadvantages  Start-up costs  Double taxation  Regulations  Stockholder revolts

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-30 Cooperatives Types of Cooperatives  Consumer  Financial  Insurance An organization formed to benefit its owners in the form of reduced prices and the distribution of surpluses Each member has one vote Marketing Service Housing

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-31 Comparison of Forms of Ownership

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-32 Reasons for Success Hard work, drive and dedication Market demand Managerial competence Luck High growth businesses more likely to use professional advisorsuse professional advisors have formally educated ownershave formally educated owners incorporateincorporate use the internetuse the internet

Business, Sixth Canadian Edition, by Griffin, Ebert & Starke Copyright © 2008 Pearson Education Canada 4-33 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 4-34 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