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MGTA01H3 (583)
Chapter 3

CHAPTER 3

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Department
Management (MGT)
Course
MGTA01H3
Professor
Chris Bovaird
Semester
Fall

Description
CHAPTER 3: UNDERSTANDING ENTREPRENEURSHIP, SMALL BUSINESS, AND NEW VENTURE CREATION -every day, approx 380 businesses started in Canada -new firms create most jobs, noted for their entrepreneurship and typically small -but doesn’t mean that most small businesses are entrepreneurial Small Business -difficult to define “small” business -various measures: # of ppl business employs, company’s sales revenue, size of investment required or type of ownership structure business has -Industry Canada is main federal government agency responsible for small business -gov’t relies on 2 distinct sources of info when reporting Canadian small business stats: 1) Business Register (which tracks businesses) 2) Labour Force Survey (which tracks individuals) -to be included in register, business must have at least one paid employee, annual sales of $30, 000 or more, or be incorporated -a goods-producing business in register is considered small if it has fewer than 100 employees -service-producing business small if it has fewer than 50 employees -Labour Force Survey uses info from individuals to make estimates of employment and unemployment levels -individuals classified as self-employed if they’re working owners of a business that’s either incorporated or unincorporated, if they work for themselves but don’t have a business, or if they work without pay in a family business -Industry Canada reports that there are 2.2 million “business establishments” in Canada and about 2.5 million people who are “self-employed” -an unincorporated business operated by a self-employed person (with no employees) would not be counted among the 2.2 million businesses in register -important b/c majority of businesses in Canada have no employees (just owner), nor are they incorporated -small business: an owner-managed business with less than 100 employees THE NEW VENTURE/FIRM -3 of most common criteria to determine when new firm comes into existence are when it was formed, whether it was incorporated, and if it sold goods and/or services -business considered to be new if it’s become operational w/in previous 12 months, if it adopts any of main organizational forms (proprietorship, partnership, corporation, or co-operative), and if it sells goods or services -new venture (new firm): a recently formed commercial organization that provides goods and/or services for sale ENTREPRENEURSHIP -entrepreneurship: process of identifying an opportunity in the marketplace and accessing resources needed to capitalize on that opportunity -entrepreneurs: people who recognize and seize opportunities -small businesses are usually independently owned and influenced by unpredictable market forces so often provide an environment to use personal attributes—such as creativity—that have come to be associated with entrepreneurs -not only small business owners exhibit entrepreneurial characteristics -successful managers in large organizations in public and private sectors also exhibit -people who exhibit entrepreneurial characteristics and create something new within an existing large firm or organization are called intrapreneurs -key diff b/w intrapreneurs and entrepreneurs: intrapreneurs typically don’t have to concern themselves with getting resources needed to bring new product to market since employer provides resources THE ROLE OF SMALL AND NEW BUSINESSES IN THE CANADIAN ECONOMY SMALL BUSINESSES -98% of all businesses in Canada are small -58% of all businesses located in Ontario and Quebec -allocation of size of small business is identical to U.S.’s -majority of small businesses in Canada (57%) have fewer than 5 employees -private sector: part of economy that’s made up of companies and organizations that are not owned or controlled by the gov’t -49% of private sector employees worked for small businesses -16% for medium-sized enterprises -35% for large businesses -businesses b/w 5-19 employees account for highest % of employment -small businesses account for over 2/3’s of employment in 4 industries: non-institutional health care (90%), construction industry (77%), other services (73%), & accommodation & food (69%) -in another 5 industries at least half of workforce is employed by small businesses -annual contribution of small businesses over past year to Canada’s GDP valued at 25% -less than sector’s contribution to employment but still significant NEW VENTURES -new firms source of job creation, and vast majority of new products and services -b/w 1991 to 2003, # of firms in Canada grew 12% -most of growth in firms occurred in services-producing sector, with # of firms in high- knowledge industries such as high-tech and biotech nearly doubling -high knowledge industries in goods-producing sector also grew at much faster pace than in other industries -women playing far more prominent role than ever in growth of new firms -now more than 800, 000 women entrepreneurs in Canada and # increasing by more than 3% each year in recent years -b/w 1991 and 2001, self-employment among women increased by 43% as compared w/ an increase of 21% among men -important that these stats exclude businesses w/out employees -business counted as “new” could have been operating for several years before being statistically counted as a new business—only when it hires employees it becomes business -individually, 1 large business easily outperforms contribution of countless # of small businesses, collectively, small and medium-sized enterprises outperform large businesses in many areas (particularly in terms of contribution to employment) -new businesses lead way when it comes to innovation and new technology THE ENTREPRENEURIAL PROCESS -to start new venture, entrepreneur must identify business opportunity and access resources needed to capitalize on it -3 key process elements—entrepreneur, opportunity, and resources -if these elements are mismatched (“misfit”), journey may be abandoned before destination is reached -ex. If entrepreneur identifies opportunity for new health service but doesn’t have relevant background of it, then business may never get off ground -after start-up, venture’s next phase of development will be one of following outcomes: -growth, stability, decline, or demise (ceasing to exist) The Entrepreneur -what’s really important is not who the person is but what the person does -some personal characteristics are behavioural, others personality traits and others are skills -entrepreneurial characteristics widely distributed in population -personal characteristics often have less impact on a person’s actions than situation person’s in -2 main things entrepreneurs do are identify an opportunity and access resources IDENTIFYING OPPORTUNITIES -involves generating ideas for new (or improved) products, processes, or services -and screening those ideas so that the one that presents best opportunity can be developed Idea Generation -generating ideas involves abandoning traditional assumptions about how things work and how they ought to be and seeing what others don’t -if prospective new product, process, or service can be profitably reduced and is attractive relative to other potential venture ideas, it might present an opportunity -majority of ideas originate from events relating to work or everyday life -work experience is most common source of ideas (45-85%) -next most frequent source are personal interest/hobby (16%) then chance happening (11%) -chance happening: situation where a venture idea comes about unexpectedly Screening -screening is key part of entrepreneurial process -faster you weed out “dead-end” venture ideas, more time and effort you can devote to ones that remain -more of following characteristics an idea has, greater the opportunity it presents: The Idea Creates or Adds Value for the Customer -product/service that creates/adds value for customer is one that solves a significant problem or meets significant need in new or diff ways The Idea Provides a Competitive Advantage that Can Be Sustained -competitive advantage exists when potential customers see the product or service as better than that of competitors -sustaining competitive advantage involves maintaining it in face of competitors actions or changes in industry -the longer the markets are in a state of flux, the greater the likelihood of being able to sustain a competitive advantage -absence of competitive advantage or developing competitive advantage that’s not sustainable constitute 2 fatal flaws of many new ventures The Idea is Marketable and Financially Viable -determine whether there are enough customers willing to buy product/service -determine whether sales will lead to profits -estimating market demand requires initial understanding of who customers are, what their needs are and how product or service will satisfy their needs better than competitors’ products will -also requires thorough understanding of key competitors who can provide similar products, services, or benefits to target customer -customers define competition in terms of who can best satisfy their needs -sales forecast: estimate of how much of a product or service will be purchased by prospective customers over a specific period (typically 1 year); entrepreneur must prepare this after learning about competition and customers -total sales revenue is estimated by multiplying units expected to be sold by selling price -sales forecast forms foundation for determining financial viability of venture and resources needed to start it -determining financial viability involves preparing financial forecasts—2 to 3 year projections of a venture’s future financial position and performance -typically consist of an estimate of start-up costs, a cash budget, an income statement, and balance sheet -cash budget forecasts cash receipts and cash disbursements of business -income statement shows profit or loss -balance sheet shows assets (what business owns), liabilities (what’s owed) owners’ equity (owners’ investment, including any profits that business retains) -these projections serve as basis for decisions regarding whether to proceed with venture and if so, amount and t
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