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Chapter 1-9

MGTA01H3 Chapter 1-9: MGTA03 - Textbook Notes
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Department
Management (MGT)
Course Code
MGTA01H3
Professor
Chris Bovaird

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MGTA03 – Introduction to Management
Chapter 1 – Understanding the Canadian
Business System
The Concept of Business and Pro!t
-Business – An organization that produces or sells goods or services in an
eort to make a prot
-Pro!t – The money that remains (if any) after a business’s expenses are
subtracted from its revenues
-Expenses – The money a business spends producing its goods and services
and generally running the business. Also referred to as “costs”
-Revenues – The money a business earns selling its product and services.
Also referred to as “sales”
-Businesses exist to earn prot for owners
oBusinesses need take into account what consumers want or need
oNo matter how e'cient, the business won’t survive if there is no
demand for it
Economic Systems around the World
-Economic Systems – Allocates a nation’s resources among its citizens
oDier in terms of who owns and controls these resources
Factors of Production
-Factors of Production – Basic resources that a country’s businesses use to
produce goods and services
-Traditionally, focused on 4 factors of production
oLabour
oEntrepreneurs
oCapital
oNatural Resources
o
Information resources are now often included as 5th factor
Labour
-Labour- Mental and physical training and talents of people
-Well trained and knowledgeable employees can be a real competitive
advantage for a company
Capital
-Capital – The funds/nancial resources needed to operate an enterprise
-Major source of capital for small businesses is personal investments by
owners
-Revenue from the sales of products is a key and ongoing source of capital
once a business has opened/started
Entrepreneurs
-Entrepreneurs—An individual who organizes and manages labour, capital
and natural resources to produce goods and services to earn a prot, but who
also runs the risk of failure
Natural Resources
-Natural Resources – Items used in the production of goods and services in
their natural state
oEx. Land, Water, Mineral deposits, Trees
Information Resources
-Information Resources – Information such as market forecasts, economic
data, and specialized knowledge of employees that is useful to a business
and that helps it achieve its goals
Types of Economic Systems
-Command Economies – An economic system in which government makes
all or most factors of production and makes all or most production factors
-Market Economy – An economic system in which individuals control all or
most factors of production and make all or most production decisions
Command Economics
-Most basic forms of command economics – Communism and Socialism
-Communism was proposed by German economist Karl Marx
-Communism – A type of command economy in which the government owns
and operates all industries
-Socialism – A kind of command economy in which the government owns and
operates the main industries, while individuals own and operate less crucial
industries
oMany government operated enterprises are ine'cient; extensive public
welfare systems
Market Economies
-Market – A mechanism for exchange between the buyers and sellers of a
particular good or service
oBoth buyers and sellers enjoy freedom of choice
-Capitalism – A kind of market economy oering private ownership of the
factors of production and of prots from business activity
-Economic basis of market is supply and demand
Mixed Market Economies
-Mixed Market Economies – A system featuring characteristics of both
command and market economies
-Privatization – The process of converting government enterprises into
privately owned companies
oCanada had privatized its air tra'c control system
New enterprise reduces its payroll, boosted e'ciency and
productivity and quickly became protable
-Deregulation – Reduction in the number of laws aecting business activity
and in powers of government enforcement agencies
Interactions between Business and Government
How Government In2uences Businesses
-Government plays several dierent roles in Canadian economy
-Each role in<uences business activity in some way
Government as Customer
-Government buys thousands of dierent products and services from business
rms
-Also largest purchaser of advertising
-Many depend on government purchasing
-Government expenditures on goods and services amount to billions a year
Government as Competitor
-Competes through crown corporations, accounted to minister of Parliament
for their conduct
-Exists on both federal and provincial level
-Accounts for signicant and wide variety of economic activity in Canada
Government as Regulator
-Regulates business through many administrative boards, tribunals or
commissions

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Description
MGTA03 – Introduction to Management Chapter 1 – Understanding the Canadian Business System The Concept of Business and Profit - Business – An organization that produces or sells goods or services in an effort to make a profit - Profit – The money that remains (if any) after a business’s expenses are subtracted from its revenues - Expenses – The money a business spends producing its goods and services and generally running the business. Also referred to as “costs” - Revenues – The money a business earns selling its product and services. Also referred to as “sales” - Businesses exist to earn profit for owners o Businesses need take into account what consumers want or need o No matter how efficient, the business won’t survive if there is no demand for it Economic Systems around the World - Economic Systems – Allocates a nation’s resources among its citizens o Differ in terms of who owns and controls these resources Factors of Production - Factors of Production – Basic resources that a country’s businesses use to produce goods and services - Traditionally, focused on 4 factors of production o Labour o Entrepreneurs o Capital o Natural Resources o Information resources are now often included as 5 factor Labour - Labour- Mental and physical training and talents of people - Well trained and knowledgeable employees can be a real competitive advantage for a company Capital - Capital – The funds/financial resources needed to operate an enterprise - Major source of capital for small businesses is personal investments by owners - Revenue from the sales of products is a key and ongoing source of capital once a business has opened/started Entrepreneurs - Entrepreneurs—An individual who organizes and manages labour, capital and natural resources to produce goods and services to earn a profit, but who also runs the risk of failure Natural Resources - Natural Resources – Items used in the production of goods and services in their natural state o Ex. Land, Water, Mineral deposits, Trees Information Resources - Information Resources – Information such as market forecasts, economic data, and specialized knowledge of employees that is useful to a business and that helps it achieve its goals Types of Economic Systems - Command Economies – An economic system in which government makes all or most factors of production and makes all or most production factors - Market Economy – An economic system in which individuals control all or most factors of production and make all or most production decisions Command Economics - Most basic forms of command economics – Communism and Socialism - Communism was proposed by German economist Karl Marx - Communism – A type of command economy in which the government owns and operates all industries - Socialism – A kind of command economy in which the government owns and operates the main industries, while individuals own and operate less crucial industries o Many government operated enterprises are inefficient; extensive public welfare systems Market Economies - Market – A mechanism for exchange between the buyers and sellers of a particular good or service o Both buyers and sellers enjoy freedom of choice - Capitalism – A kind of market economy offering private ownership of the factors of production and of profits from business activity - Economic basis of market is supply and demand Mixed Market Economies - Mixed Market Economies – A system featuring characteristics of both command and market economies - Privatization – The process of converting government enterprises into privately owned companies o Canada had privatized its air traffic control system  New enterprise reduces its payroll, boosted efficiency and productivity and quickly became profitable - Deregulation – Reduction in the number of laws affecting business activity and in powers of government enforcement agencies Interactions between Business and Government How Government Influences Businesses - Government plays several different roles in Canadian economy - Each role influences business activity in some way Government as Customer - Government buys thousands of different products and services from business firms - Also largest purchaser of advertising - Many depend on government purchasing - Government expenditures on goods and services amount to billions a year Government as Competitor - Competes through crown corporations, accounted to minister of Parliament for their conduct - Exists on both federal and provincial level - Accounts for significant and wide variety of economic activity in Canada Government as Regulator - Regulates business through many administrative boards, tribunals or commissions - Provincial boards and commissions also regulate business through their decisions - Business people feel that government is unfair in the way it performs it roles as regulator (sometimes) - Important reasons for regulating business activity o Protecting competition o Protecting consumers o Achieving social goals o Protecting the environment Government as Taxation Agent - Taxes imposed and collected by local, provincial and federal governments - Revenue Taxes – Taxes whose main purpose is to fund government services and programs - Progressive Revenue Taxes – Taxes levied out at a higher rate on higher- income taxpayers and at a lower rate on lower-rate taxpayers - Regressive Revenue Taxes – Taxes that cause poorer people to pay a higher percentage of income than richer people pay - Restrictive Taxes – Taxes levied to control certain activities that legislators believe should be controlled o Ex. Alcohol, tobacco, gasoline Government as Provider of Incentives - Federal, provincial and municipal governments offer incentive programs that help stimulate economic development - Also offered through services providing to business firms through government organizations - Many other government incentive programs include: o Municipal tax returns for companies that locate in certain areas o Design assistance programs o Remission of tariffs on certain advanced technology production equipment Government as Provider of Essential Services - Federal, provincial, municipal governments facilitate business activities through variety of services they supply - Federal governments provide : Highways, postal service, minting of money, armed forces, statistical data - Tries to maintain stability through fiscal and monetary policy - Provincial and municipal provides: Streets, sewage and sanitation systems, police and fire departments, utilities, hospitals, educationThe Canadian Market Economy Demand and Supply in a Market Economy - (Economic) Market is not a specific place but on exchange process between buyers and sellers The Laws of Demand and Supply - Demand – The willingness and ability of buyers to purchase a product of service - Supply—The willingness and ability of producers to offer a good or service for sale - Law of Demand – Buyers will purchase (demand) more of a product as its price drops and less of a product as its price increases - Law of Supply – Producers will offer (supply) more of a product for sale as its price rises and less as its price drops The Demand and Supply Schedule - Demand and Supply Schedule – Assessment of the relationships between different levels of demand and supply at different price levels o Obtained from marketing research and other systematic studies of the market o Help managers better understand the relationships among different levels of demand and supply Demand and Supply Curves - Demand Curve—Shows how many products will be demanded (bought) at different prices - Supply Curve—Shows how many units of a product will be supplied (offered for sale) at different prices - Market Price/Equilibrium Price – Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal Surplus and Shortages - Surplus – A situation in which the quantity supplied exceeds the quantity demanded - Shortage – A situation in which quantity demanded exceeds quantity demanded - To optimize profits; all businesses must constantly seek the right combination of the price charged and the quantity supplied o Found at the Equilibrium point - When there is a shortage of a commodity, the price of the commodity rises and there may also be a rise of criminal behaviour Private Enterprise and Competition in a Market Economy - Market economies rely on private enterprise systems (An economic system Characterized by private property rights, freedom of choice, profits, and competition) o Private Property – Ownership of the resources used to create wealth is in the hands of individuals o Freedom of Choice – The choice to sell labour to any employer. Also choose which products to buy and producers can choose whom to hire and what to produce o Profits – The lure of profits (and freedom) leads some people to abandon the security of working for someone else. Assumes the risks of entrepreneurship. Anticipated profits also influence individual’s choices of which goods or services to produce o Competition – Competition motives individuals to operate businesses efficiently. It occurs when two or more businesses vie for the same resources/customers. To gain an advantage, a business must produce its good/services efficiently and sell them at a reasonable profit Degrees of Competition - In a free enterprise system not all industries are equally competitive - Four degrees of competition o Perfect Competition o Monopolistic Competition o Oligopoly o Monopoly Perfect Competition - Perfect Competition – A market or industry characterized by a very large number of small firms producing an identical product so that none of the firms has any ability to influence price - Prices are determined by market forces ; supply and demand o 1. The products of each firm are so similar that buyers view them as identical to those of other firms o 2. Both buyers and sellers know the prices that others are paying and receiving in the marketplace o 3. Because each firm is small, it is easy for firm to enter and leave the market o 4. Going prices are set exclusively by supply and demand and accepted by both sellers and buyers - Ex. Wheat production; relatively to start, and stop Monopolistic Competition - Monopolistic Competition – A market or industry characterized by a large number of firms supplying products that are similar but distinctive enough from one another to give firms some ability to influence price - Differentiating strategies include brand names, design or styling, advertising - Can still enter and exit the market easily Oligopoly - Oligopoly – A market or industry characterized by a small number of very large firms that have the power to influence the price of their product and/or resources - These sellers are quite large; difficult for new competitors to enter the industry (large capital investment needed) o X. Automobile, airline, steel industries  “Global oligopolies are as inevitable as sunrise” - Oligopolists have control over their strategies, but the actions of one firm can significantly affect the sales of every other firm in the industry Monopoly - Monopoly – A market or industry with only one producer, who can set the price of its product and/or resources - Being the only supplier gives firm complete control over the price; only constraint is consumers demand will fall as its price rises - Laws such as “Competition Act” forbid many monopolies and prices charged by “natural monopolies” are closely watched by provincial utilities boards - Natural Monopoly – A market or industry in which having only one producer is most efficient because it can meet all of consumers’ demand for the product - Assumption that certain activities qualify as natural monopolies is increasingly being challenged Chapter 2 – Understanding the Canadian Business SystemThe Economic Environment - External Environment – Everything outside an organization’s boundaries that might affect it o Plays a major role in determining the success or failure of any organization o Managers must have an accurate understanding of the environment facing the company and strive to operate and compete within it - Economic Environment—Conditions of the economic system in which an organization operates o Ex. McDonalds – Moderate growth, moderate unemployment and low inflation  Moderate Employment means most people can afford to eat out  Low inflation means MCD pays constant prices for its supplies; meaning MCD can’t increase the prices it charges consumers - 3 key goals of the Canadian Economic System o Economic Growth  Measuring tools: Aggregate output, standard of living, gross domestic product, productivity o Economic Stability  Main Threats: Inflation, unemployment o Full Employment Economic Growth - Agricultural efficiency has improved because we devised better ways of producing products and invented better technology - Agricultural production has grown because we have increased the total output in the agricultural sector Business Cycle - Business Cycle – Pattern of short-term ups and downs (expansions and contractions) in an economy o Four Phases – Peak, Recession, Trough, Recovery - Recession – Period during which aggregate output, as measured by real GDP, declines - Depression – Particularly severe and long-lasting recession Aggregate Output and the Standard of Living - Aggregate Output – Total quantity of goods and services produced by an economic system during a given period o Basically; an increase in aggregate output is growth - When output grows more quickly than the population two things happen o 1. Output per capita – The quantity for goods and services per person goes up o 2. The system provides relatively more of the goods and services people want  People benefit from a higher standard of living ( Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system Gross Domestic Product - Gross Domestic Product (GDP) – Total value of all goods and services produced within a given period by a national economy through domestic factors of production - If GDP is going up, the nation is experiencing economic growth and vice versa - Gross National Product (GNP) – Total values of all goods and services produced by a national economy within a given period regardless of where the factors of production are located o The profits earned by a Canadian company abroad are included in GNP but not GDP - GDP and GNP are useful measures of economic growth; they allow us to track and economy’s performance - Redefining Progress proposed Genuine Progress Indicator (GPO) to assess economic activity o GPI treats activities that harm the environment/our quality of life as costs and gives them negative values Real Growth Rates - GDP is the preferred method of calculating nation income and output - Real growth rate of GDP – the growth rate of GDP adjusted for inflation and changes in value of the country’s currency - Growth depends on output increasing at a faster rate than population o If the growth rate of GDP exceeds the rate of population growth, our standing of living should be improving GDP per Capita - Basically; GDP per person; dividing total GDP by total population of a country o GDP per capita is a better measure than GDP as a measure of economic well-being Real GDP - Real GDP – GDP calculated to account for changes in currency values and price changes - Nominal GDP – GDP measured in current dollars or with all components valued at current prices Purchasing Power Parity - Principle that exchange rates are set so that the pries of similar products in different countries are about the same - Gives us a better idea of what people can actually buy with financial resources allocated to them by their respective economic systems o Gives us a sense of standards of livings around the world Productivity - Productivity – Measure of economic growth that compares how much a system produces with the resources needed to produce it - Standard of living improves only through increases in productivity; real growth in GDP reflects growth in productivity - Balance of Trade & the National Debt are two factors that can help/hinder the growth of an economic system Balance of Trade - Balance of Trade – The economic value of all the products that a country exports minus the economic value of its imported products o A positive balance of trade results when a country exports (sells to other countries) more than it imports (buys from other countries); Positive balance of trade helps economic growth o A negative balance of trade results when a country imports more than it exports; Negative balance of trade inhibits economic growth - Negative Balance of trade is commonly referred to trade deficit National Debt - National Debt—The amount of money that the government owes its creditors - Government takes in revenues (primarily from taxes) and has expenses (military spending, social programs, and so forth) - Budget Deficits—The result of the government spending more in one year than it takes in during that year o Accumulated annual deficits have creates a huge national debt  Canada is the only highly industrialized country in the world that continue to have a budget surplus - How does the national debt affect economic growth? o The more money the government borrows, the less money is available for the private borrowing and investment that increases productivityEconomic Stability - The chief goal of an economic system is stability—A condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate - Inflation, Deflation and unemployment threaten stability Inflation - Inflation—Occurrence of widespread price increases throughout an economic system - Occurs when the amount of money injected into an economy outstrips the increase in actual output o People have more money to spend, however there will still be the same quantity of products available for them to buy. Competition for products causes prices to go up o High prices will erase the increase in the amount of money injected into the economy, purchasing power will decline - Comparison of increased income to the increased price of a product contributes to your buying decision; inflation decreases the purchasing power of your money Measuring Inflation: The CPI - Consumer Price Index (CPI) – Measure of the prices of typical products purchased by consumers living in urban areas o Products included in the basket have changed over the years with the introduction to new products and services o Changes in the CPI reflect changes that have occurred in the pattern of consumer purchases Deflation - Deflation—A period of generally falling prices o When deflation occurs, The Bank of Canada reduces interest rates in an attempt to increase consumer demand - Prices fall because industrial productivity is increasing and costs savings can be passed on the consumers (good thing); Consumers have high levels of debt and are unwilling to buy very much (bad thing) Unemployment - Unemployment—Level of joblessness among people actively seeking work - Various types of unemployment o Frictional Unemployment – People who are out of work temporarily while looking for a new job o Seasonal Unemployment – People are out of work because the seasonal nature of their jobs o Cyclical Unemployment – People are out of work because of a down turn in the business cycle o Structural Unemployment – People are unemployed because they lack the skills needed to perform available jobs Managing the Canadian Economy - Government acts to manage the Canadian economic system through two sets of polices: Fiscal & Monetary - Fiscal Policies – Polices by means of which governments collect and spend revenues o Tax increase can function as fiscal periods; increasing revenues and manages the economy too; tax cuts normally stimulate renewed economic growth o When government cut taxes people have to pay, government action is being taken to bring stability to the economic system - Monetary Policies – Policies by means of which the government controls the size of the nation’s money supply o Working primarily through Back of Canada, Government influence the ability and willingness of banks to lend money. Has the ability to influence the supply of money by prompting interest rates to go up or down - Ability of the Bank of Canada to make changes in the supply of money is the centerpiece of Canadian government’s monetary policy o Tight Monetary Policy – Bank of Canada restricts the money supply o Easy Monetary Policy – Bank of Canada loosens the money supply – stimulating the economy - Bank of Canada can influence the aggregate market for products by influencing the supply of money - Stabilization Policy – Government policy, embracing both fiscal and monetary policies, whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices The Business Environment - 3 biggest issues facing Canadian Business: Taxation, The value of the Canadian Dollar, The need for an educated/skilled workforce - Consumers and business customers want high quality goods and services — often customized—with lower prices and immediate delivery - Employees want flexible working hours and opportunities to work at home; stockholders add pressure for productivity increase, growth in market share and larger profits; vocal public demands more honesty, fair competition and respect for the environment The Industry Environment - Managers must understand the company’s competitive situation, and develop a competitive strategy to exploit opportunities in the industry - Managers use Michael Porter’s five forces model to analyze competitive pressure and decide what their competitive strategy should be: Industry Competitors (Rivalry), Potential Entrants, Buyers, Supplies, Substitutes Rivalry among Existing Competitors - Rivalry is seen in activities like intense competition, elaborate advertising campaigns, increased emphasis on customer service Threat of Potential Entrants - If it is easy for new competitors to enter a market, competition will be intense and the industry will not be very attractive - Some industries are very capital-intensive therefore difficult to enter, but others are relatively easy to enter Suppliers - Amount of power bargaining suppliers have in relation to buyers helps determine competitiveness; if there is a few suppliers in an industry, they tend to have great bargaining power - Power of suppliers are influenced by the number of substitute products that are available; if there are few substitute products, suppliers have more power Buyers - When there are only a few buyers and many suppliers, the buyers have a great deal of bargaining power; the more you buy the more power you have of bargaining Substitutes - If there are many substitutes, the industry is more competitive - Managers use Porter’s ideas to help them decide the level of competitive intensity in an industry Emerging Challenges and Opportunities in the Business Environment - Core Competency – The skills and resources with which an organization competes best and creates the most value for owners - They outsource non-core business processes, paying suppliers and distributors to perform them, increasing their reliance on suppliers o New business models call for unprecedented coordination – involving globally dispersed processes and supply chains Outsourcing - Outsourcing – Strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services - Firms today outsource numerous activities (payroll, employee training, research and development) Chapter 3 – Understanding Entrepreneurship, Small Business, and New Venture Creation The Links among Small Business, New Venture Creation and Entrepreneurship - Approximately 380 business are started every day in Canada; New firms create the most jobs, are noted for their Entrepreneurship and are typically small Small Business - Defining “small” business is tricky; can include the number of people the business employs, the company’s sales revenues, the size of the investment required, or the type of ownership structure - Difficulties in defining small businesses can be understood the way Canadian government collects/reports information o Industry of Canada (Federal government agency); relies on two sources of information provided by Statistic Canada  The Business Register (tracking of businesses)  To be included in Business Register, business must have : one paid employee, annual sales revenues of $ 30 000 of more, or be incorporated  Good-producing business is small : Fewer than 100 employees; Service-producing business is small: Fewer than 50 employees  Labour Force Survey (Tracking of Individuals)  Uses information to make estimates of employment and unemployment levels  Classified as “self-employed” if they are working owners of a business that is incorporated/unincorporated, Work for themselves but do not have a business, they work without pay in a family business - Majority of businesses in Canada have no employees (just the owner), nor are they incorporated - Small BusineError! Hyperlink reference not valid.ss – An owner-managed business with less than 100 employees The New Venture/Firm - A business is considered to be new if it became operational within the previous 12 months, if it adopts any 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/services for sale Entrepreneurship - Entrepreneurship – The process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on it - Entrepreneurs – People who recognize and seize opportunities - Small businesses are usually independently owned and influenced by unpredictable market forces; providing personal attributes (creativity) - People who exhibit entrepreneurial characteristics and create something new within an existing large firm/organization are called intrapreneurs o Intrapreneurs don’t have to concern themselves with getting the resources needed to bring the new product to the market; employers provide resources - Starting a business from scratch involves dealing with uncertainty, ambiguity and unpredictability The Role of Small and New Businesses in the Canadian Economy - Prior to the 1980s, large businesses were the focus of attention in terms of economic impact within industrialized nations Small Businesses - 98% of all business in Canada are small (Less than 100 employees) - Approximately 58% of all business establishments in Canada (small or large) are located in Ontario or Quebec; majority of small businesses (57%) have fewer than five employees - Private Sectors – The part of the economy that is made up of companies and organizations that are not owned or controlled by the government - Businesses with between 5-19 employees account for the highest percentage of employment - Small businesses account for two thirds of employment in four industries: non-institutional health care, construction industry, other services, and accommodation and food The Entrepreneurial Process - To get to the destination, the entrepreneur must identify a business opportunity and access the resources needed to capitalize on it; social, economic, political and technological factors in the environment will have an influence - Three key process elements – The Entrepreneur, the opportunity, Resources The Entrepreneur - Entrepreneurs have personal characteristics that makes them an entrepreneur; some are behavioural characteristics (high energy level) , others are personality traits (independence), and others are skills (problem solving) - Two main things that entrepreneurs need to do : Identify an opportunity & access resources Identifying Opportunities - Involves generating ideas for new/improved products, processes, or services, screening ideas so that the one that presents the best opportunity can be developed Idea Generation - Generating ideas involves abandoning traditional assumptions about how things work, and how they ought to be & seeing what others do not - New ideas do not emerge from a search of business ideas, rather from events relating to work/everyday life; may also come for a personal interest/hobby and a chance happening o Chance happening refers to a situation where a venture idea comes unexpectedly Screening - Screening is a key part of the entrepreneurial process; the faster one weeds out “dead-ends”, the more time and effort one can devote to the ones that remain The Idea Creates or Adds Value for the Customer - A product/service that ads value for the customer is one that solves a significant problem or is needed significantly in new/different ways The Idea Provides a Competitive Advantage that Can Be Sustained - Competitive advantage exists when potential customers see the product/service better than others - Involves maintaining it in the face of competitor’s actions or changes in the industry; absence of competitive advantage that is not sustainable constitute two fatal flaws of many new ventures The Idea is Marketable and Financially Viable - It is important to determine whether sales will lead to profits; estimating market demand requires an initial understanding of who the customers are, what their needs are, and how the product or service will satisfy their needs better than competitors’ products will, also requires an understanding of key competitors who can provide similar products/services/benefits - Sales Forecast – An estimate of how much a product or service will be purchased by the prospective customers for a specific period of time – typically one year - Total sales revenue is estimated by multiplying the units expected to be sold by the selling price; Sales forecast forms the foundation for determining the financial viability of the venture and the resources needed to start it - Determining financial viability – preparing financial forecasts (2-3 year projections) of a venture’s future financial position and performance The Idea Has Lower Exit Costs - Exit costs are low if it can be shut down without significant loss of time, money or reputation Developing the Opportunity - New ventures use one or more of three main entry strategies o Introduction of new product/service o Introduction of product/service that competes with existing competitive offerings with a new twist o Franchise – An arrangement in which a buyer (franchisee) purchases the right to sell the product or service of the seller (franchiser) - Business Plan – A document that describes the entrepreneur’s proposed business venture; explains why it is an opportunity, outlines marketing plan, operational and financial details, mangers’ skills and abilities Accessing Resources - Entrepreneurs use the few resources it has and use other peoples’ resources wherever they can – bootstrapping; other types of resources (people, spare, equipment, materials) that are loaned/provided for free by customers/suppliers Financial Resources - Two main types of resourcing – Debt and equity o Debt Financing – Money that is borrowed  Borrower is obliged to repay the full amount of the loan in addition to interest charges on the debt  Increases the potential for higher rates of return to the entrepreneur when the business is performing well o Equity Financing – Money that the entrepreneur (or others) invests in a business in return for an ownership interest  Makes it possible to reduce risk by giving up some control - To obtain debt financing the entrepreneur must have and adequate equity investment in the business (20%) and collateral (security) - Collateral – Items (assets) owned by the business (buildings/equipments) or by the individual (house/car) that the borrower uses to secure a loan or credit o Items may be seized by lender if the loan isn’t repaid according got specified terms - Individuals tend to be more committed to a venture if they have a portion of what they own invested in it - Most Common Sources of Debt Financing o 1. Financial Institutions -- Banks (hard to borrow from as new businesses are considered very risky), If entrepreneur is able to get a loan, it is a personal loan (mortgage a house/borrow against the cash value of a life insurance policy), trust companies, co-operatives, finance companies, equipment companies, credit unions, government agencies (low-interest loans, loan guarantees, interest free loans, wage subsidies) o 2. Suppliers – Suppliers who provides goods or services to the entrepreneur with an agreement to bill them later (Trade credit); Amount of trade credit available depends on the type of business and the supplier’s confidence in the firm - Most Common Sources of Equity Financing o 1. Personal Savings o 2. Love Money – Investments from friends, relatives, business associates. Often given more on the basis of family relationship/friendship than on the merit of the business concept o 3. Private Investors – Informal capital from private investors “angels” ; investment typically does not exceed $ 100 000 o 4. Venture Capitalists – Comes from professionally managed pools of investor money (venture capital), only deals that present an attractive, high growth business opportunity (return 35-50%) are considered Other Resources - Sometimes ownership is shared with one or more stakeholders in order to acquire the use of their resources; shared ownership comes with decisions to be made about who to share it with, how much each stakeholder will own, what cost, and under what conditions o Depends on : the size and scope of the venture & personal competencies - Most teams ten dot be formed in one of two ways o A) One person has an idea, and several associates join the team over the first few years of the venture’s operation o B) An entire team is formed at the outset based on such factors as a shared idea, a friendship, or an experience Start – Up and Beyond Starting Up a Small Business - 3 ways to start a small business – Start from scratch, buy an existing business, buy a franchise Buying an Existing Business - 1/3 of all new businesses were bought form someone else; buying an existing business is recommended because it’s odds of existing are greater o It has the ability to attract customers, established relations with lenders, suppliers, other stake holders o Gives the buyer an idea of what to expect than any estimate of a new business’s prospects - Buying a business comes with negative things too – previous poor reputations, bad locations, difficult to determine an appropriate purchase price, uncertainty about exact financial shape the business is in Taking Over a Family Business - Possesses challenges and opportunities o Can provide otherwise unobtainable financial/management resources (personal sacrifices from family members) o A strong reputation/goodwill that can result in important community/business relationships o Employee loyalty is high and an interested, unified family management/shareholders group may emerge o Disagreements over which family members assume control o Expectations of other family members o Family members expect a job promotion/impressive title because they are part of the family Buying a Franchise - Franchising became visible in the 1950s w/fast food restaurants, but actually started in 1800s o 1898 (GM), 1902 (Rexall), 1926 (Howard Johnson) - Accounts for 43% of retail sales in Canada - Franchising Agreement – Outlines the duties and responsibilities of each party - Franchisees make an initial payment for the right to operate a local outlet of the franchise, making royal payments to franchiser (2 – 30%) of the franchisee’s annual revenues/profits, also paying advertising fee so that the franchiser can advertise in local area Is Franchising for You? - Things to consider before going into franchising o The franchise sales price o Expenses that will be incurred before the business opens o Training Expenses o Operational expenses for the first six months o Personal Financial needs for the First Six months o Emergency Needs Success and Failure in Small Business Reasons for Success - 1. Hard work, drive, and dedication – Owners must be committed to succeed and be willing to put in time and effort - 2. Market demand for the product or service – Careful analysis of market conditions helps small business people asses the probable reception of their new products - 3. Managerial competence – Successful small business people have a solid understanding of how to manage a business. Most spend time in a successful company or partner with others to bring expertise - 4. Luck – Luck also plays a role in the success of some firms Reasons for Failure - 1. Managerial incompetence or inexperience – Some entrepreneurs put their faith in common sense, overestimate their own managerial skills or believe that hard work alone ensures success, but they don’t know how to make basic business decisions or understand basic management principles - 2. Neglect – Some entrepreneurs try to launch ventures in their spare time, others devote only limited time to new businesses. Starting a new business demands an overwhelming time commitment - 3. Weak control systems -- Effective control systems keep a business on track and alert managers to potential trouble - 4. Insufficient capital – Some entrepreneurs are overly optimistic about how soon they start earning profits, usually takes months or even years Chapter 4 – Understanding Legal Forms of Business Organizations Organizing Options (Forms of Business Ownership) - Four types of legal ownership: Sole proprietorship, partnership, corporation, the cooperative The Sole Proprietorship - Sole Proprietorship – Business owned and operated by one person; may be a large as a steel mill or as small as a lemonade stand Advantages of a Sole Proprietorship - Freedom; sole proprietors answer to no one but themselves - Easy to form; if operating under own name there is no need to register business name and can simply go into business by simply putting a sign on the door - Simplicity of legal setup procedures makes this form appealing to self-starters and independent spirits (low set-up costs) - Tax benefits; losses from businesses and the proprietor can be deducted from income the proprietor earns from personal sources other than the business Disadvantages of a Sole Proprietorship - Unlimited Liability – Personal liability for all debts of the business - Personally liable for all debts and legal liabilities incurred by the business; if business fails, all bills must be paid out of owners pockets - Lac of continuity – sole proprietorship dissolves when the owner dies - Sole proprietoryship depends on the recourse of one person whose managerial/financial limitations may constrain the business; hard to borrow money to start up/expand The Partnership - Partnership – A form of organization established when two or more persons agree to combine their financial, managerial, and technical abilities for the purpose of operating a business for profit - Canada – Two or more lawyers/accountants carry on business together, they are required by law to carry on their businesses as a partnership; otherwise, owners may wish to work together as partners for tax reasons - Two types of partnerships o General Partnership -- A type of partnership in which all partner are jointly liable for the obligations of the business o Limited Partnership – A type of partnership with at least one general partner (who has unlimited liability) and one or more limited partners. Limited partners cannot participate in the day-to-day management of the business or they risk the loss of their limited liability status  They share some for the profits, but they have no personal liability for the debts and liabilities of the partnership business Advantages of a Partnership - The ability to grow by adding talent and money; a somewhat easier time to borrowing funds than do sole proprietorships; the ability to invite new partners to join by investing money - Simple to organize, with a few legal requirements; Partnership agreement is a private document and no laws require partners to file an agreement with a government agency Disadvantages of a Partnership - Each partner is held personally liable for all debts incurred in the name of the partnership - Lack of continuity – If one dies/pulls out, the partnership dissolves legally, even if the other agrees to continue the business - The difficulty of transferring ownership; no partner may sell out without the other partner’s consent - Partnership provides little/no guidance in resolving conflict between the partners The Corporation - Corporation – A business that is a separate legal entity that is liable for its own debts and whose owners’ liability is limited to their investment o Corporations may sue, be sued, buy, hold, and sell property, make and sell products to consumers, and commit crimes and be tried and punished for them - Shareholders – Persons who own shares in a corporation o Profits may be distributed in the form of dividends - Board of Directors – A group of individuals elected by a firm’s shareholders and charged with overseeing, and taking legal responsibility for, the corporation’s actions o Sets policy on paying dividends, on financing major spending, executive salaries and benefits - Inside Directors – Members of a corporation’s board of directors who are also full-time employees of the corporation (Top managers, the president, executive vice president) - Outside Directors – Members of a corporation’s board of directors who are not also employees of the corporation (Attorneys, accountants, university officials, executives for other firms) - Chief Executive Officer (CEO) – The person responsible for the firm’s overall performance Types of Corporations - Two types of private sector corporations o Public Corporation – A business whose shares are widely held and available for sale to the general public (Ex. George Weston, Air Canada, Canadian Pacific) o Private Corporation – A business whose shares are held by a small group of individuals and is not usually available for sale to the general public - I
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