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RSM219H1 (136)
Chapter 3

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Rotman Commerce
Bill Mc Conkey

Chapter 2: Understanding Entrepreneurship, small businesses and NEW VENTURE CREATION - approx 380 businesses are started in Can EVERYDAY - NEW FIRMS create the most jobs, noted for their entrepreneurship and are typically small Small Business: • To define uses various measures: number of employees, sales revenue, size of investment required and the ownership structure. • Industry Canada is the main federal government agency responsible for small business*** o In reporting small business statistics, gov`t relies on two sources of info: 1. Statistics Canada: the Business Register (tracks businesses) 2. Labour Force Survey (tracks individuals). • To be including in register: business must have at least one paid employee, annual sales revenue of $30 000+ or be incorporated. o Goods-producing business considered small with < 100 employees. o Service-producing business considered small with <50 employees. • Labour Force Survey uses information from individuals to make estimates of employment and unemployment levels. o Classified as self-employed if working owners of a business that is either incorporated or corporate o Work for themselves but do not have a business (e.g. musicians) o Work without pay in a family business • Industry Canada reports there are 2.2 million businesses and 2.5 million self-employed. o No way of identifying overlap, however, unincorporated business operated by a self- employed person (no employees) is NOT counted in the 2.2 million businesses *** o Majority of businesses in Canada have no employee nor are they incorporated. o Astudy by PSED conducted by ERC shows only 15 percent of those establishing an operating business had incorporated their firm. • In our case, a small business is an owner-managed business with less than 100 employees THE NEW VENTURE/FIRM • Three most common criteria to determine when a new firm comes into existence: o When it was formed becomes operational with previous 12 months. o Whether it was incorporated adopts main organizational forms. o If it sold goods and/or services sells goods or services. o Therefore, we can say a new venture is a recently formed commercial organization that provides goods and/or services. ENTREPRENEURSHIP: The process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on that opportunity. - Entrepreneurs are people who recognize and seize opportunities. - Small business are usually independently owned and influenced by unpredictable market forces  provide environment to use personal attributes (e.g. creativity) associated with entrepreneurs. - Not only small business owners exhibit entrepreneurial characteristics, successful managers of large organizations in both the public and private sectors do too. - People with entrepreneurial characteristics that create something new within an existing large firm/organization are called intrapreneurs (e.g. employees of Procter & Gamble creating Swiffer).Akey difference between intrapreneurs and entrepreneurs is intrapreneurs don’t have to worry about attaining resources to put product in the market, since employer has that responsibility. - Every new venture founder needs to exercise some of the personal attributes that entrepreneurs are noted for. THE ROLE OF SMALL/NEW BUSINESSES IN Cdn. ECONOMY • Small Businesses: o 98% of all businesses in Canada are small. o 58% of total businesses in Canada are located in Ontario and Quebec, 36% in western provinces and 6% in theAtlantic provinces. o small, med and lrg businesses comparison nearly identical toAmerican economy. o 57% have fewer than 5 employees o 10 317 481 work in private sector of which 49% worked for small businesses usually ranging from 5 to 19 employees. o 5-19 employees account for the highest % of employment o Small businesses account for 2/3 of employment in four industries: non-institutional health care, construction industry, other services and accommodation and food. •distribution of employment by size of firm varies across industries o Small businesses annual contribution to Can’s GDP is at 25%. •less than sectors contribution to employment but still significant New Ventures - NEW FIRMS in addition to be the main source of job creation, they are responsible for the vast majority of new products and services. - According to Stats Can, number of firms in Canada increased 12 percent between 1991 and 2003. Most growth occurred in the services-sector (most in high-knowledge industries). - Between 1991 and 2003, businesses grew by an average of 9300 each year with 8800 being small/ medium sized enterprises. - Women are playing a far more prominent role in growth of new firms with more than 800 000 women entrepreneurs (increasing by 3 percent each year). - Research shows that over past two decades, female entrepreneurs jumped 208 percent compared to 38 for men. - Self-employment between 1991 and 2001 among women increased by 43 percent compared to 21 percent men. In 2000, majority-women owned SMEs had annual revenues of $72 billion (8% of all revenues from Canada’s SMEs) and employed 974 000 employees. -Abusiness counted as “new” could have operated for several years before being statistically counted as a new business (e.g. unincorporated business w/ no employees) ENTREPRENEURIALPROCESS - Entrepreneur - Identifying opportunities - Accessing resources • The Entrepreneur: o 2 main things an entrepreneur needs to do is identify opportunities and access resources o imp not who the person is but what they do o Just look at table on page 43. • Identifying Opportunities: involves generating ideas for new (or improved) products, processes, or services, screening ideas so that the one with the best opportunity can be developed in order to develop the opportunity. o Idea Generation: involves abandoning traditional assumptions about how things NORMALLY work and seeing what others do not. o Where do ideas come from? Work experience is the most common source of ideas (45%-85%) o .As an employee, the introspective entrepreneur is aware of the workplace and can relate to others in the same shoes. Therefore, they can determine whether or not he or she is capable of producing products or services that can fill the void. o 2 frequent source of ideas is personal interest and hobby. o And chance happening refers to a situation where a venture idea comes about unexpectedly (e.g. while on vacation) o Screening: Weeding out dead-end venture ideas. The more of the following characteristics an idea has, the greater its opportunity: 1. Idea Creates orAdds Value for Customer: one that solves a significant problem or meets a significant need in new or different ways (e.g. Sally Fox’s FoxFibre). 2. Idea Provides a CompetitiveAdvantage that Can Be Sustained: potential customers see products as better than competitors. To sustain a competitive advantage is to maintain it in the face of competitors’actions or changes. The longer markets are in a state of flux, the greater the likelihood of being able to sustain a competitive advantage. (Reconsider Sally Fox’s FoxFibre.) 3. Idea is Marketable and Financially Viable: important to see if sales will lead to profits. • Estimating the market demand requires an initial understanding of whom the customers are, what their needs are, and how the product or service will satisfy their needs the best.As well, one requires a thorough understanding of his or her key competitors. Customers define competition in terms of who can best satisfy their needs. • The entrepreneur must prepare a sales forecast –estimate of how much product or service will be purchased by prospective customers over a specific period— usually of a one year cycle. It forms the foundation for determining the financial viability of the venture and the resources needed to start it. • Determining financial viability involves preparing financial forecasts (two- to three year projections of a ventures financial position and performance. • Typically consist of start-up costs, a cash budget (cash receipts and cash disbursements of the business), an income statement (shows profit or loss) and balance sheet (shows assets, liabilities and the owners equity). Other information are liabilities (what is owed) and owner’s equity (owner’s investment, including profits that the business retains). • these projections serve as the basis for decisions regarding whether to proceed w/ the venture and if so the amt and type of financing to be used in financing the new business o Idea has a Low EXIT cost: the final consideration. EXIT COSTS are low if a venture could be shut down without a significant loss of time, money, or reputation. • If a venture is not expected to make a profit for a number of years, its exit costs are high, since the project cannot reasonably abandoned in the short term. • However, if venture is expected to make a profit quickly, its exit costs will be lower. o Developing the Opportunity: the business process often changes from what was originally envisioned, sometimes developing entirely new markets, products, and sources of competitive advantage. o So, what is to be achieved is important, but so is being responsive to new information and to be on the lookout for opportunities not originally anticipated. New ventures use one or more of the three main entry strategies: 1. Introduce a totally new product or service 2. Introduce a product or service that will compete directly with existing competitive offerings but add a new twist (e.g. customizing option) 3. Franchise –arrangement in which a buyer (franchisee) purchases the right to sell the product or service of the seller (franchiser). o When the aim is to attract potential investors, a comprehensive written business plan— document describing the entrepreneur’s proposed business venture; explains why it is an opportunity; outlines marketing plan, its operational and financial details, and its manager’s skills and abilities. (Example on page 47, Table 3.2.) 4. Cover page: Name of venture & owners, date, contact person and contact. 5. Executive Summary: 1 to 3 page overview of total business plan. Written a
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