The Idea of business and Profit (definition)
Business: An organization that seeks to earn profits by providing goods and services.
Profit: What remains (if anything) after a business’s expenses are subtracted from its sales revenues.
Non-profit organizations: An organization that provides goods and services to customers, but does not seek to make a profit while doing so.
Factors of Production + definition:
factors of production are: The resources used to produce goods and services: labour, capital, entrepreneurs, and natural resources
Capital: refers to the funds required to start a business and to keep it operating and growing. For example, Petro Canada needs capital to pay for its annual drilling costs, which run into millions of dollars each year. Major sources of capital for businesses are personal investment by owners, the sale of stock to investors, profits from the sale of products and services, and funds borrowed from banks and other lending institutions
Human Resources/Labour: the people who work for a company represent the first factor of production—labour. Sometimes called human resources, labour is the mental and physical capabilities of people. Carrying out the business of a huge company, such as Suncor Energy, requires a labour force with a wide variety of skills ranging from managers to geologists to truck drivers.
Natural Resources: Natural resources include all physical resources, such as land, water, mineral deposits, and trees. Suncor Energy (which sells products to consumers through the Petro Canada retail brand) makes use of a wide variety of natural resources. It obviously has vast quantities of crude oil to process each year. But Suncor Energy also needs the land where the oil is located, as well as land for its refineries and pipelines.
Entrepreneurs: are people who accept the opportunities and risks involved in creating and operating businesses. Sergey Brin and Larry Page (Google), Mark Zuckerberg (Facebook), and Tobias Lutke (Shopify) are well-known entrepreneurs.
Informational Resources: n includes the specialized knowledge and expertise of people who work in businesses, as well as information contained in market forecasts and various other forms of economic data. Information is a key factor of production because, unlike land, labour, and capital, information can be shared without being diminished. For example, if two people exchange apples, they still each have only one apple, but if two people exchange ideas, each person now has two ideas instead of one.
Economic Systems Around the World + definition
Economic System: The way in which a nation allocates its resources among its citizens.
- Communism
- Socialism
- Mixed Economy
- Capitalism
Communism (Command Economy)
Mixed Market Economy
- Combination of both command and market economies
- No country has pure communist, socialist, or capitalist
**An economic system with elements of both a command economy and a market economy, which in practice is typical of most nations’ economies
Command and market economies are two extremes or opposites. Most countries rely on some form of mixed market economy that features characteristics of both command and market economies. One trend in mixed market economies that began back in the 1990s is privatization— converting government enterprises into privately owned companies. In Canada, for example, the air traffic control system was privatized, and the federal government sold several other corporations, including Petro Canada, Canadian National Railway, and Air Canada. The Organization for Economic Co-operation and Development (OECD) said that Canada Post’s monopoly should be ended, and it should be privatized.
Market Economies + definition of market
An exchange process between buyers and sellers of a particular good or service.
- Economic basis is supply and demand
- Political basis is capitalism
- Ownership of the factors of production is open
- Buyers and sellers have freedom of choice
- The market is the mechanism for the exchange of goods and services
Input market
firms buy resources from households
Output market
Households buy goods and services from firms
Capitalism
- Encourages entrepreneurship and the private ownership of the factors of production
- Encourages profit making as an incentive
- Operates under the concept of supply and demand
** An economic system in which markets decide what, when, and for whom to produce.
Privatization
- converting government firms into privately owned companies
**The transfer of activities from the government to the private sector.
Nationalization
the conversion of private firms into government-owned firms
Deregulation
reducing laws and government intervention
** means a reduction in the number of laws affecting business activity and in the powers of governmental enforcement agencies. A study by the Conference Board of Canada showed that deregulation (in tandem with privatization and increased competition) caused a sharp increase in productivity in sectors such as freight and airlines.
A reduction in the number of laws affecting business activity
Government as Regulator
Regulates through administrative boards, tribunals, and commissions
Promotes healthy competition between businesses
• Protects consumers: The federal government has initiated many programs that protect consumers. Consumer and Corporate Affairs Canada administers many of these. Important legislation includes the Tobacco Act (which prohibits cigarette advertising on billboards and in stores), the Weights and Measures Act (which sets standards of accuracy for weighing and measuring devices), the Consumer Packaging and Labelling Act (which stipulates labelling requirements for products), the Textile Labelling Act (which regulates the labelling, sale, importation, and advertising of consumer textile articles), and the health care Food and Drug Act (which prohibits the sale of food that contains any poisonous or harmful substances).
• Achieves social goals: Social goals, which promote the well being of Canadian society, include things such as universal access to health care, safe workplaces, employment insurance, and decent pensions. All these goals require the interaction of business firms and the Canadian government. But the decisions of foreign governments—as they pursue their own social goals—can also affect Canadian businesses
• Protects the environment: Government legislation designed to protect the environment includes the Canada Water Act (which controls water quality in fresh and marine waters), the Fisheries Act (which controls the discharge of any harmful substance into water), and the Environmental Contaminants Act (which establishes regulations for airborne substances that are a danger to human health or the environment).
**COMPETITION ACT (promotes competition):
Prohibits a variety of business practices that lessen competition
Government as Taxation Agent
• Revenue Tax
• Progressive Revenue Tax
• Regressive Revenue Tax
• Restrictive Tax
LOBBYIST: A person hired by a company or an industry to represent its interests with government officials.
The federal Lobbying Act requires lobbyists to register with the Commissioner of Lobbying so that it is clear which individuals are being paid for such activity. It also sets rules for accountability and transparency and requires lobbyists to report detailed information about their communications with what are known as Designated Public Office Holders (DPOHs).22 For many lobbying efforts, there are opposing points of view. For example, the Canadian Cancer Society and the Tobacco Institute present very different points of view on cigarette smoking and cigarette advertising.
Government as Provider of Incentives
• Provides Aid and Financial Assistance
• Provides Incentives to stimulate growth (revenues and employment)
TRADE ASSOCIATION An organization dedicated to promoting the interests and assisting the members of a particular industry
Employees and owners of small businesses that cannot afford lobbyists often join trade associations, which may act as an industry lobby to influence legislation. They also conduct training programs relevant to the industry, and they arrange trade shows at which members display their products or services to potential customers. Most publish newsletters featuring articles on new products, new companies, changes in ownership, and changes in laws affecting the industry.
Government as Provider of Essential Services
all three levels of government provide various services:
▪ Highways
▪ postal service
▪ money
▪ military
▪ education
▪ health services
▪ sewer and sanitation
▪ emergency services
The various levels of government facilitate business activity through the services they supply. The federal government provides highways, the postal service, the minting of money, the armed forces, and statistical data on which to base business decisions. It also tries to maintain stability through fiscal and monetary policy (discussed in Chapter 2).
Supply curve + definition
A supply curve is a representation of the relationship between the price of a good or service and the quantity supplied for a given period of time.
The willingness and ability of producers to offer a good or service for sale
law of supply: The principle that producers will offer (supply) more of a product as price rises.
A supply curve shows how many pizzas will be supplied (cooked) at different prices.
Demand curve + definition
A demand curve represents the relationship between the price of a good or service and the quantity demanded for a given period of time.
The willingness and ability of buyers to purchase a product or service.
Law of demand: The principle that buyers will purchase (demand) more of a product as price drops.
A demand curve shows how many products—in this case, pizzas—will be demanded (bought) at different prices.
Supply and demand relationship
The law of supply and demand is the theory that prices are determined by the relationship between supply and demand. If the supply of a good or service outstrips the demand for it, prices will fall. If demand exceeds supply, prices will rise.
demand and supply schedules: Are obtained from marketing research and other systematic studies of the market. Properly applied, they help managers understand the relationships among different levels of demand and supply at different price levels
**When the demand and supply curves are plotted on the same graph, the point at which they intersect is the market price, or equilibrium price—the price at which the quantity of goods demanded and the quantity of goods supplied are equal
MARKET PRICE (EQUILIBRIUM PRICE) Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal
When there is a shortage…
demand goes up, so equilibrium price goes up!
If the pizzeria supplies only 800 pizzas, a shortage will result, because the quantity demanded will be greater than the quantity supplied. The pizzeria will “lose” the extra money it could have made by producing 200 more pizzas.
when there is a surplus....
demand goes down so equilibrium prices goes down!
surplus—a situation in which the quantity supplied exceeds the quantity demanded. The restaurant will thus lose the money that it spent making those extra 200 pizzas.
Private Entreprise
Private enterprise occurs in a market economy with little government restriction
• Under this system individuals
- can own property
- have freedom of choice
- have the freedom to earn profits
- have freedom to compete
private enterprise: An economic system characterized by private property rights, freedom of choice, profits, and competition.
Competition
- occurs when businesses compete for the same resources or customers in a particular market or industry.
▪ motivates business to operate efficiently
▪ forces business to make products better or cheaper
Degrees of Competition
- Perfect Competition
- Monopolistic Competition
- Oligopoly
- Monopoly
Perfect Competition
- many sellers; product is basically identical
- relatively easy to enter the industry
- individual firms have no control over price
In perfect competition, all firms in an industry are small, the number of firms in the industry is large, and the products produced by the different firms are virtually identical. Under these conditions, no single firm is powerful enough to influence prices, so the market forces of supply and demand determine them. Canadian agriculture is a good example of perfect competition. The wheat produced on one farm is the same as that on another. Both producers and buyers are aware of prevailing market prices. It is relatively easy to start producing wheat and relatively easy to stop when it is no longer profitable.
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.
Monopolistic Competition
- few to many sellers; the product is seen as unique by some buyers (not all)
- differentiated brands have some (minor) control over pricing
In monopolistic competition, there are fewer sellers, but many buyers. Businesses may be large or small, and small clothing stores, for example, can compete successfully with large apparel retailers such as Reitmans. Whatever their size, sellers try to make their products at least seem different from those of competitors, and this product differentiation (through traditional media advertising, social media, and other brand-building tools) gives sellers some control over prices. For instance, even though a shirt sold at The Bay (from a fairly unknown brand) may look pretty much like a Ralph Lauren Polo shirt, the latter can be priced $20 higher.
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
Oligopoly
- a few large suppliers dominate
- high barriers to entry
- products are seen as similar
- prices gravitate toward a common "market price"
When an industry has only a handful of very large sellers, an oligopoly exists. Entry into an oligopolistic market is difficult because large capital investment is usually necessary. Thus oligopolistic industries (such as the automobile, rubber, and steel industries) tend to stay oligopolistic. Companies in an oligopoly market have more control over their strategies than monopolistically competitive firms do, but the actions of one firm can significantly affect the sales of every other firm in the industry. For example, when one firm cuts prices or offers incentives to increase sales, the others usually protect sales by doing the same. Likewise, when one firm raises prices, others generally follow. Therefore the prices of comparable products are usually similar. Ultimately, the firms usually realize that they are better off fighting for market share on features and benefits rather than price. In simple terms, cooperation in this industry leads to better profits for all. Overly aggressive actions (especially price cuts) hurt all companies in an oligopoly industry. To understand oligopoly competition, look no further than your game console. Nintendo, Sony, and Microsoft have been going head-to-head for years. The industry was worth US$36.2 billion in 2017. These three major console manufacturers literally own that market. Sony leads the pack (main console: PS4), Microsoft is second (main console: Xbox One), and Nintendo ranks third.
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.
Monopoly
- one producer and source of supply
- unique product
- complete control over price
- no competitors
When an industry or market has only one producer, a monopoly exists. Being the only supplier gives a firm complete control over the price of its product. Its only constraint is how much consumer demand will fall as its price rises. In Canada, laws such as the Competition Act forbid most monopolies. So-called natural monopolies—such as provincial electric utilities—are closely watched by provincial utilities boards, and the assumption that there is such a thing as a natural monopoly is increasingly being challenged. For example, the volume of mail that Canada Post handles has declined, and it has been losing millions of dollars annually in recent years
MONOPOLY A market or industry with only one producer that can therefore set the prices of its products and resources.
External Environment
factors beyond an organization’s boundaries that cannot be controlled (ex. Competition)
EXTERNAL ENVIRONMENT Everything outside an organization’s boundaries that might affect it.
parts of the external environment:
technological environment
socio-cultural environment
political-legal environment
industrial environment
business environment/trends
economic environment:
Conditions of the economic system in which an organization operates.
Organizational Boundaries
that which separates the organization from it’s environment
An organizational boundary separates the organization from its environment. Consider the simple case of a neighbourhood grocery store that includes a retail customer area, a storage room, and the owner or manager’s office. In many ways, the store’s boundary coincides with its physical structure; when you walk through the door, you’re crossing the boundary into the business, and when you leave and return to the sidewalk, you cross the boundary back into the environment. But this is an oversimplification. During the business day, distributors of soft drinks, snack foods, ice, and bread products may enter the store, inventory their products, and refill coolers and shelves just as though they were employees. These distributors are normally considered part of the environment rather than the organization, but while inside the store, they are essentially part of the business. Customers may even assume these distributors are store employees and ask them questions as they restock shelves. Now consider cases of large domestic businesses (e.g., GM Canada) that are owned by even larger international corporations (e.g., U.S.-based General Motors). Domestic businesses have complex networks of relationships with other businesses. For example, Magna International conducts research and builds components for GM. GM Canada also deals with companies that supply tires, glass, steel, and engines. But GM Canada also functions within the boundaries of its international parent, which has its own network of business relationships, some overlapping and some distinct from GM Canada’s network
Organizational environment types:
à Goals all over the world are mostly the same (3 key goals)
Economic growth
Economic stability
Full employment
Business cycle
the typical pattern of short—term ups and downs in an economy (peak, recession, trough and recovery)
Ex. 2008 market crash
The growth (and contraction) pattern of short-term ups and downs in an economy is called the business cycle. It has four recognizable phases: peak, recession, trough, and recovery (see Figure 2.2). A recession is usually defined as two consecutive quarters when the economy shrinks, but it is probably more helpful to say that a recession starts just after the peak of the business cycle is reached and ends when the trough is reached.7 A depression occurs when the trough of the business cycle extends two or more years. Periods of expansion and contraction can vary from several months to several years
BUSINESS CYCLE Pattern of short-term ups and downs (expansions and contractions) in an economy
Aggregate Output
Measure of economic growth
Total quantity of goods and services produced by an economic system during a given period
Standard of Living
Total quantity and quality of goods and services that a country’s citizens can purchase with their currency.
Productivity
Measure of growth that compares the output of an economic system with the resources that are needed to produce the output
A major factor in the growth of an economic system is productivity, which is a measure of economic growth that compares how much a system produces with the resources needed to produce it. Let’s say, for instance, that it takes 1 Canadian worker and 50 Canadian dollars to make 10 pairs of leather boots in an 8-hour workday. Let’s also say that it takes 1.2 Spanish workers and the equivalent of $60 (in euros, the official currency used in Spain) to make 10 pairs of equivalent leather boots in the same 8-hour workday. We can say, then, that the Canadian boot manufacturing industry is more productive than the Spanish boot manufacturing industry. The two factors of production in this simple case are labour and capital. According to the Organisation for Economic Co-operation and Development (OECD) rankings, Canada stood in sixteenth place with a productivity ratio of 48.9 percent. Ireland, Luxembourg, and Norway were the most productive nations at 83.1, 81.2, and 79.2 percent, respectively.15 If more products are being produced with fewer factors of production, what happens to the prices of these products? They go down. Therefore as a consumer, you will need less of your currency to purchase the same quantity of these products. Thus your standard of living—at least with respect to these products—has improved
PRODUCTIVITY Measure of economic growth that compares how much a system produces with the resources needed to produce it.
** Standard of living improves through increased productivity
Measuring Economic Growth: Gross National Product (GNP)
Value of all goods and services produced by a national economy within a given period regardless of production location
GROSS NATIONAL PRODUCT (GNP) Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located.
Measuring Economic Growth: Gross Domestic Product (GDP):
Value of all goods and services produced by a national economy within a given period with domestic factors production
Real Growth Rates: GDP is the preferred method of calculating national income and output. The real growth rate of GDP—the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency—is what counts. Remember that growth depends on output increasing at a faster rate than population. If the growth rate of GDP exceeds the rate of population growth, then our standard of living should be improving
GDP Per Capita: GDP per capita means GDP per person. We get this figure by dividing total GDP by the total population of a country. As a measure of the economic well-being of the average person, GDP per capita is a better measure than GDP. Luxembourg has the highest GDP per capita (approximately US$100 738), followed by Switzerland (US$79 887), Macao SAR, China (US$74 017), and Norway (US$70 068). Canada ranked eighteenth at US$42 183 GDP per capita.1
Real GDP: Real GDP means that GDP has been adjusted. To understand why adjustments are necessary, assume that pizza is the only product in an economy. Assume that a pizza cost $10 in 2018 and $11 in 2019. In both years, exactly 1000 pizzas were produced. In 2018, the GDP was $10 000 ($10 × 1000); in 2019, the GDP was $11 000 ($11 × 1000). Has the economy grown? No. Because 1000 pizzas were produced in both years, the aggregate output remained the same. If GDP is not adjusted for 2019, it is called nominal GDP, that is, GDP measured in current dollars.
Purchasing Power Parity: In our example, current prices would be 2019 prices. On the other hand, we calculate real GDP when we account for changes in currency values and price changes. When we make this adjustment, we account for both GDP and purchasing power parity—the principle that exchange rates are set so that the prices of similar products in different countries are about the same. Purchasing power parity gives us a much better idea of what people can buy. In other words, it gives us a better sense of standards of living across the globe.
The term gross domestic product (GDP) refers to the total value of all goods and services produced within a given period by a national economy through domestic factors of production
Balance of Trades
Value of all exported products minus imported products
The balance of trade is the economic value of all the products that a country exports minus the economic value of its imported products. For decades, Canada had a positive balance of trade. For example, from 2006 to 2008, Canada received $43 to $47 billion more from exports than it spent on imports annually, but that long trend was reversed in 2009 when Canada had a trade deficit of $6 billion, mainly because of the sharp rise in the Canadian dollar relative to the U.S. dollar at the time. However, in recent years, despite the fact that the Canadian dollar is once again weaker relative to that of the United States (its main trading partner), Canada had an overall trade deficit of $23.7 billion in 2017 (following deficits of $25.8 and $23.7 billion in the two previous years).16 So what has changed? More manufacturing has moved overseas (e.g., more companies are shifting manufacturing to China and other countries with low labour costs), so even with a cheaper Canadian dollar, fewer products are being made in Canada to sell abroad. A trade deficit negatively affects economic growth because the money that flows out of a country can’t be used to invest in productive enterprises, either at home or overseas.
BALANCE OF TRADE The total of a country’s exports (sales to other countries) minus its imports (purchases from other countries).
National Dept
Amount of money that a government owes its creditors
Increases/decreases based on budget deficit/surplus
A country’s national debt is the amount of money the government owes its creditors. Like a business, the government takes in revenues (e.g., taxes) and has expenses (e.g., military spending, social programs). For many years, the government of Canada incurred annual budget deficits; that is, it spent more money each year than it took in. These accumulated annual deficits created a huge national debt (estimated to be above $651.5 billion at the beginning of 2018). This figure amounts to approximately $17 500 per citizen. When you include the debt of the federal crown corporations, Canadian debt surpassed the 1-trillion-dollar debt marker for the first time in its history in the 2018–2019 fiscal year.17
How does the national debt affect economic growth? When the government of Canada sells bonds to individuals and organizations (both at home and overseas), this affects economic growth because the Canadian government competes with every other potential borrower—individuals, households, businesses, and other organizations—for the available supply of loanable money. The more money the government borrows, the less money is available for the private borrowing and investment that increase productivity.
Take a look at the following “There’s an App for That!” feature, which outlines three economics apps.
NATIONAL DEBT The total amount of money that a country owes its creditors.
BUDGET DEFICITS The result of the government spending more in one year than it takes in during that year.
Economic Stability
condition when the amount of money available and the quantity of goods and services produced are growing at about the same rate
A key 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. Several factors threaten stability—namely, inflation, deflation, and unemployment.
Threats to the economy: Inflation + measure inflation
Occurs when there are widespread price increases in an economic system
Consumer Price Index (CPI)
Tool to measure inflation
INFLATION Occurrence of widespread price increases throughout an economic system
CONSUMER PRICE INDEX (CPI) Measure of the prices of typical products purchased by consumers living in urban areas.
Inflation is evident when the amount of money injected into an economic system outstrips the increase in actual output. When inflation occurs, people have more money to spend, but there will still be the same quantity of products available for them to buy. As they compete with one another to buy available products, prices go up. Before long, high prices will erase the increase in the amount of money injected into the economy. Purchasing power therefore declines. The stated goal of the Bank of Canada is to help maintain steady prices in the economy and see modest increases on a year-to-year basis of between 1 to 3 percent, with a midpoint target of 2 percent per year.18 Inflation varies widely across countries. One dramatic example occurred in Zimbabwe about a decade ago, when inflation reached an astonishing annual rate above 40 million percent (most countries have rates between 2 and 15 percent). Within a three-year span, one Zimbabwean dollar would have been worth 1 trillion Zimbabwean dollars. Many workers simply stopped going to their jobs because their pay was not enough to cover their bus fare.19 The problem was finally solved when the government began allowing people to pay their bills using other currencies, such as the U.S. dollar and the South African rand.20 Inflation was 4 percent at the beginning of 2018 in South Africa (the rand is a more stable measure of value in the region)
The Consumer Price Index (CPI) measures changes in the cost of a “basket” of goods and services that a typical family buys. What is included in the basket has changed over the years. For example, the first CPI in 1913 included items such as coal and spirit vinegar, whereas today it includes bottom-freezer fridges, flat-screen TVs, energy-saving light bulbs, and laser eye surgery.22 These changes in the CPI reflect changes that have occurred in the pattern of consumer purchases. Figure 2.3 shows how inflation has varied over the past 30 years in Canada.
Threats to the economy: Deflation
A period of generally falling prices (opposite of inflation)
Deflation (falling prices) is evident when the amount of money injected into an economic system lags behind increases in actual output. Prices may fall because industrial productivity is increasing and cost savings are being passed on to consumers (this is good) or because consumers have high levels of debt and are therefore unwilling to buy very much (this is bad)
DEFLATION A period of generally falling prices.
Unemployment
Level of joblessness among people actively seeking work in an economic system
At the beginning of 2018, 8.5 million men and 7.6 million women (over age 25) were working in Canada’s labour force.28 Many additional people wanted a job but could not get one. Unemployment is the level of joblessness among people actively seeking work. There are various types of unemployment: frictional unemployment (people are out of work temporarily while looking for a new job), seasonal unemployment (people are out of work because of the seasonal nature of their jobs), cyclical unemployment (people are out of work because of a downturn in the business cycle), and structural unemployment (people are unemployed because they lack the skills needed to perform available jobs).
UNEMPLOYMENT The level of joblessness among people actively seeking work in an economic system.
Types of unemployment
Frictional-most concerning for governments: Certain jobs have become obsolete and certain skills are no longer needed. Frictional unemployment is the result of voluntary employment transitions within an economy. Frictional unemployment occurs in a growing, stable economy. Workers moving from job to job and new workers entering the workforce contribute to frictional unemployment.
Seasonal: Some jobs are seasonal
Structural: Structural unemployment is long-lasting unemployment that comes about due to shifts in an economy. This type of unemployment happens because though jobs are available, there's a mismatch between what companies need and what available workers offer.
Cyclical : most concerning for governments, depends on the economy. Cyclical unemployment occurs with changes in economic activity over the business cycle. During an economic downturn, a shortfall of demand for goods and services results in a lack of jobs being available for those who want to work.
Fiscal Policies (Stabilization Policies)
Taxing and spending (small businesses were begging the government for money)
Ex. The interest rate was lowered during covid for businesses
Fiscal policies involve the collection and spending of government revenues. For example, when the growth rate of the economy is decreasing, tax cuts will normally stimulate renewed economic growth
FISCAL POLICIES Policies whereby governments collect and spend revenues
Monetary Policies
Money supply (i.e. interest rates)
Monetary policies focus on controlling the size of the nation’s money supply. Working primarily through the Bank of Canada the government can influence the ability and willingness of banks throughout the country to lend money. The power of the Bank of Canada to make changes in the supply of money is the centrepiece of the Canadian government’s monetary policy.
MONETARY POLICIES Policies whereby the government controls the size of the nation’s money supply
The Technological Environment
Rate of speed how technology changes and affects businesses in a positive or negative way (referred to as clock-speed not on exam**)
All the ways a company creates value for its customers -
Knowledge, work methods, physical equipment, etc.
Research and Development (R & D)
The innovation process includes research and development (R&D), which provides new ideas for products, services, and processes (see Chapter 12). There are two types of R&D. Basic (or pure) R&D involves improving knowledge in an area without a primary focus on whether any discoveries that might occur are immediately marketable. For example, chemists in a laboratory might examine how certain chemical compounds behave. The knowledge gained from this activity might or might not result in a marketable product. Applied R&D, on the other hand, means focusing specifically on how a technological innovation can be used in the making of a product or service that can be sold in the marketplace
Provides new ideas for products services and processes (basic and applied)
Can affect businesses and consumers
Big part of producing new services + ideas
Political-Legal Environment
Reflects the relationship between business and government (e.g. regulations)
PRO or ANTI business sentiment
Political stability
International relations
The political–legal environment reflects the relationship between business and government, including government regulation of business. The legal system defines what an organization can and can’t do. Although Canada is a free-market economy, there is still significant regulation of business activity, as we saw in Chapter 1. At times, government policy can be tremendously advantageous to businesses. For example, the Yukon government has not raised taxes (royalties) on the extraction of gold since 1906. So the 2.5 percent export royalty is still based on a price of $15 per ounce of gold, which translates into a royalty of only 37.5 cents an ounce at a time when gold is selling at approximately US$1355 per ounce. In another case aimed to encourage an industry, there are over 100 000 electric vehicles (EVs) in Norway out of a population of 5 million. According to the government, there may not be any gas-fueled cars sold in the country by 2025. Why the boom? The government does not tax new electric vehicle purchases (other cars are taxed 25 percent). EVs also get a break on annual fees: they don’t have to pay tolls, and they can use bus lanes to avoid traffic.37 These are extreme examples of government-sponsored business-friendly practices.
POLITICAL–LEGAL ENVIRONMENT Conditions reflecting the relationship between business and government, usually in the form of government regulation
Socio-Cultural Environment
Customs, values, attitudes, and demographic characteristics of the society in which an organization function
Customer preferences and tastes
Vary across and within national boundaries.
Ethical compliance and responsible business behaviour
The socio-cultural environment includes the customs, values, attitudes, and demographic characteristics of the society in which a company operates. It influences the customer preferences for goods and services and what standards of business conduct are acceptable.
SOCIO-CULTURAL ENVIRONMENT Conditions include the customs, values, attitudes, and demographic characteristics of the society in which an organization functions.
Industry Environment
Porter’s five forces model is used to analyze the competitive situation in an industry the four forces affecting rivalry amongst competitors are:
The threat of new entrants:
When new competitors enter an industry, they may cause big changes. If it is easy for new competitors to enter a market, competition will likely be intense, and the industry will not be very attractive. Some industries (e.g., automobile manufacturing) are very capital-intensive and are therefore difficult to enter, but others (e.g., home cleaning and lawn-care services) are relatively easy to enter. Holt Renfrew has new competition with the entry of Nordstrom, Inc. north of the border. This American retailer is taking it slow with five locations across the nation: one in Calgary, one in Ottawa, one in Vancouver, and two in Toronto.47 The company also opened its first Nordstrom Rack location (its off-price retail brand) in 2018, with plans to open 15 locations across the country.4
Bargaining power of consumers:
When there are only a few buyers and many suppliers, the buyers have a great deal of bargaining power. For example, retail powerhouse Walmart is often described as a buyer that puts tremendous pressure on its suppliers to reduce their prices. It can do this because it buys so much from them. In another example, when Canadian Tire purchased Forzani (owner of Sport Chek and Hockey Experts stores) for $771 million a few years ago, it was not necessarily good news for suppliers. When two of your biggest customers merge, the power relationship is somewhat altered. Bauer CEO Scott Davis indicated that this merger may lead to price pressure on his company
Bargaining power of suppliers:
The amount of bargaining power suppliers have in relation to buyers helps determine how competitive an industry is. When only a few suppliers are in an industry, they tend to have great bargaining power. The power of suppliers is influenced by the number of substitute products available (i.e., products that perform the same or similar functions). When only a few substitute products are available, suppliers obviously have more power
Threat of substitutes:
If many substitute products are available, the industry is more competitive. For example, various synthetic fibres can be used as substitutes for cotton. The internet has changed the way people pay bills. Because of online banking, people use postal services much less than they did in the past and thus spend less on stamps. This is bad news for Canada Post, as the threat from substitutes is expected to reduce mail volume by another 50 percent in the next decade.
** These are the key components of industry rivalry
Every business firm operates in a specific industry, and every industry has different characteristics. The intensity of the competition in an industry has a big influence on how a company operates. To be effective, managers must understand the competitive situation and then develop a strategy to exploit opportunities in the industry. One of the most popular tools to analyze competitive situations in an industry is Michael Porter’s five forces model.45 The model (see Figure 2.5) helps managers analyze five important sources of competitive pressure and then decide what their competitive strategy should be. We briefly discuss each of the elements of the model in the following paragraphs.
Business Environment
The most successful firms are getting leaner by focusing on their core competencies
The skills and resources with which an organization competes best and creates the most value for owners
Business today is faster-paced, more complex, and more demanding than ever before. As businesses aggressively try to differentiate themselves, there has been a trend toward higher-quality products, planned obsolescence, and product life cycles measured in weeks or months rather than years. This, in turn, has created customer expectations of instant gratification. Consumers and business customers want high-quality goods and services—often customized—for lower prices and with immediate delivery. Sales offices, service providers, and production facilities are shifting geographically as new markets and resources emerge in other countries. Employees want flexible working hours and opportunities to work at home. Shareholders’ expectations also add pressure for productivity increase, growth in market share, and larger profits. At the same time, however, a more vocal public demands more honesty, fair competition, and respect for the environment.
Ethical Compliance and Responsible Business Behaviour
An especially critical element of the socio-cultural environment is the practice of ethical conduct and social responsibility. Keeping up with today’s increasingly fast-paced business activities is putting a strain on the accounting profession’s traditional methods for auditing, financial reporting, and time-honoured standards for professional ethics. The stakeholders of business firms—employees, stockholders, consumers, labour unions, creditors, and the government—are entitled to a fair accounting so they can make enlightened personal and business decisions, but they often get a blurred picture of a firm’s competitive health. Mountain Equipment Cooperative (MEC) has always stood out from the crowd of retailers. From its initial founding in British Columbia, the company’s mission has placed sustainability at its core. Many of the retail locations are among the most environmentally friendly commercial buildings in Canada, with a focus on reducing heating and cooling and the effective use of roof space. Solar panels are just the beginning; some locations collect rainwater to use for their sprinkler systems and for other non-drinkable uses for the stores. MEC is a cooperative, so the members are technically the owners. Those members led the charge recently and took an ethical stand against Vista Outdoor Inc. when they realized that the supplier that sold water bottles and stand-up paddleboards to MEC also made assault weapons like the ones used at yet another shooting in the United States, in Parkland, Florida. The movement that began from this tragedy led to an online petition and quick action from the executive team to cut all ties with this supplier.
Outsourcing
paying suppliers and distributors to perform certain business processes
Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. For example, the cafeteria in a museum may be important to employees and customers, but the museum’s primary focus is on exhibits that will interest the public, not on foodservice operations. That’s why museums usually outsource cafeteria operations to food-service management companies. The result is more attention to museum exhibits and better food service for customers. Firms today outsource numerous activities, including payroll, employee training, and research and development.
OUTSOURCING Strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services
The growing role of social media
An integral part of daily communication
Social media sites and applications such as Facebook and Snapchat are now an important part of everyday life for consumers (especially the youth market). Companies are addressing this new reality by providing content and creating various links to connect with consumers. Most organizations are being careful about their online presence because they don’t want it to be an imposition, but rather a natural extension of their real-world relationship with clients. As we discuss throughout this book in the E-Business and Social Media Solutions boxes, some companies are making strong inroads as this new model evolves and companies learn to deal with an empowered consumer base. Viral marketing predates the social media craze and first gained prominence through basic email transfer; it describes word-of-mouth marketing that spreads information like a virus from customer to customer and relies on the internet to replace face-to-face communications. Messages about new cars, sports events, and numerous other goods and services are transferred from consumer to consumer. Using various formats—games, contests, and instant messaging—marketers encourage potential customers to try out products and tell other people about them.51 Viral marketing works because people increasingly rely on social media for information they used to get from traditional media and because the customer becomes a participant in the process of spreading the word by forwarding information to friends and followers. For example, think of all the crowdsourcing contests companies offer in which they ask their customers to develop a new flavour, a new design, or a new slogan in return for prizes, with the ultimate purpose of gaining information and increasing customer engagement.
Business Process Management
moving away from department-oriented organizations toward process-oriented teams
A process is any activity that adds value to an input, transforming it into an output for a customer (whether external or internal).52 For example, human resources departments perform interviewing and hiring processes, payroll departments perform employee-payment processes, purchasing departments perform processes related to ordering materials, accounting departments perform financial reporting processes, and marketing departments perform processes involved in taking orders from customers.
Business process management means moving away from organizing around departments and moving toward organizing around process-oriented team structures that cut across old departmental boundaries. Companies often begin by asking, “What must we do well to stay in business and win new orders?” Next, they identify the major processes that must be performed well to achieve these goals. Then they organize resources and skills around those essential processes.
By organizing according to processes rather than functional departments, decision-making is faster and more customer-oriented, materials and operations are coordinated, and products get to customers more rapidly
BUSINESS PROCESS MANAGEMENT Approach by which firms move away from department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries
Mergers
Horizontal merger: one company takes over another
Vertical merger:
Conglomerate merger
a merger is a consolidation of two firms, and the arrangement is more collaborative. In 2017, mergers and acquisitions in Canada reached a total value of $243.5 billion.55 When companies in the same industry merge, it is called a horizontal merger. When one of the companies in the merger is a supplier or customer to the other, it is called a vertical merger. For example, the French company Essilor, the world’s biggest lens maker, merged with the Italian company Luxottica, the largest eyewear frame maker in the world. The merger, valued at $70 billion, created Essilor Luxottica, which touted having well-known brands such as Oakley and Ray-Ban in its portfolio and had enormous industry power at all levels. On the other hand, when merged companies are in unrelated businesses, it is called a conglomerate merger
MERGER The union of two companies to form a single new business
Friendly/Hostile takeovers (Acquisitions)
Friendly when the company welcomes acquisitions
Hostile when the acquiring company buys enough stock to take control
Poison pills are defense tactics where the firm becomes less attractive to buyers
A merger or acquisition can take place in one of several ways. In a friendly takeover, the acquired company welcomes the acquisition, perhaps because it needs cash or sees other benefits in joining the acquiring firm. For example, BCE Inc. bought Manitoba Telecom Services Inc. (MTS) for $3.1 billion in 2017. In the joint announcement, BCE talked about how it was going to invest heavily in building network improvements in the province and how it was going to offer its Fibe-branded services in Manitoba.56 In a hostile takeover, the acquiring company buys enough of the other company’s stock to take control, even though the other company is opposed to the takeover
A poison pill is a defence tactic that management adopts to make a firm less attractive to an actual or potential hostile suitor in a takeover attempt. The objective is to make the “pill” so distasteful that a potential acquirer will not want to swallow it. A few years ago, Air Canada announced plans to institute a poison pill provision that would give all Class A and Class B shareholders the right to purchase stocks at a discounted price the moment any group or person announced the intention to buy more than 20 percent of the outstanding shares
ACQUISITION The purchase of a company by another, larger firm that absorbs the smaller company into its operations.
POISON PILL A defence that management adopts to make a firm less attractive to an actual or potential hostile suitor in a takeover attempt.
Divestitures and Spinoffs
A divestiture occurs when a company decides to sell part of its existing business operations to another corporation. When Pfizer Inc. decided to divest its infant-nutrition and animal-health units, competitors jumped at the chance. Nestlé and Groupe Danone both showed interest in the strong infant-nutrition assets, and Nestlé eventually won the auction with a bid of US$11.85 billion.58 Recently, Mosaic purchased Vale SA’s fertilizer business for US$2.5 billion in cash and stock.59
In other cases, a company might set up one or more corporate units as a new, independent company because a business unit might be more valuable as a separate company. This is known as a spinoff. For example, PepsiCo spun off Pizza Hut, KFC, and Taco Bell into a new, separate corporation known as Yum! Brands, Inc
DIVESTITURE Occurs when a company sells part of its existing business operations to another company.
SPINOFF Strategy of setting up one or more corporate units as new, independent corporations.
Employee-Owned Corporations
Employee stock ownership programs (ESOP) à encourage employees to own shares
Corporations are sometimes owned by their employees. The current pattern is for this ownership to take the form of employee stock ownership plans, or ESOPs. A corporation might decide to set up an ESOP to increase employee motivation or to fight a hostile takeover attempt. The company first secures a loan that it then uses to buy shares of its stock on the open market. Some of the future profits made by the corporation are used to pay off the loan. The stock, meanwhile, is controlled by a bank or other trustee. Employees gradually gain ownership of the stock, usually based on seniority. Even though they might not have physical possession of the stock for a while, they control its voting rights immediately.
Strategic Alliances/ Joint Venture
Two or more companies temporarily join forces
Often called a joint venture
A strategic alliance, or joint venture, involves two or more enterprises cooperating in the research, development, manufacture, or marketing of a product. For example, Magna International, the Canadian auto parts giant, invested $200 million to partner with Lyft, the ridesharing service, to jointly develop, finance, and manufacture self-driving systems. This deal brought together a traditional industry giant, with extensive manufacturing knowledge, and a new-age firm that is on the leading edge of disruptive new models.60 Companies form strategic alliances for two main reasons: (1) to help spread the risk of a project and (2) to get something of value (such as technological or industry expertise) from their strategic partner.
Subsidiary and Parent Companies
Subsidiary corporation owned by another (parent) corporation
Ethics
Standard or moral values that dictate what is right and wrong (Point of reference in which a person makes decisions.)
Culturally based & formed upon society’s expectations
Everyone develops their ‘code of ethics’ including businesses.
Code of ethics: determine actions/values of a person.
Influenced by family, peer groups, and experiences (potentially more such as religion)
Influenced by experiences
No law makes you help a person in need (for example)
Managerial Ethics
Managerial ethics are the standards of behavior that guide managers in their work.
Behavior towards the employees, organization, and other economic entities
Process of assessing ethical behaviour:
Gather the relevant factual information.
Analyze the facts to determine the most appropriate moral values.
Make an ethical judgement based on the rightness or wrongness of the proposed activity or policy
Ethical Behavior (Questions to ask)
Utility: does the act optimize what is best for those who are affected by it
Rights: does it respect the rights of the individuals involved
Justice: Is it consistent with what we regard as fair
Caring: Is it consistent with people’s responsibilities to others?
**When making a decision, it’s important to think about how others including consumer bases will react (referred to as optics)
Written code of ethics:
Increase confidence in a firm.
Help stem the tide of government regulation.
Improve internal operations by providing consistent standards of both ethical and legal conduct.
Help managers respond to problems as a result of unethical or illegal behavior.
Each organization has core principles and organizational values (3 aspects)
Organizational objectives changed infrequently.
Core Principles organizational values unchanging
Strategies and Practices Revised Frequently
Corporate Social Responsibility
**A little bit of an outdated term
The idea that a business should balance its commitments to individuals and groups that are directly affected by its activities
Faire-Trade Movement: a movement designed to help workers in developing countries receive faire pay for their work
Comes with different areas, responsibility toward:
Environment
Air pollution
Water pollution
Land pollution; toxic waste disposal, recycling
Customers and customer rights
There are consumer protection laws in Cananda so that consumers receive all information about products (ex. Nutritional labels)
Rights of consumers:
Right to safe products
Right to be informed about all relevant aspects of a product
Right to be heard
Right to choose what to buy
Right to be educated about purchases
Right to courteous service
Collusion
Unfair pricing
Ethics in advertising
truth in advertising
advertising counterfeit brands
morally objectionable advertising
Employees
Legal and social commitments
Human resource management issues
Social responsibility issues
Privacy issues; drug testing and computer monitoring
Encouraging ethical behaviours
Whistle-blowers
Most companies give employees opportunities to report behaviours
Improper financial management
Doing a poor job of managing the financial resources of a company
May be legally unpunishable because no laws have been broken
Knitting checking
Checks that can’t be cashed because they don’t have money in them
Insider Trading
Using confidential (non-public) information to gain from the sale of stocks
Can involve the collusion of investors buying and selling stock at the appropriate time to make profits
Happened in 2008
Misrepresentation of finances
Companies must conform to accounting guidelines and principles.
Failure to follow GAAP in order to inflate expected profit figures can mislead investors.
Levels of Social Responsibility
Obstruction stance: company will do as little as possible to solve social or environmental problems
Defensive Stance: doing only what is legally required
Accommodation Stance: doing more than required (depending on how cost of going above and beyond)
Proactive Stance: doing well beyond what is required and preventing incidents from happening in the first place
Corporate Charitable Donations
companies contribute to a program, donate goods when disaster strikes, many encourage employees to volunteer
The Social Audit (step 4)
A systematic analysis of how the firm is using funds
Addresses the effectiveness of the money spent
Triple bottom line reporting:
Financial reports
Social audits
Sustainability reports
Sustainable Development
Sustainable Development: Activities that meet current needs that do not put future generations at a disadvantage
Social Responsibility in Small Businesses
Face the same issues as large businesses
May be tested by ethical dilemmas because of limited financial resources and concerns for economic survival.
Temptation to take cash deals (may convince themselves internally to justify an illegal choice)
Might avoid sustainable products because of higher costs
Small Business
Less than 100 employees
Definitions vary; some statistics do not include unincorporated businesses with one owner + no employees
Small business BC – Government funded organization providing resources for small businesses
For our purposes, we define a small business as an owner-managed business with fewer than 100 employees. We do so because it enables us to make better use of existing information and because you are now aware of how definitions can affect our understanding of small businesses. According to Industry Canada’s statistics, small businesses contributed approximately 30 percent of Canada’s GDP over the past decade. The percentages are consistent across the country. According to research, British Columbia has the highest rate of GDP contribution from small businesses at 33 percent and Newfoundland and Labrador have the lowest percentage at 23 percent.
SMALL BUSINESS An independently owned and managed business that does not dominate its market.
New Venture
Recently formed business/organization that started within the last 12 months
Providing services, products, or both
Not only are new firms the main source of job creation, but they are also responsible for the vast majority of new products and services. From 2005 to 2015, small businesses created 87.7 percent of all private-sector jobs in Canada (on average 100 000 per year).25
Women are playing a more prominent role than ever before in starting new ventures (see Figure 4.2). More and more women are starting and successfully operating their own small businesses, and they now account for half of all new businesses formed. However, on a negative note, women lead only 12 percent of the small and medium-sized businesses that export goods and services. The RBC Canadian Woman Entrepreneur Awards are held annually to recognize women who have made an impact. Previous winners include Trina Bailey, Bailey Veterinary Surgical Specialty Ltd., from Mount Pearl,
NEW VENTURE A recently formed commercial organization that provides goods and/or services for sale
Entrepreneurship
Process of identifying and capitalizing on marketplace opportunity
Entrepreneurial Characteristics:
Regardless of their goals, many successful entrepreneurs share certain characteristics. Among these characteristics are resourcefulness and a concern for good long-term customer relations. Most of them also have a strong desire to be their own bosses. Many express a need to “gain control over my life” or “build for the family” and believe that building successful businesses will help them do it. They can also deal with uncertainty and risk.
ENTREPRENEURSHIP The process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on it
Entrepreneur
Person who recognizes and sizes opportunities
Process includes looking at the marketplace and seizing something that is missing
Entrepreneurship is the process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on it. People start new businesses because they want to control their own destiny and prefer to take a chance rather than looking for a secure job. Entrepreneurs are people who recognize and seize these opportunities
Intrapreneur
Create something new within an existing large organization
Many successful managers in large organizations in both public and private sectors also exhibit similar characteristics. Entrepreneurial behaviour therefore occurs in a wide range of contexts. People who exhibit entrepreneurial characteristics and create something new within an existing firm or organization are intrapreneurs. Procter & Gamble, 3M, and Xerox encourage intrapreneurship by having divisions that focus on creating new products for specific markets. At Telus, a recent redesign of the company’s website was accomplished by a small intrapreneurial team that was given the mandate to operate in a creative manner, independent of the bureaucratic structure that characterizes large companies.21 A key difference between intrapreneurs and entrepreneurs is that intrapreneurs typically do not have to concern themselves with getting the resources needed to bring a new product to market because big companies tend to have the necessary resources already available
INTRAPRENEURS People who create something new within an existing large firm or organization.
Role of a small business
98% of all employer businesses in Cananda are small (fewer than 100 employees)
Main source of job creation
Leaders in innovation and technology
Agriculture – 88.9%
Other Services (except public administration – 91.1%
Accommodations and food services – 91.1%
Construction - 81.2%
Female entrepreneurs now account for approximately half of all new businesses
Rise of ‘mompreneurs’
According to Statistics Canada, in 2017, there were 11 885 600 employees in the private sector (the part of the economy consisting of companies and organizations not owned or controlled by the government)
Entrepreneurial process
**Sociocultural, economic, political-legal, and technological factors
Identifying opportunities:
Identifying opportunities involves generating ideas for new (or improved) products, processes, or services, screening those ideas, and developing the best ones.
Generating ideas:
Typically, generating ideas involves abandoning traditional assumptions about how things work and how they ought to be and seeing what others do not. If the prospective new (or improved) product, process, or service can be profitably produced and is attractive relative to other potential venture ideas, it might present an opportunity.
Screening ideas
Idea adds/creates value for a customer (solving a significant problem or meeting a significant need in new or different ways)
Idea is marketable and financially viable (provides competitive advantage that can be sustained)
Idea is Marketable and Financially Viable (sales forecast must be prepared to estimate how much the product or service would be purchased over a period of time—typically one year)
Idea has a low exit cost:
The final consideration is the venture’s exit costs. Exit costs are low if a venture can be shut down without a significant loss of time, money, or reputation. If a venture is not expected to make a profit for many years, its exit costs are high because the project cannot be reasonably abandoned in the short term
Developing the opportunity
As the “dead-end” venture ideas are weeded out, a clear notion of the business concept and an entry strategy for pursuing it must be developed. The business concept often changes from the original plan. Some new ventures develop entirely new markets, products, and sources of competitive advantage once the needs of the marketplace and the economies of the business are understood. So, while a vision of what is to be achieved is important, it is equally important to incorporate new information and to be on the lookout for unanticipated opportunities
Business plan
Cover page, executive summary, table of contents, company description, product or service, description, marketing, operating
plan, management, financial plan, supporting details/appendix
SALES FORECAST An estimate of how much of a product or service will be purchased by prospective customers over a specific period.
BUSINESS PLAN Document in which the entrepreneur summarizes her or his business strategy for the proposed new venture and how that strategy will be implemented.
Bootstrapping
Limited amount of resources
Doing more with less
Preferably external resources
Typically, entrepreneurs acquire the various resources needed to make the venture a reality by bootstrapping, which means “doing more with less.” Usually the term refers to financing techniques whereby entrepreneurs make do with less and use other people’s resources wherever they can. However, bootstrapping can also refer to the acquisition of other types of resources, such as people, space, equipment, or materials loaned or provided free by customers, suppliers, or other sources.
For example, 26-year-old Omeed Asadi is the founder of Sherpa Tax, a website that helps people find all the tax breaks they are entitled to. In a short time, he has managed to attract the attention of major news media groups such as The Globe and Mail, BNN, and CTV. Omeed is a firm believer in the bootstrapping approach and proudly proclaimed in an article, “I would not be able to be an entrepreneur if I didn’t live at home.” With rising rents (especially in big cities), some young entrepreneurs like Omeed are finding ways to stretch their dollars to keep their business dreams alive.4
Financial Resources
debt:
To obtain debt financing, the entrepreneur must have an adequate equity investment in the business—typically 20 percent of the business’s value—and collateral (or security)
Collateral refers to items (assets) owned by the business (such as a building and equipment) or by the individual (such as a house or car) that the borrower uses to secure a loan or other credit. These items can be seized by the lender if the loan isn’t repaid according to the specified terms. To lenders, equity investment demonstrates the commitment of the entrepreneur, as individuals tend to be more committed to a venture if they have a substantial portion of what they own invested in it.
equity:
Equity is equal to total assets minus its total liabilities.
COLLATERAL Assets that a borrower uses to secure a loan or other credit and that are subject to seizure by the lender if the loan isn’t repaid according to the specified repayment terms.
Financial resources: other resources
Business development bank of Canada – part of the federal government-mandated to provides financial resources to businesses in Canada. (BDC)
Incubators:
Business incubators provide new businesses (“newborns”) with support to help nurture them into a successful future. The type of support varies but some key forms of assistance include consulting services, legal advice, accounting services, business contacts, clerical services, and office space. According to the Canadian Association of Business Incubation (CABI), business survival rates are greatly improved by getting involved with an incubator. Survival rates after five years stand at about 80 percent, far above the average rates for businesses that don’t use incubators
The internet:
Countless resources online can help budding entrepreneurs gather research information, write a business plan, and access government grants. The banks all have unique sites dedicated to small business and entrepreneurship resources.
Crowdfunding – common now days with the internet where people invest in startups:
Of course, the online world is now much more than a source for information. One important vehicle for financing is the use of crowdfunding to raise money to fund new projects. The term refers to the practice of collecting financial contributions from various individuals through an online platform. It gives regular people the chance to pledge funds to a company.
INCUBATORS Facilities that support small businesses during their early growth phase by providing basic services, office space, legal advice, and more.
The possibilities for bootstrap financing are endless. For example, an entrepreneur might require an advance payment from customers. Equipment can be leased rather than purchased (which reduces the risk of obsolete equipment). Office furniture can be rented, premises can be shared, and manufacturing can be subcontracted, thereby avoiding the expense of procuring materials, equipment, and facilities. All of these activities free up cash that can then be used for other purposes. The need for cost-reduction services is clear; Regus PLC, a temporary rental space company based in Dallas, has opened 30 office centres in Canada in the past decade. It has locations in 120 countries and cities across the nation, including Calgary, Edmonton, Winnipeg, Regina, Montreal, Toronto, Ottawa, Vancouver, Dartmouth, and Halifax.44
Businesses have other resources to help them with financing, legal, marketing, or operational advice or support. The federal and provincial governments have a wide range of financial-assistance programs for small businesses. Among the various forms of assistance are low-interest loans, loan guarantees, interest-free loans, and wage subsidies. We examine four sources of information and assistance below: Business Development Bank of Canada, business incubators, the internet, and crowdfunding vehicles
Equity
Equity is equal to total assets minus its total liabilities.
To lenders, equity investment demonstrates the commitment of the entrepreneur, as individuals tend to be more committed to a venture if they have a substantial portion of what they own invested in it.
The most common sources of equity financing are:
1. Personal savings. New venture founders draw heavily on their own finances to start their businesses. Most save as much as they can in preparation for start-up.
2. Love money. This type of financing includes investments from friends, relatives, and business associates. It is called “love money” because it is often given based on the relationship, more than on the merit of the business concept.
3. Private investors. One popular source of equity is informal capital from private investors called angels. Usually, these persons are financially well
Debt
Financial institutions
Suppliers
The most common sources of debt financing are:
1. Financial institutions. Although commercial banks are the main providers of debt financing for established small businesses, it is usually hard for a new business to get a loan. Banks are risk-averse, and new businesses are considered very risky. Typically, entrepreneurs have more luck obtaining financing for a new venture with a personal loan (as opposed to a business loan). The most common way to obtain a personal loan is to mortgage a house or borrow against the cash value of a life insurance policy. In addition to commercial banks, other sources of debt financing include trust companies, co-operatives, finance companies, credit unions, and government agencies.
2. Suppliers. Another source of financing is suppliers who provide goods (i.e., inventory) or services to entrepreneurs with an agreement to bill them later. This is referred to as trade credit. Trade credit can be helpful in getting started because inventory can be acquired without paying cash, freeing up money to pay other start-up costs. This type of financing is short-term; 30 days is the usual payback period. The amount of trade credit available to a new firm depends on the type of business and the supplier’s confidence in the firm. Frequently, though, a new business has trouble getting trade credit because its capacity to repay has not been demonstrated.
Entrepreneur ‘fit’
Is it possible for you to do so at the point in time?
Can required resources be acquired?
Capacity to meet requirements?
If you have obligations, often times not able to proceed
Entrepreneur-opportunity fit:
The entrepreneur needs to decide whether the opportunity is something he or she can do and wants to do. A realistic self-assessment is important.
Opportunity-resources fit:
Assessing the opportunity–resources fit involves determining whether the resources needed to capitalize on the opportunity can be acquired. When challenges or risks appear, the aim is to determine whether they can be resolved and to deal with them quickly. For example, if the venture requires a greater financial investment than originally anticipated, this does not necessarily mean that the venture should be abandoned. Other options, such as taking on partners or leasing rather than building a facility, may be viable. Of course, some ventures may not be viable regardless of the alternatives considered.
Entrepreneur-resources fit:
Once the resource requirements of the venture have been determined, the entrepreneur needs to assess whether he or she has the capacity to meet
Venture Capitalists
Investments by venture capitalists come from professionally managed pools of investor money (venture capital). Because the risk of receiving little or no return on investment is high, only deals that present an attractive, high-growth business opportunity with a return between 35 and 50 percent are considered. Very few new ventures meet this criterion. Venture capital investment in Canada was a source of concern a few years ago, but it has been increasing steadily in recent years, totalling $3.2 billion (from 530 deals) in 2016, more than double what was raised just five years earlier.
Futurepreneur
Organization from government of Canada
Provides interest-free loans
Starting a small business
Buy an already existing business
Taking over a family business
Buying a franchise
(starting your own obviously)
Buying an existing business
Many experts recommend buying a successful existing business. Doing so increases the chances of success as the business has already proven its ability to attract customers and has established relationships with lenders, suppliers, and other stakeholders. The track record also gives potential buyers a clearer picture of what to expect rather than an estimate of a new business’s prospects
However, an entrepreneur who buys someone else’s business may not be able to avoid certain problems. For example, there may be uncertainty about the exact financial shape the business is in, the business may have a poor reputation, the location may be poor, or it may be difficult to determine an appropriate purchase price.
Family-Owned Businesses Challenges (ex. Addidas)
Ongoing management
Which family members have control?
Price to be paid?
Family member’s rights to the job?
Succession (people who could inherit the company or could want to/had the right to)
Successor selection?
how is the successor selected and is there already a successor selected?
Succession timing?
how is the timing of the purchase compared to the age/position of the potential successors?
Successor training?
if there is a successor, how are they being trained/what training is required
Taking over a family business poses both opportunities and challenges.
On the positive side, a family business can provide otherwise unobtainable financial and management resources—it often has a valuable reputation that can result in important community and business relationships, employee loyalty is often high, and an interested, unified family management and shareholders group may emerge.
On the other hand, there may be disagreements over which family members assume control. Choosing an appropriate successor is a key issue for continuity, but it is also a key source of conflict. In addition, if a parent sells his or her interest in the business, the price to be paid may be an issue. Expectations can also be problematic, as some family members may feel that they have a right to a job, promotion, and an impressive title based on birthright.51 Handling disagreements among family members about the future of the business can be a challenge. How do you fire a loved one if things are not working out?
Franchises
Benefits
Attain rapid growth
Share advertising cost
Increased investment money
Development of a motivated sales team
Increased revenue
No need to deal with local business issues
Expert Advice
Training Provided
Lower failure rate
Well-developed brands
Keep most of the profits
Help with external financing
Access to management expertise
Economics of scale in buying suppliers
No need to build a business from scratch
Cons
Location restrictions
Less control over business/lots of rules
A franchising agreement outlines the duties and responsibilities of each party. It indicates the amount and type of payment that franchisees must make to the franchiser. These franchise agreements have become increasingly complicated, often 60 or even 100 pages long
FRANCHISING AGREEMENT Stipulates the duties and responsibilities of the franchisee and the franchiser.
Studied by 19 people
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Flashcard