ENTREPRENEUR AND BUSINESS PLANNING

Chapter 1:THE NATURE AND IMPORTANCE OF

ENTREPRENEURS

Prepared by:

Prof. SEYED ALI FALLAHCHAY

Nature and Development of Entrepreneurship

Who is an entrepreneur? What is Entrepreneurship? What is an entrepreneurial career path? These frequently asked questions reflect the increased national and international interest in entrepreneurs by individuals, university professors and students, and government officials. In spite of all this interest, a concise, universally accepted definition has not yet emerged. The development of the theory of entrepreneurship parallels to a great extent the development of the term itself. The word entrepreneur is French and, literally translated, means “between-taker” or “go-between”.

Earliest PeriodAn early example of the earliest definition of an entrepreneur as a go-between is Marco Polo, who attempted to establish trade routes to the Far East. As a go-between, Marco polo would sign a contract with a money person(forerunner of today’s venture capitalist) to sell his goods. A common contract during this time provided a loan to the merchant–adventure at a 2205percent rate, including insurance. While the capitalist was a passive risk bearer, the merchant-adventure took the active role in trading, bearing all the physical and emotional risks. When the merchant-adventurer successfully sold the goods and completed the trip, the profits were divided with the capitalist taking most of them (up to 75 percent), while the merchant-adventurer settled for the remaining 25 percent.

Middle Age

In the Middle Ages, the term entrepreneur was used to describe both an actor and a person who managed large production projects. In such large production projects, this individual did not take any risks, but merely managed the project using the resources provided, usually by the government of the country. A typical entrepreneur in the Middle Ages was the cleric- the person in charge of great architectural works, such as castles and fortifications, public buildings, abbeys, and cathedrals.

17th Century

The reemergent connection of risk with entrepreneurship developed in the 17th century, with an entrepreneur being a person who entered into contractual arrangement with the government to perform a service or to supply stipulated products. since the contract price was fixed, any resulting profits or losses were the entrepreneur’s . One entrepreneur in this period was John Law, a Frenchman, who was allowed to establish a royal ban. The bank eventually evolved into an exclusive franchise to form a trading company in the New Word- the Mississippi Company. Unfortunately, this monopoly on French trade led to Law’s downfall when he attempted to push the company’s stock price higher than the value of its assets, leading to the collapse of the company.

18th Century

In the 18th century, the person with capital was

differentiated from one who needed capital. In other

words, the entrepreneur was distinguished from the

capital provider(the present-day venture capitalist). One

reason for this differentiation was the industrialization

occurring throughout the world. Many of the inventions

developed during this time were reactions to the

changing world.

19th and 20th Centuries

In the late 19th and early 20th centuries, entrepreneurs were frequently not distinguished from managers and were viewed mostly from an economic perspective.

In the middle of 20th century, notion of an entrepreneur as an innovator was established:

The function of the entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological methods of producing a new commodity or producing an old one in a new way, opening a new source of supply of materials or a new outlet for products, by organizing a new industry.

The concept of innovation and newness is an integral part of entrepreneurship in this definition.

Definition of Entrepreneur Today

Entrepreneur is a loanword from French.

It is defined as an individual who organizes or operates a

business or businesses.

In almost all of the definitions of entrepreneurship, there is

agreement that we are talking about a kind of behavior that

includes: (1) initiative taking, (2) the organizing and

reorganizing of social and economic mechanisms to turn

resources and situations to practical account, (3) the

acceptance of risk or failure.

The Entrepreneurial Decision Process

Tough many individuals have creative new ideas, few can bring their ideas to the market and create a new venture. Yet entrepreneurship and the actual entrepreneurial decisions have resulted in several million new businesses being started throughout the world. Although no one knows the exact number, in the United States (Which leads the world in company formation), estimates indicate that in recent years around 1 million new companies have been formed each year.

Indeed, millions of ventures are formed despite recession, inflation, high interest rates, lack of infrastructure, economic uncertainty, and the high probability of failure. Each of these ventures is formed through a very personal human process that, although unique, has some characteristics common to all. While some ventures result from specific circumstances many entrepreneurs follow the entrepreneurial decision process which entails a movement, from something to something- a movement from a present lifestyle to forming a new enterprise.

Change from Present Lifestyle

The decision to leave a career or lifestyle is not an easy one. It takes a great deal of energy and courage to change and do something new and different. Although individuals tend to start businesses in areas that are familiar, two work environments have been particularly good for spawning new enterprises: research and development and marketing. While working in technology (research and development), individuals develop new product ideas or processes and often leave to form their own companies when these new ideas are not accepted by their present employers. Similarly, individuals in marketing have become familiar with the market and customers’ unfilled wants and needs, and they frequently leave to start new enterprises to fill these needs.

Perhaps an even stronger incentive to overcome the inertia and leave a present lifestyle to create something new comes from a negative force-disruption. A significant number of companies are formed by people who have retired, who are relocated due to move by the other member in a dual-career family, or who have been fired. There is probably no greater force than personal dislocation or galvanize a person’s will to act.

Another cause of disruption that can result in company formation is someone’s completion of an educational degree. For example, a student who is promoted after receiving an MBA degree may become frustrated and decide to leave and start a new company.

What cause this personal disruption to result in a new

company being formed?

The decision to start a new company occurs when an

individual perceives that forming a new enterprise is

both describe and possible.

Desirability of New Venture FormationThe perception that starting a new company is desirable results from an individual's culture, subculture, family, teachers, and peers. A culture that values an individual who successfully creates a new business will spawn more venture formations than one that does not.

The American culture places a high value on being one’s own boss, having individual opportunities, being a success, and making money- all aspects of entrepreneurship. Therefore, it is not surprising to find a high rate of company formation in United States. On the other hand, in some countries successfully establishing a new business and making money are not as highly valued, and failure may be a disgrace. Countries with cultures that more closely emulate this attitude do not have a high a business formation rate. It will be increasing to watch which of the once-controlled economies will develop a strong pro-entrepreneur culture.

Possibility of New Venture FormationWhat makes it possible to form a new company ?

Several factors- government, background, marketing, role models, and finances- contribute to the creation of a new venture.

The social, psychological, and financial risks are still present, the entrepreneur must also have the necessary background. Formal education and previous business experience give a potential entrepreneur the skills needed to form and manage a new enterprise.

Financial resources must be readily available. Although most of the start-up money for any new company comes from personal savings, credit, friends, and relatives. There is often a need for additional risk capital.

Types of Start-ups

1. Lifestyle firm

Is privately held and usually achieves only modest growth due to the nature of the business, the objectives of the entrepreneur, and the limited money devoted to research and development. This types of firm may grow after several years to 30-40 employees. A lifestyle firm exists primarily to support the owners and usually has little opportunity for significant growth and expansion.

2. Foundation companies

Is created from research and development and lays the foundation for anew business area. This firm can grow in 5-10 years from 40 to 400 employees.

This type of start-up rarely goes public, it usually draws the interest of private investors only, not the venture-capital community.

3. High-potential venture

Is the one that receives the greatest investment interest

and publicity. While the company may start out like a

foundation company, its growth is far more rapid. After

5-10 years, the company could employ around 500

employees. This firm also called gazelles and are

integral to the economic development of an area.

Role of Entrepreneurship in Economic Development

The entrepreneur who is a business leader looks for ideas and puts them into effect in fostering economic growth and development. Entrepreneurship is one of the most important input in the economic development of a country. The entrepreneur acts as a trigger head to give spark to economic activities by his entrepreneurial decisions. He plays a pivotal role not only in the development of industrial sector of a country but also in the development of farm and service sector. The major roles played by an entrepreneur in the economic development of an economy is discussed in a systematic and orderly manner as follows:

(1) Promotes Capital Formation:

Entrepreneurs promote capital formation by mobilizing the idle savings of public. They employ their own as well as borrowed resources for setting up their enterprises. Such type of entrepreneurial activities lead to value addition and creation of wealth, which is very essential for the industrial and economic development of the country.

(2) Creates Large-Scale Employment Opportunities:

Entrepreneurs provide immediate large-scale employment to the unemployed which is a chronic problem of underdeveloped nations. With the setting up. Of more and more units by entrepreneurs, both on small and large-scale numerous job opportunities are created for others. As time passes, these enterprises grow, providing direct and indirect employment opportunities to many more. In this way, entrepreneurs play an effective role in reducing the problem of unemployment in the country which in turn clears the path towards economic development of the nation.

(3) Promotes Balanced Regional Development:

Entrepreneurs help to remove regional disparities through setting up of industries in less developed and backward areas. The growth of industries and business in these areas lead to a large number of public benefits like road transport, health, education, entertainment, etc. Setting up of more industries lead to more development of backward regions and thereby promotes balanced regional development.

(4) Reduces Concentration of Economic Power:

Economic power is the natural outcome of industrial and business activity. Industrial development normally lead to concentration of economic power in the hands of a few individuals which results in the growth of monopolies. In order to redress this problem a large number of entrepreneurs need to be developed, which will help reduce the concentration of economic power amongst the population.

(5) Wealth Creation and Distribution:

It stimulates equitable redistribution of wealth and income in the interest of the country to more people and geographic areas, thus giving benefit to larger sections of the society. Entrepreneurial activities also generate more activities and give a multiplier effect in the economy.

(6) Increasing Gross National Product and Per Capita Income:

Entrepreneurs are always on the look out for opportunities. They explore and exploit opportunities,, encourage effective resource mobilization of capital and skill, bring in new products and services and develops markets for growth of the economy. In this way, they help increasing gross national product as well as per capita income of the people in a country. Increase in gross national product and per capita income of the people in a country, is a sign of economic growth.

(7) Promotes Country's Export Trade:

Entrepreneurs help in promoting a country's export-trade, which is an important ingredient of economic development. They produce goods and services in large scale for the purpose earning huge amount of foreign exchange from export in order to combat the import dues requirement. Hence import substitution and export promotion ensure economic independence and development.

(8) Induces Backward and Forward Linkages:

Entrepreneurs like to work in an environment of change and try to maximize profits by innovation. When an enterprise is established in accordance with the changing technology, it induces backward and forward linkages which stimulate the process of economic development in the country.

(9) Facilitates Overall Development:

Entrepreneurs act as catalytic agent for change which results in chain reaction. Once an enterprise is established, the process of industrialization is set in motion. This unit will generate demand for various types of units required by it and there will be so many other units which require the output of this unit. This leads to overall development of an area due to increase in demand and setting up of more and more units. In this way, the entrepreneurs multiply their entrepreneurial activities, thus creating an environment of enthusiasm and conveying an impetus for overall development of the area.

Entrepreneurial Careers and Education

Framework for on entrepreneur’s career development:• Educational environment• The individual’s personality• Childhood family environment• Employment history• Adult development history• Adult family/non-work history• Current work situation• The individual’s current perspective • Current family situation

Types of skills required for entrepreneurship

Technical skills Business Management skills

• Writing• Oral communication• Technical business

management• Interpersonal• Technology• Ability to organize• Coaching• Being a team player• Management style• Network building

• Planning and goal setting• Decision making• Human relations• Marketing• Finance• Accounting• Management• Negotiation• Venture launch• Managing growth

Personal Entrepreneurial Skills

• Inner Control/ disciplined

• Risk Taker

• Innovative

• Change oriented

• Persistent

• Visionary leader

• Ability to Manage change

• Pioneer

• Self belief

Ethics

Ethics - Is study of what ever is right and good for humans.

Business ethics - Concerns itself with the investigation of business

practices in light of human moral and values.

Classifications of business ethics

• Pedagogically oriented inquiry, including both theory and empirical studies

• theory-building without empirical testing• Empirical research, measuring the attitudes and

ethical beliefs of the students and academic faculty• Empirical research within business environments,

measuring the attitudes and ethical views, primarily of managers within large organizations

Ethics and Social Responsibility of Entrepreneurs

The life of the entrepreneur is not easy. An entrepreneur must take risks with his or her own capital in order to sell and deliver products and services while expanding greater energy than the average businessperson in order to innovate. Face to daily stressful situations and other difficulties, the possibility exists that the entrepreneur will establish a balance between ethical exigencies, economic expediency, and social responsibility, a balance that differs from the point where the general business manager takes his or her moral stance.

Assignment

1. Research at least 2 future of Entrepreneurship.

2. Ethical behavior of being Entrepreneur.