IITM BBA6 Entrep.dev. M1 - Units 1, 2 - Feb 2012 Exam

8/2/2019 IITM BBA6 Entrep.dev. M1 - Units 1, 2 - Feb 2012 Exam

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(Please read the text book in addition to the guiding notes) 1

ENTREPRENEURSHIP DEVELOPMENT

UNIT I

The word entrepreneur immediately conjures up images of business tycoons like L N Mittal or Bill

Gates. While these rich, famous and successful individuals can be inspirational for some, most of us

would find it difficult to associate our own lives, personalities or abilities with them. But the fact is that

virtually everybody is entrepreneurial provided s/he exhibits certain characteristics decision making, risk

taking, creativity etc.

Entrepreneur is a person who creates an enterprise. The process of creation is called as

entrepreneurship.

The word entrepreneur is derived from the French word Entreprendre which means to undertake, i.e. a

person who undertakes the risk of new enterprise.

In the context of employment generation, the three terms i.e. income generation, self employment and

entrepreneurship are often used interchangeably. Entrepreneurship refers to identification of innovativeideas, setting up a new enterprise. Whereas, self-employment refers to full time involvement in ones own

occupation. One may or may not be bearing risk, mobilizing inputs, organizing production and marketing

the product or service. Income generating activities, on the other hand, are part time, casual and practiced

with a view of raising additional income. All entrepreneurs are self-employed and income generating

persons. But all self-employed and income generating persons may not be entrepreneurs.

All entrepreneurs are business persons but all business persons are not entrepreneur.

What the difference between Entrepreneur and Entrepreneurship?

Enterpreneur Entrepreneurship

Person Process Visualiser Vision Organiser Organisation Decision maker Decision making Innovator Innovation Risk bearer Risk bearing Motivator Motivation Creator Creation Leader Leadership Manager Management Initiator Initiation Planner Planning Communicator Communication Administrator Administration

Various Definitions of an Entrepreneur


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The New Encyclopaedia Britannica considers an entrepreneur as an individual who bears the risk of

operating a business in the face of uncertainty about the future conditions.

According to International Labor Organisation (ILO), entrepreneurs are people who have the ability to see

and evaluate business opportunities; together with the necessary resources to take advantage of them; and

to intimate appropriate action to ensure success.

As Professor Jan Tinberg points out: The best entrepreneur in any developing country is not necessarily

the man who uses capital, but rather the man who knows how to organize the employment and training of

employees. Whoever concentrates on this is rendering a much more important service to his country than

the man who uses huge capital.

With J.A. Schumpeter, the term entrepreneur had received a wide acclaim. He defined the entrepreneur as

an innovator who carries out new combination to initiate the process of economic development through

introduction of new products, new markets, conquests of new source of raw materials and establishment

of a new organization of industry. He said, The carrying out of a new combination we call enterprise, the

individuals whose function is to carry them out we call entrepreneurs. The entrepreneur is also a change

agent who provides economic leadership. Cole described entrepreneur as an individual who undertakes

to initiate, maintain or aggrandize a profit-oriented business unit for production or distribution of

economic goods and services.

J A Schumpeter thus writes: The entrepreneurin an advanced economy is an individual who introduces

something new in the economy a method of production not yet tested by experience in the branch of

manufacturer concerned, a product with which consumers are not yet familiar, a new source of raw

material or of new markets and the like. He further states the entrepreneurs function is to reform or

revolutionize the pattern of production by exploiting an invention or more generally, an untried

technological possibility for producing a new commodity

Briefly, an entrepreneur is one who innovates, raises money, assembles inputs, chooses managers and sets

the organization going with his ability to identify them. Innovation occurs through (i) the introduction of a

new quality in a product, (ii) a new product, (iii) a discovery of a fresh demand and a fresh source of

supply and (iv) by changes in the organization and management.

In the case of a developing country like India, the concept is being understood differently. An

entrepreneur in a developing economy is one who starts an industry (old or new), undertakes risk, bears

uncertainties and also performs the managerial functions of decision-making and co-ordination. He also

puts the new process based on technological research into operation. Even if he imitates any technique of

production from a developed economy, he is called an entrepreneur. Unlike in the developed industrial

world, emphasis is not put (nor is there any need for it) only on Schumpeterian innovations in the case

of developing countries.

Entrepreneurshipthe Dynamic Need

Entrepreneurship is the dynamic need of a developing nation. Entrepreneurship is one of the most

important inputs in the economic development of a country or a region.


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Employment generation Growing unemployment, particularly educated unemployment, is anacute problem of the nation. The available employment opportunities can cater to only 5-10 per

cent of the unemployed. This employment is a self-saturating process. When government creates,

say a hundred jobs in various departments, 100 persons get employed and the vacancies are filled

for thirty years or so, till these people retire and the vacancies are filled for thirty years or so, till

these people retire and vacancies re-emerge. If a hundred persons become entrepreneurs they notonly create jobs for themselves but create a hundred jobs to many more. As the time passes these

enterprises grow providing direct and indirect employment to many more. Thus, entrepreneurship

is the best way to fight the evil of unemployment.

National incomeThis consists of goods and services produced in the country and imported. Thegoods and services produced are for consumption within the country as well as to meet the

demand of exports. The domestic demand increases with ever increasing population and standard

of living. The export demand also increases to meet the needs of growing import due to various

reasons. An increasing number of entrepreneurs are required to meet this increasing demand for

goods and services. Thus, entrepreneurship increases national income.

Dispersal of economic power The world affairs have been dominated by power. Economicpower is the natural outcome of industrial and business activity. Developing a large number of

entrepreneurs helps in dispersing the economic power amongst the population. When a society

produces a small number of entrepreneurs, the enterprises due to lack of competition grow into a

few big business houses. This results in concentration of wealth in a few families. This can have

serious social and national implication. But when the same is shared by a large number of

entrepreneurs it leads to dispersing wealth and thus leading to a healthy economy.

Balanced regional developmentThe growth of industry and business leads to a large number ofpublic benefits like road transport, health, education, entertainment etc. When the industries are

concentrated in selected cities, the development gets limited to these cities. A rapid development

of entrepreneurship ensures a balanced regional development. When the new entrepreneurs grow

at a faster pace, in view of the increasing competition in and around the cities, they are forced toset up their enterprises in the smaller towns away from big cities. This helps in the development

of the backward regions.

Characteristics of a Successful Entrepreneur

The following are some characteristics that every successful entrepreneur must possess in adequate

measure.

a) Innovation: The terms creativity and innovation are often used to mean the same thing, but eachhas a unique connotation. Creativity is the ability to bring something new into existence. This

definition emphasizes the ability, not the activity of bringing something new into existence.A person may therefore conceive of something new and envision how it will be useful, but not

necessarily take necessary action to make it a reality. Innovation is the process of doing new

things, but creativity is a prerequisite to innovation. Ideas usually evolve through a creative

process whereby imaginative people bring them into existence, nurture them, and develop them

successfully.

Entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship. It is the act that

endows resources with a new capacity to create wealth. Innovation, indeed, creates a resource.


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Successful entrepreneurs are not content simply to improve on what already exists, or to modify

it. They try to create new and different values and new and different satisfaction, to convert a

material into a resource, or to combine existing resources in a new and more productive

configuration. It is change that always provides the opportunity for the new and different.

b) Dynamism: Innovation together with dynamism constitutes a potential combination forprosperity. Dynamism revises the targets of the enterprise upwards time and again. The enterprisemay open new vistas, better product mix, charismatic product image stimulating steady growth.

c) Leadership: Leadership is the basic quality of an entrepreneur. This spirit keeps his pace forwardin any field. Leadership qualities will enable a person to stand apart in whatever profession he

might be in. The quality of his leadership is clear from personal relationships, mode of handling a

problem, generating resources and taking others in to ones own stride. An enterprise endowed

with the resource of leadership will always be prominent in the market.

d) Teambuilding: An entrepreneur should have an ability to build a team. A team is a group ofindividuals with a common purpose that is focused and aligned to achieve a specific task or set of

outcomes. A good team will be able to share knowledge, core competency, and goals.

e) Risk taking ability Entrepreneurs are persons who take decisions under conditions ofuncertainty, and therefore are willing to bear risk but never gamble with results. This is evidenced

by market studies, exploring alternative lines of production or a new product mix, or a new

combination of inputs, and so on. They set goals that require high level of performance. Risk

bearing and decision making calls for absolute clarity in thinking and coordinated actions.

Though decision-making can be taught in classrooms and perfected through experience,

individual ability always stands supreme. Every decision pertaining to an enterprise involves risk.

As a matter of fact, economic decisions become critical in an atmosphere of uncertainty. An

uncertainty is faced not just by a single enterprise but by all, like the market. An entrepreneur has

to make decisions under uncertainty and he has to take actions with unknown and unpredictable

results. They seem to be very much aware of no risk-no return, high risk-high return

continuum. They take moderate challenging risk where moderate returns are attainable and thesame are influenced by their abilities and decisions. This characteristic of entrepreneurs has

significant implications for the ways decisions are made, and thus, for the success or failure of the

business.

f) Decision making ability Decision-making in an environment of uncertainty requiresanticipation of risk. Profit is said to be the reward for anticipating and taking such a risk. The

stakes involved in the event of a wrong decision are enormous. The risk, however, needs to be

always well calculated. How far risk taking is justified depends on the caliber of the entrepreneur.

Persons who can take risks and make quick decisions tend to prosper. Therefore, entrepreneurs

develop the art of decision making under conditions of uncertainty as a matter of survival.

However, the progress of an entrepreneur depends increasingly on effective knowledge and its

continuous updating and proper utilization.

g) Business planningFor converting an idea into reality, an entrepreneur has to develop a businessplan. A comprehensive and concise business plan is basically a route map. It includes inputs for

the project like land, machinery, power, material etc. financial aspects like sources of finance,

assets and liabilities cost of production and marketability total income, operative net profit,

technological feasibility, licensing regulation etc.- information regarding marketing, present


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disposal, unless the enterprise is established, other functions do not get due focus. The task of

establishing an enterprise calls for mobilization of various resources. This needs an initial

investment in fixed assets.

viii) Manpower staffing The entrepreneur has to estimate manpower need of theorganization, lay down selection procedure/criteria, compensation scheme, training and

development rules etc.ix) Managing the enterpriseThe entrepreneur has also to perform the role of a manager to manage

the enterprise effectively. Managing involves decision-making, planning, organizing, staffing,

directing, and controlling.

x) Growth and developmentAn entrepreneur cannot afford to remain at his starting point. He hasto look for growth potential of his products and services. He has to pursue higher goals and

expand his market. He has to watch for the activities of the competitors and formulate appropriate

strategies of growth.

Managers and Entrepreneurs

Differing FocusAreas of Similarity Managers Entrepreneurs

To produce results -Results of today, this month,this year. Short-term and medium

term.

-Results of tomorrow, next year

and coming five years. Long-

term and very long-term

To produce resultsthrough people

-Have usually to handle people

oriented to day-to-day

management nitty-gritty and nuts

and bolts typeMen of details

-Have to deal with people who

can conceptualize with aggregate

perspectivesStrategists

To take decisions -Operational and administrativedecisions, which have a bearing

on short-term and medium-term

results.

-Mostly strategic decisions,

involving growth through

expansion, diversification, take-

overs and mergers. To co-operate under

constraints

-The constraints are usually

organizational i.e. those within

an organization like machinecapacity, labour productivity,

routing and scheduling,

information availability, financial

limitations etc.

-The constraints are

organizational as well as

environmental which lie outsidean organization like policy of

financial institutions, import

policy, licensing policy,

infrastructural constraints etc.

To follow soundprinciples of

management

-The principles are more oriented

towards internal administration

and control like delegation,

accountability, responsibility,

planning, budgeting, reportingand information system.

-The principles are with

reference to macro-social aspects

like social responsibility, equal

opportunity, employment, ethical

advertisement practices,adherence to government policies

etc.

Difference between and Entrepreneur and a Manager Intrapreneur


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Of late, a new breed of entrepreneurs is coming to the fore in large industrial organizations. They are

called intrapreneurs. They emerge from within the confines of an existing enterprise. In big

organizations, the top executives are encouraged to catch hold of new ideas and then convert these into

products through research and development activities within the framework of organization. The concept

of intrapreneurship has become very popular in developed countries. It is found that an increasing number

of intrapreneurs are leaving their jobs in big organizations and starting their own ventures. What is moreis that they are causing a threat to the organizations they have left. Such intrapreneurs breed to the

innovative entrepreneurs who inaugurate new products.

Entrepreneur Intrapreneur

Dependency -An entrepreneur is independentin his operations.

-An intrapreneur is dependent onthe entrepreneur, i.e. the owner.

Raising of Funds -An entrepreneur himself raisesfunds required for the enterprise.

-Funds are not raised by the

intrapreneur.

Risk -Entrepreneur bears the riskinvolved in the business.

-An intrapreneur does not fully

bear the risk involved in the

enterprise.

Operation -An entrepreneur operates fromoutside.

-An intrapreneur operates fromwithin the organization itself.

Types of Entrepreneur

a) Based on Functional Characteristicsi) Innovative entrepreneur Such entrepreneurs introduce new goods or new methods of

production or discover new markets or reorganize their enterprise. Entrepreneurs in this

group are characterized by an aggressive assemblage of information and analysis of

results, for trying out a novel combination of factors. Such an entrepreneur is one who

sees the opportunity for introducing a new technique of production process, a newcommodity, a new market, a new service or even reorganization of an existing enterprise.

ii) Imitating or adoptive entrepreneur Such entrepreneurs do not innovate themselves, butimitate techniques and technology innovated by others. They do not try out new ideas or

products, but if a new idea is accepted by the market, they imitate the new idea and hence

join in the competition. Entrepreneurs in this group are characterized by their readiness

to adopt successful innovations by successful entrepreneurs. Such entrepreneurs are

particularly suitable for developing and underdeveloped economies as adoption saves

costs of trial and error, and contribute significantly to the development of such

economies.

iii) Fabian entrepreneur Such entrepreneurs display great caution and skepticism inexperimenting with any change in their enterprise. They neither have the will to introduce

new changes nor desire to adopt new methods innovated by the most enterprising

entrepreneurs. They change only when there is an imminent threat to the very existence

of their enterprise. They are not much interested in taking risk and they try to follow the

footsteps of their predecessors. They are readily interested in introducing any change in

their organization and when they do so it is because unless they introduce the change they

would be out of the market.


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iv) Drone entrepreneurThis is characterized by a refusal to adopt and use opportunities tomake changes in production. They do not like changing the working organization with

changing times. They prefer facing loses to introducing changes in their present

processes, equipments and policies. Such entrepreneurs are characterized by a die-hard

conservatism and may even be prepared to suffer the loss of business. In the present

competitive world, these entrepreneurs are simply thrown out of the business for notbeing able to adapt themselves to the changing dynamics of business.

v) CopreneursWhen both husband and wife together start and run a business venture thenthey are called copreneurs. Emergence of copreneurs in the present times is a reflection

of the fact that womens role in business is increasing.

b) Based on Types of Entrepreneurial Business Manufacturing An entrepreneur who runs such a business actually produces the

products that can be sold using resources and supplies. For e.g. apparel and other textile

products, chemical and related products, electronics and other electrical equipments,

rubber and miscellaneous plastic products, stone etc.

WholesalingAn entrepreneur with such a business sells products to the middle man. RetailingAn entrepreneur with such a business sell products directly to the people who

use or consume them.

Service An entrepreneur in this business sells services rather than products. Theycontinue in their traditional way and in fields their product loses its marketability or their

operation becomes uneconomicalthey are pushed out of the market.

Entrepreneurial Development Process

i) Identification and evaluation of the opportunity - First, perceiving, identifying andevaluating opportunity which is a difficult task. In other words, it is the process by which

an entrepreneur comes up with the opportunity for a new venture. One has to be

watchful for opportunities. Ideas can come from various sources. The opportunities

should be carefully screened and evaluated. It is important for the entrepreneur to

understand the cause of opportunity. It may be technological changes, market shift,

governmental regulations. Opportunity analysis focuses only on the opportunity but not

the entire venture.

ii) Development of the business planAfter having identified the project, the next step is todevelop a plan for the venture. A good business plan must be developed in order to

exploit the defined opportunity.

iii) Determining the required resources - A further step in the process is to assess theresource position. The resources needed for the opportunity must be determined. It is

important not only for developing the opportunity but also essential to determine theresources required and obtaining these resources and successfully managing the resulting

venture. Any resource that is critical must then be distinguished from those which are just

helpful.

iv) Management of enterprise - Once the enterprise is established, an entrepreneur shouldalways look forward to indefinite future, to growth, development, or at least continuation.

After the resources are identified the entrepreneur must employ them through the


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implementation of the business plan. A control system must be established so that

problem areas can be carefully monitored.

Theories of Entrepreneurship

Entrepreneurship is an evolved thing. With the advancement of science and technology it has undergone

metamorphosis change and emerged as a critical input for socio-economic development. Various writers

have developed theories on entrepreneurship and popularized the concept among the common people.

1) Max Webers Theory of Social Change2) Hoselitz Sociological theory3) Trait theory of entrepreneurship4) Economic theory5) Schumpters Innovation theory6) McClellands Psychological Theory7) Theory of social Behavior8) X-Efficiency Theory1) Max Webers Theory of Social Change Weber contended that entrepreneurial growth is

dependent upon ethical value system of the society concerned. This theory provides an analysis of

religion and its impact on entrepreneurial culture. According to him the spirit of capitalism is a

set of attitudes towards the acquisition of money and the activities involved it. The elements of

capitalism include private property ownership, creation of goods/services for profit/income,

individuals and companies are allowed for their own economic gain, the accumulation of capital,

voluntary exchange and wage labour. The spirit of capitalism is subjected to a strict discipline

which is quite incompatible with giving free rein to impulse. This spirit of capitalism can be

generated only when mental attitude in the society is favourable to capitialism. According to

Weber the protestant ethic provides this mental attitude while Hinduism lacks such an attitude.However, the rapid growth of entrepreneurship in India since independence proves that Indians

are not averse to the spirit of capitalism and to adventurous spirit. Hinduism has contributed a lot

to the development of entrepreneurs in India.

(In Weberian theory, the spirit of capitalism is highlighted. As we know capitalism is an

economic system in which economic freedom and private enterprise are glorified and so also the

entrepreneurial culture. Spirit of capitalism is influenced by strict discipline and adventurous

spirit is affected by free force of impulse. According to Weber the spirit of capitalism intertwined

with the motive of profit resulted in creation of greater number of business enterprises.)2) Hoselitz Sociological theoryHoselitz explains that the supply of entrepreneurs is governed by

cultural factors. Entrepreneurs have emerged from a particular socio-economic class. According

to him, entrepreneurship can be developed only in a society in which cultural norms permit a

variety of choices and where social processes are not rigid and in a situation which encourages

the development of personalities interested in enterprise. Hoselitz emphasized the role of

culturally marginally groups like Jews and the Greeks in medieval Europe, the Chinese in south

Africa and Indian in east Africa in promoting economic development. History reveals that many

leading entrepreneurs have emerged from a particular socio-economic class. For e.g. Marwaris


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and Parsees in India and Samurai in Japan are considered to be the dominant social classes as the

source of entrepreneurship.

3) Trait theory of entrepreneurship According to F.A.Walker, an entrepreneur is one who isendowed with more than average capacities in the task of organizing and co-ordinating the factors

of production, i.e. land, labor, capital and enterprise. The profit an entrepreneur gets depends on

his efficiency and superior talents. In other words, to be successful an entrepreneur must possesscertain traits or characteristics like creativity, self confidence, risk taking, imagination,

perseverance etc. The trait theory holds that because these individuals called entrepreneurs

possessed certain specific traits it made them capable of generating new ideas and creating a new

venture. However, different studies have emphasized different traits which is a criticism of the

theory.

4) Economic theory According to economists, entrepreneurship and economic growth will takeplace in those situations where particular economic conditions are most favorable. G F Papanek

and J R Harris are the main advocates of this theory. According to them, economic incentives are

the main drive for the entrepreneurial activities. In some cases, it is not so evident, but the

persons inner drives have always been associated with economic gains. Therefore, these

incentives and gains are regarded as the sufficient condition for the emergence of industrial

entrepreneurship. The economic theory holds that when favorable economic conditions are

prevailing, entrepreneurship develops at a faster rate and come forward to establish new ventures

and bring resources, labor, materials and other assets and put them together to increase their

wealth.

5) Schumpeters Innovation theoryAccording Joseph Schumpeter, entrepreneurship is essentiallya creative activity. Entrepreneurship consists of doing such things as are generally not done in the

ordinary course of business. An entrepreneur is one who innovates i.e. carries out new

combinations. Thus, an entrepreneur is one who innovates, raises money, collects inputs,

organizes talent, provides leadership and sets the organization. Innovation may occur in the

following forms: The introduction of a new product with which consumers are not yet familiar or

introduction of a new quality of an existing product.

The introduction of a new method of production that is, not yet tested by experience inthe branch of manufacture concerned.

The opening of a new market, i.e. a market into which the particular branch ofmanufacture of the country in question has not previously entered.

Finding a new source of raw material or half-manufactured goods, again irrespective ofwhether this source already exists or whether it has to be created

The carrying out of the new organization of any industry, like the creation of a monopolyposition or the breaking up of a monopoly position.

Schumpeter makes a distinction between an innovator and an inventor. An inventor discovers new

methods and new materials. On the contrary, an innovator is one who utilizes or applies inventions and

discoveries in order to make new combination and thus produces newer and better goods which yield both

satisfaction and profits. An inventor produces ideas while the innovator implements these ideas (converts

into economic performance). An individual is an entrepreneur only when he actually carries out new


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combinations and ceases to be an entrepreneur the moment he settles down to running the established

business. The entrepreneur leads the means of production into new channels.

6) McClellands Psychological theory David McClelland (1961) developed his theory to explainthe psychological roots of entrepreneurship. He argued that certain needs are learnt and socially

acquired as the individual interacts with the environment. Such acquired needs or basic human

motives drive individuals towards entrepreneurial activities. He identified the following types of

needs:

Need for achievement (n Ach): a drive to excel, advance and grow. Need for power (n Pow): a drive to influence others and situation Need for affiliation (n Aff): a drive for friendly and close inter personal relationships

According to McClelland, it is the high need for achievement which drives people towards

entrepreneurial activities (prerequisite for becoming an entrepreneur). Individuals with high achievement

motive tend to take keen interest in situations of high risk, desire for responsibility and a desire for a

concrete measure of task performance. They are highly motivated by challenging and competitive work

situations. Employees with a high need for achievement derive satisfaction from achieving goals.

7) Theory of Social Behavior Kunkel presented a behavioral model of entrepreneurship. Thismodel is concerned with the overtly expressed activities of individuals and their relations to the

previous and present surroundings, social structures and physical conditions. According to

Kunkel, individuals perform various activities of which some are accepted by the society while

others are not. The accepted ones are rewarded. The rewards act as reinforcing stimulus

increasing the probability of repeating that behavior pattern. The supply of entrepreneurship

depends upon four structures found in a society or community. These structures are:

Limitation structure In this structure the entrepreneur is viewed as the most importantdeviant individual and such behavioral pattern is restricted. The society limits specific

activities and this limitation structure affects all the members of a society. It is basically

social and cultural in nature.

Demand Structure It is mainly economic and changes with economic progress andgovernment policies. It can be improved by providing material rewards. Such rewards are

necessary to lay the foundation for future social gains. In short, behavior of people can be

made entrepreneurial by manipulating certain selected components of the demand

structure.

Opportunity structure It consists of the availability of capital, management andtechnological skills, information concerning production methods, labor and markets.

Opportunity to learn and all the activities associated with the effective planning and

successful operation of industrial enterprises are also covered. This structure is requiredto increase the probability of entrepreneurial activity.

Labor StructureIt is concerned with the supply of competent and willing labor. Laborsupply cannot be at par with the supply of material factors like capital. The supply of

labor is governed by several factors such as available alternative means of livelihood,

traditionalism and expectations of life.


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Thus, entrepreneurial supply depends upon the four structures given above.

Entrepreneurship depends on rather specific combinations of circumstances which are

difficult to create and easy to destroy.

8) X-efficiency Many firms face the problem of inefficient utilization of various inputs orresources. Innovative entrepreneurs come forward to check inefficiencies in the utilization ofvarious resources through novel ways. According to Liebenstein, the most significant feature of

entrepreneurship is gap filling. It is the job of the entrepreneur to fill the gap or make up the

deficiencies which always exist in the knowledge about the production function i.e. utilization of

various resources. The gaps or deficiencies in the production function arise because all the inputs

in the production function cannot be marketed. Some inputs like motivation and leadership are

vague and their output is indeterminate. An entrepreneur has to marshall all the inputs to achieve

efficiency and economy. Thus, entrepreneurship is a function of input completing and gap filling.

Role of Socio Economic Environment in Entrepreneurship Development

Development of entrepreneurship is not always spontaneous. It is very often affected by environmentalfactors like economic, social, political, legal, cultural etc. These conditions or factors may have both

positive and negative influences on the emergence and development of entrepreneurship. Positive

influences constitute facilitative and conducive conditions for the development of entrepreneurship,

whereas negative influences discourage development of entrepreneurship. In most of the developed

countries, the educational system is designed in such a way that it creates more entrepreneurs. The type of

education prevailing in the country is also an important factor for entrepreneurship development.

Therefore, any attempt to understand the entrepreneurial spirit among people should include an

examination of the socio-economic origins of the entrepreneurs.

a) Social Environment Social environment strongly affects the entrepreneurial behavior whichcontributes to entrepreneurial growth. The social factors can be family background, relatives,friends and teachers, religion, social status, social mobility and social marginality.

Family background greatly affects the entrepreneurial environment and maintenance of socialsystem. This factor includes size of family, type of family, and economic status of family.

Joint family or nuclear families have their own benefits and disadvantages. There is more

sentimental attachments of family members of joint family as compared to nuclear family. To

some extent joint family provided family property to invest and expand the family firm. But

even in nuclear families, sentimental association or emotional bonds are stronger in India as

compared to those in the western countries. In some families due to access to political power,

the members exhibited higher level of entrepreneurship. Background of a family in

manufacturing provided a source of industrial entrepreneurship. Rural background is not

necessarily a handicap for the exercise of entrepreneurship though urban background may

provide to be an added advantage. The environment of the family also influences the

entrepreneurship. Support from family and friends are important factors for motivating the

people to become successful entrepreneurs. Children of entrepreneurs are more likely to

adopt the same occupation because of certain inherent advantages.

Caste and Religion Due to the influence of prevailing social factors, some social groupshave produced more entrepreneurs than others. It has been suggested that certain religious


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and castes encourage the growth of entrepreneurial talent. In India, some religious

communities like the Parsees, Marwaris and Sindhees seem to have an affinity for industrial

activity. The protestant ethics in the west, the Sammurai in Japan and the like in other

countries have distinguished themselves as entrepreneurs. However, entrepreneurship is no

more confined to the traditionally known communities.

Social StatusIt has its own role to play. Every human being aspires for a high social statusand once s/he achieves a reasonable level, his aspirations and desires for it start getting

multiplied. People, therefore, become quite responsible in the wake of protecting and

developing their status. Chester Barnard said that the desire for improvement of status and

especially the desire to protect status appears to be the basis of a sense of general

responsibilities. People work hard to maintain their status as it also contributes to their

entrepreneurial growth.

Social MobilityIt involves the degree of social and geographical mobility and the nature ofmobility channels within a system. Hoselitz and McClellands need for openness of a system

and the flexibility in role relations respectively reveal an imperative role of mobility within a

system for entrepreneurship development. Their viewpoint is that high degree of social

mobility would help in the emergence of entrepreneurship.

b) Economic EnvironmentThe entrepreneurship growth and development is also governed by theeconomic environment. It encompasses a wide spectrum of items, namely land, availability of

raw materials, skilled labour, infrastructure, machinery, capital and so on. Apart from this, if an

entrepreneur does not posses knowledge and various marketing techniques, he is unlikely to

survive.

Barriers to Entrepreneurship

Personal Barriers These barriers are caused by emotional blocks of an individual. These barriers cause

mental obstruction to the individual and lead to the failure in business. Some of the personal factors are:

Lack of ConfidenceMany people think that they lack what it takes to become an entrepreneur.They think that they would never be able to find a successful idea or would be unable to attract

the resources required and therefore dismiss the thought of becoming self-employed as irrelevant.

They may regard themselves as risk-averse and feel that running a business is too risky.

Lack of Dependability on Others Many entrepreneurs aim to gain their additional expertisethrough the trail and error of experience, rather than seeking further personal development or

assistance from others. As business grows, they increasingly need to replace the initial, largely

informal management arrangements with more formality. They need to think more strategically

and devise effective management systems in order to grow and prosper. Individuals who do not

recognize that they need support when they start to do things are likely to be less successful in thelong run.

Lack of Motivation When an individual starts a new business venture he is filled withenthusiasm and drive to achieve success, but when he faces the challenges of real business, bears

losses or his ideas dont work, he loses interest/motivation. This causes further loss of interest and

the entrepreneur starts withdrawing from the mainstream competition.

Lack of PatienceThe desire to achieve success in the first attempt or to become rich instantlyare the motivating factors of modern youth. They want to achieve success through cakewalk.


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When such desires are confronted by business challenges/ problems they lose interest. Apart from

inability to get into the details of business.

Inability to DreamIt is being rightly said, think big to achieve big. The entrepreneurs who areshort of vision or become complacent (satisfied) with what they achieve sometimes lose interest

in further expansion/growth of business, which further impedes the growth of the business.

Environmental Barriers These are the factors which do not lie within the individual but are present in

the environment.

Raw materialsNon-availability of raw materials required for production of goods, especiallyduring the peak season causes hindrances in the growth of the business. In such kind of

situation, competition causes increase in the price of the raw material. This problem becomes

more severe if there are alternative goods or services available in the market.

Labour Human resources have been identified as the most important resource in anorganization. But unfortunately, there is always a dearth of the desired manpower in an

organizationeither because of the lack of skilled labour in the market or because of lack of

committed and loyal employees in the organization. MachineryGood machineries are required in the organization for production and operation of

goods. These machines come at a cost and because of rapid technological developments they

also become obsolete very soon and need to be replaced, which requires a lot of money.

Land and building Acquisition of land and construction of building at prime location withrespect to business requires a lot of expenditure. An alternative approach could be acquiring

land on lease or rent. But this becomes a matter of constant concern for the entrepreneur.

Other Infrastructure requirements Apart from the factors of production mentioned above,there are other infrastructure requirements of the business and which when not present in

adequate amount, can further cause barriers to the growth of business. Any business

organization requires some basic infrastructure support like adequate power supply, proper

roads, water and drainage facilities etc. This support has to come from the various development

authorities, which again is a chain in a long bureaucratic system that suffers from problems like

corruption and red-tapism.

Financial BarriersAvailability of funds is one of the most important ingredients required forthe successful running of a business. There are various methods by which entrepreneur arranges

for funds like his own savings, borrowing from friends and relatives, banks and other

institutional bodies supporting new ventures. If there is a delay in the release of payments by

the source of finance, it causes delay in starting and/or running business.

Societal Barriers Traditionally, the hardest barrier to overcome is the societal barrier, which inhibits

many people even from thinking of starting a business. For e.g. it is still rare that teachers or doctorssuggest, as an active choice, that people should consider starting their own business. Conversely, people

whose parents have run their own business are usually more disposed to consider their own business.

Arguably, more needs to be done to raise awareness of the option of starting a business. Starting off ones

own enterprise needs to be seen a positive career option.


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Unit - II

Broadly, the entrepreneurial process involves two phases:

1) Spotting an opportunity2) Championing a project

The first process involves generation of ideas, scanning of environment and transforming ideas into

potential opportunities. The second process involves starting a new enterprise, may be in the small scale

sector. This includes the steps involved in setting up an enterprise i.e. market research, feasibility,

business plan and operational steps of resource mobilization and project commissioning.

Steps in Setting up a New Business Unit

a) Scanning the environment for entrepreneurial opportunitiesb) Development of products/service ideac) Assessment of feasibility of the idead) Preparation of business plane) Appraisal by funding agenciesf) Resource mobilizationg) Project commissioning and launch

Opportunty Analysis

Opportunities for launching new enterprises exist in the environment.

The entrepreneurs perceive opportunities, synthesize the available information and analyse emerging

patterns that escape the attention of other people.

They are people with a vision, capable of persuading others such as customers, partners, employees andsuppliers to see the opportunity, share it and support it.

For entrepreneur opportunity exists in the environment in the form of needs and problems of people and

society.

After spotting an opportunity, they evolve a strategy to find a creative solution to the problem or need.

Idea Generation

Entrepreneurship is not just limited to innovation (generation of an entirely new concept, product or

service, but it also encompasses incremental value addition to the concept/ product/ services offered to the

consumer, shareholder and employee). Hence, value addition is the key work that an entrepreneur needs

to keep in mind while generating new ideas even at the inception stage.

It involves generation of new concepts, ideas, products/services to satisfy the existing demands and future

demands of the market.

There are different sources of idea generation which could be:


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- Consumers, Existing companies, Employees, Research and development, Dealers, suppliers,retailers.

Also ideas can be generated by/through:

- Good understanding of the economy- Changing needs of the people in a locality/society- Emerging trends in the society (e.g. migration of people from rural to urban centres, preference

for fast food among youth.

- Extensive travelling and wide range of readingEven with such sources of ideas, a creative person is likely to derive more advantage than a person who is

less creative and continues to think on traditional lines.

Every problem is an opportunity for a creative person. Creativity is a major tool for the survival of an

entrepreneur. It not only gives one the edge for recognizing needs, generating business and marketing

ideas, but it also helps in solving problems.


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WHAT IS A BUSINESS PLAN?

A business plan is the blueprint of the step-by-step procedure that would be followed to convert a

business idea into a successful business venture. A business plan first of all identifies an innovative idea,

researches the external environment to list the opportunities and threats, identifies internal strengths and

weaknesses, assesses the feasibility of the idea and then allocates resources (production/operation,

finance, human resources) in the best possible manner to make the plan successful.

The objectives of a business plan are:

To give directions to the vision formulated by entrepreneur. To objectively evaluate the prospects of business. To monitor the progress after implementing the plan. To persuade others to join the business. To seek loans from financial institutions. To visualize the concept in terms of market availability, organizational, operational and financial

feasibility. To guide the entrepreneur in the actual implementation of the plan. To identify the strengths and weaknesses of the plan. To identify challenges in terms of opportunities and threats from the external markets. To clarify ideas and identify gaps in management information about their business, competitors

and the market.

To identify the resources that would be required to implement the plan. To document ownership arrangements, future prospects and projected growths of the business

venture.

Preparing a business plan is not an easy task. A business plan makes the entrepreneur forcibly plan all the

critical dimensions of business and it also ensures that entrepreneur does a thorough research about the

planned business venture. The process of researching and writing the business plan helps to identify the

gaps in the existing plan. For any business venture all the functional plans (marketing,

operation/production, finance, human resources) have to be prepared. The functional plans reveal the

resources required, strategies planned and the budgeted expenditure of each functional area. The also

determine when the company would break-even and when it would begin registering profits. It is

important to keep in mind that preparing a business plan is not just a one-time activity but is an ongoing

process. A successful business enterprise constantly keeps improving its business plan based on market

dynamics and learning experiences.

A business plan is a written document, which has to be presented to various stakeholders to get their

consent. The shareholders require it to ascertain the ownership patterns and future prospects, the

government needs it to give various certifications like pollution control, the financial institutions like

venture capitalists need it to estimate the prospects and the risks in disbursing funds to the business

venture.


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PREPARING A BUSINESS PLAN

A plan which looks very lucrative/feasible at the first instance, might actually not be when the details are

drawn. Hence documenting the business plan is one of the early steps that an entrepreneur should take.

The various steps involved in preparing a business plan are:

I] Preliminary Investigation: Before preparing the plan entrepreneur should:

Review available business plans (if any). Draw key business assumptions on which the plans will be based (e.g. inflation, exchange rates,

market growth, competitive pressures etc,)

Scan the external environment and internal environment to assess the strengths, weaknesses,opportunities and threats.

Seek professional advice from a friend/relative or a person who is already into similar business (ifany).

II]Business Planning Process: A successful entrepreneur lays down a step-by-step plan that s/he follows

in starting a new business. This business plan acts as a guiding tool to the entrepreneur and is dynamic in

nature it needs continuous review and updating so that the plan remains viable even in changing

business situations. The various steps involved in business planning process are:

1) Idea Generation Idea generation in the first stage of business planning process. This stepdifferentiates between an entrepreneur and a businessman. An entrepreneur is a highly creative

person who gets an innovative idea about a product or service that could be brought into the

market. It is not necessary to have an idea which is entirely new; even value added to the new

products in market is included in the innovative products/services. Idea generation is the first

stage of business planning process. It involves generation of new concepts, ideas, products or

services to satisfy the existing demands, latent demands and future demands of the market. The

various sources of new ideas are:

Consumers/customers Existing companies Research and Development Employees Dealers, retailers

The various methods of generating new ideas are:

- Brainstorming: There are a variety of ways to approach brainstorming, but theprinciples remain the same.

o Idea generation is separated from analysis of the idea.o You usually get more ideas with a group than by yourself.o No criticisms during the idea generation phase.o Do not waste time by trying to sell or explain your idea to others during the

idea generating stage.

o The apparently weird and silly ideas often are not so.o Changes in the way you look at something may generate new ideas.


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o Avoid experts in the idea generating group, as they tend to have rigid mindsloaded with traditional approaches.

o Ideas should breed a combination of ideas. You are seeking a large quantityof ideas.

- Reverse brainstorming e.g. how can possibly cause the problem instead ofsolving/preventing it.

- Group discussion- Data collection through questionnaire/schedules etc. from consumers, existing

companies, dealers and retailers

- Invitation of ideas through advertisement, mails, the internet.- Value addition to the current products/services.- Market research- Even contests are being-organised to identify business ideas like business bazigaar

on Star TV, which invites participation in the contest and rewards the best business

plans.

2) Environmental Scanning Once a promising idea emerges through, idea generation phase thenext step in environmental scanning, which is carried out to analyse the prospective strengths,

weakness, opportunities and threats of the business enterprise. Hence before getting the finer

details of setting up business it is advisable to scan the environmentboth external and internal

and collect the information about possible opportunities, threats from external environment and

strength and weaknesses from the internal environment. The different variables to be scanned are

in terms of socio-cultural, economic, governmental, legal, technological, demographic changes

taking place in the external environment and availability of raw materials, machinery, finance,

human resources etc with the entrepreneur. The various sources for gathering the information are

informal sources (family, friends, colleagues, etc.) and formal sources (bankers, magazines,

newspaper, government departments, seminars, suppliers, dealers, competitors). The objective a

successful environmental scanning should be to maximize the information and hence theentrepreneur should collect information from as many sources as possible and then analyze them

to understand whether the given information would be supportive/obstructive to the business

venture. The more supportive the information, the greater is the confidence regarding the success

of the business.

Internal Environment- Raw MaterialIt assesses the availability of raw material now and in the near future.

It the availability of raw material is less now or would be less in future then the

entrepreneur should give a serious thought to establishing a venture as the entire

system can come to a standstill due to shortage of raw material.

- Production/Operation It assesses the availability of various machineries,equipments, tools and techniques that would be required for production/operation.

- FinanceIt assesses the total requirement of finance in terms of start-up expenses,fixed expenses, and running expenses. It also indicates the sources of finance that can

be approached for funding.

- MarketIt assess the present, potential and latent demands of the market.


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- Human ResourceIt assesses the kind of human resources required and its demandand supply in the market. This further helps in estimating the cost and level of

competition in hiring and retaining the human resources.

External Environment- Socio-cultural AppraisalIt assesses the social and cultural norms of a society in a

given period of time. The variables that are appraised are values, beliefs, norms,fashions and fads of a particular society. It can help in understanding the level of

rigidity/flexibility of a given society towards a new product/service/concept. Take for

example, the socio-cultural norms of United States and UAE. Americans are

experimenting and adventurous whereas Arabs are conservative. If an entrepreneur

wishes to introduce an innovative product like bungee jumping its acceptability

would be more in America than in the UAE. Apart from this, the socio-cultural

environment determines the code of conduct the business should follow. If a business

follows unethical practices, various social groups and Government will intervene to

discipline it. E.g. if an industrial not fair wages to workers, trade unions and

Government will intervene.

- Political Environment Appraisal The viability of a business depends upon theability with which it can meet the challenges arising out of the political parties,

political stability, governments intervention in business, constitutional provisions

affecting business, foreign policy etc. All these factors have a bearing on business.

For instance, bottling and sale of Coca Cola was discontinued in India in the late

seventies because of the government policy of restricting the growth of multinational

companies in the country. In 1989, the Government allowed another multi-national

company, Pepsico, to enter the Indian market to give boost to the food processing

industry. Again in 1991, the Government revised its Industrial Policy which

liberalized licensing, imports and exports and inflow of foreign capital and

technology into the country. The trend towards globalization and creation of WorldTrade Organisation have posed new challenges for the Indian business.

- Economic AppraisalIt assesses the status of economy in a given society in terms ofinflation, per capita income and consumption pattern, balance of payments, consumer

price index etc. A healthy economy offers greater opportunities for growth and

development of the industry and therefore provides greater confidence to the

entrepreneur about the success of his venture.

- Governmental Appraisal It assesses the various legislations, policies, incentives,subsidies, grants, procedures etc. formulated by government for a particular industry.

The softer the government norms for the industry, the easier it is for the entrepreneur

to establish and run the business. Take for e.g., the government policies of subsidized

electricity in Uttaranchal. A manufacturing unit highly dependent on power has an

added advantage for setting up industry there. On the other hand, take Uttar Pradesh.

Here, the electricity is not just expensive but there is acute shortage of it as well and

entrepreneurship in UP are dependent on personal generators for electric supply,

which automatically increases the cost of product. Hence, it would be wise decision

on the part of entrepreneur to set up/shift his manufacturing unit to Uttaranchal. The

outcome of government policies in other sectors too should be taken into reckoning


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while conducting an appraisal of its policies. One such e.g. is the governments

intentions to allow only partial FDI in the retail segment. Because of this particular

clause, multinational retail outlets like Wal-Mart will not be able to enter the Indian

market, though the market potential and financial feasibility is in abundance.

- Legal Environment AppraisalLegal environment is determined by various laws andcourt decisions also put pressure on the business and managers. For instance, in 1992,several tanneries in Kanpur were ordered to be closed down by the Supreme court as

they were polluting the Holy Ganga. In August 1993, the Supreme Court passed an

order for the closure of iron foundries around the historical Taj Mahal because of air

pollution caused by them had adverse impact on the whiteness of Taj Mahal.

- Technological AppraisalIt assesses the various technological know-how availableto convert the idea into a product. It can also be done to assess the various modern

technologies expected in the near future and their receptiveness by the industry. For

e.g. an entrepreneur has an idea of manufacturing tobacco-free herbal cigarattes

which would not harm the health of smokers; technological appraisal can assess

whether manufacturing of this kind of product is possible or not.

- Demographic Appraisal It assesses the overall population pattern of a givengeographical region. It includes variables like age profile, distribution, sex, education

profile, income distribution etc. The demographic appraisal can help in identifying

the size of target customers.

- Financial Market Appraisal Finance is an important resource for starting andrunning a business. Thus, scanning of financial environment is very crucial before

planning to tap various sources of finance. Scanning of financial environment will

yield very useful information about financial institutions and other sources to raise

funds for an enterprise. Availability of finance from different sources and time

required for processing, sanction and release of funds are also important inputs for

deciding the size, nature, and profile of the enterprise. A very important factor relatedto finance is the rates of interest charged by different lending institutions. The terms

and conditions of repayment will always be a key factor for any entrepreneur.

- Physical Environment Appraisal Physical and geographical factors can play apredominant role in constituting the non-economic environment and thereby affecting

the business. Today there is a lot of emphasis on social responsibilities of business.

Business now has to calculate social net profitability of its ventures. In this

calculation, business must consider the physical environmental factors such as the

quantity and quality of existing forest wealth, possibility of artificial rain, the

exploitation sea products like fish, the health hazards out of pollution etc.

3) Feasibility Analysis This is done to find whether the proposed project (considering the aboveenvironmental appraisal) would be feasible or not. Environmental appraisal is carried out to

assess the external and internal environment of a business enterprise an enterprise intends to set

up. Whereas, feasibility study is carried out to assess the feasibility of the project itself in a

particular environment in greater detail. Hence, though feasibility would be dependent on

environmental appraisal yet it is more descriptive. The various variables/dimensions are:

Market AnalysisThis is to be conducted for the following reasons:


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- To estimate the demand of the proposed product/service in future.- To estimate the market share of the proposed product/service in the future.

The demand analysis and market share is based on a number of factors like

consumption pattern, availability of substitute goods/services, type of competition

etc. A wide variety of information has to be collected to make these estimations.

A preliminary discussion with consumers, retailers, distributors, competitors,suppliers etc. is carried out to understand the consumer preferences, existing, latent

and potential demands, strategy of competitors and practices of distributors, retailers

etc.

Technical/Operational AnalysisIt is done to assess the operational ability of the proposedbusiness enterprise. The cost and availability of technology may be of critical importance to

the feasibility of a project or it may not be an issue at all. Some of the key questions to be

answered: What are the technological needs of the proposed business? What other equipment

does the proposed business need? From where will this technology and equipment be

obtained? From where can the raw material be obtained? What would be the equipment and

technology?

Technical/operational analysis collects data on the following parameters: material

availability, material requirement planning, plant location, plant capacity, machinery and

equipment, plan layout.

Financial Feasibility Once the analysis of marketing and operations has been donesuccessfully, a final financial feasibility is done to assess financial issues of the proposed

business venture. Following cost estimates have to be carried out: Cost of land and building,

cost of plant and machinery; Preliminary cost estimation to assess how much would be

requird in conducting market survey, preparing feasibility report, establishment expenses,

expenses in raising capital from public and other miscellaneous expenses; Provision for

contingencies to cover certain unexpected expenses which can emerge due to change in the

external environment like price of raw material, or transport costs going up if the petrol prices

are revised; Working capital estimates for running the business are also made; Cost of

production; Sales and Production estimates; Profitability projections to be made on

parameters like cost of production, sales expenses, administrative expenses, expected sales.

The summation of all above gives gross profit.

Based on the above information, the following projections are made: break-even point, cash flow

statement, balance sheet statement, multiyear projections.

4) Drawing Functional Plans After positive results from the feasibility study, functional plans aredrawn. After the feasibility study gives positive indication about the viability of the proposed

project, one can go into the details of drawing of drawing functional plans which would plan the

strategies for all the operational areas.

Marketing Plan It lays down the strategies of marketing which can lead to success ofbusiness. These strategies are in terms of marketing mix (product, price, place and

promotion). From the market feasibility study and marketing research, potential/present

demand of customers is determined, which helps in understanding the profile of customers is


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determined which helps in understanding the profile of customers and hence helps in laying

down the strategies for segmentation of the market, identification of the target market and

laying down strategies for target market.

Production/Operation Plan Production plan is drawn for business enterprises in themanufacturing sector whereas operational plans are drawn for business enterprises in the

service sector. The production/operation plan should include strategies for the followingparameters: Location and reasons for selecting the location; Physical layout; Cost and

availability of machinery, equipments, raw material; list of suppliers and if possible

distributors; cost of manufacturing/running the operations; Quality Management; Production

scheduling, capacity management and inventory management; changes in above in case of

expansion of business.

Organisational Plan It defines the type of ownership: it could be single proprietary,partnership firm, company, private limited or public limited. It also proposes an

organizational structure and proposes human resource management practices that would

govern the successful running of the proposed business enterprise.

Financial PlanIt indicates the financial requirements of the proposed business enterprise:- cost incurred in smooth running of all the financial plans (marketing, operation, and

human resources). E.g. cost incurred in the marketing plan would include forecasting

sales, for production plan it includes cost of goods, for organizational plan it includes

cost of compensation to employees.

- Projected cash flows- Projected income statement- Projected break-even point- Projected ratios- Projected balance sheet

5) Project Report Preparation After environmental scanning and feasibility analysis, a projectreport is prepared. It is a written document that describes step-by-step, the strategies involved instarting and running a business.

6) Evaluation, Control and Review - It is imperative to continuously review and evaluate thebusiness constantly. This is because the competition in todays globalised world is intense and

technological changes are taking place at much faster rates. In this dynamic business environment

it is important to evaluate, control and review the business periodically and introduce changes to

keep up with a dynamic and changing market.

Documents

IITM BBA6 Entrep.dev. M1 - Units 1, 2 - Feb 2012 Exam