ENTREPRENEURSHIP AND SMALL BUSINESS DEVELOPMENT 2.1 Definition and nature of Entrepreneurship Entrepreneurship is the practice of starting new organizations or revitalizing mature organizations, particularly new businesses generally in response to identified opportunities. Entrepreneurship is often a difficult undertaking, as a vast majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part-time) to major undertakings creating many job opportunities
The understanding of entrepreneurship owes much to the work of economist Joseph Schumpeter and the Austrian economists such as Ludwig von Mises and von Hayek. In Schumpeter (1950), an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurship forces "creative destruction" across markets and industries, simultaneously creating new products and business models. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth.
For Frank H. Knight (1967) and Peter Drucker (1970) entrepreneurship is about taking risk. The behaviour of the entrepreneur reflects a kind of person willing to put his or her career and financial security on the line and take risks in the name of an idea, spending much time as well as capital on an uncertain venture. The act of entrepreneurship is often associated with true uncertainty, particularly when it involves bringing something really novel to the world, whose market never exists. Before Internet, nobody knew the market for Internet related businesses such as Amazon, Google, YouTube, Yahoo etc. Only after the Internet emerged did people begin to see opportunities and market in that technology. 2.2 Two elements of Entrepreneurship Innovation, i.e., doing something new or something different is a necessary condition to be called a person as an entrepreneur. The entrepreneurs are constantly on the look out to do something different and unique to meet the changing requirements of the customers. They may or may not be inventors of new products or new methods of production, but they possess the ability to foresee the possibility of making use of the inventions for their enterprises.
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Risk-Bearing: Starting a new enterprise always involves risk and trying for doing something new and different is also risky. The enterprise may earn profits or incur losses because of various factors like increasing competition, changes in customer preferences, and shortage of raw material and so on. In fact, he needs to be a risk-taker, not risk avoider. His risk-bearing ability enables him even if he fails in one time or one venture to persist on and on which ultimately helps him succeed. 2.3 Entrepreneurial Characteristics a) Risk Taking b) Self-Confidence c) Optimist d) High need of achievement e) Need for independent f) Need for power g) Creativity h) Foresight i) Effectiveness j) Imaginative k) Respect for feedback l) Learning from experience
m) Future oriented 2.4 Benefits / Opportunities of Entrepreneurship a) Opportunity of gain control over your own destiny b) Opportunity to reach your full potential c) Opportunity to reap unlimited profits d) Opportunity to contribute to society & be recognized for your effort
e) Opportunity to do what you enjoy 2.5 Limitations of entrepreneurship a) Uncertainty of income b) Risk (Financial Risk & Career Risk) c) Long hours & hard work d) Lower quality of life until the business gets established e) High level of stress
f) Complete responsibility Page 2 of 7
2.6 Theories of Entrepreneurship a) Innovation theory This theory was introduced by ‘J.A. Schumpeter’. According to him, entrepreneur is basically an innovator and innovator is one who introduces new combinations. New combinations theory covers four cases which are:
The introduction of a new product in the market.
The instituting of a new production technology which is not tested by experience in the branch of manufacture concerned.
The opening of a new market into which the specific product has not previously entered.
The discovery of new source of supply of raw material. The carrying out of the new form of organization of any industry by creating of a monopoly position or the breaking up of it.
b) Need for achievement theory This theory was developed by ‘David C. McClelland’. He tries to find the internal factors that are human values and motives that lead man to exploit opportunities, to take advantage of favorable trade conditions. The entrepreneur is concerned with need for achievement (n-achievement). The n-achievement is called as a desire to do well, not so much for the sake of social recognition or prestige, but for the sake of an inner feeling of personal accomplishment. People with high n- achievement behave in an entrepreneurial way. So it is better to develop nachievement among individuals to ensure high scale of economic development.
c) Theory of social behaviour ‘Kunkel’ presents a behavioral model of entrepreneurship. Behavioral model of concerned with the clearly expressed activities of individuals and their relations to the previous and present surroundings, social structure and physical conditions... According to him, individuals perform various activities of which some are accepted by the society while others are not. The accepted are awarded. The rewarded act is as supporting stimulus increasing the probability of repeating that behaviour pattern. This pattern of social behaviour is entrepreneurial behaviour.
d) Theory of Leadership This theory was developed by ‘Hoselitz’. According to him, entrepreneurship is a function of managerial skills and leadership. A person who is to become an industrial entrepreneur must have Page 3 of 7
more than the drive to earn profit. In this process, he has to show his ability to lead and manage. In business, there are three types of leadership:
Merchant money lender
Manager
Entrepreneur
Money lenders are market oriented who deals in goods/services which is generally acceptable to everyone. Mangers are authority oriented but an entrepreneur has in addition to these a production orientation. An entrepreneur creates his own commodity and its acceptability is uncertain. So the entrepreneur assumes more risk as compared to a money lender.
e) Theory of Model personality ‘Cocharn’ has given this theory. His emphasis Cultural values, role expectations and social sanction (agreement) as the key elements that determine the supply of entrepreneurs. According to him, an entrepreneur neither a super normal individual nor a deviant person but represents a society model personality. His personality is influenced by three factors:
His own attitude towards his occupation
The role expectations held by sanctioning groups
The operational requirements of the job
2.7 Barriers of Entrepreneurship a) Environmental Barriers Social: If the social norms expect the people to value discipline and conformity over adventure, creativity, and independence, it is likely to spoil entrepreneurial spirit Economical: Capital, labour, raw materials and market are important basics for any enterprise Cultural: If the cultural values are bound by conventionalism, they may restrain entrepreneurial spirit Political: Political policies can help or delay the growth of entrepreneurial ventures in a country b) Personal Barriers Motivational: All successful entrepreneurs are highly motivated and their drive to achieve become their engine of accomplishment Perceptional: Lack of a clear vision and misunderstanding a situation can result in faulty perception 2.8 The 7 Stages of the Small Business Life Cycle
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a) Seed The seed stage of the small business life cycle is when the small business is just a thought or an idea. This is the very conception or birth of a new small business. Challenge: Most seed stage companies will have to overcome the challenge of market acceptance and pursue one niche opportunity. Do not spread money and time resources too thin. Focus: At this stage of the small business the focus is on matching the business opportunity with the skills, experience and passions. Other focal points include: deciding on a small business ownership structure, finding professional advisors, and business planning. Money Sources: Early in the small business life cycle with no proven market or customers the business will rely on cash from owners, friends and family. Other potential sources include suppliers, customers, government grants and banks. b) Start-Up The small business is born and now exists legally. Products or services are in production and you have the first customers. Challenge: If the small business is in the start-up life cycle stage, it is likely you have overestimated money needs and the time to market. The main challenge is not to burn through what little cash you have. You need to learn what profitable needs the clients have and do a reality check to see if the business is on the right track. Page 5 of 7
Focus: Start-ups require establishing a customer base and market presence along with tracking and conserving cash flow. Money Sources: Owner, friends, family, suppliers, customers, grants, and banks. c) Growth The small business has made it through the toddler years and is now a child. Revenues and customers are increasing with many new opportunities and issues. Profits are strong, but competition is surfacing. Challenge: The biggest challenge growth companies face is dealing with the constant range of issues bidding for more time and money. Effective management is required and a possible new business plan. Learn how to train and delegate to conquer this stage of development. Focus: Growth life cycle businesses are focused on running the small business in a more formal fashion to deal with the increased sales and customers. Better accounting and management systems will have to be set-up. New employees will have to be hired to deal with the influx of business. Money Sources: Banks, profits, partnerships, grants and leasing options. d) Established The small business has now matured into a thriving company with a place in the market and loyal customers. Sales growth is not explosive but manageable. Business life has become more routine. Challenge: It is far too easy to rest on the laurels during this life stage. The entrepreneur has worked hard and has earned a rest but the marketplace is relentless and competitive. Stay focused on the bigger picture. Issues like the economy, competitors or changing customer tastes can quickly end all you have work for. Focus: An established life cycle company will be focused on improvement and productivity. To compete in an established market, you will require better business practices along with automation and outsourcing to improve productivity. Money Sources: Profits, banks, investors and government. e) Expansion This life cycle is characterized by a new period of growth into new markets and distribution channels. This stage is often the choice of the business owner to gain a larger market share and find new revenue and profit channels. Challenge: Moving into new markets requires the planning and research of a seed or start-up stage business. Focus should be on businesses that complement the existing experience and capabilities. Moving into unrelated businesses can be disastrous. Page 6 of 7
Focus: Add new products or services to existing markets or expand existing business into new markets and customer types. Money Sources: Joint ventures, banks, licensing, new investors and partners, profits, banks, investors and government. f) Mature Year over year sales and profits tend to be stable, however competition remains fierce. Eventually sales start to fall off and a decision is needed whether to expand or exit the company. Challenge: Small businesses in the mature stage of the life cycle will be challenged with dropping sales, profits, and negative cash flow. The biggest issue is how long the business can support a negative cash flow. Ask is it time to move back to the expansion stage or move on to the final life cycle stage...exit. Focus: Search for new opportunities and business ventures. Cutting costs and finding ways to sustain cash flow are vital for the mature stage. Money Sources: Suppliers, customers, owners, and banks. Profits, banks, investors and government.
g) Exit This is the big opportunity for the small business to cash out on all the effort and years of hard work. Or it can mean shutting down the business. Challenge: Selling a business requires the realistic valuation. It may have been years of hard work to build the company, but what is its real value in the current market place. If you decide to close the business, the challenge is to deal with the financial and psychological aspects of a business loss. Focus: Get a proper valuation on the company. Look at the business operations, management and competitive barriers to make the company worth more to the buyer. Set-up legal buy-sell agreements along with a business transition plan. Money Sources: Find a business valuation partner. Consult with the accountant and financial advisors for the best tax strategy to sell or close-out down business.
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