ENTREPRENEURSHIP MANAGEMENT - MMS Notes (Anant Dhuri).pdf

Anant Dhuri

ENTREPRENEURSHIP MANAGEMENT

ENTREPRENEURSHIP MANAGEMENT 100 Marks Course content: (A) ENTREPRENEURIAL PERSPECTIVE: Concept of Entrepreneur, Entrepreneurship and Enterprise; advantages

1) 2) 3) 4) (B)

Entrepreneur

Nature and Development Development of Entrepreneurship; Entrepreneurship; Gender issues in Entrepreneurship. The dynamic role of Small Business / Industry in Economic Development Personality of an Entrepreneur / Entrepreneur Innovation and Entrepreneurship THE ENTREPRENEURIAL ENVIRONMENT:

1) 2) 3) 4) 5)

Policy Perspectives in India to promote Entrepreneurship Entrepreneurship Analysis of Business Opportunities in different different sectors of economy at National National and Global levels. Quick - start Routes to establish an Enterprises (Franchising, (Franchising, Ancilliarising & Acquisitioning ) Support Organizations for an Entrepreneur and their Role Legal framework for starting a Business Business / Industry in India.

(C) THE ENTERPRISE LAUNCHING: Product / Project Identification Developing a Project Report / Business Plan Business Financing including venture Capital Finance Managing early growth of a Business, Incubation Program. New Venture expansion - strategies and issues. Reference Text 1. Beyond Entrepreneurship - By James C. Collins, William C. Lazier 2. Entrepreneurship Management Management - By P. N. Singh, By J. C. Saboo Saboo 3. Dynamics of Entrepreneurial - By Vasant Desai Desai 4. Entrepreneurship Development in India - By By Bishwanath Bishwanath Ghosh Ghosh 5. Literature Published by Support Institutions, viz i) SIICOM, ii)SIDBI, i ii)MSSIDC iv)NSIC

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(A) ENTREPRENEURIAL PERSPECTIVE

Concept of Entrepreneur, Entrepreneurship and Enterprise; advantages Entrepreneur 1. 2. 3. 4.

Nature and Development of Entrepreneurship; Gender issues in Entrepreneurship. The dynamic role of Small Small Business Business / Industry in Economic Development Development Personality of an Entrepreneur / Entrepreneur Innovation and Entrepreneurship

1. NATURE AND DEVELOPMENT DEVELOPMENT OF ENTREPRENEURSHIP; ENTREPRENEURSHIP; GENDER ISSUES ISSUES IN ENTREPRENEURSHIP ENTREPRENEURSHIP The concept of Entrepreneurship is comparatively new and dynamic. What is Entrepreneurship? "Entrepreneurship can be described as a creative and innovative response to the environment. Such responses can take place in any field of social endeavour – business, agriculture, education, social work and the like. Doing new things or doing things that are already being done in a new way is, therefore, a simple definition of entrepreneurship. In this book, however, we shall concentrate on business entrepreneurship." It would also be advisable to understand the individual qualities of an Entrepreneur this would help us understand the concept better. Who are Entrepreneurs? Entrepreneurs are quick to see possibilities for achievement. They are not blinded, as mangers in large, sedate organizations often are, by the in-grown culture in which they are embedded. As we are aware, the new ideas for new products and services often originate in unexpected places. Entrepreneurs are the first one to embark on these innovative ideas. There are several examples such as follows: 1. Credit cards were not invented by banks 2. Instant photography photography was was not started by a large camera camera manufacturer manufacturer 3. Large office equipment manufacturer did not not create the Xerographic Xerographic office-copying office-copying machine.

Entrepreneurs are the people who see the need gap and hence capitalize on the same. An entrepreneur grabs such novel ideas, developed it and pursued purs ued its success doggedly with unflagging s pirit. Therefore, these people are successful in their venture and are entrepreneurs in the true sense of the word. Thus, entrepreneurs are self-starters and doers who have organize and build successful enterprises. On the other hand we cannot call an entrepreneur an opportunist because it is not only the selfish interest that drives him but he is also meets the need of the people. The following eleven qualities/ attributes are considered to be some of the important ones for a successful entrepreneur on the basis of the research and experience of Behavioral Science Center, Delhi and various other institutions involved in selection of candidates for entrepreneurial development programs c onducted by them: 1. High level of motivation, 2. Moderate Risk-taker 3. Self-confident with positive self-concept, 4. Excellent Leadership qualities 5. Good Business acumen 6. Managerial competence 7. Problem solving attitude 8. Flexibility and adaptability 9. Realistic approach to planning 10. Independence of thought and action 11. Ability to perceive opportunities and threats What’s an Enterprise? The word enterprise describes the actions of someone who shows some initiative by taking a risk by setting up, investing in and running a business. A person who takes the initiative is someone who “makes things happen”. He or she tends to be decisive. A business opportunity is identified and the person does does something about it. Showing initiative is about taking decisions and being bold – not everyone is like that! Risk-taking is slightly different. In business there is no such thing as a “sure fire bet”. All business investments carry an element of risk – which is the chance or probability that things will go wrong. At the worst, the risk of an enterprise might mean the person making the investment loses all his/her money or becomes personally liable for the debts of the business. The trick is to take calculated risks, and to ensure that the likely returns from taking a risk are enough to make the gamble worthwhile. Someone who shows enterprise is an “entrepreneur”.

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DEVELOPMENT OF ENTREPRENEURSHIP Who is an entrepreneur? What is entrepreneurship? What ¡s 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.” HISTORY Earliest Period An 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 adventurer at a 22.5 percent rate, including insurance. While the capitalist was a passive risk bearer, the merchantadventurer took the active role in trading, bearing all the physical and emotional risks. When the merchant-adventurer successfully sold the goods and completed c ompleted 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 pe rcent. 18th Century In the 18th century, the person with capital was differentiated from the one who needed capital. In other words, the entrepreneur was distinguished from the capital provider (the present-clay 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, as was the case with the inventions of Eli Whitney and Thomas Edison. Both Whitney and Edison were developing new technologies and were unable to finance their inventions themselves. Whereas Whitney financed his cotton gin with expropriated British crown property, Edison raised capital from private sources to develop and experiment in the fields of electricity and chemistry. Both Edison and Whitney were capital users (entrepreneurs), not providers (venture capitalists). 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: Briefly stated, the entrepreneur organizes and operates an enterprise for personal gain. He pays current prices for the materials consumed in the business, for the use of the land, for the personal services he employs, and for the capital he requires. He contributes his own initiative, skill, and ingenuity in planning, organizing, and administering the enterprise. He also assumes the chance of loss and gain consequent to unforeseen and uncontrollable circumstances. The net residue of the annual receipts of the enterprise after all costs have been paid, he retains for himself. In the middle of the 20th century, the 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 method 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. Indeed, innovation, the act of introducing something new, is one of the most difficult tasks for the entrepreneur. It takes not only the ability to create and conceptualize but also the ability to understand all the forces at work in the environment. The newness can consist of anything from a new product to a new distribution system to a method for developing a new organizational structure. This ability to innovate can be observed throughout history, from the Egyptians who designed and built great pyramids out of stone blocks weighing many tons each, to the Apollo lunar module, to laser surgery, to wireless communication. Although the tools have changed with advances in science and technology, the ability to innovate has been present in every civilization. Definition of entrepreneur today The concept of an entrepreneur is further refined when principles and terms from a business, managerial, and personal perspective are considered. In particular, the concept of entrepreneurship from a personal perspective has been thoroughly explored in this century. This exploration is reflected in the following three definitions of an entrepreneur: 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 re-sources and situations to practical account, 3. The acceptance of risk or failure. failure. 4. To an economist, an entrepreneur is one who brings resources, labor, materials, and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations, and a new order.

To a psychologist, such a person is typically driven by certain forces - the need to obtain or attain something, to experiment, to accomplish, or perhaps to escape the authority of others. To one businessman, an entrepreneur appears as a threat an aggressive competitor, whereas to another businessman the same entrepreneur may be an ally, a source of supply, a customer, or someone who creates wealth for others, as well as finds better ways to utilize resources, reduce waste, and produce jobs others are glad to get. Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time, and/or career commitment or provide value for some product or service. The product or service may or may not be new or unique, but value must somehow be infused by the entrepreneur by receiving and locating the necessary skills and resources. Although each of these definitions views entrepreneurs from a slightly different perspective, they all contain similar notions, such as newness, organizing, creating, wealth, and risk taking. 3

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Entrepreneurship is the process of creating somethin9 new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, receiving the resulting rewards of monetary and personal satisfaction and independence. This definition stresses four basic aspects of being an entrepreneur regardless of the field. First1 entrepreneurship involves the creation process—creating something new of value. The creation has to have value to the entrepreneur and value to the audience for which it is developed. GENDER ISSUES IN ENTREPRENEURSHIP

Since the self-employed women are contributing in significant ways to economic health and competitiveness in countries around the world, the role performed by women entrepreneurs is of utmost importance. All the constraints faced by the women entrepreneurs should be removed so that women may find an equal status along with men in all aspects of life. Appropriate strategy has to be made to extend the benefits of transfer of technology process to women, which will help more and more women to start their own enterprises and can have a separate identity of their own. Entrepreneurship is a human universal. All over the world, and throughout history, people have created businesses. Yet, although women make up more than 50 percent of the world population, they own and manage significantly fewer businesses than men. Venture types and management styles vary across genders as well. Women entrepreneurship presents several distinctive characteristics that differentiate it from men entrepreneurship. But variations exist also across women entrepreneurs in various countries, and between women who are involved in entrepreneurship and those who are not. Overall, the explanation for the behavior of women entrepreneurs and its distinctiveness is complex and multifaceted. Evidence to date suggests that reasons contributing to explaining these differences include demographic and socio-economic variables, subjective perceptions, and cultural factors and institutions, and that such differences have significant implications at the macro-economic level. Studying female entrepreneurship allows researchers to ask questions that shed light on the linkages between entrepreneurship and wealth creation, employment choices and cognition, human capital accumulation and labor market structure, employment choice and family dynamics, business creation and peace, and many others. From a scientific point of view, the study of female entrepreneurship as a distinct area of inquiry informs us not only about women behavior, but also about entrepreneurial and human behaviors in general. All over the world, female entrepreneurship has become an important component of academic and policy conversations around entrepreneurship. Still, there is much we don’t yet understand. 2. THE DYNAMIC ROLE OF SMALL BUSINESS / INDUSTRY INDUSTRY IN ECONOMIC DEVELOPMENT DEVELOPMENT

We are constantly being involved with small business, for it is everywhere! When we think of “business,” we may think of large corporations—such as Fortune 500 companies—but if you look around you, where you work and live, you will realize that the vast majority of businesses are small. Not only are these small businesses numerically significant; they are also important as employers, as providers of needed (and often unique) goods and services, and as sources of satisfaction to their owners, employees, and customers. For these and many other reasons, there is hardly anyone who has not at some time or other oth er been tempted to start a small business. Some Unique Contributions of Small Business Small firms differ from their larger competitors. Let’s look at some major contributions made by small businesses that set them apart from larger firms. Smaller firms tend to Encourage innovation and flexibility. Maintain close relationships with customers and the community. Keep larger firms competitive. Provide employees with comprehensive learning experience. Develop risk takers. Generate new employment. Provide greater employee job satisfaction. • • • • • • •

a) Encourage Innovation and Flexibility Flexibility Smaller businesses are often sources of new ideas, materials, processes, and services that larger firms may be unable or reluctant to provide. In small businesses, experiments can be conducted, innovations initiated, and new operations started or expanded. In fact, small firms produce 55 percent of all innovations, and in 2003, there were 189,597 patents issued by the U.S. government. If we apply the 55 percent innovation rate, we can say that more than 100,000 patents were issued to small businesses. This trend is especially true in the computer field, where most initial developments have been carried on in small companies. b) Keep Larger Firms Competitive Competitive Smaller companies have become a controlling factor in the American economy by keeping the bigger concerns on their toes. With the introduction of new products and services, small businesses encourage competition, if not in price, then at least in design and efficiency, as happened in the area of California now called Silicon Valley, where the personal computer was developed. c) Develop Risk Takers Small businesses provide one of the basic American freedoms—risk taking, with its consequent rewards and punishments. Small business owners have relative freedom to enter or leave a business at will, to start small and 4

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grow big, to expand or contract, and to succeed or fail, which is the basis of our free enterprise system. Yet founding a business in an uncertain environment is risky, so much planning and study must be done before startup. d) Generate New Employment As repeatedly emphasized throughout this chapter, small businesses generate employment by creating job opportunities. Small firms also serve as a training ground for employees, who, because of their more comprehensive learning experience, their emphasis on risk taking, and their exposure to innovation and flexibility, become valued employees of larger companies.

3. PERSONALITY OF AN ENTREPRENEUR / ENTREPRENEUR

Why are certain people successful starting and growing growing a business and others are not? Is it just luck or being in the right place at the right time? Certainly Bill Gates, with with his technical talents, needed the computer revolution in order to make Microsoft the successful company it is. But is it just timing and and luck or are other factors factors involved? Recent research in the field of psychology suggests that personality has a great deal to do with being a successful entrepreneur. In a recent study published in the the highly regarded Journal of Applied Psychology (2006, Vol. 91, No. No. 2, 259-271), Hao Zao of the University of Illinois at Chicago and Scott E. Seibert of the Melbourne Business School analyzed and combined the results of twenty-three independent research studies. A statistical method known as metaanalysis was used which allows research studies to be combined in a way that yields overall trends within a field of research. When using meta-analytic techniques, a few basic rules must be followed. First, all of the studies being combined must use consistent definitions and methods. Therefore, an entrepreneur was was defined as "...someone who is the founder, owner, and manager of a small small business and whose principal purpose is growth." growth." Second, in order to pinpoint exactly exactly what makes an entrepreneur different from other business people rather than people in general, only studies which compared entrepreneurs to managers were were used. Finally, the studies chosen used only personality traits which fit the widely accepted Five Factor Model (FFM) of personality. The FFM organizes personality personality around five general personality personality traits. Personality traits are largely determined by our genetic makeup but also solidified by early environmental influences such as learning, family relationships, and our experiences to name a few. These core traits make us who we are and and cause us to behave in certain ways. Thus, personality traits predict with pretty good accuracy how we perceive situations, solve problems, interact with people, and carry out our job responsibilities. The FFM consists of the following personality trai ts. we are. Some people need a great deal of social interaction 1) Extraversion - This determines how naturally outgoing we and are comfortable in social environments. Others need very little people contact and may even be timid or a bit fearful of social encounters. more self-confident than others. In addition, some people 2) Emotional Well Being (Neuroticism) - Some of us are more show emotions readily and others are "stone faced" and rarely change their expression. 3) Agreeableness/flexibility - This trait involves how easygoing and tolerant versus how intense and potentially irritable a person behaves. Are you someone who goes through life in a fairly calm fashion or do you get frustrated frequently? Easygoing people may be easy to get along with but may also lack drive and and determination. Intense and irritable people may be highly driven and goal oriented but may also ruffle feathers or worse. 4) Openness to to Experience Experience - This trait determines whether we are likely to seek out new ideas and think creatively or whether we are more practical-minded, efficient, and conservative in our outlook. 5) Conscientiousness - This trait determines our core "modus operandi." At the one extreme, extreme, people are focused, organized, detail-oriented, perfectionistic, achievement-oriented, achievement-oriented, dependable, and compulsive. On the opposite end, people tend to be flexible, spontaneous, s pontaneous, tolerant of ambiguity, disorganized, and less achievement -oriented. Each of the twenty-three studies included in the meta-analysis compared entrepreneurs to a group of managers on the FFM personality traits. The authors found significant differences between entrepreneurs and managers managers on four out of the five traits. For those of you with minimal familiarity with statistics and research, these are impressive results. The entrepreneurs scored significantly higher than managers on the traits Openness to Experience and Conscientiousness. Therefore, entrepreneurs are characterized as more creative, more innovative, and more likely to embrace new ideas than their manager counterparts. Second, the results indicated that entrepreneurs entrepreneurs were higher than managers on on Conscientiousness. Further analysis indicated that the differences differences here were primarily due to the entrepreneurs having a higher achievement orientation as compared to managers. Entrepreneurs and managers did not differ on other aspects of Conscientiousness such as dependability and organizational skills. The second key set of results showed entrepreneurs to be significantly lower than managers on Neuroticism and Agreeableness. Consequently, entrepreneurs entrepreneurs are more self-confident, resilient, and stress-tolerant than nonentrepreneurial managers. These results make sense considering the highly stressful, demanding, and chaotic work environments which which entrepreneurs usually find themselves. With regard to lower scores on Agreeableness, entrepreneurs are likely to be tougher, more demanding, and and more prone to drive a hard bargain than than managers. This may explain how the successful entrepreneur is able to accomplish a great deal with with relatively few resources. In addition, the negative aspects of low Agreeableness, which can be significant, are no doubt less detrimental in a small entrepreneurial enterprise versus versus a larger and more structured organization. Finally, no significant differences were 5

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found between the two groups on Extraversion. Extraversion. Therefore, entrepreneurs were no no more or less outgoing than the the managers. So what is the relevance of these research findings? First, as an organizational psychologist working with business people, I'm frequently asked the question, "Do you think I would be successful starting my own company?" The ability to compare oneself to successful entrepreneurs can can help an individual make an important career decision even if they have no previous experience working in an entrepreneurial environment. Avoiding bad career decisions is something all of us desire. desire. Second, these data can help people who support and work with entrepreneurs to make sound decisions. For example, Venture Capitalists are faced frequently with the decision to fund or not fund a start-up start-up company. With tremendous amounts of money at risk, this research research allows the VC to make sound decisions about the people involved in addition to market analysis and evaluating the merits of the product/service. As the field of psychology continues to move forward forward scientifically and further away from the old days of theory and conjecture, the information which results from psychological research can and should be used to support the making of good business decisions. 4. INNOVATION AND ENTREPRENEURSHIP

It is fairly widely acknowledged that there is a very strong connection between the US’s economic success and the entrepreneurial character of its people which generates innovations. It can be plausibly argued that economic success and entrepreneur-driven innovations are bi-directionally causally linked: each gives a boost to the other in ever widening upward spirals of mutually reinforcing, positive feedback. It is perhaps difficult figure out which came first: the economic success or the entrepreneurial character of the people. It is also fairly widely acknowledged that India is not a hotbed of innovation and entrepreneurial ventures. Why is it so? My conjecture – and it is only a conjecture – is that the primary reason is that India is a late-comer in the race for economic development. India is economically backward relative to the US. The US has solved the basic problem of survival for most of its 300 million citizens. Food, housing, education, medical care, etc. Its annual per capita income is around $47,000. India’s Equivalent Population India is a subsistence economy. India is still struggling to provide even the most rudimentary necessities of life to a majority of its 1,100 million population. India’s annual per capita income is around $940, or about 2 percent of the US’s. That’s the average in an economy which has high income disparity. There are an estimated 800 million Indians whose income is less than $2 per day, and an estimated 500 million with incomes is less than $1 per day. People who barely eke out a living cannot be reasonably expected to be innovative and entrepreneurial in the same sense as people who are economically advanced enough to engage in risky, although highly rewarding, activities. Of the approximately 300 million Indians who have above $2 a day in income, let’s assume 10 percent of them have a per capita income which gives them a life-style comparable to the average American life-style. That means about 30 million Indians have the ability and willingness to engage in activities that are innovative and entrepreneurial like that of the Americans. We are therefore now comparing two economies: the US with 300 million and India with 30 million. That’s an order of magnitude difference. Ability and Willingness There are three necessary elements required for any activity: ability, willingness, and opportunity. Let’s focus on the opportunity available to the 30 million Indians who have the ability and the willingness to be innovative and entrepreneurial. The 30 million Indians exist in an environment which is starkly different from the environment that 300 million Americans live in. The problems the two societies face are qualitatively different. The Indian environment requires implementation of rather well-known solutions. It is a question of execution and not one of advancing into unknown frontiers. No cutting edge research and development is required to address the concerns that face India. The answers are well understood. Execution of the known solutions i s sufficient to engage the skills and talents of the 30 million. There are low-hanging fruits and people are busy picking them whenever they are allowed by the “colonial” government. (I am not so stupid as to not know that the British colonizers have left the place a while back. I just don’t see the difference between the British colonial administration and the administration of the post-independent governments of India.) Opportunity The US faces issues that require innovation because all the low-hanging fruits have been picked long ago. They don’t need more of anything, only better of everything that they already have. They all have phones; now they need better phones. They have to push the frontier because most of their population is at the frontier. They have to be innovative because the next things they want will be delivered by innovation, not just more of what they already have. Indians lack the opportunity to be innovative in India because India does not need innovations; it only needs execution of known innovations. Indians who wish to innovate, have to migrate to an economy that demands innovation. And they do. The US has more Indian innovators in the US than India has in India because the demand for innovation is greater in the US.

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When will Indian entrepreneurs start innovating as their American counterparts? When India has stopped being a subsistence economy. And when will that be? That will be when India has exhausted the available known solutions by implementing them, and therefore become more than just a subsistence economy. Then the opportunity will exist in India for innovations and that’s when the willing and able entrepreneurs of India (whatever their numbers then) will do the thing that the Americans do so well.

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(B)

1. 2. 3. 4. 5.

THE ENTREPRENEURIAL ENVIRONMENT

Policy Perspectives in India to promote Entrepreneurship Analysis of Business Opportunities Opportunities in different sectors of economy at National and Global levels. Quick - start Routes Routes to establish an Enterprises (Franchising, Ancilliarising & Acquisitioning ) Support Organizations for an Entrepreneur and their Role Legal framework framework for starting a Business / Industry in India.

1. POLICY PERSPECTIVES IN INDIA TO PROMOTE ENTREPRENEURSHIP

The central role of entrepreneurship in the economic growth of nations is increasingly coming into focus, especially in the recent troubled times. As pointed out in a recent article in The Economist even as governments are busy trying to save their economies, policy makers are demonstrating a renewed interest in entrepreneurship and innovation. In modern open economies, entrepreneurship is argued to be far more important than it was. It is evident that entrepreneurial ventures are driving the growth of economies — developed and emerging. However, amongst the types of entrepreneurship there is necessity based entrepreneurship at one end of the spectrum to opportunity based entrepreneurship at the other that seeks to revolutionize the world by leveraging new technology and creating new markets. While India has a long history of entrepreneurship, as evidenced by centuries of business and commercial activity and the existence of generations old business busi ness groups and families, recent Global Entrepreneurship Monitor studies found that entrepreneurship in India has predominantly been necessity based rather than opportunity based. Formidable barriers exist to entrepreneurship continue to exist in India for high growth entrepreneurship. Our research into the barriers and facilitators of entrepreneurship in the previous editions of Entrepreneurial India has revealed many facets of this problem. Several examples cited in interviews include, several constraints to quick technology adoption by Indian companies. Inconsistent Indirect tax rules and enforcement issues that limit the ability to scale quickly, Labor laws that limit the mobility of labor forced entrepreneurs to fear growth in employee strength. Poor infrastructure has led entrepreneurs to create their own and in the process, lock up precious capital which should have been deployed to grow the business. Inadequate availability of land with clear titles, and owner-occupant friendly policies has led to the diversion of scarce capital towards unproductive investments in land and buildings. Lengthy court proceedings and slow judicial enforcement of property rights and private contracts have led to sub-optimal business practices. Despite all odds, the accent on liberalization and globalization in the last two decades has brought about mitigating effects in many of the areas cited above. A discussion with sonic of the established entrepreneurs points to a positive role played by the new economic policies in opening up areas. Given the ambitious economic growth targets that India has set for itself, high growth businesses have a crucial role to play. While high growth businesses have to use their entrepreneurial ingenuity to overcome the environmental constraints or render them irrelevant, public policy has a significant and decisive role to play in minimizing, and preferably, completely removing the constraints that hobble high growth entrepreneurship. The challenge for policy makers in India can thus be articulated as one of creating the right framework of conditions to enable the establishment of fast growing, innovative new businesses. There are many avenues open to policy makers to address the issue, but the challenge would be in prioritization - picking the right set of issues and sequencing them to achieve significant and quick pay-off. Against this backdrop, the Entrepreneurial India 2009 focuses on how to redesign India’s entrepreneurial ecosystem so India can finally unleash what Prime Minister Singh called ‘the animal spirit” of Indian entrepreneurs. TiE and KPMG have studied select Indian states to understand their regulatory and policy framework and suggest best practices that could help the country to create a truly conducive entrepreneurial ecosystem focused at fostering high growth entrepreneurial activity not limited to necessity but one emerging from a plethora of opportunities.

2. ANALYSIS OF BUSINESS OPPORTUNITIES IN DIFFERENT SECTORS OF ECONOMY AT NATIONAL AND GLOBAL LEVELS.

3. QUICK - START ROUTES TO ESTABLISH AN ENTERPRISE (FRANCHISING, ANCILLIARISING & ACQUISITIONING)

A person can choose any business business as a career. A small business is a profitable profitable economic activity which can become an avenue of employment. You may think that it is easy to start a business if you have necessary money required to establish a business. But actually it is not an easy task howsoever small the business may be. It requires so many 8

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decisions and steps to be taken at various stages. At first you have to prepare a plan. You have to take decisions about the nature of business location and sources of raising necessary capital. You have also to take a decision regarding physical and material resources. Though the procedure for setting up a business is not the same for all types of business, there are certain steps which you have to take to start any business. In this lesson you will learn how to establish a business and how to expand its activities whenever opportunity arises. Preparing a plan of action Once you decide to establish a business unit, you you will have to prepare a plan of action. You will have to decide in advance each and every step you are going to take in that connection till it starts functioning which is helpful in avoiding delay at the initial stages of starting business. The following aspects of the action plan should be kept in view before deciding on the course of action. 1. Selection of the line of business: At first decision is to be taken about the line of business. The main considerations will be its profitability, risk involved and the amount of capital required. You may consider other business opportunities along with the market demand for the goods. 2. Choice of form of organisation: A small business may be organised as a sole proprietorship or a partnership firm. Advantages and disadvantages of both the forms will have to be considered and decision is to be taken. As a sole proprietor you will have the authority of managing the business and will be entitled to the entire profit generated, but then you will also have to bear the risk of loss involved. In partnership there will be others to share the risk and contribute capital and help in management. But then the profit earned will also be distributed among the partners. A company form of organization may also be considered for the purpose. 3. Financial Planning: A business cannot be started and run without sufficient amount of capital. Capital is required to buy fixed assets like land, building, machines and equipment. Capital is also required to buy raw material and meet day to day expenses of the business like wages, electricity charges, carriage, etc. Decision has to be taken in advance regarding the amount of capital required for the various purposes and regarding the sources of raising it, what amount is to be contributed by the owners and the amount to be borrowed from financial institutions, banks, etc. 4. Location of business: Where to establish a business is also to be decided in advance. A business established at a particular location cannot be shifted to other location easily. Decision regarding location of the business unit consists of decision regarding the choice of locality and selection of site. The deciding factors are nearness to the source of supply of raw material, nearness to the market, availability of labour, transportation and banking facilities. Selection of the site depends on cost of land, development cost, etc. 5. Physical facilities: Decisions have to be taken regarding plant and machinery and equipments to be provided for the business, building and other physical facilities like water and power supply, transportation, etc. The factors that may affect the decisions in this regard are the size of business, techniques of production to be used, availability of funds, etc. 6. Plant layout: After selecting the machinery and equipments required, it is necessary to decide about their installation in a proper manner. This is called plant layout. A good layout makes the operations efficient and economical. It reduces the costs of material handling, storage of inventory, use of space, etc. It helps in optimum utilisation of all resources. 7. Man Power and Raw Materials: The number and type of employees to be enrolled have to be estimated and decided in advance. Decision is also to be taken regarding source of procurement, development and training of the employees. Raw material is also very important important for producing goods. To maintain continuity of production, raw materials must be available in adequate quantity and at regular intervals. Quantity and quality of materials to purchased and sources of supply should be decided in advance. 8. Production process and operations: The whole production process is to be visualized and the various activities of the business operation are to be decided in advance. Action plan should be prepared with great care because it determines the course of action to be adopted.

4. SUPPORT ORGANIZATIONS FOR AN ENTREPRENEUR AND THEIR ROLE

The Government has setup various organisations which specialize in industry promotion & entrepreneurship development in different sectors. The organisations provide policy framework support, in addition to training & financial aid. 1. Khadi & Village Industries Commission Commission 2. COIR Board 9

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3. 4. 5. 6.

Small Industries Development Bank of India National Manufacturing Competitiveness Council National Skill Development Corporation State Level Initiatives

1. Khadi & Village Industries Commission - The KVIC is charged with the planning, promotion, organisation and implementation of programs for the development of Khadi and other village industries in the rural areas in coordination with other agencies engaged in rural development wherever necessary. Further, the KVIC is entrusted with the task of providing financial assistance to institutions and individuals for development and operation of Khadi and village industries and guiding them through supply of designs, prototypes and other technical information. 2. COIR Board - Coir Board is a statutory body established by the Government of India under a legislation enacted by the Parliament namely Coir Industry Act 1953 (45 of 1953) for the promotion and development of Coir Industry in India as a whole. It provides support & resources on coir industry to all entrepreneurs dealing with coir and coir products. 3. Small Industries Development Bank of India – Direct Credit Scheme Technology Upgradation Fund Composite Loan Single Window • • • •

4. National Skill Development Corporation - The National Manufacturing Competitiveness Council (NMCC) has been set up by the Government to provide a continuing forum for policy dialogue to energise and sustain the growth of manufacturing industries in India. The NMCC is expected to suggest various ways and means for enhancing the competitiveness of manufacturing sector including identification of manufacturing sectors which have potential for global competitiveness; current strengths and constraints of identified sectors, and recommend National level industry/sector specific policy imitative as may be required for augmenting the growth of manufacturing sec tor. State Level Initiatives Individual states across India have setup specially focused organisations which work towards the development & support of small scale industries. These organisations run specific promotional schemes in addition to providing financial support to industries. a) Examples of State Financial Corporations (SFCs ) Gujarat State Financial Corporation Maharashtra State Financial Corporation Haryana State Financial Corporation Himachal Pradesh Financial Corporation • • • •

b) Examples of State Industrial Development Corporations (SIDCs) State Industrial and Investment Corporation of Maharashtra Ltd State Industries Promotion Corporation of Tamilnadu Ltd. Tripura Industrial Development Corporation Ltd. West Bengal Industrial Development Corporation Ltd • • • •

Development Support Organisations Government of India has also set up various organizations that are at the forefront in providing support and training for the budding entrepreneurs. Few of them are: 1. Central Footwear Footwear Training Institute - Agra 2. Indo-German Tool Tool Room Room - Ahmedabad 3. Indo-German Tool Room -Aurangabad 4. Central Institute of Tool Design - Hyderabad 5. Central Tool Tool Room Room - Ludhiana 6. Indo-German Tool Tool Room Room - Indore 7. Central Tool Room & Training Center - Bubhaneshwar Bubhaneshwar 8. Circle Telecom Training Center Center - Kolkata 9. Indo-Danish Tool Tool Room Room - Jamshedpur 10. Institute for Design of Electrical Measuring In struments 10

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5. LEGAL FRAMEWORK FOR STARTING A BUSINESS / INDUSTRY IN INDIA

Besides incorporation there are many other formalities in establishing a business in India. The foll owing chart contains typical formalities including incorporating a private limited company in India. Nature of Procedure in India

Procedure Number

Duration(days)

Filing the proposed name of company for approval to the Registrar of Companies (ROC); Get the Memorandum and Articles of Association vetted by the ROC and printed

1

7

Make an application to the Superintendent of Stamps or an authorized bank requesting for stamping of the Memorandum of Association and Articles of Association.

2

1

Present the required documents along with the registration fee to the Registrar of Companies to get the certificate of incorporation

3

9

Obtain a company seal

4

3

Visit the UTI Investors Services Limited to obtain a Permanent Account Number

5

7

Obtain a Tax Account Number for income taxes deducted at source from the Assessing Office in the Income Tax Department

6

7*

Register under Shops and Establishment Act

7

2*

Register for value added tax (VAT) before the Sales Tax Officer of the ward in which the company is located

8

12*

Register for Profession tax

9

2*

Register with Employees' Provident Fund Organization

10

2*

Register with ESIC (medical insurance)

11

1*

Filing for Government Approval before RBI/FIPB for Foreigners and NRI's

12

15*

12

35

Totals:

The Different Types of Business Entities in India Starting a business in India requires one to choose a type of business entity. In India one can choose from five different types of legal entities to conduct business. These include Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Private Limited Company and Public Limited Company. The choice of the business entity is dependent on various factors such as taxation, owner liability, compliance burden, and investment and funding and exit strategy. Lets look at each of these entities 1. Sole Proprietorship This is the most easy business entity to establish in India. It doesn’t need its own Permanent Account Number (PAN) and the PAN of the owner (Proprietor) acts as the PAN for the Sole Proprietorship firm. Registrations with various government departments are required only on a need basis. For example, if the business provides services and service tax is applicable, then registration with the service tax department is required. Same is true for other indirect taxes like VAT, Excise etc. It is not possible to transfer the ownership of a Sole Proprietorship from one person to another. Assets of such firm may be sold from one person to another. Proprietors of such firms have unlimited business liability. This means that owners personal assets can be attached to meet business liability claims. 2. Partnership A partnership firm in India is governed by The Partnership Act, 1932. Two or more people can form a Partnership subject to maximum of 20 partners. A partnership deed is prepared that details the amount of capital each partner will contribute to the partnership. It also details how much profit/loss each partner will share. Working partners of the partnership are also allowed to draw a salary in accordance with The Indian Partnership Act. A partnership is also allowed to purchase assets in its name. However the owners of such assets are the partners of the firm. A partnership may/may not be dissolved in case of death of a partner. The partnership doesn’t really have its own legal standing although a separate Permanent Account Number (PAN) is allotted to the partnership. Partners of the firm have unlimited business liabilities 11

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which means their personal assets can be attached to meet business liability claims of the partnership firm. Also losses incurred due to act of one partner is liable for payment from every partner of the partnership firm. A partnership firm may or may not be registered with Registrar of Firms (ROF). Registration provides some legal protection to partners in case they have differences between them. Until a partnership deed is registered with the ROF, it may not be treated as legal document. However, this does not prevent either the Partnership firm from suing someone or someone suing the partnership firm in a court of law. 3. Limited Liability Partnership Limited Liability Partnership (LLP) firm is a new form of business entity established by an Act of the Parliament. LLP allows members to retain flexibility of ownership (similar to Partnership Firm) but provides a liability protection. The maximum liability of each partner in an LLP is limited to the extent of his/her investment in the firm. An LLP has its owner Permanent Account Number (PAN) and legal status. LLP also provides protection to partners for illegal or unauthorized actions taken by other partners of the LLP. A Private or Public Limited Company as well as Partnership Firms are allowed to be converted into an Limited Liability Partnership. 4. Private Limited Company A Private Limited Company in India is similar to a C-Corporation in the US. Private Limited Company allows owners to subscribe to its shares by paying a share capital fees. On subscribing to shares, the owners/members become shareholders on the company. A Private Limited Company is a separate legal entity both in terms of taxation as well as liability. The personal liability of the shareholders is limited to their share capital. A private limited company can be formed by registering the company name with appropriate Registrar of Companies (ROC). Draft of Memorandum of Association and Article of Association are prepared and signed by the promoters (initial shareholders) of the company. A Private Limited Company can have between 2 to 50 members with minimum share capital of Rs 1,00,000 (one lac). To look after the day to day activities of the company, Directors are appointed by the Shareholders. Minimum two Directors must be appointed to look after the daily affairs of the company. A Private Limited Company has more compliance burden when compared to a Partnership and LLP. For example, the Board of Directors must meet every quarter and at least one annual general meeting of Shareholders and Directors must be called. Accounts of the company must be prepared in accordance with Income Tax Act as well as Companies Act. Also Companies are taxed twice if profits are to be distributed to Shareholders. Closing a Private Limited Company is a tedious process and requires many months. One the positive side, Shareholders of a Private Limited Company can change without affecting the operational or legal standing of the company. Generally Venture Capital investors prefer to invest in businesses that are Private Limited Company since it allows great degree of separation between ownership and operations. It also allows investors to exit the company by selling shares without being liable for company affairs. 5. Public Limited Company Public Limited Company is similar to Private Limited Company with the difference being that number of shareholders of a Public Limited Company can be unlimited with a minimum seven members. It is generally very difficult to establish a public limited company. A Public Limited Company can be either listed in a stock exchange or remain unlisted. A Listed Public Limited Company allows shareholders of the company to trade its shares freely on the stock exchange. A Public Limited Company requires more public disclosures and compliance from the government as well as market regular SEBI (Securities and Exchange Board of India) including appointment of independent directors on the board, public disclosure of books of accounts, cap of salaries of Directors and CEO. Like a Private Limited Company, a Public Limited Company is also an independent legal person, its existence is not affected by the death, retirement or insolvency of any of its shareholders.

India’s Ministry of Corporate Affairs has announced that it is simplifying the procedures involved in incorporating a company, in order to help budding entrepreneurs en trepreneurs across the country. According to the ministry, entrepreneurs will n ow be able to incorporate their companies within 24 hrs, which previously took an average of 29 days, starting August 11. The Ministry said it has already implemented the online approval of a Director’s Identification Number (DIN) from June 12 and name registration for the proposed company was made available online from July 24. Additionally, the digital certificate of incorporation is being issued by the Registrar of Companies online, provided the application and other relevant documents submitted by a corporate promoter have been certified by a practising professional. Also, this facility will remain optional for existing applicants who haven’t got any certification done by a practicing law professional.

What are the laws that most of the startups should be careful about?

As an entrepreneur, it is important to be aware of all the local and national laws that apply to your business. Often Entrepreneurs are so engrossed in their idea, especially in the initial stages, that they completely ignore important issues that could land them up in a prison. Forming a limited liability partnership or a Limited liability company does not protect its promoters/directors from criminal liabilities. 12

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1. Tax Laws One of the most misunderstood laws in India are the Income Tax Act. It is important for you as an entrepreneur to explain to your CA about your business in as simple terms as possible. This is especially true if you are working on a tech or unconventional idea. CAs crib a lot about Indian accounting systems and how adjustments (faking accounts) account was a norm and how one cannot survive in the Indian context without indulging in such practices. But clean and true books of accounts are very important not just from compliance point of view, but also from investor point of view. Always remember that as a promoter of your company, you are criminally liable for all tax mis-deeds. If you raise money in 2nd or 3rd year of your operations, any investor will appoint his/her CAs and lawyers to do due diligence. Such account adjustments will cost dearly at the time when investors turn their back on your company due to accounting malpractices. Another important area that is over looked is the Tax Deduction at Source. Are you deducting and depositing the TDS on every payment that you make to your contractors, employees and agents? Often this gets overlooked in the initial years only to haunt back the company few years later when they receive notices from the IT department. Same is true for Profession Tax which is applicable in many states of India. Make sure you comply with every tax law of the country in letter and in spirit. 2. Labour/Employment Laws It is very important to understand the labour laws of your state. What is the minimum wage that you must pay to your employees? Is sweat equity part of minimum wage? Another mis-conception that many entrepreneurs have is that if you hire a person as a contractor, he/she is treated as a contractor as per the law. This may not always be true. It is important to take advice from a labour law specialist. Also if your staff strength (full time employees + contractors) is more than 20, you must register and comply with Provident Fund and ESIC laws in India. A professional labour law consultant can help you with the compliance. Before hiring your employees/consultants, talk to a labour law professional and get the necessary paper work done. 3. Privacy Laws It is important to have proper Privacy laws in place. This is more true for companies that are collecting customer information online. Do you have a privacy policy? Is it in accordance with the Information Technology Act 2000? How do you handle and report breach of privacy? It is also important to protect privacy rights of your employees. Often many companies ask very personal and direct questions to prospective employees during interview. Asking any information that is irrelevant for the job profile is not only illegal, it can land you in court if the person chooses to sue you.

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(C) THE ENTERPRISE ENTERPRISE LAUNCHING

1. Product / Project Identification 2. Developing a Project Report / Business Plan 3. Business Financing including venture Capital Finance 4. Managing early growth of a Business, Incubation Program. 5. New Venture expansion - strategies and issues. 1. PRODUCT / PROJECT IDENTIFICATION

The first difficult task before an entrepreneur is to select a project, thus various aspects of project identification. The sensible entrepreneur has an infinitely wide choice with respect to the new project. These may be: project/service, market, technology, equipment, scale of production, location etc. The selection of a feasible and promising project is really difficult. The selection a feasible project depends to a large extent on Government policies, infrastructural development and skill of the employees. Project Identification or Selection of a Project It refers to the collection, compilation and analysis of economic data for eventual purpose of locating possible opportunities for investment. Opportunities can be: (a) Additive: These are such opportunities which enable the decision-makers to better utilise the existing resources without any significant change in the business. (b) Compliment opportunities: Here new ideas with certain changes in the p resent structure. (c) Breakthrough opportunities: In this opportunities require fundamental change in both structure and character of the business.

Observation is one of the most seasoned choices of a suitable project. The capable business leaders come across situations which can be to invest. The observant mind is always on the lookout for opportunities which can from the existing processes sometimes lead to new opportunities and new project. In our country as well as in other developed countries trade and professional magazines provide a very fertile source of project ideas. It is very important for every person who is involved in the process of development of new investment opportunities to remain in touch with the latest developments in his own field of specialisation. It is also necessary for him to keep in touch with developments in other fields which may be horizontally or even vertically linked with his own line of specialisation. Study of technical and professional literature, besides keeping a person all constant also stimulates and helps in the process of development of new project ideas. Bulletins of research institutes are also a very fertile source of information for the development of new project ideas. These bulletins generally give the broad outlines of the new processes or products developed by research institutes and are very useful in identification of new opportunities. The information made available in the Research Bulletin may not be adequate for concretisation of ideas. Further correspondence with the research institutes may become necessary. In most developing countries where planned development has been accepted as an approach towards the removal of poverty, the plan document published by the Government provides a very useful source of project ideas. The plan document generally analyse the existing economic situation in a country and also pinpoints the investment opportunities which fit into the overall planning efforts. Considerable information can therefore, be gathered from the plan document. Departmental publications of various departments of Governments also provide useful information which can help in the development of new project ideas. These publications are either periodical in character or are issued on special occasions. In order to avoid unnecessary communications between the project sponsoring body and the project formulation team, the project idea should indicate the broad objectives of the sponsor and limit these in time, space, function and structure. GUIDELINES FOR SELECTION OF A PROJECT The entrepreneur after studying various projects for implementation should take a judicious decision as to which project he should select for implementation. The following guidelines are suggested: 1. Project Cost: Professional managers, who have worked in multinational companies or large Indian companies, should think of starting medium-sized or large-sized units only. The investment size (project cost) should be at least Rs. 3 to 5 crore. They should not commit the common mistake of restricting the project size to less than Rs. 2 crore so that they need not go to all financial institutions. In fact, under the present circumstances, it will be much easier to get projects cleared by the all-India institutions, requiring even lesser promoter’s contribution. 2. Location or Site: A new entrepreneur should locate his project around a state headquarters. There are many backward areas around such cities. It is necessary to have such a location to attract competent managers. This will also facilitate liaison with the state electricity board, state industrial development corporation and various other agencies. 3. Technology: The first project should not be for a product which requires high technology, necessitating foreign technical collaboration. It is better to go in for a product with a proven technology that is indigenously available. 4. Raw Material: The project which needs foreign raw material should not be selected. The supply of indigenous raw material be taken into consideration. 5. Cheap Labour Labour Supply: No matter, the present day business is run by automatic machines yet the labour force is required. This factor be taken into consideration. 6. Equipment: The entrepreneur should select the best equipment based on the advice of experienced technical consultants. He should not compromise on the quality of the equipment. Many entrepreneurs enter into some sort of 14

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a deal with the equipment manufacturer for a kickback and in the process sacrifice quality. Industry is a goose that lays golden eggs. One should not be shortsighted and come to grief by going in for poor quality equipment. 7. Marketing: It is not advisable to get into a project particularly the first, which would mean survival amidst cut-throat, dog-eat-dog competition involving direct selling to the ultimate consumer. One should go in for products with a limited number (say 10 to 20) of industrial c ustomers. Choosing an Idea Establishing yourself as a successful e ntrepreneur depends upon choosing a good idea. That i dea must not only be good for the market, but good for the project and good for you. It means that the project is viable, profitable and socially good. It should also be manageable without much dependence on others. At first, when one is searching for an idea worthy of his commitment, don’t pursue one idea at a time. Develop five or ten in parallel until one emerges so strongly that it begins to dominate thoughts and fantasies. To adopt one idea at a time has several disadvantages. First, because one is constantly receiving random information from what one reads and gets from people. Choosing an idea is quite difficult and the entrepreneur bas to weigh objectively his intrinsic capabilities in fmalìsing an idea. In the idea stage, suggestions for new products are obtained from all possible sources: customers, competitions, R&D, distributors, and company employees. Frequently, one of the creative problem-solving techniques discussed below are used to develop marketable ideas. The suggested ideas need to be carefully screened to determine which are good enough to qualify for a more detailed investigation. Role of Project Identification The project identification is often of great importance for the following reasons: 1. Product identification becomes the catalytic agent of economic development. 2. Product identification initiates the process of development, production, employment, income generation and so on. 3. Product identification has consequences which are long-term in nature. 4. Projects provide the framework of the future activities of the enterprises. 5. Product identification shapes the future pattern of services. 6. Projects usually involve substantial substantial financial outlays. 7. It also initiates initiates development of basic infrastructure and environment. 8. Project commitments commitments cannot be easily reversed. 9. Project identification brings the necessary changes in society in course of time. Selection of a Product: While selecting a product, the entrepreneur is concerned with identifying a particular product that he hopes to market successfully at a reasonable profit. Therefore, the selection of the right product is very essential for being successful in the business. The right product means that which can be marketed at a reasonable profit which will induce him to continue in the business. Various factors influence the entrepreneur in selecting the right product. These decisive factors are: 1. Import Restrictions: If the items selected are banned items it would considerably weigh favourably or otherwise in the selection of the products. Thus, if the item selected falls in the category of banned import items, the entrepreneur would favour it and in the case of unrestricted import of the items, he would definitely not show his favour for selecting such a product. 2. Past Experience: If the entrepreneur himself or his partners have gathered substantial amount of experience in the manufacture and marketing of certain products, then the selection of such a product would be to their advantage. The line in which they are not experienced obviously would not be favoured much as it will entail uncertain situation very often. 3. Degree of Profitability: The selection of the product will also be based upon the degree of profitability that generally lies in the market. Such information can be obtained from the banks or the financial corporations or the market itself. The selection, therefore, will depend upon the information compiled for the particular line of product for i ts profitability. 4. Facility of Concessions: Many concessions are available from the Government for producing a product which serves as an import substitute or even essential item. Hence, if a particular product enjoys a substantial amount of incentives, concessions, liberal taxation policies, obviously the entrepreneur will select such an item to enjoy these advantages. 5. Category under which Product Falls: Some products belong to the priority industries or small-scale sector also; certain products are listed by the Government for purchasing exclusively from the small-scale sector. As a result if a particular product belongs to this category, the selection of such a product would be advantageous for the entrepreneur; therefore, these factors also must receive due conside ration before the selection of a product. 6. Market for the Product: The market for the product also plays a significant role in the selection of the product. If the product also has an export market, it widens the scope of marketing; hence such a product has its own advantages in the success of the enterprise. 7. Product License: In the case of a licensed product, obtaining of license would be a difficult proposition or the capacity required for the entire industry may also have been created fully by the Government, as a consequence the impossibility of seeking further permission for the production of such a product. A product belonging to licensed or deLicenced category may be considered before selecting the product. 8. Ancillary Unit and Service Unit Unit to the the Major Industry: Industry: If a product belongs to an ancillary unit and serves as major component for the parent industry, it provides a ready demand; hence selection of this type of product entails easy marketability.

The ultimate aim is to identify the characteristics of the project. A project idea poses a problem, on the one band and seeks a solution of the problem, on the other. In order that the solution may be an appropriate one, it is necessary to examine and appreciate the nature and extent of the problem and to clearly identify its dimensions. 15

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Checklist for Choosing Ideas of New Product A) Fit with you Skills and Experience Do you believe in the product or service? Does the need arise and you feel feel like attending it personally? Do you like and understand the potential customers? Do you have experience in this this type of business? Do the basic success factors of this business fit your skills? Are the tasks of the enterprise ones you will enjoy doing yourself? Do you enjoy working working with the people employed and supervising them? Has the idea begun to take over your imagination and spare time? Is the idea innovative to the extent of social benefit? Are you expecting a good return? • • • • • • • • • •

B) Fit with the Market Is there a real customer need? Can you get a price that gives you good margins? Would customers believe in the product coming from your company? Does the the product product or service you propose produce produce a clearly perceivable perceivable customer benefit which is significantly better than that offered by competing ways to satisfy the same basic need? Is there a cost effective way to get message and the product to the customers? • • • •

•

C) Fit with the Enterprise Is there a reason reason to believe your enterprise could be very good good at the business? Does it fit the enterprise culture? Can you imagine who might sponsor it? Does it look profitable (high margin - low investment)? Will it look to large markets and growth? • • • • •

D) What to do When Your Idea is Rejected? Frequently, as an entrepreneur, you will find that your idea has been rejected and/or is not s uccessful as envisaged. There are a few things you can do: 1. Give up and select a new idea. 2. Listen carefully, understand what is wrong, wrong, improve your idea and your your presentation, and try again. 3. Find someone else to whom you you can present your your idea by considering: - Who will will benefit most if it works and can they be a sponsor? - Who are are the potential customers and will they demand the product? product? - How can you get to the people who really care about entrepreneurial ideas?

2. DEVELOPING A PROJECT REPORT / BUSINESS PLAN

When a complex environment confronts the unemployed persons, if they possess strong orientation towards entrepreneurship and growth, the most rational decision is to start a small scale business or industry. In such an organisation, the whole areas of business in general the owner control and manage. An entrepreneur possessing the keen aptitude for setting up a small unit should formulate plan and take a number of steps to give shape to his business plans. The entrepreneur put his plans (thoughts) into action. Examples of these steps are as: 1. Product selection 2. Selection of form of ownership 3. Selection of industry site 4. Form of capital structure 5. Arrangement of raw-materials 6. Arrangement of technical know-how 7. Arrangement of marketing activities 8. Arrangement of export and imports 9. Preparation of project report 10. Obtaining necessary license 11. Obtaining power connection PREPARATION OF PROJECT REPORT

An entrepreneur may get this report done by a consultant or technical consultancy organisation. The report normally covers important items like sources of finance— long term and short term, availability of machinery and technical knowhow, sources of labour and raw materials, market potential and overall profitability. All these are systematically estimated and presented balancing the opportunities and constraints. It has not always been possible for consultants to submit reports which could be straight away relief upon by financial or licensing agencies.

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1) Technical feasibility: Technical feasibility would encompass factors such as description of the product specification to be adopted, raw materials available as per requirements, outline of “Manufacturing process” inclusive of a “flow chart process”, quality control measures, power supply, and availability of water, transport facilities and communication network. 2) Economic Viability: It essentially involves complication of demands for domestic and export markets, most appropriate installed capacity requirements, capturing a substantial share of market sale, revenue expected, and suitable price structure and so on. 3) Financial Implications: Project costs covering “Non-recurring expenses” such as land and buildings, plant and machinery, equipment, pre-operative expenses, and so on and “Recurring Expenses” such as working capital needs, raw material needs, and wages for personnel and so on will have to be worked out in detail. The probable cost of production over a period of 5 years to be assigned and expenses such as fixed and variable expenses and break even analysis should be presented. Besides, profit per month, percentage of profit on total investment and percentage of profit on expected sale should also be computed and furnished. 4) Managerial Competency: The new entrepreneur manager entering the small scale sector should devote his full attention to the new venture and should consider the product line chosen as a “Major Economic Activity”. Elements of Project Report It is essential for the entrepreneur to know the basic elements of a Project Report. They are: 1) Description of the promoters of the enterprise 2) Description of the enterprise 3) Economic viability and marketability 4) Technical feasibility 5) Financial projections 6) Profitability analysis 7) Relevant documents Characteristics or Salient Features of a Project Report The general characteristics of a project report are: 1. Market potential 2. Technical aspect of project 3. Location of Business unit 4. Description of plant and machinery 5. Testing of equipment 6. Project-cost: (a) Fixed cost, (b) (b) Running costs of Project 7. Breakeven point 8. Profitability of the business 1. Market Potential: One should select-that product which is easily demanded by the consumers, thus project should throw light on the following: (a) Demand for product in the local market. (b) The demand for the product in the national and at the international market. 2. Technical Aspect of Project: Design of product. Detailed description of the product or products to be manufactured, standard specifications, usefulness or utility of the product, end users and their approximate number, etc. should be given. Manufacturing Process/Methods/Flow Process Chart It is necessary to give a brief description of the manufacturing methods/processes, right from the stage of the raw material to that of the finished product, production envisaged in the first year, and the next five years or so, whether any phased increase is planned - these and other relevant details should be discussed, quality control and inspection methods, procedures proposed to be adopted viz., whether Indian Standard Institution (ISI) Standard proposed etc., should be presented clearly.

The project report should also contain the following details: 1. The parts/components to be manufactured in the unit itself. itself. 2. The parts/components to be farmed out or subcontracted to outside units for assembling later. 3. Maintenance methods to be followed to ensure continuity continuity and regularity in production. 4. The layout of machinery as per statutory regulations: safety, health, limitation etc. 3. Location of Business Unit: A brief description of the proposed location of the factory, the locational advantage inherent viz, cheap rent, good infrastructural facilities, like electric power, affable climate, good network of communication facilities, quick transport of raw materials and finished products, availability of skilled labor nearly, availability of government subsidy, etc. is to be given. Which of these locational advantages has weighed with the entrepreneur in the site location should also be indicated. 17

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4. Description of Plant and M achinery: It is necessary to give a brief description in the project report about the plant and machinery required for the manufacturing activity with the detailed specifications, quality, cost and availability, whether indigenous or imported, name and address of supplier, whether it is envisaged to acquire all the machinery at one point of time, in the beginning itself, some machines need not be purchased by the entrepreneur but can be hired on rental basis from others. The entrepreneur may like to get the machines on hire purchase basis. in easy installments from organizations like NSIC. Some machines may have to be imported from other countries. All these facts and details thereof should be mentioned in the project report. 5. Testing Equipment: A list of testing equipment with detailed specifications, purpose, usefulness, cost, name and address of supplier is to be given. It is also necessary to state clearly why this equipment is considered necessary for the unit. 6. Project Cost: i) Fixed Capital— Land and Building: The extent and cost of the land proposed to be acquired, total cost of the buildings to be constructed and the covered area. Future expansions if any, indicating the additional covered area, proposed to be constructed, its costs, etc. should be given. 7. Break Even point. B.EP: is that point where cost and revenues de rived are always equal. On this point there c annot be any profit, thus to earn profit one should produce more than B.E.F. 8. Profitability of the Business: The profit is to be worked out year b y year for a period of three to five years. The percentage of profit, the rate of return on investment and repayment schedule are to b e indicated. A statement of cost of p roduction and profitability may be appended to the report as given below:

DEVELOPING A BUSINESS PLAN

Whether your company is organized as a sole proprietorship small business, corporation or non-profit, a Well written business plan is considered your most important roadmap to success. The document may vary in length, but should be comprehensive and include a specific timeline: at least six months of detailed strategy, a year or two of general planning, and a vision about where the business is headed for the next five years. A business plan has to answer some critical questions about the new business venture. Is this a viable business idea? Is there there a market for this product or service? What will it take to produce and deliver the product or service (materials, resources, personnel) Who will buy it, how much, how often and how will your potential customers find out about you? Who and where is your competition? Your cash flow projections should cover both the start-up phase of your business business and on-going operations. operations. How much will it take to open the doors? And, what will it take to cover direct costs, overhead and expenses, and still clear a ‘profit?’

• • • • • •

•

A startup business or organization begins to incur costs (licenses, fees, permits, leases, telephones, computers, etc) long before it starts to generate any income. Most likely, money will be going out faster than it is coming in. This negative cash flow will continue until your business or organization is generating enough revenue to equal the amount of money going out the door. This is the business’ cash breakeven point. You, the business owner, must have some way of financing the negative cash flow of your business until you reach that cash breakeven point. If you project that your business will have an accumulated negative cash flow of $50,000 before you reach your cash breakeven point, then you need to determine how you will get the $50,000 you’ll need before you start the business. Most banks and traditional lenders do not usually lend to startup businesses. However, if you’re starting a business in a growth industry and you’ve got a solid business plan that clearly shows how your business will make money, a bank loan might be possible. The lender is looking for a solid plan for the money – how much you’ll need, how you’ll use it, and how you’ll pay it back! Your personal credit history matters and you’ll need some collateral to guarantee the loan. The loan is not a substitute for your own capital, though. You’ll need more at every stage of your business development. A comprehensive business plan should help separate your business or organization from the thousands of others seeking financing and trying to enter the marketplace. There are online templates and products that can be useful in producing a professional looking business plan in the standardized format that serious financiers expect. The importance of planning should never be overlooked. For a business to be successful and profitable, the owners and the managing directors must have a clear understanding of the firm's customers, strengths and competition. They must also have the foresight to plan for future expansion. Whether yours is a new business or an existing business in the process of expanding, money is often an issue. Taking time to create an extensive business plan provides you with insight into your business. This document can serve as a powerful financing proposal. This article will take you through the step-by-step process of developing a business plan. A business plan is very specific to each particular business. However, while each business needs a unique plan, the basic elements are the same in all business plans. To complete an effective business plan you must dedicate time to complete the plan. It requires you to be objective, critical and 18

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focused. The finished project is an operating tool to help manage your business and enable you to achieve greater success. The plan also serves as an effective communication tool for financing proposals. At the completion of this exercise, you should be able to: Describe the importance of a business plan • Identify the elements of an effective business plan • Write a business plan • I. Why Write a Business Plan? Why should a business go through the trouble of constructing a business plan? There a re five major reasons: 1. The process of putting a business plan together forces the person preparing the plan to to look at the business in an objective and critical manner. 2. It helps to focus ideas and serves as a feasibility study of the business's chances for success and growth. growth. 3. The finished report serves as an operational tool to define the company's present status and future possibilities. 4. It can help you manage the business and prepare you for success. 5. It is a strong communication tool for your your business. It defines your purpose, your competition, your management and personnel. The process of constructing a business plan can be a strong reality check. 6. The finished business plan plan provides the basis for your financing proposal.

Planning is very important if a business is to survive. By taking an objective look at your business you can identify areas of weakness and strength. You will realize needs that may have been overlooked, spot problems and nip them before they escalate, and establish plans to meet your business goals. The business plan is only useful if you use it. Ninety percent of new businesses fail in the first two years. Failure is often attributed to a lack of planning. To enhance your success, use your plan! A comprehensive, well-constructed business plan can prevent a business from a downward spiral. Finally, your business plan provides the information needed to communicate with others. This is especially true if you are seeking financing. A thorough business plan will have the information to serve as a financial proposal and should be accepted by most lenders. II. Who Should Write the Business Plan? You, the owner of the business, should write the plan. It doesn't matter if you are using the business plan to seek financial resources or to evaluate future growth, define a mission, or provide guidance for running your business -- you are the one that knows the most about the business. There are a number of software packages in addition to this article that can assist you in the formatting process: Business Plan Pro, Palo Alto Software are only two of many available. Consultants can be hired to assist you in the process of formulating a business plan, but in reality you must do a majority of the work. Only you can come up with the financial data, the purpose of your business, the key employees, and management styles to mention a few items. You may still choose to use a consultant, but realize that you will still need to do most of the work, so why not tackle the plan yourself? If you need further help in one area, then seek the assistance of the consultant. III. Business Plan Components 1. The Executive Summary The first page of your business plan should be a persuasive summary that will entice a reader to take the plan seriously and read on. The Executive Summary should follow the cover page, and not exceed two pages in l ength. The summary should include: • A brief description of the company's history • The company's objectives • A brief description of the company's products or services • The market the business will compete in • A persuasive statement as to why and how the business will succeed, discussing the business's competitive advantage Projected growth for the company and the market • A brief description of the key management team • A description of funding requirements, including a time-line and how the funds will be used • 2. The Product or Service It is important for the reader to thoroughly understand your product offering or the services you currently provide or plan on providing. However, it is important to explain this section in layman's terms to avoid confusion. Do not overwhelm the reader with technical explanations or industry jargon t hat he or she will not be familiar with. It is important to discuss the competitive advantage your product or service has over the competition. Or, if you are entering a new market, you should answer why there is a need for your offering. If appropriate, discuss any patents, copyrights and trademarks the company currently owns or has recently applied for and discuss any confidential and non-disclosure protection the company has secured. Discuss any barriers that you face in bringing the product to market, such as government regulations, competing products, high product development costs, the need for manufacturing materials, etc. Areas that should be covered in this section include: • Is your product or service already on the market or is it still in the research and development stage? If you are still in the development stage, what is the roll out strategy or timeline to bring the product to market? • 19

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What makes your product or service unique? What competitive advantage does the product or service have over its competition? Can you price the product or service competitively and still maintain a healthy profit margin?

3. The Market Investors look for management teams with a thorough knowledge of their target market. If you are launching a new product, include your marketing research data. If you have existing customers, provide an analysis of who your customers are, their purchasing habits, their buying cycle. For more information, see these companion articles: Conducting a Marketing Analysis and Prepare a Customer Profile. This section of the plan is extremely important, because if there is no need or desire for your product or service there won't be any customers. If a business has no customers, there is no business. This section of the plan should include: • A general description of your market • The niche you plan on capitalizing on and why • The size of the niche market. Include supporting documentation • A statement and supporting documentation as to why you believe there is a need for your product or offering by this market • What percentage of the market do you project you can capture? • What is the growth potential of the market? Include supporting documentation • Will your share of the market increase or decrease as the market grows? • How will you satisfy the growth of the market? • How will you price your goods or services i n the growing competitive market? 4. The Marketing Strategy Once you have identified who your market is, you'll need to explain your strategy for reaching the market and distributing your product or service. Potential investors will look at this section carefully to make sure there is a viable method to reach the target market identified at a price point that makes sense. Analyze your competitors' marketing strategies to learn how they reach the market. If their strategy is working, consider adopting a similar plan. If there is room for improvement -- work on creating an innovative plan that will position your product or service in the minds of your potential customers. The most effective marketing strategies typically integrate multiple mediums or promotional strategies to reach the market. The following are some promotional options to consider. For more in-depth information on these media, see the article called Create a Promotional Package. • TV • Radio • Print • Web • Direct mail • Trade shows • Public relations • Promotional materials • Telephone sales • One-on-one sales • Strategic alliances

If you have current samples of marketing materials or strategies that have proved successful, make sure you include them with your plan. Developing an innovative marketing plan is critical to your company's success. Investors look favorably upon creative strategies that will put your product or service in front of potential customers. Spend time developing this section. Once you have identified how you will reach the market, discuss in detail your strategy for distributing the product or service to your customers. Will you mail order, personally deliver, hire sales reps, contract with distributors or resellers, etc.? The Competition Understanding your competition's strengths and weaknesses is critical for establishing your product's or service's competitive advantage. If you find a competitor is struggling, you need to know why, so you don't make the same mistake. If your competitors are highly successful, you'll want to identify why. You'll also want to explain why there is room for another player in the market. Specific areas to address in this section a re: 1. Identify your closest competitors. Where are they located? What are their revenues? How long have they been in business? 2. Define their target market. 3. What percentage of the market do they currently have? 4. How do your your operations differ from your competition? What do they do well? Where is there room for improvement? 5. In what what ways ways is your business business superior to the competition? competition? 6. How is their business doing? Is it growing? Is it scaling back? 7. How are their operations similar to yours and how do they differ? 20

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8.

Are there certain areas of the business where the competition surpasses you? If so, what are those areas and and how do you plan on compensating?

Analyzing your competitors should be an on-going practice. Knowing your competition will allow you to become more motivated to succeed, efficient and effective in the marketplace. Operations Now that you have had an opportunity to really sell your idea and wow potential investors, the next question on their mind is how you will implement the idea. What resources and processes are necessary to get the product to market? This section of the plan should describe the manufacturing, R&D, purchasing, staffing, equipment and facilities required for your business. You'll want to provide a roll out strategy as to when these requirements need to be purchased and implemented. Your financials should reflect your roll out plan. In addition, describe the vendors you will need to build the business. Do you have current relationships or do you need to establish new ones? Who will you choose and why? The Management Team For most investors the experience and quality of the management team is the most important aspect they evaluate when investing in a company. Investors must feel confident that the management team knows its market, product and has the ability to implement the plan. In essence, your plan must communicate management's capabilities in obtaining the objectives outlined in the plan. If this area is lacking, your chances for obtaining financing are bleak. If your team lacks in a critical area, identify how you plan on compensating for the void. Whether it is additional training required or additional management staff needed, show that you know the problem exists, and provide your options for solutions. When preparing this section of the business plan you should address the following five a reas: 1. Personal history history of the principals: a. Business background background of the principals b. Past experience -- tracking successes, responsibilities responsibilities and capabilities c. Educational background background (formal (formal and informal) d. Personal data: age, current address, past addresses, interests, education, special abilities, reasons for entering into a business e. Personal financial statement with supporting documentation 2.

Work experience: a. Direct operational and managerial experience in this type of business b. Indirect managerial experiences

3.

Duties and responsibilities: a. Who will do what and why b. Organizational chart with chain of command and and listing of duties duties c. Who is responsible for the final decisions?

4.

Salaries and benefits: a. A simple statement of what what management management will will be paid by position b. Listing of bonuses in realistic terms c. Benefits (medical, life insurance, disability...)

5.

Resources available to your business: a. Insurance broker(s) b. Lawyer c. Accountant d. Consulting group(s) e. Small Business Association f. Local business information centers g. Chambers of Commerce h. Local colleges and universities i. Federal, state, and local agencies j. Board of Directors k. World Wide Web (various search engines) l. Banker

Personnel The success of a business can often be measured by its employees. Seventy percent of consumers will go elsewhere if they don't receive prompt and courteous service. You must consider the following questions in completing this section of the business plan: 1. What are your your current personnel personnel needs (full or part-time)? How many employees do you envision in the near future and then in the next three to five years? 2. What skills must your employees have? What will their job descriptions be? 3. Are the people you need readily available and how will will you attract them? 4. Will you be paying salaries or hourly wages? 5. Will there be benefits? If so, what will will they be and at what what cost? 21

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6.

Will you pay overtime?

IV. Financial Data At the heart of any business operation is the accounting system. It is important to have a certified public accountant establish your accounting system before the start of business. At times there is a tendency to do it yourself. Remember that an incredible number of businesses fail due to managerial inefficiencies. Leave it to the trained professional to help you in the area of accounting and legal matters. If your business can't afford a public accountant to establish your books, then you are undercapitalized. You need to secure additional resources before starting. One of the first steps to having a profitable business is to establish a bookkeeping system which provides you with data in the following four areas: Balance Sheet - indicates what the cash position of the business is and what the owner's equity is at a given point • (the balance sheet will show assets, li abilities and retained earnings). Break-Even Analysis - is based on the income statement and cash flow. All businesses should perform this analysis • without exceptions. A break-even analysis shows the volume of revenue from sales that are needed to balance the fixed and variable expenses. • Income Statement - also called the profit and loss statement, is used to indicate how well the company is managing its cash, by subtracting disbursements from receipts. • Cash Flow - this projects all cash receipts and disbursements. Cash flow is critical to t he survival of any business.

If the goal of your business plan is to obtain financing, you will be required to generate financial forecasts. The forecasts demonstrate the need for funds and the future value of equity investment or debt repayments. This exercise is critical in obtaining capital for your business. To obtain capital from lending institutions you must demonstrate the need for the funding and your ability to repay the loan. The forecast that you generate should cover a three to five-year period. This is a period in which realistic goals can be established and attained without much speculation. Forecasts should be broken down in monthly increments. Projections and forecasts are an integral part of your financial portfolio. Carefully and accurately state your assumptions. Honesty is the best policy! Over-optimism and over-inflation can lead to failure. For more help, review the tools Conduct a Sales Forecast and Prepare a Balance Sheet. V. Supporting Documentation You must include any documents that lend support to statements made in the body of your company's business plan. The following is a list of some items for your consideration. Please be aware that this list is not complete and may vary depending on the stage of development of your business. 1. Resumes 2. Credit information, include in Appendix 3. Quotes or Estimates 4. Letters of Intent from prospective customers 5. Letters of Support from credible people people who who know you 6. Leases or Buy/Sell Agreements 7. Legal Documents relevant to the business 8. Census/Demographic data VI. Summary The completed business plan should be bound. For internal purposes three-ring binders work well. Additions and changes can easily be placed in the binders. For the business plan that is to be circulated to a lender and/or investor, many types of appropriate folders and binders can be purchased at office supply stores. Once the business plan is completed, it should become an operational ope rational tool to measure the success of the b usiness. This plan should be updated as milestones are reached. Often companies will spend enormous time, energy and financial resources to complete this arduous task just for the purpose of obtaining additional capital. The companies that shelve the business plan after its completion and presentation to lenders lose out on the real value of this useful tool in the growth and development of small and large businesses.

3. BUSINESS FINANCING INCLUDING VENTURE CAPITAL FINANCE

Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground. g round. Raising finance for start-up requires careful planning. The entrepreneur needs to decide: How much finance is required? When and how long the the finance finance is needed for? for? What security (if any) can be provided? Whether the entrepreneur entrepreneur is prepared to give up some control (ownership) (ownership) of the start-up in return return for investment?

• • • •

The finance needs of a start-up should s hould take account of these key areas: Set-up costs (the costs that are are incurred before the business starts to trade) Starting investment in capacity (the fixed assets that the the business needs before it can begin to trade)

• •

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Working capital (the stocks needed by the business –e.g. r raw materials + allowance allowance for amounts that will be owed by customers once sales begin) Growth and development (e.g. extra investment in capacity) One way of categorising the sources of finance for a start-up is to divide them into sources which are from within the business (internal) and from outside providers (external).

INTERNAL SOURCES The main internal sources of finance for a start-up are as follows: 1. Personal sources - These are the most important sources of finance for a start-up, and we deal with them in more detail in a later section. 2. Retained profits - This is the cash that is generated by the business when it trades profitably – another important source of finance for any business, large or small. Note that retained profits can generate cash the moment trading has begun. For example, a start-up sells the first first batch of stock for £5,000 cash which which it had bought for £2,000. That means that retained profits are £3,000 which can be used to finance further expansion or to pay for other trading costs and expenses. 3. Share capital – invested by the founder. The founding entrepreneur (/s) may decide to invest in the share capital of a company, founded for the purpose of forming the start-up. This is a common method of financing a start-up. The founder provides all the share capital of the company, retaining 100% control over the business. The advantages of investing in share capital are covered in the section on business business structure. The key point to note note here is that the entrepreneur may be using a variety of personal sources to invest in the shares. Once the investment has been made, it is the company that owns the money provided. provided. The shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold. A start-up company can also raise finance by selling shares to external investors – this is covered further below.

EXTERNAL SOURCES 1. Loan capital - This can take several forms, but the most common are a bank loan or bank overdraft. A bank loan provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments. The bank will usually require that the start-up provide some security for the loan, although this security normally comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets and are generally at a lower rate of interest that a bank overdraft. However, they don’t provide much flexibility. A bank overdraft is a more short-term kind of finance which is also widely used by start-ups and small businesses. An overdraft is really a loan facility – the bank bank lets the business “owe it money” when when the bank balance goes below zero, in return for charging a high rate of interest. As a result, an overdraft is a flexible source of finance, in the sense that it is only used when needed. Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time). •

•

Two further loan-related sources of finance are worth knowing about: 2. Share capital – outside outside investors investors For a start-up, the main source of outside (external) investor in the share capital of a company is friends and family of the entrepreneur. Opinions differ on whether friends and family should be encouraged to invest in a start-up company. They may be prepared to invest substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business. Both of these are positives for the entrepreneur. However, there are pitfalls. pitfalls. Almost inevitably, tensions develop with family and friends as fellow shareholders. Business angels Business angels are the other main kind of external investor in a start-up company. Business angels are professional investors who typically invest £10k - £750k. They prefer to invest in businesses with high growth prospects. Angels tend to have made their money by b y setting up and selling their own business – in other words they have proven entrepreneurial expertise. In addition to their money, Angels often make their own skills, experience and contacts available to the company. Getting the backing of an Angel can be a significant advantage to a start-up, although although the entrepreneur needs to accept a loss of c ontrol over the business.

You will also see Venture Capital mentioned mentioned as a source of finance for start-ups. You need to be careful here. here. Venture capital is a specific kind of share investment that is made by funds managed by professional professional investors. Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over £1m, often much more). They prefer to invest in businesses which which have established themselves. Another term you may here is “private equity” – this is just another term for venture capital. A start-up is much more likely to receive investment from a business angel than a venture capitalist. PERSONAL SOURCES As mentioned earlier, most start-ups make use of the personal financial arrangements of the founder. This can be personal savings or other cash balances that have have been accumulated. It can be personal debt facilities which which are made available to the business. It can also simply be the found working for nothing! nothing! The following notes explain these in a little more detail. 23

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1. Savings and other “nest-eggs” An entrepreneur will often invest personal cash balances into a start-up. This is a cheap form of finance and it is readily available. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur – e.g. redundancy redundancy or an inheritance. Investing personal savings maximises the control the entrepreneur keeps over the business. It is also a strong signal of commitment to outside investors or providers providers of finance. Remortgaging is the most popular way way of raising loan-related capital for a start-up. The way this works works is simple. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. The use of mortgaging like this provides access to relatively low-cost low-cost finance, although the risk is that, if the business fails, then the property will be lost too. . 2. Borrowing from from friends friends and family This is also common. Friends and family who are supportive of the business idea provide provide money either directly to the entrepreneur or into the business. This can be quicker and cheaper to arrange arrange (certainly compared with a standard bank loan) and the interest and repayment terms may be more flexible than a bank loan. However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties. 3. Credit cards This is a surprisingly popular way of financing a start-up. In fact, the use of credit cards is the most common source of finance amongst small businesses. It works like this. Each month, the entrepreneur pays for various various business-related expenses on a credit card. 15 days later the credit card statement is is sent in the post and the balance is paid by the business within the credit-free period. The effect is that the business gets access to a free credit credit period of aroudn30-45 days!

VENTURE CAPITAL FINANCE

Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietor’s own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital. Private equity is a broad term that refers to any type of non-public ownership equity securities that are not listed on a public exchange. Private equity encompasses both early stage (venture capital) and later stage (buy-out, expansion) investing. In the broadest sense, it can also include mezzanine, fund of funds and secondary investing. Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.). The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the inves tors (in the form of cash or shares) that is consistent with the level of risk taken. With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding. Equity finance offers the significant advantage of having no interest charges. It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing. Given the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk. When venture capitalists invest in a business they typically require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not take day-to-day control. Rather, professional venture capitalists act as mentors and aim to provide support and advice on a range of management, sales and technical issues to assist the company to develop its full potential. p otential. Venture capital has a number of advantages over other forms of finance, such as: • •

•

•

•

It injects long term equity finance which provides a solid capital base base for future growth. growth. The venture capitalist is a business partner, sharing sharing both the the risks and rewards. Venture Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations. The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co-investments with other venture capital firms when additional rounds of financing are required. The venture capitalist may be capable of providing additional rounds of funding should it be required to to finance growth.

4. MANAGING EARLY GROWTH OF A BUSINESS, INCUBATION PROGRAM. MANAGING EARLY GROWTH Critical decisions The most exciting times of owning a business are the early days. At the start every order you take is important, and often hard earned against established vendors; the highs and lows that you go through can be very extreme. As an 24

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entrepreneur, the most attractive word in your vocabulary is growth. You want high growth because in your mind, that denotes a successful business. It makes perfect sense – if you were unsuccessful you definitely wouldn’t grow… so the opposite must be true! 1. To hire or not not - One pitfall (or opportunity) in continuous growth is that at some point you will run out of capacity to handle everything personally, so you have to decide whether this is an ongoing trend or just a spike. Do you take on people to help or do you ‘get ‘ get through’ the blip and continue to manage m anage by yourself? 2. Choosing where to focus - Often a fast-growing business has more profitable options to pursue than it has resources and a decision has to be made as to which options should be pursued. One way to determine which avenues offer the best opportunities for success are to select those with the highest return on investment (ROI). 3. Balancing the books - The other big issue facing a fast-growing fast-growing business is managing cashflow. As you grow, you will almost automatically have a lag between spending money and generating funds to put back into the business, and the faster the growth, the bigger the gap. Ensuring that you have the cash to back your growth is a major challenge for many new businesses, but it is something that you ignore at your peril.

Done right, starting your own business is as good as it gets, but be aware that the highs are very high and the lows. Keep an eye on your cashflow, manage your resources and enjoy what you do. KEY AREAS OF FOCUS 1. Market Focus What makes a venture succeed is the ability to identify emerging attractive markets and to seize on unmet, unserved customer needs. Successful business is ruled not by the founders' decisions, but by the marketplace. And the marketplace, in turn, is ruled by "fears and passions". People will only buy what they want to buy, or are afraid not to buy. And these "fears and passions" change every day. "Selling is not about content, it is about fit5". The analysis of the market potential and search for the right fit separates the inventor from the entrepreneur. Have the market researched, and develop an effective marketing, advertising and selling strategy. Build a prototype and test market your product or service; identify the price at what you could sell it. Hot markets do not last forever. So, be prepared to adapt quickly to the market changes. The market focus means flexibility: watch the market dynamics, spot what has gone wrong, and move quickly to turn market changes and your errors into opportunities. Creating customers and better servicing them is the true purpose of enterprise. In today's highly competitive world with many players, "you need to be able to articulate your competitive advantage in a matter of minutes, if not seconds. If you cannot, you will lose your prospective customer's attention, and the business4". Your effective positioning strategy will help you to get seen and heard in the overcrowded marketplace. 2. Management Focus It's impossible to grow a successful business as a one-person operation. Sooner or later, you will have to share responsibility with one or more partners. Thomas Alva Edison, an inventive genius who took out more than 1000 patents, started several great companies. However, every one of them collapsed once it got to middle size, and was saved only by booting Edison himself out and replacing him with professional management. You cannot achieve success with a Class A idea and Class B management. Turning a great idea into a great business requires professional managers and market experts. In case you c annot afford top management, you would need to build your management team from within, developing their own management skills. The core team should be picked very carefully because its business and interpersonal style becomes the foundation of the company's culture and grows the value system. They should have an impressive track record, skills, and depth of experience in the areas most important to the sustainable competitive advantage of the company. Don't settle for a few average employees - "if you want a track team to win the high jump, you find one person who can jump seven feet, not seven people who can jump one foot." When building your management team, remember also that top-quality people often emerge from bankruptcies. Prior bankruptcy experience is valuable - failure has its rewards. It is often better to hire a leader who learned from mistakes than it is to hire someone who was just lucky. You would also need to learn how to do less and manage more through through decentralizing, organizing groups and delegating responsibilities. Learning to distinguish between the core activities, that cannot be delegated, from non-core activities, that must be delegated, is what often separates successful entrepreneurs from business failures. The core activities that must be performed by the entrepreneur - because no one else can perform them as well as the company founder - are those that give the company its competitive advantage over other companies in the industry. 3. Financial Focus Venture financing (see slide show) usually requires several rounds that, at different funding stages, may involve founders, family, friends, angel investors, venture capitalists, commercial banks, non-financial corporations, and stock markets. Financial focus requires entrepreneurs to change their minds. Focus on profits is a wrong one for new ventures. It should rather come last than first. Entrepreneurs should rather focus on cashflow, capital and controls in the new venture's development. "The profit figures are fiction - good for 12 or 18 months, after which they evaporate", says Peter Drucker. He also stresses that financial foresight demands more thought than time. Strategic Focus There are several types of strategies followed by successful companies. A careful study in this area will help you to sort out the kind of your enterprise strategy that could be used best. Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis is to be carried out to define your company's sustainable competitive advantage areas and develop an appropriate business strategy to capitalize on it. 25

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Strengths and weaknesses of the venture's major competitors need also to be assessed. Having that exercise completed, you must position your company and its first products against its prime competitors. Positioning is very hard work, and you may need to call for help from a start-up consultant, a marketing expert, or an experienced business executive. Your strategic thinking, vision, and business strategy development exercise need to be supported by a set of analytical techniques. Michael Porter, a professor at the Harvard Business School, points out the five major elements of strategic business planning: an analysis of the industry in which the firm competes sources of competitive advantage an analysis of the existing and potential competitors who might affect the company an assessment of the company's competitive position selection or ratification of strategy, built on competitive advantage, advantage, and how it can be sustained. • • • • •

The currently dominant view of business strategy - resource-based theory - is based on the concept of economic rent and the view of the company as a collection of capabilities. This view of strategy has a coherence and integrative role that places it well ahead of other mechanisms of strategic decision making.7 4. Competing Focus No business can be successful unless it places a top priority on outdoing its competitors. Business has always been a battle. Companies which don't do their utmost to outcompete their rivals are likely go out of business sooner or later. You need to establish and maintain a position of competitive excellence and master your competitive strategies if your business is to survive. To achieve this all-important goal, goal, you need to master the seven skills of competing: Know yourself Know your customer Outsmart your competition Make your staff your evangelists Learn to enjoy solving customer's problems When it comes to marketing - think first, spend later Learn the tactics of competitive warfare • • • • • • •

INCUBATION PROGRAM

Business incubators are programs designed to support the successful development of entrepreneurial companies through an array of business support resources and services, developed and orchestrated by incubator management and offered both in the incubator and through its network of contacts. Incubators vary in the way they deliver their services, in their organizational structure, and in the types of clients they serve. Successful completion of a business incubation program increases the likelihood that a startup company will stay in business for the long term: older studies found 87% of incubator graduates stayed in business, in contrast to 44% of all firms. Incubators differ from research and technology parks in their dedication to startup and early-stage companies. Research and technology parks, on the other hand, tend to be large-scale projects that house everything from corporate, government or university labs to very small companies. Most research and technology parks do not offer business assistance services, which are the hallmark of a business incubation program. However, many research and technology parks house incubation programs. History The formal concept of business incubation began in the USA in 1959. Incubation expanded in the U.S. in the 1980s and spread to the UK and Europe through various related forms (e.g. innovation centres, pépinières d’entreprises, technopoles/science parks). The U.S.-based National Business Incubation Association estimates that there are about 7,000 incubators worldwide. As of October 2006, there were more than 1,400 incubators in North America, up from only 12 in 1980. Her Majesty's Treasury identified around 25 incubation environments in the UK in 1997; by 2005, UKBI identified around 270 incubation environments across the country. A study funded by the European Commission in 2002 identified around 900 incubation environments in Western Europe. Incubation activity has not been limited to developed countries; incubation environments are now being implemented in developing countries and raising interest for financial support from organisations such as UNIDO and the World Bank. On November 3, 2010, New York City broke ground on its sixth business incubator and the first in the Bronx called the Sunshine Bronx Business Incubator which is a joint venture between the New York City Economic Development Corporation and Sunshine Suites. Incubators are going through a renaissance as of 2011. New experiments like Virtual Business Incubators are bringing the resources of entrepreneurship hubs like Silicon Valley to remote l ocations all over the world. The incubation process Most common incubator services: Help with business basics Networking activities Marketing assistance High-speed Internet access Help with accounting/financial management Access to bank loans, loan funds and guarantee programs Help with presentation skills Links to higher education resources Links to strategic partners • • • • • • • • •

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ENTREPRENEURSHIP MANAGEMENT • • • • • • • •

Access to angel investors or venture capital Comprehensive business training programs Advisory boards and mentors Management team identification Help with business etiquette Technology commercialization assistance Help with regulatory compliance Intellectual property management

Unlike many business assistance programs, business incubators do not serve any and all companies. Entrepreneurs who wish to enter a business incubation program must apply for admission. Acceptance criteria vary from program to program, but in general only those with feasible business ideas and a workable business plan are admitted. It is this factor that makes it difficult to compare the success rates of incubated companies against general business survival statistics. Although most incubators offer their clients office space and shared administrative services, the heart of a true business incubation program is the services i t provides to startup companies. More than half of incubation programs surveyed by the National Business Incubation Association in 2006 reported that they also served affiliate or virtual clients. These companies do not reside in the incubator facility. Affiliate clients may be home-based businesses or early-stage companies that have their own premises but can benefit from incubator services. Virtual clients may be too remote from an incubation facility to participate on site, and so receive counseling and other assistance electronically. The amount of time a company spends in an incubation program can vary widely depending on a number of factors, including the type of business and the entrepreneur's level of business expertise. Life science and other firms with long research and development c ycles require more time in an incubation program than manufacturing or service companies that can immediately produce and bring a product or service to market. On average, incubator clients spend 33 months in a program.[6] Many incubation programs set graduation requirements by development benchmarks, such as company revenues or staffing levels, rather than time in the program. 5. NEW VENTURE EXPANSION - STRATEGIES AND ISSUES STRATEGIES TO GROW YOUR BUSINESS When you first started your business, you probably did a lot of research. You may have sought help from advisors; you may have gotten information from books, magazines and other readily available sources. You invested a lot-in terms of money, time and sweat equity-to get your business off the ground. So...now what? There are numerous possibilities, 10 of which we'll outline here. Choosing the proper one (or ones) for your business will depend on the type of business you own, your available resources, and how much money, time and sweat equity you're willing to invest all over again. If you're ready to grow, we're ready to help. 1. Open another location.

This might not be your best choice for business expansion, but it's listed first here because that's what often comes to mind first for so many entrepreneurs considering expansion. "Physical expansion isn't always the best growth answer without careful research, planning and number-planning," says small-business speaker, writer and consultant Frances McGuckin , who offers the following tips for anyone considering another location: Make sure you're maintaining a consistent bottom-line bottom-line profit and that you've shown shown steady growth over the past few years. Look at the trends, both economic and consumer, for indications on your company's staying power. Make sure your administrative administrative systems and management team are extraordinary-you'll need them to get a new location up and running. Prepare a complete business plan for a new location. Determine where and how you'll obtain financing. Choose your location based on what's what's best for your business, not your wallet. wallet.

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2. Offer your business as a franchise or business opportunity.

Bette Fetter, founder and owner of Young Rembrandts , an Elgin, Illinois-based drawing program for children, waited 10 years to begin franchising her concept in 2001-but for Fetter and her husband, Bill, the timing was perfect. Raising four young children and keeping the business local was enough for the couple until their children grew older and they decided it was time to expand nationally. "We chose franchising as the vehicle for expansion because we wanted an operating system that would allow ownership on the part of the staff operating Young Rembrandts locations in markets outside our home territory," says Bette. "When people have a vested interest in their work, they enjoy it more, bring more to the table and are more successful overall. Franchising is a perfect system to accomplish those goals." Streamlining their internal systems and marketing in nearby states helped the couple bring in their first few franchisees. With seven units and some time under their belt, they then signed on with two national franchise broker firms. Now with 30 franchisees nationwide, they're staying true to their vision of steady growth. "Before we began franchising, we were teaching 2,500 children in the Chicago market," says Bette. "Today we teach more than 9,000 children nationwide and that number will continue to grow dramatically as we grow our franchise system." Bette advises networking within the franchise community-become a member of the International Franchise Association and find a good franchise attorney as well as a mentor who's been through the franchise process. "You need to be open to growing and expanding your vision," Bette says, "but at the same time, be a strong leader who knows how to keep the key vision in focus at all times." 27

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3. License your product This can be an effective, low-cost growth medium, particularly if you have a service product or branded product, notes Larry Bennett, director of the Larry Friedman International Center for Entrepreneurship at Johnson & Wales University in Providence, Rhode Island. "You can receive upfront monies and royalties from the continued sales or use of your software, name brand, etc.-if it's successful," he says. Licensing also minimizes your risk and is low cost in comparison to the price of starting your own company to produce and sell your brand or product. To find a licensing partner, start by researching companies that provide products or services similar to yours. "[But] before you set up a meeting or contact any company, find a competent attorney who specializes in intellectual property rights," advises Bennett. "This is the best way to minimize the risk of l osing control of your service or product." 4. Form an alliance Aligning yourself with a similar type of business can be a powerful way to expand quickly. Last spring, Jim Labadie purchased a CD seminar set from a fellow fitness professional, Ryan Lee, on how to make and sell fitness information products. It was a move that proved lucrative for Labadie, who at the time was running an upscale personal training firm he'd founded in 2001. "What I learned on [Lee's] CDs allowed me to develop my products and form alliances within the industry," says Labadie, who now teaches business skills to fitness professionals via a series of products he created and sells on his Web site. Seeing that Labadie had created some well-received products of his own, Lee agreed to promote Labadie's product to his long contact list of personal trainers. "That resulted in a decent amount of sales," says Labadiein fact, he's increased sales 500 percent since he created and started selling the products in 2001. "Plus, there have been other similar alliances I've formed with other trainers and Web sites that sell my products for a commission." If the thought of shelling out commissions or any of your own money for the sake of an alliance makes you uncomfortable, Labadie advises looking at the big picture: "If you want to keep all the money to yourself, you're really shooting yourself in the foot," says the Tampa, Florida, entrepreneur. "You need to align with other businesses that already have lists of prospective customers. It's the fastest way to success." 5. Diversify Small-business consultant McGuckin offers several ideas fo r diversifying your product or service line: Sell complementary products or services Teach adult education or other types of classes Import or export yours or others' products Become a paid speaker or columnist "Diversifying is an excellent growth strategy, as it allows you to have multiple streams of income that can often fill seasonal voids and, of course, increase sales and profit margins," says McGuckin, who diversified from an accounting, tax and consulting business to speaking, s peaking, writing and publishing. Diversifying was always in the works for Darien, Connecticut, entrepreneurs Rebecca Cutler and Jennifer Krane, creators of the "raising a racquet" line of maternity tenniswear , launched in 2002. "We had always planned to expand into other 'thematic' kits, consistent with our philosophies of versatility, style, health and fun," says Cutler. "Once we'd begun to establish a loyal wholesale customer base and achieve some retail brand recognition, we then broadened our product base with two line extensions, 'raising a racquet golf' and 'raising a racquet yoga.'" Rolling out the new lines last year allowed the partners' current retail outlets to carry more of their inventory. "It also broadened our target audience and increased our presence in the marketplace, giving us the credibility to approach much larger retailers," notes Cutler, who expects to double their 2003 sales this year and further diversify the company's product lines. "As proof, we've recently been selected by Bloomingdale's, A Pea in t he Pod and Mimi Maternity." • • • •

6. Target other markets. Your current market is serving you well. Are there others? You bet. "My other markets are what make money for me," says McGuckin. Electronic and foreign rights, entrepreneurship programs, speaking events and software offerings produce multiple revenue streams for McGuckin, from multiple markets. "If your consumer market ranges from teenagers to college students, think about where these people spend most of their time," says McGuckin. "Could you introduce your business to schools, clubs or colleges? You could offer discounts to special-interest clubs or donate part of [your profits] to schools and associations." Baby boomers, elderly folks, teens, tweens...let your imagination take you where you need to be. Then take your product to the markets that need it. 7. Win a government contract "The best way for a small business to grow is to have the government as a customer. The government is the largest buyer of goods and services. Working with your local government offices will help you determine the types of contracts available to you. A fair amount of patience is required in working to secure most government contracts. Requests for proposals usually require a significant amount of groundwork and research. If you're not prepared to take the time to fully comply with government terms and conditions, you'll only be wasting your time. This might sound like a lot of work, but it could be worth it: The good part about winning government contracts is that once you've jumped through the hoops and win a bid, you're generally not subjec t to the level of external competition of the outside marketplaces. 8. Merge with or acquire another business In 1996, when Mark Fasciano founded FatWire , a Mineola, New York, content management Software Company, he certainly couldn't have predicted what would happen a few years later. Just as FatWire was gaining market momentum, the tech downturn hit hard. "We were unable to generate the growth needed to maximize the strategic partnerships we'd established with key industry players," Fasciano says. "During this tech 'winter,' we concentrated on survival and servicing our clients, while searching for an opportunity to jump-start the company's growth. That growth opportunity came last year at the expense of one of our competitors." Scooping up the bankrupt company, divine Inc., from the 28

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auction block was the easy part; then came the integration of the two companies. "The process was intense and exhausting," says Fasciano, who notes four keys to their success: Customer retention. "I personally spoke with 150 customers within the first few weeks of consummating the deal, and I met with 45 clients around the globe in the first six months," notes Fasciano. They've retained 95 percent of the divine Inc. customer base. Staff retention. Fasciano rehired the best and brightest of divine's staff. Melding technologies. "One of the reasons I was so confident about this acquisition was the two product architectures were very similar," says Fasciano. This allowed for a smooth integration of the two technologies. Focus. "Maybe the biggest reason this acquisition has worked so well is the focus that FatWire has brought to a neglected product," says Fasciano. •

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FatWire's acquisition of divine in 2003 grew its customer base from 50 to 400, and the company grew 150 percent, from $6 million to $15 million. Fasciano expects no less than $25 million in sales this year. 9. Expand globally Not only did FatWire grow in terms of customers and sales, it also experienced global growth simply as a result of integrating the best of the divine and FatWire technologies. "FatWire finally has international reach-we've established new offices in the United Kingdom, France, Italy, Spain, Holland, Germany, China, Japan and Singapore," says Fasciano. This increased market share is what will allow FatWire to realize sustained growth. But you don't need to acquire another business to expand globally. You just need to prime your offering for an international market the way FatWire was primed following the integration of its technologies with divine's. You'll also need a foreign distributor who'll carry an inventory of your product and resell it in their domestic markets. You can locate foreign distributors by scouring your city or state for a foreign company with a U.S. representative. Trade groups, foreign chambers of commerce in the United States, and branches of American chambers of commerce in foreign countries are also good places to find distributors you can work with. 10. Expand to the Internet "Bill Gates said that by the end of 2002, there will be only two kinds of businesses: those with an Internet presence, and those with no business at all," notes Sally Falkow a Pasadena, California, Web content strategist. "Perhaps this is overstating the case, but an effective Web site is becoming an integral part of business today." Landing your Web site in search engine results is key-more than 80 percent of traffic comes via search engines, according to Falkow. "As there are now more than 4 billion Web pages and traffic on the Internet doubles every 100 days, making your Web site visible is vital," she says. "You need every weapon you can get." Design and programming are also important, but it's your content that will draw a visitor into your site and get them to stay. Says Falkow, "Putting together a content strategy based on user behavior, measuring and tracking visitor click streams, and writing the content based on researched keywords will get you excellent search results and meet the needs of your visi tors."

NEW VENTURE EXPANSION – ISSUES

The development of a comprehensive, systematically derived classification scheme for the types of problems encountered by emerging entrepreneurial companies would be of both theoretical and practical utility. Such a classification scheme might serve as a starting point for the conceptualization and systematic study of distinct problem types. The development of a comprehensive classification scheme for the types of problems encountered by new organizations may also provide a basis for linking these problem types to problem-solving activities, and ultimately to organizational performance (Cowan, 1988). For example, the classes could provide a focus for future research studying the relationship between certain problem types and problem formulation and subsequent information-processing activities. The initial classification framework may have implications for resolution methods, as it may influence the perceived problem solutions by directing and controlling attention and diagnostic activity (March & Simon, 1958; Volkema, 1986). Several classification frameworks have been proposed for the categorization of organizational problem types. For example, over 30 years ago, Dearborn and Simon (1958) classified organizational problems into three general types: 1) Sales, marketing, or distribution; 2) Clarifying the organization; and 3) Human relations, employee relations, or teamwork. More recently, Walsh (1988) proposed that organizational problems can be grouped into five general categories: 1) accounting-finance; 2) Human relations; 3) Marketing; 4) Internal management; and 5) External management. Both of the above studies, however, were narrowly focused on the role of selective perception, or the extent to which affiliation with a specific department in an organization influences the types of problems identified. In Dearborn and Simon's (1958) and Walsh's (1988) studies, managers were given only one hypothetical company case and were asked to identify the problem(s) facing that company. Thus, the research methodology employed in these studies quite likely limited the number and range of problems initially identified. The relatively small sample of managers employed in the 29

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Dearborn and Simon study may also have limited the range of problems identified. The study by Walsh employed a larger sample that consisted of 121 middle- and upper-level managers that had been selected by their organizations to attend a master's degree program at a large university. But again, the range of problems initially identified may have been limited by the one hypothetical case presented to the participants (the case portrayed a company with a mature product line that was specifically challenged by the advent of private-label and generic competition). One might also question whether the fact that all of the managers in Walsh's study were enrolled in the same executive master's program (and hence, subject to the same speciali zed training) may have limited the range of their problem responses. A recent study by Cowan (1990) found some partial support for the frameworks proposed by both Dearborn and Simon (1958) and Walsh (1988). In this study, 59 middle- and upper-level managers who were all enrolled in a two-year MBA program at a private Midwestern university were asked to write down an example of an organizational problem they had experienced recently. Thus, Cowan's study did not limit managers to identifying problems associated with a single case or company. There may have been some bias due to the fact that all of the managers were exposed to similar training in the MBA program, however. Additionally, the demand characteristics associated with a university classroom setting may be cause for concern in the above studies by Dearborn and Simon (1958), Walsh (1988), and Cowan (1990). Asking CEOs in the field to nominate significant organizational problems may result in a different set of initial problem types from those nominated by functional managers attending an MBA class. Additionally, the above problem classification studies were not focused on the types of problems encountered by new or rapidly growing entrepreneurial entities. Some information regarding the types of problems encountered by emerging organizations can be drawn from studies of business failures and studies of problems facing rapidly growing firms. For example, Dun and Bradstreet (1987) collected data on new business ventures that failed, and listed the following as major reasons for failure: 1) Inadequate market knowledge; 2) Poor product performance; 3) Ineffective marketing and sales efforts; 4) Inadequate awareness of competitive pressures; 5) Rapid product obsolescence; 6) Poor timing for the start of a b usiness venture; and 7) Financial difficulties. The method employed to arrive at these classes of reasons, however, was not s pecified.

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ENTREPRENEURSHIP MANAGEMENT - MMS Notes (Anant Dhuri).pdf

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