Entrepreneurship (overview)

ENTRERPRENEURSHIP & ITS IMPORTANCE:

The term entrepreneur comes from the French and translates "between-taker" or "go-between." In early period the money person (forerunner of the capitalist) entered into a contract with the go-between to sell his goods. In the 18th century the person with capital was differentiated from the one who needed capital. In the late 19th and early 20th centuries, entrepreneurs were viewed mostly from an economic perspective. The entrepreneur "contributes his own initiative, skill and ingenuity in planning, organizing and administering the enterprise, assuming the chance of loss and gain."

DEFINITION OF ENTERPRENEURSHIP:

The concept of entrepreneurship from a personal perspective has been explored in this century.

 Entrepreneurship is the dynamic process of creating incremental wealth. This wealth is created by individuals who assume the major risks in terms of equity, time, and/or career commitment of providing value for some product or service. The product or service itself may or may not be new or unique but value must somehow be infused by the entrepreneurship by securing and allocation the necessary skills and resources.

Entrepreneurship is the dynamic process of creating incremental wealth. Our definition of entrepreneurship involves four aspects:

1. Entrepreneurship involves the creation process.

2. It requires the devotion of the necessary time and effort.

3. It involves assuming the necessary risks.

4. The rewards of being an entrepreneur are independence, personal satisfaction, and monetary reward.

For the person who actually starts his or her own business there is a high failure rate due to poor sales, intense competition, lack of capital or lack of managerial ability.

Many individuals have difficulty bringing their ideas to the market and creating new venture. Yet

entrepreneurship and the actual entrepreneurial decisions have resulted in several million new businesses being started throughout the world. Although no one knows the exact number in the United States. Indeed, millions of ventures are formed despite recession, inflation, high interest rates, and lack of infrastructure, economic uncertainty and the high probability of failure. The entrepreneurial decision process entails a movement from something to something— a movement from a present life style to forming a new enterprise.

To leave a present live-style to create something new comes from a negative force--disruption. Many

companies are formed by people who have retired, moved, or been fired. Another cause of disruption is completing an educational degree. The decision to start a new company occurs when an individual perceives that forming a new enterprise is both desirable and possible.

Characteristics of successful Entrepreneurship:

1)      Self confident and optimistic

2) Able to take calculated risk

3) Respond positively to challenges

4) Flexible and able to adapt

5) Knowledge and of markets

6) Able to get along well with others

7) Independent minded

8) Versatile knowledge

9) Energetic and diligent

10) Creative, need to achieve

11) Dynamic leader

12) Responsive to suggestions

13) Take initiatives

14) Resourceful and preserving

15) Perceptive with foresight.

16) Responsive to criticism.

ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

The role of entrepreneurship in economic development involves initiating change in the structure of business and society. One theory of economic growth depicts innovation as the key, not only in developing new products, but also in stimulating investment interest. The new capital created expands the capacity for growth (supply side), and new spending utilizes the new capacity and output (demand side.)

In spite of the importance of investment and innovation in the economic development of an area, there is still a lack of understanding of few factors which are as follows:

* The product-evolution process is the process through which innovation develops and commercializes through entrepreneurial activity, which in turn stimulates economic growth. It begins with knowledge in the base technology and ends with products or services available in the marketplace.

* The critical point in the process is the intersection of knowledge and a recognized social need, called the iterative synthesis. This point often fails to evolve into a marketable innovation.

* Most innovations introduced in the market are ordinary innovations, with little uniqueness.

* Technological innovations refer to new products with significant technological advancements.

* Breakthrough innovations mean the development of new products with some technological change.

Regardless of the level of uniqueness or technology, each innovation evolves into and develops towards commercialization through one of three mechanisms: the government, entrepreneurship, or entrepreneurship. Entrepreneurship has assisted in revitalizing areas of the inner city. Individuals in inner city areas can relate to the concept and see it as a possibility for changing their present situation.

THE FUTURE OF ENTREPRENEURSHIP

In spite of the differences in definition of entrepreneurship, there are common aspects such as risk taking, creativity, independence, and rewards. Entrepreneurship is currently being embraced by educational institutions, governments, societies, and corporations. Schools are increasing their emphasis on entrepreneurship in terms of courses and academic research. In Europe many universities have started programs in entrepreneurship.

There has also been an increase in academic research, endowed chairs and centers of entrepreneurial activity.

Governments have also promoted the growth of entrepreneurship. Individuals are encouraged to form new businesses and provided tax incentives, roads, and a communications system to facilitate this creative process. Some state governments are developing strategies for fostering entrepreneurial activity.

The venture capital industry has benefited from lowering of capital gains tax rates and more relaxed rules regarding pension fund investment. Society’s support of entrepreneurship is critical in providing motivation and public support. The media has played a powerful role in developing public support. Media coverage uplifts the image of the entrepreneur and growth companies. Articles have appeared in newspapers such as New York Times, The Wall Street Journal, and the Washington Post. Business magazines such as Barron’s, Business Week, Forbes, and Fortune have provided coverage. Magazines such as Black Enterprise, Entrepreneur, Inc., and Venture focus on issues of the entrepreneurial process. Television on both a national and local level has highlighted entrepreneurship.

Large companies will continue to have a special interest in Entrepreneurship in the future. The largest 15 companies account for over 20 percent of the total U.S. research and development. Other companies will create more new businesses through Entrepreneurship.

ENTREPRENEURIAL PROCESS

The entrepreneurial process involves finding, evaluating, and developing an opportunity by overcoming the strong forces that resist the creation of something new.

Phase 1: Identifying and Evaluating the Opportunity

Most good business opportunities result from an entrepreneur being alert to possibilities. Some sources are often fruitful, including consumers and business associates. Channel members of the distribution system-retailers, wholesalers or manufacturer’s reps-are also helpful. Technically-oriented individuals often identify business opportunities when working on other projects. Each opportunity must be carefully screened and evaluated-this is the most critical element of the entrepreneurial process.

a. The evaluation process involves looking at b. The creation and length of the opportunity

c. Its real and perceived value                       d. Its risks and return.

e. It’s fit with the skills and goals of the entrepreneur

f. Its differential advantage in its competitive environment.

It is important to understand the cause of the opportunity, as the resulting opportunity may have a different market size and time dimension. The market size and the length of the window of opportunity are the primarily bases for determining risks and rewards. The risks reflect the market, competition, technology, and amount of capital involved. The amount of capital forms the basis for the return and rewards. The return and reward of the present opportunity needs to be viewed in light of any possible subsequent opportunities as well. The opportunity must fit the personal skills and goals of the entrepreneur. The entrepreneur must be able to put forth the necessary time and effort required for the venture to succeed. One must believe in the opportunity enough to make the necessary sacrifices.

Opportunity analysis, or an opportunity assessment plan, should focus on the opportunity and provide the basis to make the decision, including:

a. A description of the product or service b. An assessment of the opportunity

c. Assessment of the entrepreneur and the team d. Specifications of all the activities and resources needed e. The source of capital to finance the initial venture

The most difficult aspect of opportunity analysis is the assessment of the opportunity.

Phase 2: Develop a Business Plan

A good business plan must be developed in order to exploit the opportunity defined. A good business plan is important in developing the opportunity and in determining the resources required, obtaining those resources and successfully managing the venture.

Phase 3: Determine the Resources Required.

Assessing the resources needed starts with an appraisal of the entrepreneur’s present resources. Any resources that are critical must be distinguished from those that are just helpful. Care must be taken not to underestimate the amount and variety of resources needed. Acquiring needed resources, while giving up as little control as possible, is difficult. The entrepreneur should try to maintain as large an ownership position as possible, particularly in the start-up stage. As the business develops, more funds will probably be needed, requiring more ownership be relinquished.

Alternative resource suppliers should be identified, along with their needs and desires, in order to structure a deal with the lowest cost and loss of control.

Phase 4: Manage the Enterprise.

The entrepreneur must employ these resources through implementation of the business plan. This involves implementing a management structure, as well as identifying a control system.

ENTREPRENEURIAL LEADERSHIP CHARACTERISTICS

There are certain individual characteristics needed for a person to be successful Entrepreneurs, including:

1. Understanding the environment 2. Being visionary and flexible 3. Creating management options

4. Encourage teamwork while employing a multi-disciplined approach

5. Encouraging open discussion 6. Building a coalition of supporters, and persisting

An Entrepreneur needs to understand all aspects of the environment. Part of this ability is reflected in individual’s level of creativity. Creativity tends to decrease with age and education. The individual must be creative and have a broad understanding of the internal and external environments of the corporation The Entrepreneurial person must be a visionary leader-a person who dreams great dreams. Leadership is the ability to dream great things and communicate them in a way that people say yes to being a part of the dream. To establish a successful new venture, the Entrepreneurial leader must have a dream and overcome all obstacles to achieve it.

The third necessary characteristic is that the Entrepreneur must be flexible and create management options. An Entrepreneur is open to and encourages change. By challenging the beliefs and assumptions of the corporation, an Entrepreneur can create something new in the organization structure. He or she must possess the ability to encourage teamwork and use a multi-disciplined approach. Every new company formation requires a broad range of business skills. The Entrepreneur must be a good diplomat to minimize disruption. Open discussion must be encouraged to develop a good team for creating something new. Many corporate managers have forgotten that frank, open discussion is part of the learning process. A successful venture can be formed only when the team feels the freedom to disagree and to critique an idea. The degree of openness among the team depends on the degree of openness of the Entrepreneur. Openness leads to a strong coalition of supporters and encouragers.

The Entrepreneur must encourage each team member, particularly during hard times. A good Entrepreneur makes everyone a hero. Only through persistence will a new venture be created and successful commercialization result.

ESTABLISHING ENTREPRENEURSHIP IN THE ORGANIZATION

To establish an Entrepreneurial environment, the organization must implement a procedure. This can be done internally, but it is easier to use an outsider to facilitate the process. This is particularly true when the environment is very traditional. There are some steps involved in it.

Step 1: The first step is to secure a commitment to entrepreneurship in the organization by top, upper, and middle management. Without top management commitment, the organization will never be able to make the necessary changes. Once top management has committed to entrepreneurship for a sufficient length of time, the concept is introduced throughout the organization. This is effectively accomplished through seminars. General guidelines need to be established for Entrepreneurial venture development. Next, Entrepreneurial leaders need to be identified, selected, and trained.

Step 2: Ideas and general interest areas should be identified, along with the amount of risk money that is available. The overall expectations and target results should be established, specifying time frame, profitability requirements, and impact of the organization. A mentor/sponsor system needs to be established.

Step 3: A company needs to use technology to make itself faster and more flexible. Technology has allowed small companies to act like they are big ones. Large companies can use technology to make them responsive and flexible.

Step 4: The organization can use a group of managers to train and share their experiences with other members. These sessions should be conducted one day per month for a specified period of time. Information about entrepreneurship and about the company’s specific activities should be well publicized.

Step 5: The organization needs to develop ways to get closer to its customers by tapping the data base, hiring from smaller rivals, and helping the retailer.

Step 6: An organization must learn to be more productive with fewer resources. With middle management cutbacks, more control has been given to lower levels of the organization. The span of control should be increased.

Step 7: The organization needs to establish a strong support structure. Because they do not immediately affect the bottom line, Entrepreneurial activities can be overlooked and receive little funding. These ventures require flexible, innovative behavior, with the Entrepreneurs having total authority over expenditures and access to funds.

Step 8: The support must involve tying the rewards to the performance of the Entrepreneurial unit. This encourages team members to work harder and compete more effectively. The equity portion of the compensation is particularly difficult to handle.

Step 9: The organization needs to implement an evaluation system that allows successful units to expand and unsuccessful ones to be eliminated.

ENTREPRENEURIAL BACKGROUND AND CHARACTERISTICS

Education: Education appears important in the upbringing of the entrepreneur, in the level of education obtained and in playing a major role in coping with problems. Although formal education is not necessary for starting a new business, it does provide a good background. In education, female entrepreneurs previously experienced some disadvantage, with few having degrees in engineering, science, or math. The ability to deal with people and communicate clearly in written and spoken work is also important.

Personal Values: Studies have failed to indicate that entrepreneurs can be differentiated on personal valued from managers, unsuccessful entrepreneurs, or the general public. Leadership, support, aggression, benevolence, conformity, creativity, veracity, and resource seeking may also be important. A successful entrepreneur is frequently characterized as a winner; winning may be a prerequisite for his or her actually becoming one.

Age: Entrepreneurial age is the age of the entrepreneur reflected in the experience. Entrepreneurial experience is one of the best predictors of success. In chronological age, most entrepreneurs start their careers between ages 22 and 55. Earlier starts in an entrepreneurial career seem to be better than later ones. Generally, male entrepreneurs start their first venture in their early 30s, while women tend to do so in their middle 30s.

Work History: Dissatisfaction with one’s job often motivates the launching of a new venture. Previous technical and industry experience is also important once the decision to start a business is made. Experience in the following areas is particularly important: financing; product or service development; manufacturing; development of distribution channels; and preparation of a marketing plan. As the venture becomes established, managerial experience and skills become more important. Entrepreneurial experience becomes increasingly important as the complexity of the venture increases.

MOTIVATION

While motivations may vary, the reason cited most often for becoming an entrepreneur independence-not wants to work for anyone else. Other motivating factors differ between male and female entrepreneurs. Money is the second reason for men’s starting a venture. Job satisfaction, achievement, opportunity, and money are the second order reasons for women.

INTERNATIONAL VERSUS DOMESTIC ENTREPRENEURSHIP

Whether international or domestic, an entrepreneur is concerned about the same basic issues-sales, costs, and profits. What varies is the relative importance of the factors being considered. International entrepreneurial decisions are more complex due to uncontrollable factors such as the following.

Economics: A domestic business strategy is designed under a single economic system. Creating a business strategy for multiple countries means dealing with different levels of economic development and different distribution systems.

Balance of Payments: A country’s balance of payments affects the valuation of its currency. This economic variable will affect how companies do business in other countries.

Type of System: Barter or third-party arrangements have been used to increase business activity with the Commonwealth of Independent States, the former U.S.S.R. There are still many difficulties in doing business in developing and transition economies due to:

a. Gaps in the knowledge of the Western system regarding business plans, marketing, and profits

b. Widely variable rates of return. c. Non-convertibility of the ruble.

d. Differences in the accounting system. e. Nightmarish communications.

Political-Legal Environment: Multiple political and legal environments create different business problems. Each element of the international business strategy can potentially be affected by multiple legal environments. Laws governing business arrangements also vary greatly in the 150 different legal systems and sets of national laws.

Cultural Environment: The impact of culture on entrepreneurs and strategies is significant. Understanding the local culture is necessary when developing worldwide plans.

Technological Environment: Technology varies significantly across countries. New products in a country are created based on the conditions and infrastructure of that country.

Strategic Issues: Four strategic issues are important to the international entrepreneur:

1. The allocation of responsibility between the U.S. and foreign operations.

2. The nature of the planning and control systems to be used.

3. The appropriate organizational structure for conducting international operations.

4. The degree of standardization possible.

DIRECT FOREIGN INVESTMENT

The wholly owned foreign subsidiary has been the preferred mode of ownership for direct investment.

Minority interests

The minority interest provides the firm with either a source of raw materials or a captive market for products. Entrepreneurs have used minority positions to gain a foothold in the market before making a major investment.

Joint ventures: Two firms get together and form a third company in which they share the equity. Joint ventures have been used by entrepreneurs in two situations:

1. When the entrepreneur wants to purchase local knowledge and an established facility.

2. When rapid entry into a market it needed.

The keys to success of joint ventures have not been well understood. Reasons for forming

a joint venture today are different than those in the past. Originally, joint ventures were used for trading purposes and were one of the oldest ways of transacting business. Joint ventures in the U.S. took the form of vertical joint ventures used by mining concerns and railroads.

Motives for the significant increase in the use of joint ventures:

a. To share the costs and risks of an uncertain project. b. To gain synergy between the two firms.

c. To obtain a competitive advantage. d. To enter markets that pose entrance difficulties.

Majority interest

Another equity method is to purchase a majority interest in a foreign business. The majority interest allows the entrepreneur to obtain managerial control while maintaining the company’s local identity. In technical sense anything over 50% of the equity of the firm is majority interest.

100 percent ownership: One hundred percent ownership assures control. One form of 100 percent ownership is mergers and acquisitions, but the entrepreneur needs to have a general understanding of the benefits and problems of mergers as a strategic option.

BARRIERS TO INTERNATIONAL TRADE

The positive attitude toward free trade began about 1947 with the development of general trade agreements and reduction of trade barriers.

General Agreement on Tariffs and Trade (GATT): GATT is a multilateral agreement with the objective of liberalizing trade by eliminating tariffs and import quotas. In each round, mutual tariff reductions are negotiated between member nations. Members can ask for investigation of violations. While GATT has helped develop more unrestricted trade, its voluntary membership gives it little authority.

Increasing Protectionist Attitudes: Support of free trade increased significantly in the 1980s due to the rise in protectionist pressures in many countries. The persistent U.S. trade deficit has strained the world trading system. The economic success of a country (Japan) perceived as not playing by the rules has also strained the trading system. In response many countries have established bilateral voluntary export restrictions.

Trade Blocs and Free Trade Areas: Groups of nations are banding together to increase investment between nations in the group and exclude others. The North American Free Trade Agreement (NAFTA) between the U.S., Canada, and Mexico reduces barriers and encourages investment. The Americas, Argentina, Brazil, Paraguay, and Uruguay have created the Mercosul trade zone, a free trade zone between the countries. The European Community (EC) is founded on the principle of supra-nationality, with member nations not being able to enter into trade agreements on their own that are inconsistent with EC regulations.

Entrepreneur’s Strategies and Trade Barriers

Trade barriers pose problems for entrepreneurs who want to become involved in international business. Trade barriers increase the costs of exporting projects to a country. Voluntary export restrictions may limit the ability to sell products in a country from production facilities outside the country. An entrepreneur may have to locate assembly or facilities in a country to conform to the local content regulations.

SOURCES OF NEW IDEAS

A sound idea for a new product or service, properly evaluated, is essential to successfully launch a new venture. Some of the more frequently used ideas for new entrepreneur include consumers, existing companies, distribution channels, the federal government and research and development.

Consumers: Potential entrepreneurs should pay close attention to the final focal point of the idea for a new product or service the potential consumer. This can be an informal or formal survey of consumers expressing their opinions. Care should be taken to ensure that the idea represents a large enough market.

Existing Companies: Entrepreneurs should establish a formal method for monitoring and evaluating the products and services in the market. Frequently this analysis uncovers ways to improve on these offering that may result in a new product that has more market appeal.

Distribution Channels: Members of distribution channels are also excellent sources for new ideas because they are familiar with the needs of the market. Not only do channel members frequently have suggestions for new product, but they can also help in marketing the entrepreneur’s newly developed products.

Federal Government: The federal government can be source of new product ideas in two ways. First the files of the Patent Office contain numerous new product possibilities. Although the patents may not be feasible new product introduction, they can suggest other marketable product ideas. Several government agencies and publications are helpful in monitoring patent applications. Second new product ideas can come in response to government regulations. For example the Occupational Safety and Health Act (OSHA), aimed at eliminating unsafe working condition in industry, mandated that first aid kits be made available in business establishments employing more than three people. The kit had to contain specific item that varied according to the company and the industry. In response to OSHA, both established and newly formed ventures marketed a wide variety of first aid kits.

Research and Development

The largest source for new ideas is the entrepreneur’s own research and development. This can be a formal endeavor connected with one’s current employment. A more formal research and development department is often better equipped and enables the entrepreneurs to conceptualize and develop successful new product ideas.

Creativity & Creative process:

Creativity is the ability to bring something new into existence. The definition emphasizes on the ability not on the activity. A person may therefore conceive of something new but not necessarily make it reality.

There are five stages for creativity process.

Idea germination: This is a seeding process. It is like a natural seeding that occurs when pollinated flower seed, scattered by the wind, find fertile ground to take root. Most creative ideas can be traced to an individual’s interest in or curiosity about a specific problem or area of study.

Preparation: After idea germination, creative people embark on a conscious search for answers. If it is a problem they are trying to solve it. It is a conscious search for knowledge.

Incubation:  Individual sometimes concentrate on an idea, but , more often they simply allow ideas time to grow without intentional effort as few great ideas come from thunderbolts of insight. It is subconscious assimilation of information.

Illumination: The fourth stage, illumination, occurs when the idea resurfaces as a realistic creation. It is the stage of recognition of idea as being feasible. Illumination may be triggered by an opportune incident.

Verification: An idea once illuminated in the mind of an individual still has little meaning until verified as realistic and useful. Verification is the development stage of refining knowledge into application. During this stage, ideas may fall by the wayside as they prove to be impossible or to have little value.

Innovation & Entrepreneurship: If creativity is the seed that inspires entrepreneurship, innovation is the process of entrepreneurship. Innovation is the means by which the entrepreneur either creates new wealth producing resources or endows existing resources with enhanced potential for creating wealth.

How innovation distinguished from invention: Innovation as the process of doing new things. It is important to recognize that innovation implies action, not just conceiving new ideas. When people have passed through the illumination and verification stages of creativity, they may have become inventors, but they are not yet innovators. The difference between invention and innovation is that the invention is the creation of something new that results in new knowledge. Whereas the innovation is the transformation of an idea or resources into useful applications that results in new products, services or processes.

Elements in the Innovation process:

* Analytical Planning; to identify: Product design, market strategy, financial need. *Organizing resources; to obtain: materials, technology, human resources, capital. *Implementation; to accomplish: organization, product design, manufacturing, services. *Commercial application; to provide: value to customers, rewards for employees, rewards for employees, revenues for investors, satisfaction for founders.

Windows & Corridors: A window is time horizon during which opportunities exist. This can occur, for example, when a new change in technology takes place so that intrepid innovators rush to become early industry leaders. As opportunities for success become know, however, more competitors enter the industry, and the window rapidly closes with market saturation.

A corridor is a route or an aisle down which a person travels, often beginning with one idea that leads to revisions and further innovations. It is not uncommon for a person to pursue a weak idea but, in the process, discover some new opportunity for new product that may not have come to light except through fruitless work on the original idea. Corridors also arise from the proximity of a person who is conducting similar work and is therefore positioned to recognize change more rapidly than others.

Success factors for entrepreneurs

The entrepreneurial team: The team is on top of the list because more often the entrepreneurs not start their business themselves but they have a team, partner, close associates. We can infer that success is closely tied to a solid knowledge base and substantial experience in related fields of endeavor. They will also have well developed social and business relationships and strong foundation for business.

Venture products or services: Products tend to have strong profit potential with high initial margins rather than small margins that require a substantial volume of sales to meet profit objectives. Service businesses retain good margins by effective cost controls and well monitored overheads.

Markets & Timings: Successful entrepreneurs tend to have a clear vision of both existing and potential customers.

Business Ideology: It is defined as a system of beliefs about how one conducts an enterprise. It is included a commitment to providing customers with value, the ability to take calculated risks, the determination to grow and to control the fate of the business and the perspective of creating wealth realistically.

Common causes for small business failure:

*External factors: Business may be affected by external factors such as economic business cycles, fluctuating interest rates, interrupted supplies, labor market trends, inflation, government regulation and unstable financial markets.

*Personal factors: Dun and Bradstreet statistics attribute about 52 percent of all business failures to “management issues” and 90% of small business failures to incompetent managers like inability of managers to control inventory, to control capacity cost or lack of marketing expertise.

*Arrogance: Many small business owners are arrogant; they simply refuse to acknowledge that they cannot do everything well; consequently, they allow their business to falter.

*Mismanagement: One important ‘mismanagement’ symptom is lack of a clear business philosophy. Many small businesspersons work with blinders on, seeing only the short-term potential for profits without understanding that they must create a lasting organization capable for satisfying customers with quality goods and services.