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Unit 1: Overview of Entrepreneruship. Ace Institute of Management BBA 6 th Semester. Nature and Development of Entrepreneurship. The word “entrepreneur” stems from French, means “between-taker” or “go between.” Our definition involves four aspects: 1. The creation process.
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Unit 1: Overview of Entrepreneruship Ace Institute of Management BBA 6th Semester
Nature and Development of Entrepreneurship • The word “entrepreneur” stems from French, means “between-taker” or “go between.” • Our definition involves four aspects: • 1. The creation process. • 2. The devotion of time and effort. • 3. The assumption of risk. • 4. Rewards of independence, satisfaction, money.
Tools have changed with advances in Science & Technology, Ability to innovate has been present in every Civilization Do we all Agree ?
Nature & Development Of Entrepreneurship • Historical Evolution Of Entrepreneurship • Earliest Period • Middle Ages • 17th Century • 18th Century • 19th & 20th Century THE ABILITY TO INNOVATE CAN BE OBSRVED THROUGHOUT THE HISTORY
Earliest Period • Go-Between is Marco Polo • Sign contract with a money person(Venture capitalist) to sell his goods • VC passive risk bearer • Merchant Adventurer took active role in trading- active risk bearer (Physical, emotional) • Merchant Adventurer completes trip successfully profits were divided- VC taking 75% & MA 25%
Middle Ages • Actor & person who managed large production projects • Individual didn’t take risks but only managed the project using the resources provided • Usually by the Govt of the Country Person in charge of architectural works- Castles, public buildings, cathederals
17th Century • Emergent connection of risk with entrepreneurship developed • E person who entered into contractual agreement with the government to perform a service or to supply products • The contract price was fixed any profits or losses were of entrepreneur’s. Richard Cantillon “E is a risk taker, observing that merchants, craftsman, farmers & other sole proprietors buy at a certain price & sell at an uncertain price, therefore operating at a RISK”
18th Century • Person with capital was differentiated from the one who needed capital • E was distinguished from the capital provided(Venture capitalist) • One reason for differentiation was the industrialization occurring throughout the world • Invention developed during this time were reaction to the changing world • Case of Eli Whitney and Thomas Edison VC- professional money manager who makes risk investments from a pool of equity to obtain high ROR on the investments
19th & 20th Century • In late 19th and early 20th Century E were viewed from Economic Perspective • ‘E’ organizes & operates an enterprise for personal gain • Pays prices for material consumed in the business, for land, personal services he employs, capital he requires • Assumes the chance of loss and gain • Residue of the annual receipts is retained for himself. • 20th Century- Notion of an E as an innovator was established • Innovation & newness integral part of E • Difficult part for E to introduce something new
Entrepreneurship Process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychological, and social risks; & receiving the resulting rewards of monetary and personal satisfaction. The process of initiating a business venture, organizing the necessary resources and assuming the associated risks and rewards.
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 entrepreneurship.
Entrepreneurship If we examine the common elements in these definitions then, Creativity and innovation Resource gathering and the founding of and economic organization The chance of gain under risk and uncertainty.
What is an Entrepreneur? • An Entrepreneur is a person who recognizes a viable idea for a business product or service and carries it out. Any person (any age) who starts and operates a business, in a new way, is an entrepreneur.
What is an Entrepreneur? • Economist: Who brings resources, labor, materials and other assets into combination that make their value greater that before and also one who introduces change, innovation. • Psychologist: Drive by certain force or need to attain something or to escape authority of others • Businessmen: Competitor, or an ally or source of supply or customer
Characteristics of an Entrepreneur • Hard Work • Desire for High Achievement • Highly optimistic • Independence • Foresight • Good Organizer • Innovative
Types of Entrepreneurs • View of Clarence Danholf: • Innovating Entrepreneurs • Imitative Entrepreneurs • Fabian Entrepreneurs: Great Caution and Skepticism in experimenting any change • Drone Entrepreneurs: Refusal to adopt opportunities to make changes. Suffers losses but make no changes • Behavioral View • Solo operators, Active partners, Inventors, Challengers, Buyers, Life timers
Positive aspects of Entrepreneurship • Positive Aspects – • Opportunity to gain control over your own destiny • Opportunity to reach your full potential • Opportunity to reap unlimited profit • Opportunity to contribute to society and be recognised for your efforts
Positive aspects of Entrepreneurship • Negative Aspects – • Uncertainty of income • Risk of losing entire invested Capital • Long work hours and hard work • Lower quality of life • Emotional stress. • Complete responsibility
The Entrepreneurial Decision Process • Individuals have difficulty bringing their ideas to the market & creating a new venture • Yet entrepreneurial decisions have resulted in several new businesses through out the world • Despite recession- inflation- high interests rate, lack of infrastructure-economic uncertainty & high probability of failure
Deciding to become an entrepreneur by leaving present activity • Changing from present life style • Work Environment • Disruption Form new enterprise Desirability of New Venture Cultural Subcultural Family Teachers Peers Possibility of New Venture Government Background Marketing Financing Role Models
Changing from Present Lifestyle • Work Environment Two environment have been for spawning new enterprises • R&D : individuals develop new product ideas & leave to form their own companies when these ideas are not accepted by their employers • Marketing : become familiar with customers unfilled needs & wants- start enterprise
Changing from Present Lifestyle • Disruption • Negative force – retired • Relocated due to a move by other family member in a dual-career family • Who have been fired • 12% new business listings in the yellow pages increased during layoff period • Educational degree-MBA • Student who is not promoted after receiving an MBA-frustrated & start new company
Desirability of New Venture FormationAspects of a situation that make it desirable to start a new company • American culture places a high value on beings one’s own boss • In some countries establishing a new business is not are not as highly valued-failure might be disgrace Cultural SubCultrual Family Teachers Peers • No culture is totally for or against entreprenshuip • Silicon valley- subcultures support & even promote- forming of new company –as one of the best occupations • High % of the founders of Co’s had fathers OR mothers who valued independence • Encouragement by teachers- influence to regard E as a desirable & viable career path • No “E” courses a person takes-increases probability of starting Venture • Standford is in the Silicon • Meeting place where E & potential entrepreneurs can discuss ideas-problems & solutions spawns more new companies than an area where these are not available
Provides infrastructure to help/support a new venture • Give roads-communication systems-transportation system-utilities- & economic stability – TAX RATE can suppress company formation-since Co wont have money to start & grow Possibility of New Venture Formation • E must have necessary background-Education, previous business experience – skills needed to form & manage a new enterprise • Entrepreneurs are not born: they develop Government Background Marketing Finance Role Models • Presence of market of sufficient size- must also be a level of marketing know-how to put together the best total package of product, price, distribution & promotion needed for successful product launching • A Co. is more easily formed when the driving force is more from market demand than a technology push • Financial resources must be readily available • Most start ups comes from personal savings-credit-friends-relatives, there is often a need for additional seed capital • Most powerful influence in making Co seem possible • see someone else succeed makes it easier to picture yourself engaged in a similar activity • Frequent comment of E “if that person could do it, so can I”
Types of Start Ups • Lifestyle Firm - A small venture that supports the owner and usually does not grow much (sole proprietorship). • Foundation company – A type of company formed from research and development that usually does not go public (Private Ltd. Company). • High-Potential venture – A venture that has high growth potential and therefore receives great investor interest. High potential venture may start as foundation company and later on convert itself into high potential venture by going for public investment (Public Ltd. Company).
Role of Entrepreneurship in Economic Development • Role of entrepreneurship in economic development involves more than just increasing per capita output and income • It involves initiating change in structure of business and society. • In spite of importance of investment and innovation there is still lace of understanding of product evolution process.
Role of Entrepreneurship in Economic Development • Iterative synthesis: Intersection of knowledge and social need that starts the product development process • Ordinary innovation: New product with little technological change • Technological innovations: New product with significant technological advancement. • Breakthrough innovations: New product with some technological change. Regardless of the level of uniqueness each innovation evolves into and develops toward commercialization through one of three mechanisms.
Role of Entrepreneurship in Economic Development • Government as an Innovator • Intrapreneurship: Entrepreneurship within existing organization • Entrepreneurship
To Sum up the Role • Promotes Capital formation • Optimum utilization of resources • Promotion of employment opportunities • Balances regional development • Reduced concentration of economic power • Backward and forward Linkage • Promote foreign trade • Industralization
Sources of New Ideas (1 of 2) • Consumers • Informal & formal monitoring of potential ideas and needs- express their opinions. • Idea & need represents a large enough market to support new venture . • Existing Companies • Potential (Entpr & Intraprnrs) should also establish a formal method for monitoring & evluating competitive products & services on the market • Distribution channels • Channel members-Excellent source of new ideas b’coz of their familiarity with the needs of the market • Help in marketing the newly developed products • Example: salesclerks suggesting entrpr changing color of product
Sources of New Ideas (2 of 2) • Federal government • Files of the Patent Office contain numerous new product possibilities. • Suggest more marketable product ideas • Official Gazette, published summarize list of patents for license or sale • New product ideas can come in response to government regulations. (OSHA- eliminating unsafe WC’s in industry) • Research and development • Largest source of new ideas is the entrepreneur’s own “research and development” efforts. May be: • A formal endeavor connected with one’s current employment. • An informal lab in a basement or garage.
Methods of Generating New Ideas • Focus groups • number of group members from 6-12 • Moderator focuses discussion of the group in a directive or nondirective manner. • Co. women’s slipper-concept of “warm & comfortable slipper that’s fits an old shoe” – 12 women focus group • An excellent method for initially screening ideas and concepts. • Brainstorming • A Group method for obtaining new ideas & solutions
Brainstorming Conti.... • 4 Rules should be followed • No criticism is allowed by anyone in the group • Freewheeling is encouraged-wilder the idea the better • Quantity of ideas is desired- greater the no. of ideas the greater the likelihood of the emergence of useful ideas • Combinations and improvements of ideas are encouraged- ideas of others can be used to produce still another new idea
Focus group and brainstorming is different in the sense that FG is structured or moderated...while BS is not a debate or discussion like that....its people giving lots of ideas without criticism allowed
Methods of Generating New Ideas • Problem inventory analysis • Instead of generating new ideas themselves consumers provided with list of problems in general product category • Then asked to identify & discuss products in this category that have particular problem • Can be used to test a new product idea. • Effective method since its easier to relate known products to suggested problems & arrive at a new product idea than to generate an entirely new product idea by itself • Results must be carefully evaluated as they may not actually reflect a new business opportunity.
Family Business • A family business is characterised by direct involvement of family members in ownership and functioning. An existing family business is inherited from parents or relatives. Family business is an ongoing concern. The new owner replaces the old owner. It is all in the family. • Family business is the simplest way of entering a small business. Succession can be planned or unplanned.
Advantages of Family Business • Minimal Risk – there is no risk involved. Family business is a going concern with track record. Generation of revenue and profits is likely to continue. Competitors are known. • Reputation – The business has an established image. Goodwill exists. Relationships have been established with customers, suppliers, banks, creditors and employees. There is commitment for quality and customer service. • No start-up headaches – There are no headaches associated with start-up of a new business. The market is established. Employees are in place. Production facilities are operational. • Location – The location is proven for successful operations. • Taxation – There are no taxation problems. The owner assumes all tax-related liabilities.
Disadvantages of Family Business • Lack of interest – The inheritors may lack interest in operating the business. They may be attracted towards other opportunities, such as salaried employment. The interests of inheritors may differ, This can create conflicts. • Lack of skills – The inheritors may lack talent skills and competencies to run the business. They may also lack experience. • Overlap – Business interests may overlap with family interests. • Relationships – The inheritors may not be able to maintain amicable relationships with employees, customers, suppliers, banks and creditors. • Legal hassles – Legal problems may arise related to inheritance of business. This happens where succession planning is lacking.
Family business and Succession strategies • Succession • Handing over the business to family members. • Succession Planning: • Planning in advance regarding the continuity of the business after retirement of the owner. Developing and selecting heir to the business.
Family business and Succession strategies • Barriers to successful succession planning
Key Factors in Succession • Pressure and Interest inside the firm • Family members: family members are also employees • Non family members: Employees • Pressure and Interest outside the firm • Family members: Family members who are not employee • Non family members: Competitors, Regulatory agencies • Forcing Events: Death, illness, legal problems, financial difficulties • Sources of Succession • Environmental Forces
Family business and Succession strategies • Developing a Succession strategy involves steps: • Understanding The contextual aspects: • Time: Early the better • Type of venture: Venture with high tech and based on personal business contacts are difficult to replace • Skills, desires and abilities of heirs. • Entrepreneur’s vision • Identifying successor’s quality: • Sufficient knowledge of business • Interest. • Honesty and capabilities • Health, energy, maturity, perseverance, problem solving. • Agreement with the owner’s philosophy about the business
Family business and Succession strategies • Understanding the influencing forces If ideal successor is not found than they should be developed • Family and business culture issues: Business cultures, stage of firm’s development, business traditions and norms, family culture and strengths. • Owners concern: Relinquishing power and authority, defining family members future role in business, assuring competent future leader, educating family and non family members about key roles in business. • Family members concern: Gaining and losing of control of family assets. Control over decisions by successors in years to come. Getting money from business, Assurance that business will continue.
Family business and Succession strategies • Carry out succession plan: • Identify successor • Groom • Agree on a plan • Consider outside help.
Succession Strategies • Transfer to Family Members • Can create internal problem with employees • Knowledge of business required for successor • Helpful if entrepreneur stays around for a while as advisor • Old employees may resent the younger family member taking control • Successor may prove his ability and run business successfully
Succession Strategies • Transfer to Non Family Members: Three Choices • Train a key employee and retain some equity • Question of how much of equity to be retained • Retain control and hire a manager • Sell the business outright ( Harvesting Strategy ) • Direct Sale ( buyer outsider ) • Employee Stock Option Plan • Management Buyout ( Buyer Loyal employee ) • Initial Public Offering • Merger
Fundamental Issues of Entrepreneurship • Strategic Planning and decision making issues: • Should be participative and decentralized. • Staffing issue: should be based on expertise, knowledge and talent and not with relationship • Technological issues: Should have non imitable, unique, cutting edge technology • Infrastructure issue: Should have adequate infrastructure, water, power supply
Issues of entrepreneurial skills and strategies: Entrepreneurs should posses various skills and strategies • Financial issues: Sources of funding should be well identified so that they can be made available at the time of expansion and crisis • Issues of governmental support: The government should provide supportive policies and facilities so that new starts ups can flourish easily
Market issue: An entrepreneur should be able to create their own market • Structural and leadership issue: most appropriate organizational structure should be formed and leader should possess required quality to drive the system according to the strategy adopted.