Chapter 1 Introduction to Entrepreneurship

Entrepreneurism, entrepreneurship are the life blood of any economy, more so in the developing
economy. Information and communication technology make it easier for companies to serve the world
from any place they choose. Overnight package delivery-service allows companies to get parts from
nearly anywhere within a day or two; so, they don’t necessarily need supplies to be nearby. High
speed low cost communication systems link companies to offices anywhere in the world, giving even
small or remote communities. Therefore, just as the acquisition and application of knowledge will
differentiate winners from losers in business, the adoption of global outlook will mark those
communities and individuals who thrive in the next century.

The word entrepreneur, intrapreneur and entrepreneurship have acquired special significance in the
context of economic growth in a rapidly changing socio-economic and socio-cultural climate,
particularly in industry, both in developed and developing countries. The experience in the industrial
countries like the United States of America, Germany, Japan and the United Kingdom are
authoritatively cited in support of this claim. An in-depth study of the subject thus becomes not only
relevant but also necessary.

An entrepreneur is one of the important segments of economic growth. Basically he is a person

responsible for setting up a business or an enterprise. In fact, he is one who has the initiative, skill for
innovation and who looks for high achievements. He is a catalytic agent of change and works for the
good of the people. He puts up new green field projects that create wealth, open up many employment
opportunities and leads to the growth of other sectors.

Who is an Entrepreneur? The entrepreneur as a person brings in overall change through innovation
for the maximum social good. Human values remain sacred and inspire him to serve society. He has a
firm belief in social betterment and he carries out this responsibility with conviction. In this process,
he accelerates personal, economic as well as human development. The entrepreneur is a visionary and
an integrated man with outstanding leadership qualities. He always works for the well being of the
society. More importantly, entrepreneurial activities encompass all fields / sectors and foster a spirit of
enterprise for the welfare of mankind.

Definition of an Entrepreneur:

The term entrepreneur is defined in a variety of ways. Yet no consensus has been arrived at on the
precise skills and abilities that make a person a successful entrepreneur. The concept of entrepreneur
varies from country to country as well from period to period and the level of economic development
thoughts and perceptions. A review of research done in different disciplines over the years would
improve our understanding of the concept of entrepreneur.

The word entrepreneur is derived from the French verb entreprendre. It means ‘to undertake’. In the
early 16th century, the Frenchmen who organised and led military expeditions were referred to as
‘entrepreneurs’. Around the 1700 A.D., the term was used for architects and contractors of public
works.

Bernard Belidor applied it to the function of buying labour and material and uncertain prices and
selling the resultant product at a contracted price.

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Quesnay regarded the rich farmer as an entrepreneur who manages and makes his business profitable
by his intelligence, skill and wealth.

In many countries, the entrepreneur is often associated with a person who starts his own new and small
business. Business encompasses manufacturing, transport, trade and all other self-employed vocations
in the service sector. But not every new small business is entrepreneurial or represents
entrepreneurship.

The term “entrepreneur” was applied to business initially by the French economist, Cantillon, in the
18th century, to designate a dealer who purchases the means of production for combining them into
marketable products, business firm, central to its distributive and production function.

The New Encyclopaedia Britinnica considers an entrepreneur as “an individual who bears the risk of
operating a business in the face of uncertainty about the future conditions”.

As Professor Jan Tinbergen points out: “ The best entrepreneur in any developing country is not
necessarily the man who uses much capital , but rather the man who knows how to organise the
employment and training of his employees . Whoever concentrates on this is rendering a much more
important service to his country than the man who uses huge capital”.

“ The entrepreneur is an advanced economy is an individual who introduces something new in the
economy – a method of production not yet tested by experience in the branch of manufacture
concerned, a product with which consumers are not yet familiar, a new source of raw material or of the
new market and the like” – Joseph A Schumpeter.

New Concept of Entrepreneur

The term “entrepreneur” has been defined as one who detects and evaluates a new situation in his
environment and directs the making of such adjustments in the economic systems as he deems
necessary. In this process, he performs one or more of the following:

1. Perceives opportunities for profitable investments,

2. Explores the prospects of starting such a manufacturing enterprise,
3. obtain necessary industrial licences,
4. Arranges initial capital
5. Provides personal guarantees to the financial institutions,
6. Promises to meet the shortfalls in the capital; and
7. Supplies technical know-how.

Entrepreneurship may be defined in various ways, but the four key elements involved in it are; (i)
Innovation, (ii) Risk-taking, (iii) Vision, and (iV) Organising skills. All the four elements are
interrelated and form a continuous process in business.

Entrepreneurial Process:

Entrepreneurial process is a leadership function which centres round the dynamic of

entrepreneurial growth and change. It is process comprising several distinct stages.

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The First stage in the entrepreneurial process is some change in the socio-economic environment
leading to changes in the every aspect of life in the country. Interalia, the change creates needs for
new goods and services.

The second stage is by starting a new venture.

The third process is entrepreneurship. It is the process of extending the enterprises domain of
competence by exploiting new opportunities through new combinations of its available resources..

The fourth process is to coordinating the varied activities to achieve the entrepreneurial goal.

Entrepreneurial Structure:

Structure represents the formal, official task relationships of people in entrepreneurial activities. In
other words, structure is the logical culmination of authority and responsibility at different levels. It
implies a system. In entrepreneurial activity, policies, programmes, practices and measurement
make possible for innovation and growth. They create the proper attitudes and provide the proper
tools.

The main requirements of the structure as follows:

1. The new enterprise should be organised separately from the existing.

2. There should be a special law for the new venture.
3. The new enterprise should be the specific responsibility of entrepreneur/intrapreneur in top
management.
4. The new innovating project requires different policies, rules and evaluation criteria.
5. The entrepreneur is accountable for the success of failure of the enterprise.
6. The returns on innovation are distinctively different from existing business.
7. An entrepreneurial project requires right relationship, right rewards and right working culture.

Meaning of Entrepreneurial Culture:

Culture consists of tangible man-made objects, such as automobiles, clothing, furniture, buildings,
and tools and intangible concepts such as laws, morals, and knowledge. In addition, the culture
includes the values, character, qualities, skills acceptable within the particular society. A culture is
usually divided into sub-cultures based upon geography or such human characteristics as age or
ethnic background. Entrepreneurial culture thus implies vision, values, norms and traits that are
conducive for the development of the economy.

The emerging market environment and globalization is challenging every organisation and every
person in the organisation to consider, evaluate and bring about changes in thinking, vision and
action. And the changes that need to be brought about should facilitate organizations in becoming
competitive, profitable and sustainable.

The Concept of Entrepreneurship:

Entrepreneurship is a process undertaken by an entrepreneur to augment his business interests. It is

an exercise involving innovation and creativity that will go towards establishing his/her enterprise.
One of the qualities of entrepreneurship is the ability to discover an investment opportunity and to
organise an enterprise, there by contributing to real economic growth. It involves taking of risks
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 and making the necessary investments under conditions of uncertainty and innovating, planning,
and taking decision so as to increase production in agriculture, business, industry etc.

Entrepreneurship is a composite skill, the resultant of a mix of many qualities and traits – these
include tangible factors as imagination, readiness to take risk, ability to bring together and put to
use other factors of production, capital, labour, land, as also intangible factors such as the ability to
mobilise scientific and technological advances.

Theories of Entrepreneurship:

The concept and theories of entrepreneurship evolved over more than two centuries have
undergone major changes. Yet the concept of entrepreneurship is not clear. As the concept of
entrepreneurship is complex in its content, it is influenced by not only economic aspects, but also
by sociological, political, psychological, ethical, religious and cultural values. The distinctive
features of the entrepreneurship over the years are:

1. Innovation.
2. A function of high achievement.
3. Organisation building.
4. Group level activities.
5. Managerial skills and Leadership.
6. Gap filling,
7. Status with drawl
8. Entrepreneurial supply, and
9. Entrepreneurship – an emerging class.

Entrepreneurship Stimulants:

A variety of social, economic, political and cultural factors are stimulating entrepreneurial activity
and consequently generating economic development. These stimulants are as follows:

1. An increasing focus on capital formation. Availability of capital is a stimulant to an

entrepreneur to start a new firm and/or give birth to new idea.
2. The ability to transform scientific and technical developments through new institutional
development.
3. The supportive government programmes.
4. Availability of required training and inputs.
5. A collaborative relationship between business and research and their direct attempts to transfer
technology to the market places will be an opportunity for entrepreneurs who commercialise
their ideas.
6. Finally, an endeavour to create an environment conducive to innovation will provide a much
needed stimulant to entrepreneurial activity.

Theories:

The following theories of entrepreneurship enunciated by the social scientist from time to time are
briefly discussed here under.

1. An Economic Theory
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2. Libenstein’s X-efficiency Theory
3. Dynamic Entrepreneurship Innovation Theory
4. Harvard School Theory
5. Theory of High Achievement
6. Theory of Change
7. Theory of Profit
8. Theory of Adjustment of Price
9. Theory of Market
10. Theory of Social Change
11. Theory of Entrepreneurial Supply
12. Theory of Personal Resourcefulness
13. Theory of Cultural Values.

An Economic Theory:

Mark Casson, in his book The Entrepreneur – An Economic Theory, presented a functional
definition of the entrepreneur and considered why the entrepreneurial function is so valuable. He
emphasized that the demand for entrepreneurship stems from the need to adjust to change, and that
the supply of entrepreneurship is limited firstly, by the scarcity of the requisite personal qualities,
and secondly, by the difficulty of identifying them when they are available.

Leibenstein’s X – Efficiency Theory :

This theory originally developed for another purpose, has recently been applied to analyse the role
of the entrepreneur. Basically, X efficiency is the degree of inefficiency in the use of resources
within the firm: it measures the extent to which the firm fails to realise its productive potential.
Leibenstein identifies two main roles for the entrepreneur. The first role is input completion, which
involves making available inputs that improve the efficiency of the existing production methods or
facilitate the introduction of new ones. The second role, gap filling is closely asking to the
arbitrage function emphasised by Kirzner. Leibenstin provides a very vivid description of gap
filling.

Dynamic Entrepreneurship Innovation Theory:

A dynamic theory of entrepreneurship was first advocated by Schumpeter (1949) who considered
entrepreneurship as the catalyst that disrupts the stationary circular flow of the economy and
thereby initiates and sustains the process of development. Embarking upon the new combinations
of the factors of production – which he succinctly terms innovation – the entrepreneur activates the
economy to a new level of development. His concept of innovation included the elements of risk
taking, superintendence and co-ordination.

Harvard School Theory:

According to Harvard School (Cole, 1949) entrepreneurship comprises any purposeful activity that
initiate, maintain or develop a profit-oriented business in interaction with the internal situation of
the business or with the economic , political and social circumstances surrounding the business.

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This approach emphasized two types of activities: the organisation or coordination activity, and
sensitivity to the environmental characteristics that affect the decision making.

Theory of High Achievement:

McClleland identified two characteristics of entrepreneurship, namely, doing things in a new and
better orientation as the most directly relevant factor for explaining economic behaviour.
McClelland explains the entrepreneur’s interest in profits in terms of a need for achievement.
People with high achievement are not influenced by money rewards as compared people with low
achievement.

Theory of Change:

Young conducted the Thematic Appreciation Test (TAT) on a group of entrepreneurs. Young’s
theory is a theory of change based on society’s incorporation of reactive subgroups. A group
becomes reactive when the following three conditions coincide:

(i) When group experiences low status recognition;

(ii) When denied of access to important social networks; and
(iii) When the group has better institutional resources than other groups in the society at the
same level.

Theory of Profits:

Knight identifies the entrepreneur as a recipient of pure profit. Pure profit, according to him, with
regard to the entrepreneur, is bearing the costs of uncertainty. Knight argues that business
uncertainty can be reduced through ‘consolidation.’ Consolidation is to uncertainty what insurance
is to risk; it is a method of reducing total uncertainty by pooling individual instances.

Theory of Adjustment of Price:

For Kirzner, the adjustment of price is the main role of the entrepreneur. If the wrong price
prevails in the market, then opportunity for profit is created somewhere in the market if a
frustrated buyer or seller is willing, respectively, to pay a higher price or accept a lower one.
Then, again, if different prices prevail in the same market, there is scope for profitable arbitrage
between the two segments of the market.

Theory of Market Equilibrium:

Hayek’s main contribution to entrepreneurial theory is to point out that the absence of
entrepreneurs in Neo-classical economics is intimately associated with the assumption of market
equilibrium. He visualises a world in which there is a continuous process of discovery. Markets
help people to communicate their discoveries to others and learn of discoveries, thereby moving
towards a sale of equilibrium.

Hegen’s Theory of Social Change:

Everett Hagen, in his work “Theory of Social Change: How Economic Growth Begins(1964),
meditates on its psychological explanation. He views the entrepreneur as a creative problem solver
interested in things in the practical and technological realm, and driven by a duty to achieve.
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Theory of Entrepreneurial Supply:

Another theory of entrepreneurial supply is the Behaviouristic Model propounded and elaborated
by John Kunkal in 1965. His behavioural model is concerned with the overtly expressed activities
of individuals and their relations to both past and present, and surrounding social structures and
physical conditions.

Theory of Personal Resourcefulness:

The root of entrepreneurial process can be traced to the initiative taken by some individuals to go
beyond the existing way of life. The emphasis is on initiative rather than reaction, although events
in the environment may have provided the trigger for the person to express initiative. It is one’s
own capability for initiating actions directed towards creation and growth of enterprises.

Theory of Cultural Values:

The key elements in Thomas Cochran’s theory are cultural values, role expectations and social
sanctions. The performance of business man, according to him, will generally influenced by three
factors; (i) his own attitude towards his occupation; (ii) the role expectations held by the
sanctioning groups; and (iii) the operational requirement of the job.

Types of Entrepreneurs:

The following is the classification of types of entrepreneurs.

1. According to the type of Business

2. According to the use of Technology
3. According to the Motivation
4. According to the Growth
5. According to the stages of Development
6. Others

According to the type of Business:

Entrepreneurs are found in various types of business occupations of varying size. We may broadly
classify them as follows:

Business Entrepreneur: Business entrepreneurs are individuals who conceive an idea for a new
product or service and then create a business to materialise their idea in to reality. They tap both
production and marketing resources in their search to develop a new business opportunity.

Trading Entrepreneur: Trading entrepreneur is one who undertakes trading activities and is not
concerned with the manufacturing work. He identifies potential markets, stimulates demand for
his product line and creates a desire and interest among buyers to go in for his product.

Industrial Entrepreneur: Industrial entrepreneur is essentially a manufacturer who identifies the

potential needs of customers and tailors a product or service to meet the marketing needs. He is a
product oriented man who starts in an industrial unit because of the possibility of making some
new product.

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Corporate Entrepreneur: Corporate Entrepreneur is a person who demonstrates his innovative
skill in organising and managing corporate undertaking. A corporate undertaking is a form of
business organisation which is registered under some statue or Act which gives it a separate legal
entity. A trust is registered under the Trust Act or a company registered under the Companies Act
are example of corporate undertakings.

Agricultural Entrepreneur: Agricultural Entrepreneurs are those entrepreneurs who undertake

agricultural activities as raising and marketing of crops, fertiliser and other inputs of agriculture.
They are motivated to raise agricultural through mechanisation, irrigation and application of
technologies for dry land agricultural products.

Entrepreneurs InTechnology:

The application of new technology in various sectors of the national economy is essential for the
future growth of business. We may broadly classify these entrepreneurs on the basis of the use of
technology as follows:

Pure Entrepreneur: A pure entrepreneur is an individual who is motivated by psychological and

economic reward. He undertakes an entrepreneurial activity for his personal satisfaction in work,
ego or status.

Induced Entrepreneur: Induced entrepreneur is one who is induced to take up an entrepreneurial

task due to the policy measures of the government that provides assistance, incentives,
concessions and necessary overhead facilities to start a venture. Most of the induced entrepreneurs
enter business due to financial, technical and several other facilities provided to them by the state
agencies to promote entrepreneurship.

Motivated Entrepreneurship: New entrepreneurs are motivated by the desire for self-fulfilment.
They come into being because of the possibility of making and marketing some new product for
the use of consumers. If the product is developed to a saleable stage, the entrepreneur is further
motivated by reward in terms of profit.

Spontaneous Entrepreneur: These entrepreneurs start their business by their natural talents. They
are the persons with initiative, boldness and confidence in their ability which motivate them to
undertake entrepreneurial activity.

Growth and Entrepreneurs:

The development of new venture has a great chance of success. The industrial units are identified
as units of high growth, medium growth and low growth industries and as such we have “growth
Entrepreneur” and “Super growth Entrereneur”.

Growth Entrepreneur: Growth entrepreneurs are those who necessarily take up a high growth
industry which has substantial growth prospect.

Super-Growth Entrepreneur: Super-Growth Entrepreneurs are those who have shown enormous
growth of performance in their venture. The growth performance is identified by the liquidity of
funds, profitability and gearing.

Entrepreneur and Stages of Development:

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Entrepreneurs may also be classified as the first generation entrepreneur, modern entrepreneur and
classical entrepreneur depending upon the stage of development, they are explained below:

First Generation Entrepreneur: A first-generation entrepreneur is one who starts an industrial unit
by innovative skill. He is essentially an innovator, combining different technologies to produce a
marketable product or service.

Modern Entrepreneur: A modern entrepreneur is one who undertakes those ventures which go
well along with the changing demand in the market. They undertake those ventures which suit the
current marketing needs.

Classical Entrepreneur: A classical entrepreneur is one who is concerned with the customers and
marketing needs through the development of self-supporting venture.

Others:

Innovative Entrepreneur: Innovating entrepreneurship is characterised by aggressive assemblage

in information and analysis of results, deriving from a novel combination of factors. Innovative
entrepreneurs are commonly found in developing countries.

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 Chapter 2 Characteristics of Entrepreneur

Entrepreneurial traits and motivation are an indispensible function of management. Entrepreneur is

human being who has his dignity, self-respect, values, sentiments, aspirations, dreams apart from
economic status. Indeed, economic betterment and social upliftment motivates a person to distinguish
from other.

Characteristics of an entrepreneur:

The characteristics of an entrepreneur that contribute to success are the result of his achievement
motivation. A successful entrepreneur must be a person with technical competence, initiative, good
judgement, intelligence, leadership qualities, self-confidence, energy, attitude, creativeness, fairness,
honesty, tactfulness and emotional stability.

1. Mental ability: Mental ability consists of intelligence and creative thinking. An entrepreneur
must be reasonably intelligent, and should have creative thinking and must be able to engage in
the analysis of various problems and situations in order to deal with them. The entrepreneur
should anticipate changes and must be able to study the various situations under which
decisions have to be made.
2. Clear Objective: An entrepreneur should have a clear objective as to the exact nature of the
goods to be produced and subsidiary activities to be undertaken. A successful entrepreneur
may also have the objective to establish the product, to make profit or to render social service.
3. Business Secrecy: An entrepreneur must be able to guard business secrets. Leakage of
business secrets to trade competitors is a serious matter which should be carefully guarded
against by an entrepreneur. An entrepreneur should be able to make a proper selection his
assistants.
4. Human Relations Ability: The most important traits contributing to the success of an
entrepreneur are emotional stability. Personal relations, consideration and tactfulness. An
entrepreneur must maintain good relations with his customers if he is to establish relations that
will encourage them to continue to patronise his business. He must also maintain good
relations with his employees if he is to motivate them to perform their jobs at a high level of
efficiency. An entrepreneur who maintains good human relations with customer, employees,
suppliers, creditors and the community is much more likely to succeed in his business than the
individual who does not practice good human relations.
5. Communication ability: Communication ability is the ability to communicate effectively.
Good communication also means that both the sender and the receiver understand each other
and are being understood. An entrepreneur who can effectively communicate with customers,
employees, suppliers and creditors will be more likely to succeed than the entrepreneur who
does not.
6. Technical Knowledge: An entrepreneur must have a reasonable level of technical knowledge.
Technical knowledge is the one ability that most people are able to acquire if they try hard
enough.

An entrepreneur who has a high level of administrative ability, mental ability, human relations ability,
communication ability, and technical knowledge stands a much better chance of success than his
counterpart who possesses low levels of these basic qualities. Brilliant men with first class degrees
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from universities shy away from becoming entrepreneurs because the one thing they cannot be taught
is coping with human emotions.

Robert D. Hisrich has identified a few more capabilities or personal characteristics that an entrepreneur
should possess. According to him, the entrepreneur must have an adequate commitment, motivation,
and skills to start and build a business. The entrepreneur must determine if the management team has
the necessary complementary skills necessary to succeed. Some key characteristics of successful
entrepreneur are:

1. Motivator: An entrepreneur must build a team, keep it motivated and provide an environment
for individual growth and career development.
2. Self-confidence: Entrepreneurs must have belief in themselves and the ability to achieve their
goals.
3. Lon-term involvement: An entrepreneur must be committed to the project with a time horizon
of five to seven years. No ninety day wonder are allowed.
4. High energy level: Success of an entrepreneur demands the ability to work long hours for
sustained period of time.

The following figure may provide a better insight into the characteristics of an entrepreneur.

ADMINISTRATIVE ABILITY

ORGANIZATION SKILLS

INTELLIGENCE

CREATIVITY
ENTERPRENEUR

INNOVATION

CLEAR OBJECTIVE

BUSINESS SECRECY
BUSIN

SOUND KNOWLEDGE

EMOTIONAL STABILITY

PUBLIC RELATIONS

EFFECTIVE COMMUNICATION

TECHNICAL KNOWLEDGE

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Characteristics of Small Scale Entrepreneurs/ Entreprise:

The following characteristics generally we do find with the small scale Entrepreneurs.

1. Basically they are young entrepreneurs. They are young men

2. They are energetic/ zealous / enthusiastic to achieve their goals.
3. They will have minimum basic educational back ground.
4. These entrepreneurs are very hard working
5. They are very determined towards their objectives
6. They are systematic
7. They are generally self made men
8. They do have high self confidence
9. Very disciplined
10. They follow a planned approach
11. They are trained / experienced
12. They do have entrepreneurial zeal
13. They do start business with meagre capital
14. Their area of operation is very small
15. Generally they deal in one product
16. They employee few people
17. Their turn over is small
18. They are very flexible.

While the above characteristics are seen with the small scale enterprise, the following characteristics
can be seen with the Large Scale Enterprise:

1. Promoted and professionally-managed through employed persons.

2. Large capital
3. Capital contributed by a large section of share holders
4. Shares are registered in the markets/stock exchange
5. Large Assets
6. Engaged in diversified activities
7. Promotes and pushes goods in the market
8. Huge turn over/ sales/ Profits
9. Easy access to financial institution
10. They have greater leverage for development
11. They are well acquainted with political and officialdom
12. They are the trend setters
13. They can create demand for their products through consumer awareness programmes,
education etc,
14. They are great visionaries, who foresee the need of the country well ahead of times.
15. They are responsible and have a value-driven, corporate philosophy.

Kilby has rightly enumerated the following activities for a successful entrepreneur in an
underdeveloped economy:

1. Perception of market opportunities (novel or imitative)

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 2. Gaining command over scarce resources.
3. Purchasing inputs
4. Marketing of the product and responding effectively to competition.
5. Dealing with public bureaucracy as regards concessions, licences, taxes, etc
6. Management of the human relations within the enterprise
7. Management of customer and supplier relations
8. Financial Management
9. Control through written records, supervision, coordinating input flows with order, maintenance.
10. Acquiring and overseeing assembly of the plant.
11. Taking care of minimising inputs for a given production process
12. Maintaining the production process and improving the quality of the product
13. Introduction of new production techniques and product lines.

Nature and Importance of Entrepreneurs:

The world is rapidly changing: we should be able to change our attitudes and approaches to prevent a
country of Ethiopia’s size and potential to exist on the periphery of the world’s economy. The process
of development includes creation of appropriate infrastructure and setting up and management of
public utilities. Non-conventional energy sources have to be developed on a commercial scale.
Similarly, application of modern scientific techniques in agriculture and horticulture has become
imperative for providing a sound base for a more rapid growth of employment and incomes. Apart
from land, labour, capital, there is greater need for entrepreneurs to strive for growth on an ongoing
basis.

Entrepreneurial Qualities:

The entrepreneurial qualities are to some extent innate. But not all of them are entirely innate. Some
can be enhanced by training, or simply by experience. For example, analytical ability and
computational skills can be enhanced by education at school and university, while practical knowledge
and foresight skills can be enhanced by the general experience of everyday life. Entrepreneurial career
will be strongly influenced by the desire to enhance qualities which are scare, yet difficult to obtain
through delegation because of the problems involved in screening for them. Of the two indispensable
qualities of the entrepreneur, imagination is almost entirely innate, while foresight, can be enhanced by
a varied experience. Imagination and foresight are the scarce qualities which are difficult to analyse
and quantify. Delegation skill and organisation skill, though not essential, are highly desirable
whenever large-scale decision-making is involved. These are the qualities which can be enhanced
through experience.

Entrepreneurial Functions:

A successful entrepreneur recognises the commercial potential of a product or service, design

operating policies in marketing, production, product development and the organisational structure. He
carries out the whole set of activities of the business. He has high capacity for taking calculated risks
and has faith in his own capabilities.

According to some economists, the functions of an entrepreneur incorporate coordination of the

business management of the enterprise, risk-taking, controlling the enterprise, innovation for change,
motivation and other related activities. In reality, an entrepreneur has to carry out a combination of
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these in keeping with time and environment. Truly, he has to consider new ideas, demands and exploit
the opportunities, and there by contribute to technical progress. He is thus a nucleus of high growth of
the enterprise. An entrepreneur is expected to perform the following functions:

1. Assumptions of Risk: The entrepreneur assumes all possible risks of business which emerges
due to the possibility of changes in the tastes of consumers, techniques of production and new
inventions. Such risks are not insurable. If they, they materialise , the entrepreneur has to bear
the loss himself. Thus, risk bearing or uncertainty bearing still remains the most important
function of an entrepreneur which he tries to reduce by his initiative, skill and good judgement.
2. Business Decisions: The entrepreneur has to decide the nature and type of goods to be
produced. He enters the particular industry which offers him the best prospects and produces
whatever commodities he thinks will pay him the most and employs those methods of
production which seems to him the most profitable. He effects suitable changes in the size of
the business, its location, techniques of production and does everything that is needed for the
development of his business.
3. Managerial Function: The entrepreneur performs the managerial function through they are
different from entrepreneurial function. He formulates production plan, sees to the finance,
deals with purchase of raw materials, provides production facilities, organises sales including
management. IN a large establishment, these management functions are delegated to the paid
managerial personnel.

The entrepreneurial functions can be performed by different categories of people under different
economic systems. In principle, the entrepreneur could be a planner in a socialist economy, or een a
priest or king in a traditional society. In practice, entrepreneurship is closely identified with priate
enterprise in amarket economy.

Entrepreneur Vs Entrepreneurship:

The term entrepreneur is often used interchangeably with entrepreneurship. But, conceptually, they
are different, yet they are just like the two sides of a coin. Their differences are as follows:

Entrepreneur Entrepreneurship
Refers to a person Refers to a process
Visualiser Vision
Creator Creation
Organiser Organisaton
Innovator Innovation
Technician Technology
Initiator Initiative
Decision Maker Decision
Planner Planning
Leader Leadership
Motivator Motivation
Programmer Action
Risk Taker Risk taking
Communicator Communication
Administrator Administration

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Entrepreneurship management is basically concerned with the development and co-ordination of
entrepreneurial functions. In a way, entrepreneur precedes entrepreneurship. Experience shows that
entrepreneurship as an economic function is not a single point but rather a range of behaviour. There
are six critical dimensions that distinguish entrepreneurial behaviour from more administratively-
oriented behaviour; (i) Strategic orientation; (ii) Commitment to opportunity; (iii)the resource
commitment process; (iv) the concept of control over resources; (v) the concept of management; and
(vi) compensation policy.

Entrepreneurs play an important role in the development of society. For example, the use of jeans in
America has created the demand for it throughout the world. Similarly Coca Cola has been accepted
as a social drink. The introduction of the television has provided the society a means of information
and entertainment. The society has accepted the innovations of such entrepreneurs as Gillet, Wright
Brothers, and Henry Ford. The inventions of these great entrepreneurs of the history has
revolutionised the life style of people in the society.

Modern business studies have a distinct entrepreneurial discipline. The approach to the study of
entrepreneurship is multi-disciplinary. It impinges on such areas as demography, economic
anthropology, business history, politics, sociology, psychology, marketing and finance. That is why
entrepreneurship development becomes an integral part of the overall economic, social and industrial
development of a country.

ENTREPRENEUR VS PROFESSIONAL MANAGERS:

Entrepreneurs and professional managers are the two sides of the coin. Their individual itineraries will
make the differences between success and failure for the enterprise. An effective entrepreneurial
strategy should be an integral part of an enterprise’s competitive positioning. The progressive
development in the size of business and the separation of ownership and management in enterprises
has made management a distinct profession. Although both strive to achieve the similar goals they are
said to distinguish themselves in varies measures.

A professional manager is one who specialises in the work of planning, organising, leading and
controlling the efforts of others by the systematic used of classified knowledge and principles. He
subscribes to the standards of practices and code of ethics established by a recognised body. To be a
professional manager he should (i) have an insight of his job requirements; (ii) carry out continuous
with his subordinates, super-oriented and colleagues based on mutual respect to facilitate team work
for collective contribution to the organisation; (iv) have a relationship based on long-term mutual
benefit approach with customer, suppliers and other members of the public; and (v) have
communication with colleagues to improve the standard contribution and the prestige of the
managerial profession.

The characteristics of professional management are as follows:

Body of Knowledge: Management theory has a philosophy of it own. It is based n systematic and
scientific studies. Precisely, the management of knowledge is the passport to enter the world of
entrepreneurship.

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Specialization: There is a growing tendency to select and appoint highly qualified, trained and
experienced persons to manage the business in each functional area of management. This has created a
greater demand for professionals.

Code of Conduct:

Business management is regarded as a social institution. It has social responsibilities towards

customers, employees and the society on the whole. Consumer-oriented marketing concept is an
important corporate code of conduct. Pressure of consumerisim, trade unionism, public opinion and
legislation are definitely inducing the management to evolve a code of ethics for consumer satisfaction
and holding a major share.

Professional Association: In every country business management associations are formed and they
mainly aim at spreading the ethics of business management and build up a sound public image of the
managerial profession.

Both managers and entrepreneurs are answerable for producing results. The results are, of course,
different. In their respective result areas, the buck stops with them. While they can delegate, they are
finally accountable. Both have to produce results through people working with them through they deal
with different sets of people. Both are decision-makers but the decisions are different as their tasks
vary. Both have to operate under constraints which are understandably different. To be effective in
their respective roles, both have to follow sound principles of management like planning, staffing,
delegation and control. The focus of these management tools may vary depending upon the ultimate
purpose.

The following table summarises the similarities, focusing on the different perspective within each
similarity.

Area of similarity Managers Entrepreneurs

To produce results Results of today, this month, Results of tomorrow, next year
this year, short term and and coming five years, Long
medium term. term and very long term.
To produce results through Have usually to handle people Have to deal with people who
people oriented day-to-day can conceptualise with
management of nitty-gritty and aggregate perspectives –
nuts and bolts type – men of Strategist.
details.
To take decisions Operational and administrative Mostly strategic decisions,
decisions, which have a bearing involving growth through
on short-term and medium-term expansion, diversification, take-
results. overs and mergers.
To co-operate under constraints The constraints are usually The constraints are usually
organisational, i.e., those within environmental which lie outside
an organisation like machine an organisation like the policy
capacity, labour productivity, of financial institutions, import
routing and scheduling, policy, licensing policy,
information availability, infrastructural constraints etc.
financial limitations etc.
To follow sound principles of The principles are more oriented The principles are with
management towards internal administration reference to macro-social
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 and control like delegation, aspects like social responsibility,
accountability, responsibility, equal opportunity, employment,
planning, budgeting, reporting ethical advertisement practices,
and information system. adherence to government
policies, etc.

A successful organisation needs both entrepreneurship and management. The entrepreneurial role may
be played by the Chief Executive and his team of top-level executives, the managerial role by the
middle-level and joint-level executives.

The following factors which distinguish an entrepreneur from a professional manager as shown below:

Entrepreneur Professional Manager

Perception of opportunity Setting of Objective
Risk Taking Policy Formulation
Tactical Planning Strategic Planning
Interpersonal communication Formal Communication
Negotiating Organising
Trouble-shooting Motivating
Making it a growing concern Controlling
Innovator Administrator
Determined Confident
Idealist Specialist
Committed Loyal
Visionary Planner
Planner Implementer

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 Chapter 3 Entrepreneurial Environment

The entrepreneurial development is a key to achieve overall economic development through higher
level of industrial activity. Empirical studies have shown that entrepreneurs are made. Entrepreneurial
development is a process in which person are injected with motivational drives of achievement and in
sight to tackle uncertain and risky situations especially in business undertakings. The process of
entrepreneurial development focuses on training, education, reorientation and creation of conducive
and healthy environment for the growth of enterprise. Entrepreneurship involves taking risks or
making investment under conditions of uncertainty and to innovate, plan and take decisions so as to
increase production and productivity.

The Meaning of EDP: Entrepreneurial Development Programme designed to help a person in

strengthening and fulfilling his motive and in acquiring skills and capabilities necessary for playing his
entrepreneurial role effectively. Towards this end, it is necessary to promote his understanding of
motives, motivation pattern, their impact on behaviour and entrepreneurial value. A programme which
seeks to do this can qualify to be called a programmer. This has to be stressed here, because there are
a number of programmes which aim at providing informational or managerial inputs or focus on
preparation of a project. Although all these inputs are required by a new entrepreneur, a programme
not touching entrepreneurial motivation and behaviour cannot be called an EDP.

EDP is primarily meant for developing those first-generation entrepreneurs, who on their own cannot
become successful entrepreneurs. It covers three major variables: Location, target group and enterprise
(entrepreneurial activities). Any of these can become the focus or starting point for initiating and
implementing an EDP. The remaining two then will follow by making proper synthesis with the first.

EDP by itself therefore aims at achieving the specific objectives of the programmes and therefore
cannot create any magical result. It is continuous process of training and motivating then to set up
profitable enterprise in large measure.

Appropriate Design: It is now well recognised that entrepreneurs can be developed through
appropriately designed entrepreneurship development programmes. These programmes broadly
envisage a three-tiered approach: developing achievement motivation and sharpening entrepreneurial
traits and behaviour, project planning and development and guidance on industrial opportunities,
incentives and facilities and rules and regulations, and developing managerial and operational
capabilities. Various techniques and approaches have been developed and adopted to achieve these
objectives, keeping in view the target groups and/or target areas. Another important aspect of an EDP
is the human factor. The human factor refers to the attitude, desire and motivation of the individual,
his capability to perceive the environmental changes and opportunities as well as ability to solve the
problems which he as an entrepreneur is likely to face. Training develops all these aspects of human
factor, and also sharpens is skills, builds up a sound value system.

Misconception about EDP: EDP is a catchword. But misconceptions about EDP prevail. Lack of
understanding and clarity has limited its growth. EDP has yet to contribute much to the industrial
economy of the country. Chandramauli Pathak has listed some of the prevailing common
misconceptions about EDP. They are:

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 1. Join an EDP all your problems are solved: Joining an EDP is a privilege. It is indeed a
valuable opportunity not available to all. But many a time an impression is created that joining
EDP means assurance of finance, obtaining the required licences for business ventures and
availing of the special incentives. This misconception arises either because of lack of honest
promotional efforts to get participants for EDP, or by attracting entrepreneurs by rising false
hopes. In reality, an EDP equips and makes them competent to anticipate and deal with a
variety of problems any entrepreneur may face. It prepares them to deserve and make good use
of various forms of assistance.
2. EDP means only Training: Any attempt to develop potential entrepreneurs through classroom
training has been treated as EDPs. In fact, training is only one of the segments in the process
of developing entrepreneurs. The ED process starts from identifying the potential and right
candidates, linking suitable projects with each one, training and developing managerial and
entrepreneurial capabilities, counselling and motivating the entrepreneur and providing the
required follow-up support to help him/her in establishing the venture. The whole process
extends much beyond “training”.
3. Higher the number, better the EDP: EDPs unfortunately have often been linked with statistical
output rather than qualitative results. The quantitative dimension has forced manipulations in
EDPs. It is taken that EDP is a success with the maximum number of participants of responses.
The quality and impact of the EDP matters more than the quantitative dimension. Strategies to
promote a particular target group, the nature of the non-traditional entrepreneurial activities and
higher chances of success in new ventures go a long way in deciding the quality and impact of
an EDP.
4. EDP success is the sole responsibility of Trainer/Motivator: It is the responsibility of the
Trainer-Motivator in most cases, to conduct the programme. However, many environmental
factors challenge his role as a motivator. The trainer alone cannot control or influence external
factors which usually come in the way of start-ups out of an EDP. EDP conducting agencies
and the trainers alone cannot develop entrepreneurs and help them set up their enterprises since
many other support agencies are also involved to create better coordination and effective
linkages with these agencies.

Such misconceptions prevail amongst EDP trainers or funding agencies, as also among entrepreneurs.

The Nature of International Entrepreneurship: International entrepreneurship is the process of an

entrepreneur conducting business activities across national boundaries. It may consist of exporting,
licensing, opening of a sales office in another country, or something as simple as placing a classified
advertisement in the paris edition of Herald Tribune. When an entrepreneur executes his or her
business model in more than one country, international entrepreneurship is occurring.

The Importance of international business to the firm: International business has become
increasingly important to firms of all sizes particularly today when every firm is competing in a
hypercompetitive global economy. There can be little doubt that today’s entrepreneur must be able to
move in the world of international business. The successful entrepreneur will be someone who fully
understands how international business differs from purely domestic business and is able to respond
accordingly. An entrepreneur entering the international market should address the following
questions:
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 1. Is managing international business different from managing domestic business?
2. What are the strategic issue to be resolved in international business management?
3. What are the options available for engaging in international business?
4. How should one assess the decision to enter into an international market?

International Vs Domestic Entrepreneurship: Although international and domestic entrepreneurs

alike are concerned with sales, cost, profits, what differentiates domestic from international
entrepreneurship is the variation in the relative importance of the factors affecting each decision.
International entrepreneurial decisions are more complex due to such uncontrollable factors as
economic, political, culture and Technology.

1. Economics: In a domestic business strategy, a single country at a specified level of economic

development is the focus of their entrepreneurial efforts. The entire country is almost always
organized under a single economic system and has the same currency. Creating a business
strategy for a multi-country area means dealing with differences in: levels of economic
development; currency variations; government regulations; and banking, venture capital,
marketing, and distribution systems. These differences manifest themselves in each aspect of
the entrepreneur’s international business plan and methods of doing business.
2. Political- Legal Environment: The multiplicity of political and legal environments in the
international market creates vastly different business problems, opening some market
opportunities for entrepreneurs and eliminating others. For example, U.S environmental
standards have eliminated the possibility of entrepreneurs establishing ventures to import
several models of European cars. Another significant event in the political-legal environment
involves the price fluctuations in oil and other energy products. Each element of the business
strategy of an international entrepreneur has the potential to be affected by the multiplicity of
the legal environment. Types of ownership and organizational forms vary widely throughout
the world.
3. Cultural Environment: The impact of the culture on entrepreneurs and strategies is also
significant. Entrepreneurs must make sure that each element in the business plan has some
degree of congruence with the local culture. For example, in some countries, points of
purchase displays are not allowed in retail stores as they are in the United States. An
increasingly important aspect of the cultural environment in some countries concerns bribes
and corruptions. How should an entrepreneur deal with these situations when it may mean
losing the business?. Sometimes one of the biggest problems is finding a translator. Significant
problem can occur when careless translation occurs. To avoid errors like these, care should be
taken to hire a translator whose native tongue is the target language and whose expertise
matches that of the original author.
4. Technology, like culture, varies significantly across countries. The variations and availability
of technology are often surprising, particularly to an entrepreneur from a developed country
like the United States. While U.S firms produce mostly standardized, relatively uniform
products that can be sorted to meet industry standards, this is not the case in many countries,
making it more difficult to achieve a consistent level of quality. New products in a country are
created based on the conditions and infrastructure operant in that country. For example, U.S
car designers can assume wider roads and less expensive gasoline that European designer.

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Entrepreneurial entry into International Business: There are various ways an entrepreneur can
market products internationally. The method of entry into a market and the mode of operating
overseas are dependent on the goals of the entrepreneur and the company’s strength and weakness. The
modes of entering and engaging in international business can be divided into three categories :
exporting, non-equity arrangements and direct foreign investment.

I. Exporting: Usually, an entrepreneurs starts doing international business through exports.

Exporting normally involves the sale and shipping of products manufactured in one country
to a customer located in another country. There are two general classifications f exporting ;
direct and indirect.
a) Indirect Exporting: Indirect exporting involves having a foreign purchaser n the local
market or using an export management firm. For certain commodities and
manufactured goods, foreign buyers actively seek one source of supply and have
purchasing offices in markets throughout the world. The export management firm
handles all of the selling, marketing, and delivery, in addition to any technical problems
involved in the export process.
b) Direct Exporting: If the entrepreneur wants more involvement without any financial
commitment, direct exporting through independent distributors or the company’s own
overseas sales office is a way to get involved in international business. Independent
foreign distributors usually handle products for firms seeking relatively rapid entry into
a large number of foreign markets. This independent distributor directly contacts
foreign customers and potential customers and takes care of all the technicalities of
arranging for export documentation, financing, and delivery for an established rate of
commission.
II. Non-equity Arrangements: When market and financial conditions warrant the change, an
entrepreneur can enter into international business by one of three types of nonequity
arrangements; licensing, turn-key projects, and management contracts. Each of these
allows the entrepreneur to enter a market and obtain sales and profits without direct equity
investment in the foreign market.
a. Licensing: Licensing involves an entrepreneur, who is a manufacturer (licensee) giving
a foreign manufacturer the right to use a patent, trade mark, technology, production
process, or product in return for the payment of a royalty. The licensing arrangement is
most appropriate when the entrepreneur has no intention of entering a particular market
through exporting or direct investment.
b. Turn-key projects: Another method by which the entrepreneur can do international
business without much risk is through turn-key projects. The underdeveloped or lesser
developed countries of the world have recognized their needs for manufacturing
technology and infrastructure and yet do not want to turn over substantial portion of
their economy to foreign ownership. One solution to this dilemma has been to have a
foreign entrepreneur build a factory or other facility, train the workers, train the
management, and then turn it over to local owners once the operation is going, hence
the name turn-key operation.
c. Management Contracts: A final non-equity method the entrepreneur can use in
international business is the management contract. Several entrepreneurs have
successfully entered international business by contracting their management techniques

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 and skills. The management contract allows the purchasing country to gain foreign
expertise without giving ownership of its resources to a foreigner. For the entrepreneur,
the management contract is another way of entering a foreign market without a large
equity investment.
III. Direct Foreign Investment: The wholly owned foreign subsidiary has been a preferred
mode of ownership for entrepreneurs using direct foreign investment for doing business in
international markets. Joint ventures and minority and majority equity position are also
methods for making direct foreign investments. The percentage of ownership obtained in
the foreign venture by the entrepreneur is related to the amount of money invested, the
nature of the industry, and the rules of the host government.
a. Minority Interests: Japanese companies have been frequent users of the minority equity
position in direct foreign investment. A minority interest can provide a firm with a
source of raw materials or a relatively captive market for its products. Entrepreneurs
have used minority positions to gain a foothold or acquire experience in a market before
making a major commitment.
b. Joint Ventures: Another direct foreign investment method used by entrepreneurs to
enter foreign markets is the joint venture. Although a joint ventures can take on many
forms, in its most traditional form, two firms get together and form a third company in
which they share the equity.
c. Majority Interest: Another equity method for the entrepreneur to enter international
markets is to purchase a majority interest in foreign business. In a technical sense,
anything over 50 percent of the equity in a firm is majority interest. The majority
interest allows the entrepreneur to obtain managerial control while maintaining the
acquired firm’s local identity.
d. Mergers: An entrepreneur can obtain 100 percent ownership to ensure complete control.
Mergers and Acquisitions have been used significantly in international business. During
the period of intense merger activity, entrepreneurs may spend significant time
searching for a firm to acquire and then finalizing the transaction. There are five types
of mergers namely, horizontal, vertical, product extension, market extension, and
diversified activity.

Barriers to International Trade: There are varying attitudes throughout the world concerning trade.
Starting around 1947 with the development of general trade agreements and the reduction of tariffs and
other trade barriers, there has been an over all positive atmosphere concerning trade.

General Agreement on Tariffs and Trade (GATT): One of the longest lasting agreements on trade is
the general agreement on tariffs and trade, which was established in 1947 under U.S leadership.
GATT is a multilateral agreement with the objective of the liberalizing trade by eliminating or
reducing tariffs, subsidies, and import quotas. If a member country feels that a violation has occurred,
it can ask for an investigation by the Geneva based administrators of GATT. If the investigation
uncovers a violation, member countries can be asked to pressure the violating country to change its
policy and conform to the agreed-upon tariffs and agreements.

Increasing Protectionist Attitudes: The support of GATT goes up and down. Although down in the
1970s, the support increased in the 1980s, due to the protectionists pressures in many industrialized
countries.

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Trade Blocs and Free Trade Areas: Around the world, groups of nations are banding together to
increase trade and investment between nations in the group and exclude those nations outside the
group. One little known agreement between the United States and Israel in 1985, establishes a Free
Trade Area between the two nations. All tariffs and quotas except on certain agricultural products were
phased out over a 10 year period.

Entrepreneurs Strategy and Trade Barriers: Clearly, trade barriers pose problems for the entrepreneur
who wants to become involved in international business. First, trade barriers increase an
entrepreneur’s cost s of exporting products or semi-finished products to a country. If the increased
cost puts the entrepreneur at a competitive disadvantage with respect to indigenous competitive
products, it may be more economical to establish production facilities in the country. Second,
voluntary export restraints may limit an entrepreneur’s ability to sell products in a country from
production facilities outside the country, which may also warrant establishing production facilities in
the country in order to compete. Finally, an entrepreneur may have to locate assembly or production
facilities in a country to conform to the local content regulations of the country.

Chapter 4 Search for Business Ideas

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Industrialization is brought about by well-trained entrepreneurs. Entrepreneurship is one of the most

Choosing an Idea: Establishing yourself as a successful entrepreneur depends upon choosing a good
idea. That, but good for the project idea must not only be good for the market and good for the
entrepreneur. It should also be manageable by you without much dependence on others. Importantly,
the idea should give satisfactory results to you. As an entrepreneur, when you are searching for an idea
worthy of your commitment, don’t pursue one idea at a time.

Develop five or ten in parallel until one emerges so appropriate that it begins to dominate your
thoughts and fantasies. To adopt one idea at a time has several disadvantages. First, because you are
constantly receiving random information from what you read and from people you talk to, having a
number of back-burner ideas gives you a great likelihood of finding uses for information you pick up,
secondly, if you are pursuing a single idea by feigning commitment before you feel it, you may put
yourself into a tight corner. It is very hard to be objective when you are down to your last idea.
Choosing an idea is quite difficult and the entrepreneur has to weigh objectively his intrinsic
capabilities in finalising an idea.

Methods of Generating Ideas: Even with a wide variety of sources available, coming up with an idea
to serve as the basis for a new venture still poses a problem. The entrepreneur can use several methods
to help generate and test new ideas, such as; focus groups, brainstorming, and problem inventory
analysis.

Focus Group: Focus groups have been used for a variety of purposes since the 1950s. A moderator
leads a group of people through an open, in-depth discussion rather than simply asking questions to
solicit participant response. For a new product area, the moderator focuses the discussion of the group
in either a directive or a nondirective manner. The group of 8 to 14 participants is stimulated by
comments from other group members in creatively conceptualizing and developing a new product idea
to fulfil a market need. In addition to generating new ideas, the focus groups are excellent method for
initially screening ideas and concepts.

Brainstorming: The brainstorming method allows people to be stimulated to greater creativity by

meeting with others and participating in organized group experiences. Although most of the ideas
generated from the group have no basis for further development, sometimes a good idea emerges
When using brainstorming, these four rules should be followed:

1. No criticism is allowed by anyone in the group – no negative comments.

2. Freewheeling is encouraged – the wilder the idea, the better
3. Quantity of ideas is desired – the greater the number of the ideas, the greater the likelihood of
the emergence of the useful ideas
4. Combinations and improvements of ideas are encouraged; ideas of other can be used to
produce still another new idea.

The brainstorming session should be fun, with no one dominating or inhibiting the discussion.

Problem Inventory Analysis: Problem inventory analysis uses individuals in a manner that is
analogous to focus groups to generate new product ideas. However, instead of generating new ideas

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themselves, consumers are provided with a list of problems in a general product category. They are
then asked to identify and discuss products in this category that have the particular problem. This
method is often effective since it is easier to relate known products t suggested problems and arrive at
a new product idea than to generate in entirely new product idea by itself. Problem inventory analysis
can be used to test a new product idea. Results from product inventory analysis must be carefully
evaluated as they may not actually reflect a new business opportunity.

CREATIVE PROBLEM SOLVING: Creativity is an important attribute of a successful

entrepreneur. Unfortunately, creativity tends to decline with age, education, lack of use, and
bureaucracy. Creativity generally declines in stages, beginning when a person starts school. It
continues to deteriorate through the teens and continues to progressively lessen through ages 30, 40
and 50.

1. Brainstorming: The first technique, brainstorming, is probably the most well known and
widely used for both creative problem solving and idea generation. In creative problem solving,
brainstorming can generate ideas about a problem within a limited time frame through the
spontaneous contribution of participants.
2. Reverse Brainstorming: Reverse brainstorming is similar to brainstorming, except that
criticism is allowed. In fact, the technique is based on finding fault by asking the question “ In
how many ways can this idea fail?” Since the focus is on the negative aspects of product,
service or idea, care must be taken to maintain the group morale. The process usually involves
the identification of everything wrong with an idea, followed by a discussion of ways to
overcome these problems.
3. Brainwritting: Brainwriting is a form of written brainstorming. It was created by Bernd
Rohrbach at the end of the 1960s under the name method 635and differs from classicl
brainstorming by giving participants more time to think than in brainstorming sessions, where
the ideas are expressed spontaneously. Brain writing is silent, written generation of ideas by a
group of people.
4. Gordon Method: The Gordon Method, unlike many other creative problem-solving techniques,
begins with group members not knowing the exact nature of the problem. This ensures that the
solution is not clouded by preconceived ideas and behavioural pattern. The entrepreneur starts
by mentioning a general concept associated with the problem.
5. Checklist Method: In the checklist method, a new idea is developed through a list of related
issues or suggestions. The entrepreneur can use the list of questions or statements to guide the
direction of developing entirely new ideas or concentrating on specific “idea” areas. The check
list may take any form and be of any length.
6. Free Association: One of the simplest yet most effective methods that entrepreneurs can use to
generate ideas is free association. The technique is helpful in developing an entirely new slant
to a problem. First, a word or phrase related to the problem is written down, then another and
another, with each new word attempting to add something new to the ongoing processes,
thereby creating a chain of ideas ending with a new product idea emerging.
7. Forced Relationships: Forced relationships, as the name implies, is the process of forcing
relationships among some product combinations. It is a technique that asks about objects or
ideas in an effort to develop a new idea. The new combination and eventual concept is
developed through a five-step process. 1. Isolate the elements of the problem. 2. Find the

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 relationship between these elements. 3. Record the relationship in an orderly form. 4. Analyze
the resulting relationship to find ideas or pattern. 5. Develop new ideas from these patterns.
8. Collective Notebook Method: In the collective notebook method, a small notebook that easily
fits in a pocket – containing a statement of the problem, blank pages, and any pertinent back
ground data is distributed. Participants consider the problem and its possible solutions,
recording ideas at least once, but preferably three times, a day.
9. Attribute Listing: Attribute listing is an idea-finding technique that requires the entrepreneur to
list the attribute of an item or problem and then look at each from a variety of viewpoints.
Through this process, originally unrelated objects can be brought together to form a new
combination and possible new uses that better satisfy a need.
10. Big-Dream Approach: The big-dream approach to coming up with a new idea requires that the
entrepreneur dream about the problem and its solution, in other words, thinking big. Every
possibility should be recorded and investigated without regard to all the negatives involved or
the resources required.
11. Parameter Analysis: A final method for developing a new idea – parameter analysis involves
two aspects: parameter identification and creative synthesis. Step one involves analyzing
variables in the situation to determine their relative importance. These variables become the
focus of the investigation, with other variables being set aside. After the primary issues have
been identified, the relationships between parameters that describe the underlying issues are
examined. Through the evaluation of the parameters and relationships, one or more solutions
are developed; this solution development is called creative synthesis.

Concepts of projects and Classification: The project is an important groundwork of an enterprise and
is also very crucial to the entrepreneur. Invariably, an entrepreneur cannot succeed in his venture and/
or enterprise without a project. By and large, project connotes programme of action. There are
agricultural projects with sub-project relating to land development, irrigation, soil-conservation,
fertiliser, seeds etc. The concept of project is intrinsically woven with all socio-economic and cultural
activities. The dictionary meaning of project is speculative imagination; a scheme of something to be
done; a proposal for under taking. In this case two important aspects have to born in mind, viz., a
scheme and speculative imagination. In other words, innovation and vision from an integral aspect of a
project programme.

Meaning of projects: Several economists and bankers have defined a project in different ways. The
world bank has defined project as an approval for a capital investment to develop facilitates to provide
goods and services. A project should be understood in terms of economic behaviour. Dr. Albert O.
Hirchman has said that “ the development project connotes purposefulness. Some minimum size, a
specific location, the introduction of something qualitatively new, and the expectation that a sequence
of further development moves will be set in motion. Development projects are privileged particles
of the development process”.

Characteristics of a Project: Though various connotation have been given to the concept of a project,
they have four basic characteristics:

1. Investment pattern;
2. Benefits or gains;
3. Time limit; and
4. Location.
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Project Levels: Project work in its broadest sense takes place at three levels:

At the National Level , where national investment plans are formulated, priorities among sectors are
established, and the framework of policies for economic growth is put in place.

At the Sector Level, where priorities for investment within each sector are determined and the issues
and problems affecting the development of the sector are addressed.

At a project Level, where individual projects are identified, prepared, and implemented and attention is
given to their technical, economic, financial, social, institutional, and other dimensions.

Project Classification: Project classification helps in graphically expressing and highlighting the
essential features of the project be it quantifiable or non-quantifiable, be it any potential sector, be it
capital-intensive or labour-intensive, whether it will involve small or large scale investment – will
materially affect the project’s feasibility evaluation is undertaken. In a broad sense, a project includes
all activities which are aimed at –

1. Production of goods and/or services.

2. Increasing the capacity of the existing projects, and
3. Increasing the productivity of these goods/services.

Projects have been classified in various ways by different authorities;

1. Quantifiable and non-Quantifiable Projects: Quantifiable projects are those in which a plausible
quantitative assessment of benefits can be made. Non-quantifiable projects are those where
such an assessment is not possible. Projects concerned with industrial development, power
generation, mineral development fall in the first category while projects involving health,
education and defence fall in the second category.
2. Sectoral Projects: A project may, under this classification, fall into any one of the following
sectors:
a. Agriculture & Allied Sector
b. Irrigation and Power Sector
c. Industry and Mining Sector
d. Transport and Communication Sector
e. Social Service Sector
f. Miscellaneous
3. Techno Economic Projects: Projects are sometime classified on the basis of their techno-
economic characteristics. Three main groups of classification can be identified here:
a. Factor Intensity-oriented classification: On the basis of this classification, projects may be
classified as capital intensive or labour intensive depending upon whether large scale
investment in plant and machinery or human resources is involved.
b. Causation-oriented classification: Here projects are classified as demand based or raw
material based projects.
c. Magnitude oriented classification: In this the size of investment forms the basis of
classification. Projects may thus be classified as large scale, medium scale, or small scale
projects depending upon the total project investment.
4. Financial Institutions Classification: Generally financial institutions classify the projects in the
following way;
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 a. New Projects
b. Expansion Projects
c. Modernisation Projects
d. Diversification Projects
5. Service Projects: The service oriented projects are classified as under;
a. Welfare Projects
b. Service Projects
c. Research and Development Projects
d. Educational Projects.

Aspects of Projects: There are two aspects of a project. First, a preliminary aspect of analysing the
product, its marketing, technical, financial and economic aspects. Second, the feasibility aspects. It
contains adequate information of decision making and sometimes, even implementation. The
important aspects of a project are shown kbelow:

Aspects Concerned with

I. Preliminary
Product/Service 1. Choice of product or service
2. Technical characteristics of the product or
service
3. Use of the product or service
Marketing 1. Consumer preference
2. Nature of competition
3. Potential aggregate demand
4. Likely share of the project
Technical 1. Location
2. Scale of operation
3. Manufacturing process
4. Plant and Machinery
5. Plant layout
6. Work schedule
Financial 1. Outlay on fixed assets
2. Current assets
3. Working capital
4. Short and long term finance
5. Bills etc
Economic 1. Utility to society
2. Employment generation
3. Ancillary development
4. Scope for area development
5. Social benefits
II. Feasibility
Financial Viability 1. Costs and benefits
2. Risk characteristics
3. Viability
4. Internal rate of return
Profitability 1. Revenues, earnings
2. Costs
3. Profits
4. Break-even level of operations
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Financial Projections 1. Pro-forma balance sheet
2. Sources and use of funds
Socio-economic 1. Social goals
desirability 2. Desirability of the project from the large
social angle
3. Maximum returns.

The Project Cycle: The project work comprises of several distinct stages, commonly referred to
collectively as the project cycle. The stages are closely linked and follow a logical progression, with
the later stages providing the basis for a renewal of the cycle. The principle stages of the cycle are the
identification of a project; its design, preparation and appraisal; its implementation; and its evaluation
once the investment phase has been completed.
Project identification: The project cycle begins with the identification of project ideas that appear to
represent high priority to achieve important development objectives.
Project preparation: At the next stage, a feasibility study should be taken in its principal dimensions
technical, economic, financial, social and so forth to establish the justification of the project. Project
should be designed with a view to how they will be implemented. Appropriate design is essential.
The design of projects need to be adopted to local, political, administrative, economic, and cultural
conditions, particularly if success hinges on changing behaviour.
Project Implementation: All project identification and preparation work is directed toward facilitating
project implementation and helping to ensure its success. Implementation is a critical stage of project
work.
Ex-post Evaluation: The project cycle does not end when implementation is completed and the project
goes into operation. The main purpose is to learn lessons for the design of future projects and help
ensure accountability. Ex-post evaluation should provide a comprehensive and detailed review of the
elements of success and failure of the project for enhancing the development impact of project work.
Project Management: Project management is a specialised branch of management capable of
differentiation from others based on a variety of factors which include the organisation structure, the
process of planning and control, human relation etc. Project management is a twofold; financial , and
Administrative. The process of project management is an integrative one – an action in one area
usually effects other areas. Successful project management requires actively managing the
interactions. The common project management process can be categorised into the following:
Operational Management Processes: These activities are seen as ongoing activities with neither a clear
beginning nor an expected end.
Planning: Identifying objectives and devising a workable scheme to accomplish them.
Executing: Co-ordinating people and other resources to carry out the plan.
Controlling: Ensuring that the objectives are met by measuring progress and taking corrective action
when necessary.
Additional Project Management Processes: Projects are temporary in nature, they have both an
identifiable starting point and an emphasis on timely future termination. The additional process are:
Initiating: Recognising that a project should begin and committing to do so.
Closing: Formalising acceptance of the project and bringing it to an ordinary end.
Technical Processes: These vary by application areas and are to be identified and handled by
application experts. These processes are not discrete and in an actual project there will be many
overlaps. Basic process interactions occur within each phase such that closing one phase provides
inputs for initiating the next. Thus the planning process must not only provide work done in the
current phase for successful completion, but must also provide some preliminary description of or to
be done in later phase.
.

“
 Chapter 5 Source of Capital

Where does an entrepreneur get the funds to turn his or her dreams into reality? Funds come from a
variety of sources, but in the case of Walt Disney, it all started with a clandestine paper route. Born in
Chicago and raised on a small farm in Missouri, Walt Disney move to Kansas city with his family
when he was 10 years old. He and his brother worked without pay delivering newspapers for their
father’s circulation franchise. Whenever Walt found a new customer, he bypassed his father and
brought the additional papers directly from newspaper office, thereby establishing his own route. With
the profits from his private venture, he was able to satisfy his sweet tooth without the knowledge of his
parents, who forbade the candy in their home.

One of the most difficult problems in the new venture creation process is obtaining financing. For the
entrepreneur, available financing needs to be considered from the perspective of debt versus equity and
using internal versus external funds.

Debt or Equity Financing: Two types of financing need to be considered: debt financing and equity
financing. Debt financing is a financing method involving an interest-bearing instrument, usually a
loan, the payment of which is only indirectly related to the sales and profits of the venture. Typically
debt financing (also called as asset based financing) requires that some asset (such as car, house, plant,
machine or land) be used as collateral. Debt financing requires the entrepreneur to pay back the
amount of funds borrowed as well as a fee expressed in terms of the interest rate. There can also be an
additional fee, sometimes referred to as points, for using are being able to borrowing money.

Equity financing does not require collateral and offers the investor some form of ownership position in
the venture. The investor shares in the profits of the venture, as well as any disposition of its assets on
a pro rata basis based on the percentage of the business owned. Key factors favouring the use of one
type of financing over another are the availability of funds, the assets of the venture and the prevailing
interest rates. Usually, an entrepreneur meets financial needs by employing a combination of debt and
equity financing. All venture will have some equity, as all ventures are owned by some person or
institution. Although the owner may sometimes not be directly involved in the day-to-day
management of the venture, there is always equity funding involved that is provided by the owner.
The amount of equity involved will of course vary by the nature and size of the venture.

Internal or External Funds: Financing is also available from both internal and external funds. The type
of funds most frequently employed is internally generated funds. Internally generated funds can come
from several sources within the company: profits, sale of assets, reduction in working capital, extended
payment terms, and accounts receivable. In every new venture, the start-up years involve putting all
the profits back into the venture; even outside equity investors does not expect any pay back in these
early years. The needed funds can be sometimes be obtained by selling little used assets. A short
term, internal source of funds can be obtained by reducing short-term assets; inventory, cash and other
working-capital items. A final method of internally generating funds is collecting bills (accounts
receivable) more quickly.

The other general source of funds is external to the venture. Alternate sources of external financing
needs to be evaluated on three bases; the length of the time the funds are available, the costs involved,
and amount of company control lost. The more frequently used sources of funds are self, family and

“
friends, commercial banks, R&D Limited partnerships, Government loan programs and grants,
Venture capital and private placement.

Personal Friends: Few, if any, new ventures are started without the personal funds of the entrepreneur.
Not only are these the least expensive funds in terms of cost and control, but they are essential in
attracting outside funding, particularly from banks, private investors and venture capitalists. The
typical sources of personal funds include savings, life insurance, or mortgage on a house or car. These
outside providers off capital feel that the entrepreneur may not be sufficiently committed to the venture
if he or she does not have money invested.

Family and Friends: Family and friends are a common source of capital for a new venture. They are
most likely to invest due their relationship with the entrepreneur. This helps overcome one portion of
uncertainty felt by impersonal investors – knowledge of the entrepreneur. Family and friends provide a
small amount of equity funding for new ventures, reflecting in part the small amount of capital needed
for most new ventures. The entrepreneur should carefully consider the impact of the investment on the
family member or friend before it is accepted. Particular concern should be paid to any hardships that
might result should the business fail. Each family member or friend should be investing in the venture
because they think it is a good investment, not because they feel obligated.

Commercial Banks: Commercial banks are by far the source of short-term funds most frequently used
by the entrepreneur when collateral is available. The funds provided are in the form of debt financing
and, as such, require some tangible guaranty or collateral – some asset with value. This collateral can
be in the form of business assets, personal assets or the assets of the co-signer of the note. There are
several types of bank loans available. To ensure repayment, these loans are based on the assets or the
cash flow of the venture. The asset base for loans is usually accounts receivable, inventory, equipment
or real estate.

1. Accounts Receivable Loans: Accounts receivable provide a good basis for a loan, especially if
the customer base is well known and creditworthy. For those creditworthy customers, a bank
may finance up to 80 percent of the value of their accounts receivable.
2. Inventory Loans: Inventory is another of the firm’s assets that is often a basis for a loan,
particularly when the inventory is liquid and can be easily sold. Usually, the finished goods
inventory can be financed for upto 50 percent of its value. Trust receipts are unique type of
inventory loan used to finance floor plan of retailers, such as automobile and appliance dealers.
In trust receipts, the bank advances a large percentage of the invoice price of the goods and is
paid on a pro rata basis as the inventory is sold.
3. Equipment Loans: Equipment can be used to secure longer-term financing, usually on a 3 to 10
years basis. Equipment finance can fall into any of several categories: financing the purchase
of new equipment, financing used equipment already owned by the company, sale-leaseback
financing, or lease financing. When new equipment is being purchased or presently owned
equipment is used as collateral, usually 50 to 80 percent of the value of the equipment can be
financed depending on its salability.
4. Real estate Loans: Real estate is frequently used in asset-based financing. This mortgage
financing is usually easily obtained to finance a company’s land, plant or another building,
often up to 75 percent of its value.

“
 Cash Flow Financing: The other type of debt financing frequently provided by commercial banks
and other financial institution is cash flow financing. These conventional bank loans include lines
of credit, instalment loans, straight commercial loans, long term loans and character loans.

a. Lines of Credit financing is perhaps the form of cash flow financing most frequently used by
entrepreneurs. In arranging for a line of credit to be used as needed, the company pays a
“commitment” fee to ensure that the commercial bank will make the loan when requested and
then pays interest on any outstanding funds borrowed from the bank. Frequently, the loan must
be repaid or reduced to a certain agreed upon level on a periodic basis.
b. Instalment Loans: Instalment loans can also be obtained by a venture with a track record of
sales and profits. These short term funds are frequently used to over working capital needs for
a period of time, such as when seasonal financing is needed. These loans are usually for 30 to
40 days.
c. Straight Commercial Loans: A hybrid of the instalment loan is the straight commercial loan, by
which funds or advanced to the company for 30 to 90 days. These self liquidating loans are
frequently used for seasonal financing and for building up inventories.
d. Long-Term Loans: When a longer time period for use of the money is required, long term
loans are used. These loans (usually available only to strong, mature companies) can make
funds available for up to 10 years. The debt incurred is usually repaid according to a fixed
interest and principle schedule.
e. Character Loans: When the business itself does not have the asset to support a loan, the
entrepreneur may need a character (Personal) loan. These loans frequently must have the assets
of the entrepreneur or other individual pledged as collateral or the loan co-signed by another
individual.

Research and Development Limited Partnerships: Research and development partnerships are another
possible source of funds for entrepreneur in high-technology areas. This method of financing provides
funds from investors looking for tax shelters. A typical R&D partnership arrangement involves a
sponsoring company developing the technology with funds being provided by a limited partnership of
individual investors. R&D limited partnerships are particular good when the project involves a high
degree of risk and significant expense in doing the basic research and development. Since the risks, as
well as the ensuing rewards, are shared.

Government Grants: The entrepreneurs sometimes can obtain financial support from Government and
agencies run by government to encourage young entrepreneurs to come forward and establish
enterprises to give push to the economic development of the country. Any country economic
development is largely depends on the entrepreneurs, who not only provides the employment to the
people and at the same time they bring foreign currency to the country, which is very essential for the
economic growth of the country.

Private Placement: Another source of funds for the entrepreneur is private investors, who may be
family and friends or wealthy individuals. Individuals who handle their own sizable investments
frequently use advisors such as accountants, technical experts, financial planners or lawyers in making
their investment decisions. An investor usually takes an equity position in the company, can influence
the nature and direction of the business to some extent, and may even be involved to some degree in
the business operation. The degree of involvement in the day-to-day operations of the venture is an
important point for the entrepreneur to consider in selecting investor. Some investors want to be
“
actively involved in the business; others desire at least an advisory role in the direction and operation
of the venture. Still others are more passive in nature, desiring no active involvement in the venture at
all. Each investor is primarily interested in recovering his or her investment plus a good rate of return.

Bootstrap Financing: One alternative to acquiring outside capital that should be considered is
bootstrap financing. The approach is particularly important at start-up and in the early years of the
venture when capital from debt financing (i.e., in terms of higher interest rates) or from equity
financing (i.e., in terms of loss of ownership) is more expensive. Bootstrap financing involves using
any possible method for conserving cash. While some entrepreneurs can take advantage of any
supplier discount available.

“
 Chapter 6 Marketing Concepts

It is necessary to distinguish between marketing as a concept and marketing as a group of activities

that executives carry out, between marketing as a ‘thought-process’ and marketing as a ‘doing-
process’. Marketing must start as a concept which defines the purpose of marketing operation rather
than as a description of the operations themselves. There is no universal formula for mobilising and
organising the marketing effort and no single mould for casting a firm’s marketing structure. There is
no indeed universally accepted definition of ‘marketing’.

The American Marketing Association defines marketing as ‘the performance of business activities that
direct the flow of goods and services from producer to consumer or user’. As it stands this definition is
purely factual and descriptive. It emphasises activity rather than effective accomplishment. It does not
provide an adequate explanation of which goods or services in what quantities and with what
characteristics ought to be produced or of the importance of planning and integrating these and related
activities concerned with the movement of goods and services from the producer to the consumer. The
economies of large scale production and return from long range investments cannot be realised unless
the output can be sold and added capacity resulting from investment fully utilised, at least for most of
the time.

J.H.Buck, a unilever food marketing specialist, gave his organisation’s definition of marketing as ‘the
planning and execution of all aspects and activities of product so as to extent optimum influence on the
consumer to result in maximum long-term profit’. The key element in the definition is maximum
consumption at optimum price resulting in maximum long-term profit.

Traditional Marketing Modern Marketing

1. Meaning It deals with production and It deals with production and
product to be sold out at any distribution, satisfying the needs
cost to consumer. of consumer.
2. Satisfaction of It deals with circulation of It consider consumer
consumers products, irrespective of satisfaction as an important
satisfaction of consumer aspect.
3. Profit generation Profit earning has weightage Profit motive is secondary to the
satisfaction of consumer
4. Approach It is product oriented It is consumer oriented
5. Mutual relations It does not find any relationship It takes into account
among the various marketing relationship, coordination and
functions. integration among all the
marketing functions.
6. Social responsibility It has such an approach It deals with satisfaction of
consumers as social
responsibility.
7. Research and It is absent in this regard However, it has a basis of
Development research and development of
products, marketing research for
products, consumer and
publicity.

Salient Features of Marketing: The following are the salient features of marketing.
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1. It is a creative function.
2. It promotes business and employment;
3. It coordinate finance, production and distribution and determines and directs the scale and
value of the total efforts;
4. There is an emphasis on what the customer/borrower wants.
5. There is an emphasis on the social good, on increasing employment, by giving the
customer/consumer the chance to decide; and
6. It is a process of exchange between seller and buyer. It may be a commodity or a service.

Marketing Mix: A successful marketing strategy depends upon a marketing mix of all the
marketing elements and resources. The basic marketing mix is the blending of four inputs or sub-
mixes which form the core of the marketing system: 1. Product mix, 2. Place mix, 3. Promotion
mix, 4. Price Mix. The outputs are optimum productivity and satisfaction.

PRODUCTION MIX PRICE MIX

1. Brand 1. Pricing strategy

2. Style 2. Pricing policy
3. Colour 3. Basic price
4. Design 4. Terms of Credit
5. Product line 5. Discounts
6. Package 6. Allowances
7. Warranty
8. Service

MARKETING STRATEGY

Marketing mix focussed

on Target Market

PR OMOTION MIX PLACE MIX

1. Personal Selling DISTRIBUTION CHANNELS

2. Advertising
3. Publicity 1. Wholesalers
4. Sales Promotion 2. Retailers
i. Dealers Aids 3. Mercantile agents
ii. Consumer Aids PHYSICAL DISTRIBUTION

Transport

Warehousing

Inventory

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Marketing involves three basic inputs: the product, the promotional methods and the distribution
system. These three are the core of the marketing programme and must be integrated to achieve
maximum consumer satisfaction and optimum profits. The marketing process brings together
producers and customers – the two important segments in any exchange. An exchange or a transaction
takes place when a market offering is acceptable to the customer who is prepared to give something in
return for the product he purchases. The marketing process starts with knowledge of the customer, his
needs and ends with a customer purchase and the satisfaction of those needs.

Marketing Research: In a dynamic economy, marketing research acts as the investigative arm of the
marketing manager – a management tool in the planning –control cycle. Marketing research covers: 1.
Marketing research; 2. Sales research; 3. Product research; 4. Advertising and promotion research; 5.
Research on sales methods and policies; 6. Distribution research, including dealers research.

Marketing research is invaluable tool to plan, measure and evaluate marketing effort so that the
marketing management can offer: 1. The right product; 2. The right package, and brand; 3. The right
time; 4. The right promotion; 5. The right channels; 6. The right means of physical distribution; 7. The
right trade policies, and 8. The right marketing strategies and plans

Company’s marketing efforts starts and end with customer

1. Company’s marketing efforts start and end with customer

2. Marketing research is a valuable tool to optimise the marketing efforts so that we have a
minimum of waste and maximum of advantage.
3. Marketing research enables identification and analysis of customer’s market.
4. Marketing research is used for devising an appropriate marketing programme.
5. Each component of the marketing mix is formulated on the basis of marketing information and
research on product, price, promotion and distribution.
6. Marketing research is also used to evaluate the results of marketing effort when marketing
programme is implemented. It provides feedback information on customer’s satisfaction and on
the achievement of marketing goals
7. At present marketing research is used to evolve the solution of consumers’ problems as well as
ecological and environmental problem under the social concept of marketing.

Marketing Channel: A channel is the pipeline through which a product flows on its way to the
consumer. The manufacturer puts his product into the pipeline or marketing channel and various
marketing people move it along to the consumer at the other end of the channel. In the words of
Stanton “ A channel of distribution for a product is the route taken by the title to the product as it
moves from the producer to the ultimate consumer or industrial user”.

Importance of Marketing Channel: Channels of distribution have a vital role to play, especially in the
distribution of consumer goods. The most innovative product offered at an attractive price would be of
no use unless there is an efficient distribution system. The consumer will not search for the product, it
has to be made available at a convenient place from where he can obtain it easily. The distribution
channel provides three types of utilities – time, place and ownership. Time utility means the product
should be made available when consumer wants them. Place utility is provided by making the product
available at a location where consumer wants it. Ownership utility is created when the physical
possession and title to the product are transferred to the consumer.

“
Functions of Marketing Channels: The channels of distribution perform the following functions:

1. Channels provide the route to link the producers and users. Goods produced in far away places
are made available to the users.
2. Goods are stored by the middlemen in the channel and released to the market depending on the
demand.
3. Introduction of new product/merchandising is made easier. They bring to the notice of their
customers new products and help the manufacturer in demand creation.
4. Consumers can purchase a variety of products from the retailers, because retailers usually stock
various products manufactured by different manufacturers.
5. Channels provide the financing function. They advance money to the manufacturers and render
credit facilities to the retailers.
6. They give advice regarding the price which is acceptable to the producer and the consumer.
7. Physical possession and transfer of title to goods are made easier.
8. They provide market information to the buyers.
9. They bring product nearer to the consumer.
10. They play a crucial role as price regulator of products.

Important Distribution Channels: The distribution of goods takes place through one of the following
channels:

1. From the manufacturer direct to the consumer.

2. From the manufacturer to the retailer and then to the consumer.
3. From the manufacturer to the wholesaler; from the wholesaler to the retailer and then to the
consumer.
4. From the manufacturer to the commission agent; from agent to the wholesaler, retailer and then
to the consumer.
5. From the manufacturer to the wholesaler and then to the consumer. There are alternatives in a
direct sale to the consumer:
a. Sale through advertising and direct methods
b. Sale through a travelling salesman (house-to-house) canvassing;
c. Sale through retail shops of small entrepreneurs, i.e., mills cloth shops

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 Chapter 7 Location of enterprise

Location considerations for the establishment of manufacturing plants are critical to the operation of
the set-up in an uninterrupted and least resistant manner. The study of industrial location forms an
important branch of economic geography which has engaged the attention of both economists and
geographers. Economists judge from the point of view of profit, productivity and growth. Similarly
they may also look from the point of view of raw material, market, labour, finance, infrastructure
policy costs, incentives and subsidies. An ideal site certainly contributes to the smooth and efficient
functioning of an enterprise. It not only saves on costs but also enhances productivity and profits. An
ideal location is a boon to a manufacturing unit to grow, diversify and prosper, as well as provide
quality products on an ongoing basis.

Need for Enterprise Location: The need for plant location arises under the following circumstances:

1. When a new enterprise is to be established.

2. In the case of established enterprise, the need for enterprise location arises when expansion,
decentralisation and diversification is undertaken to meet the increased demand for its products.
3. Whenever the existing factory is not in a position to obtain renewal of license.
4. When an undesirable location is to be abandoned.
5. When the tendency of shifting the market, depletion of raw materials, changes in transportation
facilities, new processes requiring a different location are observed in a factory.
6. When a new branch or branches are to be opened for increasing the volume of production or
distribution or both.

The selection of an appropriate location enables the enterprise to operate smoothly, efficiently, and
with the minimum cost, it is estimated that manufacturing and distribution costs may vary to an extent
of 10 per cent simply by virtue of the choice of enterprise location. Wrong location leads to wastage in
efforts and talents of the promoters with consequent uncertainty. Location is also an important factor
determining the ultimate success or failure of a small-scale unit.

Steps in Enterprise Location: According to Bethel, Atwater and Smith, enterprise location involves
three main steps. They are: 1. Selection of the region or general area; 2. Selection of the particular
community; and 3. Select of the exact plant site.

In choosing a plant location the entrepreneur would do well to follow the under mentioned steps:

i. Selection of the region

ii. Selection of the locality or community;
iii. Selection of the exact site; and
iv. Selection of an optimum site.

However, sometimes the project site is determined by the Government’s licensing regulations and not
by the choice of the promoters. Since location is an extremely important aspect for ensuring
commercial success of an enterprise, appraisers evaluate location in relation to availability of raw
materials, power, labour, fuel, transport, market and other infrastructure needs.

Factors Affecting Location of Enterprise:

“
 A. Selection of B. Selection of C. Selection of D. Optimum
Region Community Site Selection of
Site
Availability of raw Availability of labour Soil, size and Optimum site is
materials topography selected on the basis of
Nearness to market Civic amenities for Disposal waste a comparative
workers economic survey of the
Availability of power Existence of Price of land alternative sites in
and fuel complementary and question
competing industries
Transport Finance and Research Expansion Potential
facilities
Suitability of climate Availability of water Commercial service
and the fighting
facilities
Government policy Local taxes and Communication
restrictions
Competition among Momentum of early Availability of
states start amenities
Methodological Personal factors Health of locality
conditions and
topography
Banking facility Statutory
considerations
Communication facility Flood and drought
experience
Cultural affinity Right and title of the
land
Religious and Social Good scenery
institutions
Educational Attitude of local people
environment
Historical Factors Technological know
how
Political stability State Assistance

Small Scale Industry: One of the distinctive characteristics of small scale sector is that, the
development of these industries would create broader employment opportunities, assist in
entrepreneurship and skills development, and ensure a better use of scarce financial resources and
appropriate technology.

The basic objective underlying the development of small and medium scale industries are the increase
in the supply of manufactured goods, the promotion of capital formation, the development of
indigenous entrepreneurial talents and skills and the creation of broader employment opportunities. In
addition, they include socio-economic goals such as the decentralisation and dispersal of
manufacturing activities from the metropolitan to non-metropolitan and rural area, the reduction of
regional economic imbalances within a country and the diffusion of entrepreneurial and managerial
abilities and skills and technology throughout the country.

“
An entrepreneur may be a qualified engineer. Even so, he should not dream of becoming a small
entrepreneur unless he is confident of meeting the following twelve essential requirements:

1. The entrepreneur should be fully conversant with the product line. It is not enough that he
knows the method of manufacture; he has to know how to operate the machines, etc.
2. He should have adequate shop floor experience to guide the machine operators in fool-setting
techniques or the die-maker on the specific needs of his press tools.
3. He should familiar with the raw materials he requires, their specifications, how to ensure the
quality and where to get them at a reasonable price.
4. He should know how to keep accounts, how to maintain stores, how to prepare the balance
sheet, etc.
5. He should have knowledge of marketing channels, distribution network, agency practices,
transport intricacies and the economics of packaging.
6. He should know how to ensure the stipulated quality of his product.
7. He should be well versed with taxation and other laws related to small scale companies.
8. He should know how to avail himself of the various benefits available to the small scale
industries.
9. He should possess expertise, shrewdness, resourcefulness and, most important preservance in
his business dealings. There is no substitute for hard work.
10. He should have the guts to withstand the high pleasure climate in which he has to build his
unit.

The following is the process through which any entrepreneur goes for setting up a small scale
enterprise.

UNDERLYING MOTIVATION

FORMULATION OF IDEAS

PROJECT PLANNING

PRACTICAL ELOBARATION

THE START

The following are the steps of the ladder the entrepreneur (Small) has to climb:

34. Ancillary Development

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33. Grow Bigger

32. Compete with others

31. Modernisaton

30. Diversification

29. Plough back profits

28. Keep up to date

27. Sell

26. Produce

25. Plan out record keeping

24. Organise Marketing

23. Decide on Pricing Policy

22. Trial Run

21. Recruit Personnel

20. Procure Material

19. Install Machinery

18. Plan Buying

17. Apply for materials

16. Place order for machinery

15. Plan sources of machinery

14. Plan Finance

13. Obtain clearance from central and local authorities

12. Make sure what laws will particularly affect.

11. Arrange the work-shed with facilities.

10. Decide on Location and Site

09. Obtain project report

08. Decide whether to purchase a going concern or to start a new one.

07. Decide on form of ownership ( Private/public/Partnership)

06. Choose a line.

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05. Date with yourself for a decision.

04. Discuss with all around you and with government agencies

03. Consult publications and agencies

02. Date with yourself for newer ideas.

01. Analyse yourself and your objectives.