Concept and Practice of Entrepreneurship

By Prof. Dionco-Adetayo

A summary description of entrepreneurship according to Robert C. Ronstadt in Kuratko states as follows:

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

The entrepreneurs who serve as agents of change provide creative, innovative ideas for business enterprises and make businesses grow and become profitable. They build multimillion enterprises from fledgling businesses. There are entrepreneurs of today (who) research to have personal initiatives, ability to perceive economic opportunities, ability to consolidate resources requiring management skills, (to) create an enterprise, (to have) a demonstration of a desire of autonomy and the spirit to succeed.

The cotemporary entrepreneur is not the entrepreneur known to have ceased his entrepreneurial position after generating an innovative idea. Entrepreneurship is a process that goes beyond generating ideas. Entrepreneurship is a process involving ideation, conceptualization, enterprise creation, commercialization, and business growth. There are factors involved to ensure entrepreneurial success. These factors were integrated in a definition developed by Kuratko. Entrepreneurship is defined as:

a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. Essential ingredients include the willingness to take calculated risks in term of time, equity, or career; the ability to formulate an effective venture team; the creative skill to marshal needed resources; the fundamental skill of building a solid business plan; and finally, the vision to recognize opportunity where others see chaos, contradiction, and confusion.

Entrepreneurship is more than creating a new business enterprise, acquiring or expanding an existing business. Entrepreneurship is the process of creating value. Entrepreneurship requires skill and ability of an individual to achieve the set goals and objectives of the enterprise regardless of business size, be it small or large. It is only the capital or investment size or other parameters of measurement that separates small from other scales. The entrepreneurial process remains the same and the roles and nature of the entrepreneurs are universal. It is notable, however, that a society has its own peculiar environment different from other societies. These environmental factors have been identified to be influencing the development and success of entrepreneurship. This is why there are countries or societies whose entrepreneurial level is high and there are those that are low.

The entrepreneur establishes the business and is also responsible in the accomplishment of its mission in the industry. The term entrepreneurship was earlier referred as to “undertake”. To undertake means an attempt to begin or to do and make oneself responsible. Thus, entrepreneurship entails not only the creation of the enterprise but also the organization and management of resources, and the responsibility of its survival and growth. This could be explained further that entrepreneurship (entrepreneurs) initiates appropriate actions to get things done at the right time through innovative, creative and persistent efforts in the realization of the organization’s goals.

The entrepreneur makes decisions. The entrepreneur thinks of various ways and selects the best alternative in every decision he makes. He may, either put the product into other uses or discover a new market, look for raw material substitute during resource scarcity or decide for bulk buying strategy and so forth. The entrepreneur always generates or looks for ideas and integrates these into the stored ideas or newly deliberated ideas. He may incubate them, letting his subconscious mind work to hit upon a bright idea. This process of creating value can be called entrepreneurship. Entrepreneurship involves, (as mentioned), the stages of ideation, conceptualization, enterprise creation, commercialization and business growth.

Stage 1 Ideation➙ Perceives economic opportunity Introduces innovation Takes risk

Stage 2 Conceptualization➙Developing feasibility study Business planning Capital formation Resource organization

Stage 3 Venture creation➙ venture choice; starting a new business Franchise agreement Buying existing business Business ownership: proprietorship Partnership Corporation

Stage 4 Commercialization ➙ Production Marketing

Stage 5 Business Growth➙Expansion Diversification Modernization Merger/acquisition

The Process of Entrepreneurship

Stage 1: Ideation Stage

Ideation is the process of generating ideas and becoming thoroughly familiar with them. It is a period of sleepless nights thinking for business opportunities. The ideas may not only come from the entrepreneur as prior work experience, his hobbies and vocations, but may come from various sources like friends, associates, technology, bank, experts, networks, family, and others. The ideas may also originate from the market, which has the peculiar need of the goods and services. Ideation has three stages: (1) perceived economic opportunity, (2) introduces (introduction of) an innovation, and (3) taking the ris k of starting an enterprise.

Entrepreneur perceives economic opportunity:

Before any economic undertaking will be set up, the entrepreneur has to respond to the opportunity the environment is offering. The entrepreneur has the vision to spot the opportunities in the environment. It could be a problem of the society that requires a solution or it could be resources that have to be utilized or it could be a need to be satisfied. Identifying the problems of consumers is one of the best ways to describe an economic opportunity. Another is to take note of the kinds of raw materials that are available and relate these materials to the needs of the people. The entrepreneur keenly observes the environment in search of ideas. He is sensitive to the needs of his society and this energizes him to look for a solution to satisfy the need of mankind. Entrepreneurs successfully identify economic opportunity and he is equipped of the three fundamental points to consider. These include: (i) a product must respond to buyers’ needs and wants, (ii) available resources, and (iii) possible sources of business ideas.

Entrepreneurs are clearly described as opportunity driven people. Opportunity comes from changes in the environment. Entrepreneurs are good in seeing the patterns of changes. The ability to perceive economic opportunity marks that entrepreneurs are not resource driven. While the manager asks, “given the resources under my control, what can I achieve?”, the entrepreneur asks, “given what I want to achieve, what resources I need to acquire?”

Entrepreneur introduces innovation:

To produce better solutions to human needs, innovations have to be turned into inventions and diffused through the society. Technological progress has no effect on development unless this is actually introduced into day-to-day operations of the economic system. That is transforming theory into practice. Innovation is a creative process that enables the entrepreneur to do things never done before in order to change and improve the quality of life. It can mean not merely improvement of the same goods, but goods and services that have not previously existed. It could be ideas of technological design, introduction of new products, process, service, or market.

In the process, the entrepreneur may experience the following steps of creative thinking:

• Saturation: becoming thoroughly familiar with the ideas and the responsibilities of making it a reality.
• Deliberation: mulling over these ideas, analysing them, challenging them, rearranging them, and looking at them from several viewpoints.
• Incubation: relaxing, turning off the conscious and purposeful search, forgetting the frustration of unproductive labour, letting the subconscious mind works.
• Illumination: hitting upon a bright idea, a bit crazy perhaps, but new and fresh and full of promise, sensing that it might be the first.
• Accommodation: clarifying the idea, seeing whether the concept satisfies the need as it did on first thought, reframing and adapting it, getting other people’s reaction to it.

Innovation implies newness, variation, novelty or uniqueness. Thus, an innovative person is open to change. The entrepreneur is continuously revolutionizing everyday living. He thinks on how an existing product can have more uses and more usage, adapted, modified, magnified, substituted, reversed or combined. Innovation could also mean a new undertaking and untried business possibilities, reorganizing an enterprise, opening up a new market, developing a new source of supply, or exploiting an invention (Schumpeter, 1934). The entrepreneur in this sense keeps on looking for ways in which products could be more efficiently produced. For instance, Japan devoted twenty-five years of developing western inventions and did very little inventions. They went on to improve those inventions until their copies outstripped the original in features and in quality. In the United States, Carnegie is remembered as principal creator of the steel industry, Rockefeller as the prime mover in the rise of standard oil; and Ford as the father of the moving assembly line technique of mass production. None of them, however, invented anything. The achievement of each laid on the ability to judge the most opportune time in introducing an available technology, to set fundamental production and marketing policies, to establish the organization for carrying them out, to adjust the realities of a changing market, and to maintain the inner growth and development of the enterprise.

Entrepreneur assumes the risks:

Entrepreneurs are calculated risk-takers. They enjoy the excitement of a challenge, but they don’t gamble as the high risk takers do. Risk-taking implies that an entrepreneur does not merely perceive ideas as opportunities but also calculate the risks involved in implementing these ideas. Risk denotes uncertainty or chance. When a business is described as risky, it means that the outcome is uncertain. There is a chance that the business may fail, as there is that it may succeed. When an entrepreneur calculates the risks of a business, he estimates the odds for success as well as for failure. That is, by balancing potential success against potential loss. On the basis of this, he makes decision. This made entrepreneurs to be called risk-takers or moderate risk-takers. They avoid low risk because there is a lack of challenge. Seldom, they go to the bank and queue to get their statements of account and know if the interest has been paid. They also avoid high risk because they want to succeed. Entrepreneurs as moderate risk takers do not undertake activities where they know nothing at all about the possibilities for success. Moderate risk activities are those whose outcome depends largely on a person’s skill or efforts, which means the more efficient the efforts put forward, the higher would be the reward. High risks activities are based mainly on luck andalmost certainly cannot be controlled by efforts or skills such as investing money in lottery tickets. Low risk means an investment that requires less effort with high assurance for the reward, although the reward is lesser. For instance, putting money in the bank is an assurance that it yields interest.

In taking such risks, the attractiveness of each alternative is considered. The attractiveness of an alternative means the probability of the venture to enjoy a competitive advantage. This advantage over competitors can be measured following these steps: (1) clarify the alternatives. (ii) deliberate and analyse the alternatives, and (iii) minimize the risks.

Clarify the alternatives:

The alternatives are important to be specified in sufficient detail and should have adequate information. There must be a realistic assessment of all the given alternatives. The entrepreneur needs to recognize the effect of environmental factors into the business operation.

Analyse and deliberate the alternatives:

Reactions to the above information must be assessed and predicted and the possible effects must be calculated. The results of the analysis and deliberation can give an assurance of a possible success and provide a positive outlook towards the best alternative.

Minimized the risks:

In business, there is clearly no way to avoid risk-taking because if there are opportunities, threats are also inevitable. However, business risks can be minimized. This can be done through the following steps:

• Identity the trend and development of the business environment. Trend and development in the external environment can be opportunities or threats to the business. Opportunity refers to the attractiveness and success probability that the enterprise would have, while a threat is unfavourable environment that could lead the enterprise into failure.
• Classify the attractiveness and success probability of each alternative. The attractiveness and success probability of an alternative can be classified based on the competence of the enterprise. Competence of the enterprise can be described as the resource ability and capacity of the firm in meeting its objectives and goals. This specifically refers to the ability of the enterprise in meeting the demand of the consumers on products and services intended to offer and the competence to exceed those of the competitors. It must be born in mind that success depends on the organization’s ability to generate the greatest customer value and sustain it overtime.

• Classify the identified threats: The various identified threats should be classified according to their seriousness and probability of occurrence. The identified threats with high probability of occurrence have outweighed the attractiveness of the opportunity. It is impossible, however, to determine and characterize the overall attractiveness of a business against its threats; but an ideal business is one that is high in major opportunities and low in major threats, while a speculative business is high in both major opportunities and threats. A mature business is low in major opportunities and threats, and a troubled business is low in opportunities and high in threats.
• Rate the strengths and weaknesses: An enterprise has to identify and rate its strengths and weaknesses. Rating the strengths and weaknesses of the firm mean determining the areas of its competence. This step determines the low priority or high priority of concentration in all the functional areas of the organization.
• Selecting the best alternative: In selecting the best alternative, ranking method may be useful to identify the best option. Another way involves the screening of ideas or alternatives, and selecting the best option. This can be done through comparing the options according to (i) ease of entry (ii) (degree of risk, (iii) return on investment, and (iv) personal interest.

Ease of entry is affected by several factors. These include capital requirements, market demand, technology availability, manpower skills, and legal aspects. A potential entrepreneur may be limited to a certain type of business by the amount of capital he has. The business will also be determined by the degree of competition in the market. Technical knowledge or experience of the potential entrepreneur is also needed in a particular business. Products that are under legal restrictions are necessary to be considered. The entrepreneur then weighs the level of risk he takes in carrying out the venture considering each aspect and quantifies the possible gains he would have. Personal interest is also important to consider because an individual who is interested in a particular activity will certainly put his utmost best to see that the undertaking would be a success.

Stage 2: Conceptualization Stage

Conceptualization is the process of generalising the possibility of the ideas into a tangible offer by considering all the factors needed in producing and marketing the product. These factors include the market, raw materials, technology, economy, workforce, competition, finance and other related factors. The process involves four stages: (i) feasibility study, (ii) business plan, (iii) capital formation, and (iv) resource organization.

• Entrepreneur undertakes feasibility study: In selecting the best decision from a possible number of business alternatives, the place of a good project feasibility study (is inevitable). Once the project has been identified, a more detailed study has to be undertaken not only to confirm that one had made the right choice but also to guide the entrepreneur in running the business smoothly. This detailed study about the business is called the feasibility study. A feasibility study is not an antidote to failure (in business) as others believed but it is done purposely to enhance the probability of a specific business activity. A feasibility study is a thorough and systematic analysis of all factors that affect the possibility of success of a proposed undertaking. It covers the market, technical, financial, organization and management, and socio-economic aspects of the proposed enterprise.

The marketing study projects the annual product quantity expected to be sold by the project. Specifically, the market study seeks to determine the size, nature and growth of total demand; description and price of the product; supply situation and nature of competition; factors affecting the product and marketing programme. The technical study considers three basic issues; these are product quality; resource availability and accessibility; and optimal use of resources to produce the highest possible quality at the lowest possible cost. In evaluating the project’s profitability, it is important to consider the industry’s profitability picture. This requires the preparation of the financial study. This includes the number of financial statements and the analysis of several benchmarks in the form of ratios culled from the statements.

The management study deals with ascertaining the effective organization which will carry out the objectives of the projects. It encompasses the organisation from the point of its inception to accomplishment of the objectives within the most reasonable period and within budgeted costs. In other words, organisation’s effectiveness refers to the ability of the organisation setup to carry out its functions effectively while having the lowest manpower level possible. This implies a clear and precise identification of duties and responsibilities, flow of authority, and manpower level requirements. Financial study gauges the project’s profitability, liquidity, cash solvency and growth overtime. The socio-economic study includes the social and economic contributions of the project. This determines whether the society and the economy will derive net positive gains from the project. That is, if the environment as a result of the activities will be seriously polluted, or if the project would improve income earning opportunity for people and the like.

• Entrepreneur develops business plan: The entrepreneur has to prepare a business plan after conducting the feasibility study. In conformity with the information generated from the analysis, a written document that describes all the relevant elements involved in starting a new venture must be developed. It includes all the functional plans in marketing, production, organization and human resources; and finance inclusive of the socio-economic desirability of the project. The entrepreneur must be able to clearly articulate what the venture is all about together with information on the product, manufacturing, size of the market, competition, and potential growth.

• Entrepreneur produces and mobilises capital: Capital formation is the stage where entrepreneurs raise capital for the enterprise. Entrepreneur produces and mobilises capital. This is a critical stage in the process of entrepreneurship because in starting a venture, like other stages financing influences the business success. Many potentially successful firms have failed because of under- capitalisation or lack of sufficient funds to pay for needed assets or operating expenses. This does not mean, however, that lack of capital is the major problem causing business failures.

There are also people who are kept from venturing into business simply because they have no capital to start the enterprise. This could be the reason why people always voiced that lack of finance is the fundamental obstacle in going into business. But an entrepreneur never allows lack of capital to stop them from the drive of getting ahead. The entrepreneur wanting to start a business will take as his own responsibility to raise the capital needed. The entrepreneur is known for his resourcefulness just to make an idea a reality. The entrepreneur I know, who realized he had no money to finance his business, went to approach a relative to borrow some amount of money. Unfortunately, the amount borrowed was not enough to get him the equipment needed to manufacture jute bags. Knowing the demand for this product, he went to buy jute bags in the factory and offered those for sale. He earned quite well, and from the proceeds, he acquired second hand reconditioned equipment for jute bag making. In this way, he was able to gradually build up his resources and with his skills of being efficient and effective in the management of resources, his factory grew to a full swing jute bag factory.

The entrepreneur produces the capital in so many ways. Apart from borrowing from his relatives, if he has none, he may look for investors who believes in the viability of the project and who is willing to share risks. Many are angel investors. They are great sources of start-up business capital. They typically invest their own funds to help new businesses reach success. The entrepreneur may also establish a business ownership either partnership or corporation to start a venture. An entrepreneur that I know who had realised he had enough experience to start soap making industry but had no sufficient capital to start with, went to borrow the amount needed and from the proceeds, he paid the personal loan. After a couple of years developing his skill, he built up his resources and expand his market. There was a time when he could no longer meet the demand of his market; he approached a financing institution to ask for financial assistance. Recognizing the company’s bright prospect, as well as his fifteen years experience in the business and his credible industry operation, the bank granted him a loan to expand the operation.

Although there is no one best way to finance a business under all conditions, great care should be exercised in determining the amount of money needed to start or expand the businesses effectively. In other words, capital must be determined and source of funds must be justified. It is important that the entrepreneur must be realistic and not under or overestimate his capital requirements. If too much capital is raised, capital costs will be unnecessarily high; if too little is raised, the business may be short of funds at a time when it is difficult to raise more on favourable terms. It follows then that every enterprise should have financial plan with a clear and positive view of what funds will be needed to begin the operation, what additional funds will keep it going, and where these funds needed by the enterprise giving important consideration on the following financial issues:

• How much money is needed by the enterprise
• Where is the source of (the) money
• When (will) the money is (be) available

Knowledge in financial planning ensures the success of the enterprise. There should be enough capital to procure the business equipment, building, and other assets. There will be enough operating funds to pay expenses during the initial months of operation when cash flow is limited to cover other expenditures like development costs and unplanned expenses that always seem to show up after operations have begun. In financial planning, specifically in raising funds to launch a new business, it is imperative therefore for the entrepreneur to identify how funds will be used. He also has to determine the right type of funds needed. Basically, in raising funds, there are two kinds of capital an entrepreneur must understand, hence it is not merely the amount of money required that is important but the kind of money as well. These are fixed capital and working capital.

• Fixed capital: These are assets that will be retained for a long time, such as land and buildings, machinery, furniture and fixtures, and other equipment.
• Working capital: These include the enterprise’s reserves and all assets that can be readily converted into cash, such as inventories and accounts receivable. Working capital or circulating capital is used to acquire materials or merchandise and to pay off current obligation such as rent or wages.

The kind of money should also be classified accordingly on the uses to which the capital is put and on the liquidity requirements of the enterprise’s assets. A decision should be made either on short-term funds which are rapid within one year and are generally used for daily operations; intermediate funds which are funds repaid within 1 to 5 years and are used for capital equipment; and long-term funds which are funds repaid for longer than 5 years usually intended for buildings, projects, and business expansion.

• Entrepreneur organises resources: The entrepreneur is the man responsible for getting together all these resources needed for the business. He is in charge of designing and maintaining an environment in which individuals, working together in groups, accomplish efficiently selected aims. He is the one who thinks of the labour (human resource) and capital (non-human resource), resources needed to transform an idea into a functioning enterprise. His task involves establishing an organizational structure and fill in the needed staff. He coordinates the human resource for effective utilisation of the material resources in order to attain the organization’s goals. As an organiser of the business, it is through him that activities needed are identified and are done by the right people at the right time. Sometimes, the entrepreneur has a good business idea for which he is willing to take the risks, but he needs to minimise the chance of failure or enhance the probability of success. In this case, development of a feasibility study is of great importance. A feasibility study pervades the entire life of the proposed business undertaking from the time the latter is conceived to the time it is actually implemented and the goals are achieved. The development of feasibility study is an important activity for the success of the venture.

The implementation of the activities stipulated in the feasibility study guides the entrepreneur in the achievement of the organisation’s objectives and goals. Implementation stage is the beginning of the business life. It involves the introduction of an innovation such as introducing new products, introducing new methods of production, opening new markets, or opening new supply sources. Here, the entrepreneur sees to it that the goals set are achieved. That is, if the orders are fulfilled on time, the product quality is maintained, the deliveries are made as scheduled and all the transactions are efficiently recorded among other business activities. In other words, the entrepreneur coordinates personnel, purchasing, production, marketing and finance functional activities of the enterprise.