Module 1 THE NATURE OF ENTREPRENEURSHIP

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1 Module 1 THE NATURE OF ENTREPRENEURSHIP

2 Outline Theories and Definition of Entrepreneurship Essential Components of Entrepreneurship Entrepreneurship and Traditional Corporate Management Compared The Role and Significance of Entrepreneurship in Society The Entrepreneurial Vision Ethics and Other Challenges

3 Theories and Definition of Entrepreneurship Definition Entrepreneurship is the willingness and the ability of a business minded individual to identify the areas of need of people, look out for resources to match these needs, combine these resources in most optimum way, bears the un-insurable risk and establish a successful and profitable venture. It is the process of creating something new by devoting in the necessary time and efforts while taking the financial and social risks to obtain the associated rewards.

4 Definition Cont. Generally, we can deduce the following from the definitions of entrepreneurship already given above: Identification of investment opportunities Decision making as to what opportunities to exploit, promotion and establishment of the business enterprise. Optimum combination of scarce resources Organization and management of human and other resources Bearing the un-insurable risks Creation of an innovative economic activity Bringing about improvement on the methods of doing things

5 Theories of Entrepreneurship Some of the authorities that have propounded theories in this regard include the following: 1. Max Weber Protestant Ethics and the Spirit of Capitalization Theory. Max Weber propounded thisin1958. According to him, certain religious beliefs create either a positive or negative attitude towards profit generation and accumulation of wealth. He argues that business leaders and owners of capital of modern enterprises are overwhelmingly Protestants. In Weber s view, Protestant Ethics tend to go well with high profit generation and capital accumulation and it encourages hard work.

6 2. Kirzner Theory sees an entrepreneur as one who is alert to and perceives profitable opportunities. He believes that reward comes as a result of intermediary functions performed. He has information not available to others and he takes advantage of such information. He is creative, he does not believe in risk taking, he enjoys being independent and believes that everybody can be an entrepreneur or has the potentials of being an entrepreneur.

7 3. Joseph Schumpeter s Aspiration to Power Theory According to Schumpeter, an entrepreneur is a special person; he is an innovator who introduces new technological process or product. The driving force of Schumpeter s entrepreneur is the will to achieve power, ability to see things as it will later prove to be correct, must be able to forecast the future with a degree of accuracy which will eventually determine the success of his entrepreneurial skill.

8 4. Knight Theory Knight in his theory, believes that an entrepreneur is a risk taker; he gets his reward in return for undertaking risk in an uncertain world. He undertakes such risk by setting up business ventures. Knight describes entrepreneurs as one who is ready to undertake risk by setting up a business. His risk could be financial or personal. Risks exist when we have uncertain outcome that can be predicted with statistical model whole uncertainty cannot be calculated with mathematical model.

9 5. Shackle Theory Shackle s entrepreneur is someone who is creative, imaginative and original. He does not perceive opportunity but he creates and imagines his opportunities. As far as he is concerned, everybody has the potential of creating opportunities. Uncertainty and important information may act as catalyst as they may act as the driving force for an entrepreneur to imagine and create opportunities.

10 6. Casson Theory - Casson asserted in his theory that an entrepreneur is one who possesses different skills. He uses his skill to co-ordinate scarce resources and makes judgemental decisions. He is expected to have personal wealth because lack of capital will be a barrier to successful entrepreneurship. 7. Alfred Marshal s Theory: Charismatic Entrepreneurship: This is an entrepreneur who perceives business ideas and takes advantage of scarce resources by using them in profitable manner. His aim is to satisfy customers Achieve the goals of the organization He is an originator He is not risk averse He accepts failures as part of business trend and does not allow failure to weigh him down e.g. originator of electric bulb. He is always ready to risk his personal energy and financial resources to achieve unpredictable result. He is a strong willed individual, very aggressive and purposeful. He is always looking forward to success in all his endeavours even though failures may come his way, he does not allow that to dampen his morale.

11 Essential Components of Entrepreneurial Ventures 1. Production of Goods and Services: It is the act of ensuring that consumer needs/wants are taken care of. Production process involves three segments. Conversion of raw materials and finished goods (change of form) Carrying the finished goods to the consumer (change of place) Exchange of the finished goods to money (change of ownership) 2. Marketing Marketing is a total system of interacting business activities designed to plan, price, promote and distribute want, satisfying products and services to present to potential customers. Marketing functions include: Marketing research Product development function i.e. quality, quantity, model, size packaging etc. Price Mix Price to adopt, discount. Physical Supply Wholesale, retail, transport, storage etc. Promotion Mix Advert, contest, display Reinforcing and Repeat buys Education, repairs, service, delivery etc.

12 3. Finance: Finance is like a thread that runs round a cloth, if it is pulled wrongly at one side, it will destroy the beauty of the cloth. Finance functions involve the act of managing the funds available. It involves: Investment decision Financing decision Capital structure decision Dividend decision Liquidity decision Asset management

13 4. Personnel: This has to do with recruitment and selecting, remuneration and compensation or emoluments, promotion and discipline, training and development, welfare and discharge of fringe benefits. 5. Research and Development: Any business venture that is not innovating and bringing out new products will soon pack up. Research and development will ensure the company s resources are channelled in part to R & D which will help in developing new and better products and services. R & D will also assist in automating production process, which will greatly reduce cost.

14 Entrepreneurship Vs. Traditional Corporate Management Entrepreneurs are the people who have the ability to see and evaluate business opportunities, to gather the necessary resources to take advantage of them and to initiate appropriate action to ensure success. An entrepreneur is viewed as a person who perceives a new way to providing satisfaction or perceives the existence of a new consumer demand and how to meet that consumer demand.

15 The successful manager is an organizational leader whose followers are subordinates and, to a limited extent, colleagues. All leaders have certain behaviours, but an entrepreneur or a manager differ from other kinds of leaders in two fundamental respects. First, they perform many management functions in addition to leadership, such as planning, organizing, staffing, financing and decision making. Leaders are concerned with the efficiency of results.

16 Second, is their concern for business objectives, any good entrepreneur who manages his business, must not lose sight of follower s contribution to the overall success of the business. Managers obtain their authority from regulations within the organization. Managers determine the success of their businesses; entrepreneurs who are managers determine the success of the organization through their leadership behaviour.

17 Differences Between an Entrepreneur & a Manager Point Entrepreneur Manager a) Motive The main motive of an entrepreneur is to start a venture, by setting up an enterprise. He undertakes the venture for his personal gratification. The main motive of a manager is to render his services in an enterprise already set up by someone else for a salary b) Status An entrepreneur is the owner of the enterprise A manager is the servant in the enterprise owned by the entrepreneur c) Risk-bearing An entrepreneur, being the owner of the enterprise assumes all risks and uncertainty involved in running the enterprise A manager bears no risk in the business since he invests nothing in it. He can only lose his salary in event of business failure.

18 d) Rewards The reward of an entrepreneur gets for bearing risks involved in the enterprise is profit which is highly uncertain. Innovation Entrepreneur himself thinks over what and how to produce goods to meet the changing demands of the customers. Hence, he acts as an innovator also called a change agent. A manager gets salary as reward for the services rendered by him in the enterprise. Salary of a manager is certain and fixed What a manager does is simply to execute the plans prepared by the entrepreneur. Thus, a manager simply translates the entrepreneurs ideas into practice f) Qualification An entrepreneur needs to possess qualities like high achievement motive, originality in thinking, foresight, risk bearing ability and so on A manager needs to possess distinct qualifications in terms of sound knowledge in management theory and practice

19 The Role and Significance of Entrepreneurship The significance of entrepreneurship cannot be under related in a developing economy like ours. The significance of entrepreneurship in our economy can be seen as enumerated below: It provides Employment Opportunities: It serves a good purpose of providing employment opportunities for the young school leavers and those who are laid from their previous employments. It encourages infrastructural development: It helps in developing infrastructural facilities within the areas in which the business is established. It increases the standard of living by increasing per capita income. It encourages indigenous entrepreneurship activities that will in turn help in developing manpower and local technology. Conservation of Foreign Exchange: Entrepreneurship activities have succeeded in reducing the amount of foreign exchange used for the importation of foreign goods, which are now produced locally.

20 Utilization of Local Resources: This is an area in which entrepreneurship has helped local producers. Agricultural products are now used in manufacturing process e.g. cassava is now being used as a raw material for baking bread. Promotion of Business Interdependence: There is no business that is an island in itself. Entrepreneurship promotes interdependence of business by buying from and selling to each other. This will in turn ensure the on-going concern of the related ventures. Agent of Industrial Development: The availability of raw materials produced by entrepreneurial activities has helped in no small way to feed the larger industries. The effect of this is that the larger industries will be able to continue in business and entrepreneurs will have ready market for their products and services. The entrepreneur will not only monitor the happenings in his environment, he also tries to keep up with the pace of rapid changes within the economy. Acts as an adviser to other Producers: Entrepreneurship acts in the capacity of an adviser to producers of products and having interacted with the users, he takes suggestions from them and advises other manufacturers to modify their products to suit the purpose of the customers.

21 Ethical and Other Challenges What is Ethics? Ethics is the study of what is wrong or right. It helps in guiding and dictating the shape of entrepreneurial behaviour. It is the means through which the entrepreneurs adhere to moral principles and values that inform the customers and consumers. It is the standards of right and wrong by which the entrepreneur is guided in business dealings. Entrepreneurs should always live by a set of simple morals, bounded by what we believe are the tenets of ethics. Be honest. Don't lie. Admit mistakes. Treat people with respect. Be bounded by the ethics of "do unto others," "inalienable rights," "innocent until proven guilty," and "free speech." We should always conduct business that way. Whether public or private, tell the truth.

22 Ethical and Other Challenges There are five steps to entrepreneurial ethics. They are; Step 1 Recognize that a dilemma exists, and has a potential long-term impact. Systematically recognize as many ethical dimensions of the dilemma as possible. Before you make an informed decision, you must understand that the dilemma exists, and try to determine the various angles of approach for problem solving. Step 2 Identify your key stakeholders and determine how they will be affected by the decision. Sometimes the stakeholders values are not in line with the values of the entrepreneur or the business as a whole. They can make conflicting demands, forcing the entrepreneur to play King Solomon, having to choose which groups to satisfy, and which groups will have their demands put off, temporarily or permanently. Sort out the conflicting interests of the stakeholders, and triage their demands.

23 Step 3 Understand all alternative choices. Separate those choices in terms of their ethical viability. Some of those choices won t be very ethical, and some won t even be legal but it s important to lay everything out on the table to make an informed decision. Evaluate the positive and negative consequences associated with each choice and consider the following questions: Does this decision meet my personal ethical standards and moral values? What are my true motives? Can I sleep at night if I make this decision?

24 Step 4 Choose the best option and implement it don t vacillate, be confident in your choice. At this point there will likely be a lot of options regarding this decision. The final choice should be consistent with the company s procedural ethical code, as well as with the individual decision maker(s) values.

25 Review Questions 1. Define entrepreneurship. 2. What are the main components of entrepreneurship? 3. Highlight the difference between an entrepreneur and a manager. 4. What are the key differences in the theories of entrepreneurial behaviour? 5. List and explain five components of an entrepreneurship venture?

26 References Fasua, K. O. (2006). Entrepreneurship, Theory, Strategy and Practice: Bee Printing & Publishing Co. Abuja-Nigeria. Adejola. P. A (2011). Discovering Entrepreneurial Opportunities: Rainbow Graphics Printers & Publishers, Abuja