MGT601 - SME Management - Lecture Handout 03

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THE ROLE OF ENTREPRENEURSHIPS IN SMEs

This lecture will define the modern concepts of enterprise, entrepreneurship and will establish the relationship between an enterprise and an entrepreneur. It will also relate the SMEs advancement with entrepreneurship.

The modern civilization is the industrial system and the directing force that animates this framework is the business enterprise. In the current economic theory “the businessman” is called entrepreneur.

History

A French baker Cantilon identified the first definition of entrepreneur function in the mid-18th century to mean, a person who is “uncertainty bearer” the same term appeared in Adam Smith’s writings but not very clearly. J.B Say regarded entrepreneur to be an organizer who combines various factors of production to produce a viable project. The famous economist Joseph Schumpeter defined the theory of entrepreneurship with a new perspective and regarded the entrepreneur as an innovator who has the potential of doing things in a new way. He subdivided this innovation process into following five forms.

  1. Introduction of new goods
  2. Introduction of new methods of production
  3. Finding of new product
  4. Discovery of new sources of supply of raw materials.
  5. The organization of industry in a new way.

But, the concept of innovation has been criticized by the developing countries who need “imitating entrepreneurs” capable of implementing innovation made in the developed countries. According to Peter Kilby, an entrepreneur in an underdeveloped country performs a wide range of activities including perception of market opportunities, combining and managing factors of production, introduction of production techniques and products etc. This conflict was solved by defining innovation entrepreneur as “independent entrepreneur” and the person who carried out new combinations in order to meet perceived opportunity “corporate entrepreneur”.

The concept of entrepreneur was referred to a generic type of operator who bought at fixed prices in order to sell at prices, which were uncertain at the time of purchasing. Entrepreneurship was defined by Cole (1959), “a purposeful activity (including an integrated sequence of decisions) of an individual or group of associated individuals who undertake to initiate, or organize a profit oriented business unit for the production or distribution of economic goods or services”. In the year 1959 her Bison and Meyers replaced the terms with “management” and “organization” for entrepreneurship.

The entrepreneurship played a very vital role in the small and medium sized industries. The new innovations, courage to face the risk of uncertainties and qualities of entrepreneur to act as a leader gave rise to more than seventy percent of new innovations and new combination of skills like Microsoft, Yahoo, and Linux etc. The major developments in the computer industry, bio- informatics, medicine, electronics, telecommunications and hundreds of other things are the result of such entrepreneurships in the medium and small industrial sector.

Entrepreneurship

By Reggie Aggarwal and Mark Esposito:

Entrepreneurship is a way of life. It is a driving force that compels you to do more, move faster, and go farther than anyone else, even in the face of high risk and uncertain outcomes. Unmistakably, the rewards of entrepreneurship, especially in the technology arena can be great. But it is not an easy road to travel. Consider the following five facts:

  1. Only 1 in 6,000,000 high-technology business ideas wind-up in an IPO;
  2. Less than one percent of business plans received by venture capitalists get funded;
  3. Founder CEOs typically own less than 4 percent of their high tech companies after an IPO;
  4. 60 percent of high tech companies that are funded by VCs go bankrupt.
  5. Most high tech companies that succeed in having an IPO take between three and five years to get there.

Clearly, it is not easy to be a technology entrepreneur. Many successful entrepreneurs have failed at one point or another. And most have experienced a healthy dose of frustration, burnout, and sorrow along the way. So why become an entrepreneur? For the true entrepreneur, that is a rhetorical question. For the emerging entrepreneur, there are at least three major reasons.

First: Objective of creating something novel and useful. “To be on the cutting edge” is a necessary mantra. A technology entrepreneur generally seeks to solve a problem that exists in the market. Whether that means developing a better communications resource tool, a better optical switching device, or a better bioinformatics system, a void is always identified and then attempted to be filled.

Too many people confuse this process with the process of identifying hot technology companies in the market and building new companies that mimic them. The hot technology companies are hot because they seek to solve a problem. Those that mimic them neither identified a problem nor created a solution; they simply found a new trend that they wish to follow. The ability to maintain a sustainable competitive advantage over others is what brings rewards to the entrepreneur. The reason for taking risks fundamentally is tied to this concept. That is why being on the cutting edge is so critical to the entrepreneur.

Reggie Aggarwal is the CEO of Cvent, Inc., a premier online registration, e marketing, and data analysis company dedicated to maximizing the return on meetings and events. He also is the co-founder of the Indian CEO High Tech Council, the largest and most influential CEO organization on the east coast. Mark
Esposito is the Vice President of Global Sales and Business Development for the NASDAQ Stock Market, the most influential stock exchange in the technology world

Second: A second objective of the technology entrepreneur is to build long-term value. Sustainability is crucial. The would-be entrepreneur often confuses this concept with building “valuation.” Those who build companies for the primary purpose of attracting investment dollars at high premiums are opportunists, not entrepreneurs. The entrepreneur always is focused on creating something of lasting utility. This does not mean that the entrepreneur is not concerned with attracting investment dollars or creating wealth. Rather, the entrepreneur’s strategy is to create long-term value and thereby ensure wealth. The trick is to not put the proverbial cart before the horse. Concentrating on long-term value can create wealth; concentrating on wealth typically creates neither value nor wealth.

Third: A third objective of the entrepreneur is to have freedom. Being your own boss has definite appeal. Glass ceilings cease to exist and achievement is limited only by imagination. Entrepreneurs are motivated by having control over their work and the flexibility to pursue their dreams. But freedom always has a price. With greater personal freedom, comes greater uncertainty about the future, particularly in relation to finances. Greater personal freedom also means a less structured environment, in which greater self-discipline is required in order to thrive. Entrepreneurs are willing to accept these risks, though, because of their absolute conviction that they have what it takes to overcome any odds.

If achieving these three objectives is not of basic interest, then the very thought of becoming an entrepreneur should be extinguished. If a big personal cash payout seems to be glaringly missing from the list of major objectives, it is because it is not a primary motivating factor. These three major goals are not objectives to be self-evident should embrace entrepreneurship. But what makes an entrepreneur special, besides believing in major common objectives?

There are several characteristics that define the entrepreneur. For example, Entrepreneurs always have passion. Entrepreneurs live and breathe their business enterprises. They are zealots about their business models and are evangelical about their products or services. They have to be. If they weren’t, the stress and financial pressures of running a fledgling business would completely wipe them out. The sheer magnitude of the odds that are stacked against entrepreneurs requires a special kind of irrational exuberance to overcome.

Entrepreneurs have unshakable confidence in and enthusiasm for their business ventures that contagiously spreads to their business team. Laser focus is another feature of entrepreneurs. There are many people that are creative, but lack discipline. Entrepreneurs, on the other hand, have both qualities. An entrepreneur identifies a path towards a solution and follows that path, notwithstanding the frequent temptation to take side roads leading to seemingly newer, more exciting destinations. The entrepreneur knows that most of the journey down the chosen path is checkered with drudgery, yet continues down the path unswervingly, confident that there will be a reward at the end. The entrepreneur also knows that the side roads encountered along the way may appear appealing at their start, but will quickly become as checkered with drudgery as the originally chosen path and likely lead to a dead end.

Focus and Perseverance Guide the Entrepreneur

Courage is a defining trait of entrepreneurs. To understand the odds against success and still forgeahead, knowing that many battles will be lost along the way, requires a certain amount of fearlessness. Entrepreneurs are purposeful in their tactics and can think on their feet. Yet they regularly face daunting challenges whose failure to overcome will spell certain disaster for their business ventures. Their ability to face these challenges without fear enables entrepreneurs to succeed where others cannot.

Entrepreneurs also are leaders. Contrary to the popular belief those entrepreneurs are Mavericks who prefer to be lone wolves, entrepreneurs are visionaries that can inspire and lead their colleagues. There are few things more compelling than people who are Passionate about their work, have the discipline to achieve success, and are fearless in their outlook. An entrepreneur builds teams and instills confidence in others.
Finally, an entrepreneur always is thinking ahead, perpetually in motion towards well-defined goals. In the end, entrepreneurs can best be described as ocean waves, existing only so long as they move forward.

Characteristics of Entrepreneurs

Studies have established the existence of some common personal characteristics amongst entrepreneur like high level of energy, desire to pursue innovation goals, desire for achievement, a deep involvement in work, optimistic believe in work etc.

Let’s discuss the resume some of the important studies relating to characteristics profile of entrepreneur by David Mecleaaland:

  1. Need for achievement
    It is the prime psychological derive that motivates the entrepreneur it brings behavior motivation towards accomplishment, i.e. in achieving a goal that possesses reasonable challenge to an individuals competence such an entrepreneur is energetic but not a gambler. His motivation is the product of a scientific assessment of his energies and the challenge.
  2. Desire for Responsibility
    Entrepreneur prefers to use his own resources and to be personally responsible for the results. He can perform well in groups particularly when he can influence the results in some specific way.
  3. Preference for Moderate Risk
    Always seeking high level of performance consistent with the possibility of achievement.
  4. Perception for the Probability of Success
    This consists in collecting and analyzing facts and thereafter falling upon his own self-confidence for accomplishing the task.
  5. Future Oriented:
    He plans and thinks in the future. He anticipates possibilities that lie beyond the present.
  6. Stimulated by Feedback
    Irrespective whether the signals about his performance are good or bad, he draws his inspiration from the feedback.
  7. Energetic Activity
    He exhibits a high level of energy than an finding out novel ways of getting task done.
  8. Skill in Organizing
    Entrepreneurs have remarkable skill in organizing work and people. They make objective selection of individuals in conformity with their skill in solving a specific problem.
  9. Attitude Towards Money
    His attitude towards money is cavalier, i.e. money is not a principal obsession. He values money but not for itself. Money acts as a measure of his accomplishment, a token of his achievement rather than a commodity to be hoarded.

Qualities of an Entrepreneur

  1. Mental Ability: it consists of :(a) overall intelligence, (b) creative thinking, i.e. the ability to adapt to various situations, (c) analytical ability, i.e. ability to systematically analyze the business problems.
  2. Human Relation Ability: it is demonstrated by emotional stability, skill in interpersonal relations, sociability, tactfulness, empathy (to put oneself to another’s place).
  3. Communication Ability: it is the skill in conveying information to others so that understanding is created.
  4. Technical Knowledge: the expertise in such areas as personal selling techniques, operating a complex piece of equipment, analysis and interpretation of financial records etc.
  5. Decision Making Ability: the skill in selecting satisfactory course of action from among various alternatives.
  6. Conceptual Ability: the ability to comprehend the organizational structure and how each units fits into the whole. It enables him to recognize opportunities.

References

  1. Entrepreneurship by Reggie Aggarwal and Mark Esposito MIT (Massachusetts institute of technology, Harvard USA) center for entrepreneurial skills.
  2. The theory of leisure class by T.Veblen
  3. Entrepreneurship and small business management by C L BANSAL (This is also the recommended book.)

Sources

  1. Aitken, Huge J.(ed.), Exploration in Enterprise, Cambridge, Harvard University Press, (1965) p. 46.
  2. The Theory of Economic Development; Harvard University Press (1959), pp. 89-105.
  3. Mc Clelland, David C., The Achieving Society, collier Mac Millan, N.Y. (1967)

Key Terms

  • Bio-informatics (The branch of electronics dealing with life or biology)
  • IPO (A public issue of shares on stock exchanges)
  • Venture Capital (VC) Money invested in a business or firm but with high risk factor
  • NASDAQ (National association of dealers in securities automated quotations)
  • Mavericks (individualists)

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