ADMAS University College-Hargeisa Main Campus-2010 Department of Management and Accounting Entrepreneurship and Small Business Lecture Notes

A. Chapter One

1. The Nature and Development of Entrepreneurship

1.1.

Historical Overview

Earliest Period In this period the money person (forerunner (Pioneer) of the capitalist) entered into a contract with the go-between to sell his goods. While the capitalist was a passive risk bearer, the merchant bore all the physical and emotional risks. Middle Ages (era) In this age the term entrepreneur was used to describe both an actor and a person who managed large production projects. In such large production projects, this person did not take any risks, managing the project with the resources provided. A typical (normal) entrepreneur was the cleric who managed architectural projects. 17th Century In the 17th century the entrepreneur was a person who entered into a contract with the government to perform a service. Richard Cantillon, a noted (well-known) economist of the 1700s, developed theories of the entrepreneur and is regarded as the founder of the term. He viewed the entrepreneur as a risk taker who "buy[s] at certain price and sell[s] at an uncertain price, therefore operating at a risk." 18th Century In the 18th century the person with capital was differentiated from the one who needed capital. In other words, entrepreneur was distinguished from the capital provider. Many of the inventions developed during this time as was the case with the inventions of Eli Whitney and Thomas Edison were unable to finance invention themselves. Both were capital users (entrepreneurs), not capital providers (venture capitalists.) Whitney used expropriated (confiscated) crown (kingdom) property. Edison raised capital from private sources.

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ADMAS University College-Hargeisa Main Campus-2010 A venture capitalist is a professional (expert) money manager who makes risk investments from a pool of equity capital to obtain a high rate of return on investments. 19th and 20th Centuries In the late 19th and early 20th centuries, entrepreneurs were viewed mostly from an economic perspective (viewpoint). The entrepreneur "contributes his own initiative, skill and ingenuity in planning, organizing and administering the enterprise, assuming the chance of loss and gain." Andrew Carnegie is one of the best examples of this definition, building the American steel industry, one of the wonders of industrial world, primarily through his competitiveness rather than creativity. In the middle of the 20th century, the notion (idea) of an entrepreneur as an innovator was established. Innovation, the act of introducing something new, is one of the most difficult tasks for the entrepreneur. This ability to innovate is an instinct (natural feeling) that distinguishes human beings from other creatures (animals) and can be observed throughout history. 1.2 Definition of Entrepreneurship The word entrepreneur is derived from French Entreprendre translated into undertakers "between-taker" or "go-between. meaning those who undertook the risk of new enterprise (business). Entrepreneurship is one of the four main stream (course) economic factors:
1. Land 2. Labour 3. Capital 4. Entrepreneurship

The concept of entrepreneurship from a personal perspective (viewpoint) has been explored (investigated) in this century. This exploration is reflected in the following three definitions of an entrepreneur and in almost all definitions of the entrepreneurship, there is an agreement that we are talking about a kind of behavior that includes:
1. Initiative taking 2. The organizing (arrange) and re-organizing of economic/social mechanisms (methods) to turn resources and situations to practical account. 3. The acceptance of risk or failure.

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ADMAS University College-Hargeisa Main Campus-2010 To an economist view, the entrepreneur is one who brings resources, labour, materials and other assets into combination, that make their value greater than before and one who introduces(bring in) changes, innovations and new order. To a psychologist view, such a person is typically driven by certain forces-the need to obtain something to experiment (carry out trial), to accomplish (achieve) or perhaps to escape the authority (power) of others. Therefore, by definition Entrepreneurship is the dynamic process of creating incremental (increased) wealth. Our definition of entrepreneurship involves four aspects:
a. Entrepreneurship involves the creation process b. It requires the devotion(dedication) of necessary time and effort (energy) c. It involves assuming the necessary risks d. The rewards of an entrepreneur are Independence Personal satisfaction And monetary reward

For the person who actually starts his or her own business there is a high failure rate due to poor sales, intense (strong) competition, lack of capital or lack of managerial ability. 1.3 Definition of an Entrepreneur An entrepreneur is someone who starts, organizes, manages, and assumes the risks of a business enterprise. Some personal qualities entrepreneurs have include:
a. curiosity and creativity b. motivation and self-confidence c. willingness to take risks d. eagerness (enthusiastic) to learn e. ability to co-operate f. ability to identify opportunities g. ability to innovate (do something that nobody has done before) and lead h. determination to overcome obstacles (difficulties) (never take no for an answer!) i. ability to learn from mistakes made by oneself and others, etc. Lecture Note 1 Entrepreneurship and Small Business Prepared by AYOUB WARBECADE

ADMAS University College-Hargeisa Main Campus-2010

These qualities help the entrepreneur to think, analyze, solve problems and take action.

1.4 The Entrepreneurs Tasks An entrepreneur executes different tasks in managing the operations of the enterprise. These tasks need managerial as well as other skills to achieve the organizations long and short term goals/objectives. The skills required by entrepreneurs can be classified in to three main areas:
a. Technical Skills involve such things as writing, listening, oral presentations, coaching, and technical know-how. b. Business Management Skills include those areas involved in starting, developing and managing any enterprise. Including these are planning, organizing, leading and controlling.

Planning is a function that determines in advance what should be done. It consists of selecting the enterprise objectives, policies, programs, procedures and other means of achieving these objectives. Organizing is the management function of relating people, tasks (or activities), and resources to each other so that an organization can accomplish its objectives. A firm becomes a structured organization through the process of organizing. Plans are carried out by the organizing process. Controlling is about evaluation of performance in an organization and applying necessary correction Leading is a process by which a person influences others to accomplish an objective and directs the organization in a way that makes it more cohesive and coherent (logical).

c. Personal Entrepreneurial Skills differentiate an entrepreneur from a manager and include inner control (discipline), risk taking, innovativeness, persistence, visionary leadership, and being change oriented.

1.5 Contributions of Entrepreneurs to the National Economy

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ADMAS University College-Hargeisa Main Campus-2010 Following are some of the major entrepreneur contributions to any national economy:
a. Develop new markets. Entrepreneurs are resourceful and creative. They can create customers or buyers. This makes entrepreneurs different from ordinary businessmen who only perform traditional functions of management like planning, organization, and coordination. b. Discover new sources of materials. Entrepreneurs are never satisfied with traditional or existing sources of materials. Due to their innovative nature, they persist on discovering new sources of materials to improve their enterprises. In business, those who can develop new sources of materials enjoy a comparative advantage in terms of supply, cost and quality. c. Mobilize capital resources. Entrepreneurs are the organizers and coordinators of the major factors of production, such as land labor and capital. They properly mix these factors of production to create goods and service. Capital resources, from a layman's view, refer to money. However, in economics, capital resources represent machines, buildings, and other physical productive resources. Entrepreneurs have initiative and self-confidence in accumulating and mobilizing capital resources for new business or business expansion. d. Introduce new technologies, new industries and new products. Aside from being innovators and reasonable risk-takers, entrepreneurs take advantage of business opportunities, and transform these into profits. So, they introduce something new or something different. Such entrepreneurial spirit has greatly contributed to the modernization of the economy. Every year, there are new technologies and new products. All of these are intended to satisfy human needs in a more convenient and pleasant way. e. Create employment. The biggest employer is the private business sector. Millions of jobs are provided by the factories, service industries, agricultural enterprises, and the numerous small-scale businesses.

1.6 Entrepreneurship and Small Business Owner, Manager; is there a

difference? 1.6.1 Entrepreneurship Vs Small Business

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ADMAS University College-Hargeisa Main Campus-2010 Entrepreneurs are those who incubate (develop) new ideas; start new enterprises based on those ideas and added value to society based in their independent initiative. However, individuals who simple substitute income by leaving jobs to operate local stores or independence service businesses are described as small business owners. The distinction (difference) is subtle (delicate) but important. The person who establishes a fast-food franchise chain is called an entrepreneur, but the local restaurant owner is called a small business person. Distinguishing factors are the entrepreneur has; vision for growth,

commitment to construct change,

persistent to gather necessary resources, and energy to achieve unusual results.

The small business person may exhibit (show) these characteristics (personality), but coincidentally, not as pre-requisite (precondition) to establishing and enterprise. Some fundamental distinctions between small business and entrepreneurship will be: Small Business Even though it differs in different countries, a small business is one that does not dominate (lead) its industry (trade), has less annual sales, and fewer employees. Family Enterprises These are locally owned and operated, often by one person called a sole proprietor. Types of businesses that are family owned vary widely and can include retail stores, contracting businesses, small manufacturing firms, and restaurants among others. Personal Service Firms These rely crucially on unique skills of their founders or key employees. In most instances, the business is the person and succession is unlikely unless a son or a
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ADMAS University College-Hargeisa Main Campus-2010 daughter develops compatible skills. Incidentally, the the Personal Service Firms is a formal category of business. These include; beauty salons, medical practices, interior designers and freelance writers. Franchises These represent an extraordinary growth sector of the American economy that is spreading overseas at an accelerated pace. They are created through legal contracts that limit their size and scope of commercial activity. These include fast food outlets, print shops, car dealerships, distributors, retailers.

Corporate Entrepreneurship Corporate entrepreneurship also called entrepreneurship, describes the innovation that occurs inside established companies through efforts of creative employees. Following are some significant differences between the entrepreneurial venture and the small business. Entrepreneurial ventures differ from small businesses in these ways:
a. Amount of wealth creation - rather than simply generating an income stream (flow) that replaces traditional employment, a successful entrepreneurial venture creates substantial wealth, typically in excess of several million dollars of profit. b. Speed of wealth creation - while a successful small business can generate a limited amount of profit sometimes millions - but over a lifetime, entrepreneurial wealth creation often is rapid; for example, within 5 years. c. Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive of sure profits many entrepreneurs would be pursuing the idea and the opportunity no longer would exist. d. Innovation - entrepreneurship often involves substantial innovation beyond what a small business might exhibit. This innovation gives the venture the competitive advantage that results in wealth creation. The innovation may be in the product or service itself, or in the business processes used to deliver it.

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Entrepreneurship and Small Business Prepared

ADMAS University College-Hargeisa Main Campus-2010

e. Small scale business enterprises -include e.g. shops, restaurants, salon and hair dressers, barber shops, food and drink units etc. These businesses provide direct service to the consumers and they enjoy doing it. Relatively, these businesses can also serve as entrepreneurial ventures.

Lecture Note 1 by AYOUB WARBECADE

Entrepreneurship and Small Business Prepared