CHAPTER ONE

ENTREPRENEURSHIP AND FREE ENTERPRISE

1.1. Definitions of Entrepreneurship and
Entrepreneur
Entrepreneurship :
Ability of people to bring the necessary
inputs together and produce something
valuable.
The process of creating value by devote
resources.
 is a function of :
 Seeing investment and production
opportunity,
 Organizing an enterprise to
undertake a new production process,
 Raising capital, hiring labor,
arranging for the supply of raw
materials and
 Selecting managers for the day to
day operation of an enterprise
Generally, entrepreneurship
 Is both a science and an art.
 Involves vision and passion of innovation
and creation.
 Requires willingness to undertake
calculated risk.
 Involves building a committed and
dedicated team.
 More over involves accepting challenges,
managing skills and organization of
resources
Entrepreneur
 Someone who is responsible for the
task of deciding, planning, mobilizing
the resources and make the actual
production a reality.
 Someone who perceives an
opportunity and creates an
organization to practice it with the
intention of being profitable.
The Four Key Elements in Entrepreneurship

 Vision -Identifying emerging opportunities.

 Innovation -Doing something new

 Risk taking-Assuming different types of

risks: financial, psychological, social
 Organizing-Coordinating resources and
creating enterprise.
1.2. History of Entrepreneurship
Its origin:
lies in 17th century France, where an
entrepreneur was an individual
commissioned to undertake a particular
commercial project.
Earliest Period:
In this period, the money person
(forerunner of the capitalist) entered into
a contract with the merchant to sell his
goods. While the capitalist was a passive
risk bearer, the merchant bore all the
physical and emotional risks.
Middle Ages:
 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, but
managing the project with the resources
provided.
 A typical 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 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:
 Here, the person with capital was
differentiated from the one who
needed capital.
 In other words, entrepreneur was
distinguished from the capital provider.
19th and 20th Centuries:
Here, entrepreneurs were viewed mostly
from an economic perspective.
The entrepreneur "contributes his own
initiative, skill and ingenuity in planning,
organizing and administering the
enterprise, assuming the chance of loss
and gain."
1.3 The Process of Entrepreneurship
It has four phases:
I. Identifying and evaluating business
opportunity
II. Developing business plan
III. Determining the resources required
for business and
IV. Managing the enterprise
 PHASE 1: Identifying and Evaluating Business
Opportunity
 Sources for business opportunities include:
consumers, business associates
channel members of the distribution system-
retailers,
wholesalers or
manufacturer’s
 each opportunity must be carefully screened and
evaluated.
 this is the most critical element of the
entrepreneurial process.
The evaluation process involves looking
at:
The creation and length of the
opportunity
Its real and perceived value
Its risks and return
Its fit with the skills and goals of the
entrepreneur
Its differential advantage in its
competitive environment
Opportunity analysis, or an opportunity
assessment plan, should focus on the
opportunity and provide the basis to make the
decision, including:
 A description of the product or service
 An assessment of the opportunity
 Assessment of the entrepreneur and the
team
 Specifications of all the activities and
resources needed
 The source of capital to finance the initial
venture.
The most difficult aspect of opportunity
analysis is the assessment of the
opportunity.
PHASE 2: Develop a Business Plan
A business plan is a document the
entrepreneur prepares before going to the
implementation stage.
It contains description of ;
the business and the marketing plan,
financial plan,
organizational plan and
operational plans necessary for the
foundation of the venture.
PHASE 3: Determining the Resources Required
 Assessing the resource needed starts with an
appraisal of the entrepreneur’s present resources.
 Resources: Helpful and Critical

 Financial resources: Resources which take the

form of or can be readily converted to cash.
 Human resource: Qualified personnel who can
efficiently use the facilities using their skills.
 Operating resources: The facilities which allow
people to do their jobs such as buildings, vehicles,
office equipment, machinery, raw materials, etc.
PHASE 4: Managing the Enterprise
Involves:
 implementing a management style and
structure,
 determining the key variables for success.
 developing a control system.
1.4 FORMS OF ENTREPRENEURSHIP

 Entrepreneurship can take three different forms.

They are:
1. The Individual Entrepreneur
 is someone who started, acquired or franchised his/her
own independent organization.
2. The Entrepreneur/Intrapreneurs
 is a person who does entrepreneurial work within large
organization.
3. The Entrepreneurial Organization
 An organization that creates an internal environment in
which all of its members can contribute in some way to
the entrepreneurial function.
1.5 Managerial Versus Entrepreneurial Decision Making

A. Strategic Orientation
 The entrepreneur’s strategic
orientation depends on his or her
perception of the opportunity.

 Regarding the use of planning systems

in the strategic orientation, there is
more pressure for the administrative
domain to be operant.
B. Commitment to Opportunity
 The entrepreneurial domain is
pressured by the need for action and has
a short time span in terms of opportunity
commitment.

 The administrative domain is not only

slow to act on an opportunity, but the
commitment is usually for a longer time
span.
C. Commitment of Resources
An entrepreneur is used to having
resources committed at periodic
intervals, often based on certain tasks
or objectives being reached.

In the administrative domain, the

commitment of resources is for the
total amount needed.
D. Control of Resources
The administrator is rewarded by
effective resource administration and
has a drive to own or accumulate as
many resources as possible.

The entrepreneur, under pressure of

limited resources, strives to rent
resources on an as-needed basis.
E. Managerial Structure
In the administrative domain, the
organizational structure is formalized
and hierarchical in nature.

The entrepreneur employs a flat

organizational structure with informal
networks.
1.6 Classifications of Entrepreneurs
According to Types of Business

Classification by Danhof

Classification According to Motivation

Classification According to Use of

Technology
According to Types of Business
Business entrepreneur: is an individual who
conceive and create an idea for a new product
or service .
Trading entrepreneur: is one who undertakes
trading activities (foreign and domestic) and is
not concerned with the manufacturing desire .
Industrial entrepreneur: is essentially a
manufacturer who identifies the potential needs
of customers and tailors product or service to
meet the marketing needs.
Corporate entrepreneur: is a person who
demonstrate his innovative skill in organizing
and managing a corporate undertaking.

Agricultural entrepreneur: are those

entrepreneurs who undertake such agricultural
activities as raising and marketing of crops,
fertilizers, and other inputs of agriculture.
 Classification by Danhof
 Clarence Danhof, in his study of American
agriculture, classified entrepreneurs into four
categories:
1. Innovating entrepreneurs: is one who
introduces new goods, inaugurates new
method of production, discovers new
market and reorganizes the enterprise
2. Imitative Entrepreneurs: imitative
entrepreneurs do not innovate the change
themselves, they only imitate techniques and
technology innovated by others.
Cont`d
3. Fabian Entrepreneurs: Fabian entrepreneurs are
characterized by very great caution and skepticism
in experimenting any change in their enterprises.
They imitate only when it becomes perfectly clear
that failure to do so would result in a loss of the
relative position in the enterprise.

4. Drone Entrepreneurs: these are characterized by a

refusal to adopt opportunity to make change in
production formulae even at the cost of severely
reduced returns relative to other producers.
Classification According to Motivation
Motivation is the force that influences the
effort of the entrepreneur to achieve his
or her objective.
1. Pure Entrepreneur: - an individual who
is motivated by psychological and
economic reward.
 The entrepreneur undertakes the
enterprise for his personal satisfaction.
2. Induced Entrepreneur: -
 the one who is induced to take up
entrepreneurial task due to the policy
measures of the government that provides
assistance, incentive and necessary
overhead facilities to start a venture.
3. Motivated Entrepreneur: -
 motivation is the desire for self-fulfillment.
They come into being because of the
possibility of making and marketing some
new product.
4. Spontaneous Entrepreneur-
is one who is motivated by his/her
natural talent to begin a business.
this kind of entrepreneurs is very
confident in their natural blessings from
God.
Classification According to Use of Technology
1) Technical Entrepreneurs:
 Have technical knowledge regarding innovation of
new products
 Concentrate on manufacturing (technical aspect)
rather than marketing

2) Non technical Entrepreneurs

 Are not concerned with technical aspect of a product
 Concentrate on developing alternative marketing,
distribution and promotion aspects of their product
rather than manufacturing aspect
 Cont`d
3) Professional Entrepreneurs
 Are interested in neither the technical aspect nor in
the non technical aspects of a product

 Are interested in establishing a business but doesn’t

have the interest to manage or operate once a
business is established. Professional entrepreneurs
sell their business ideas and look on to creating
another business.
1.7 Entrepreneurial traits
Mental ability: consists of intelligence and
creative thinking.

Clear objectives: An entrepreneur should

have a clear objective as to the exact
nature of the business.

Business secrecy: An entrepreneur must

be able to guard business secrets.
Human relation ability: An entrepreneur
must maintain good relation with his/her
customers, and employees.

Communication ability: Communication

ability is the ability to communicate
effectively.

Technical knowledge: An entrepreneur

must have a reasonable level of technical
knowledge.
1.8 TYPES OF RISKS ASSUMED BY ENTREPRENEURS
Financial Risk: the risk of losing one’s
own saving and entire capital that
would result from failures to repay
loans and other financial
requirements.
Career Risk: If entrepreneurs fail to be
successful, it would be difficult for
them to easily acquire another
employment opportunity.
Psychic Risk: The mind of entrepreneurs is
subject to constant frustration and
psychological tensions as to the fate of
their business.
Family Risk: The spouses and offspring's
of entrepreneurs are also subject to certain
psychological frustrations in state of being
worried whether their business will fail or
not.
Social Risk: the risk of losing societal
acceptance/reputation.
1.9 Functions of Entrepreneurs
o  The main functions of an entrepreneur are as follow:
A. Innovation: implies doing new things or doing
things that are already being done in new ways.
 An entrepreneur introduces new combinations in any
branch of economic activity.
 It may occur in the following forms:
1. Introduction of a new product or new quality of an
existing product.
2. Introduction of new methods of production or
distribution.
3. Opening of a new market
4. Conquest of a new source of raw materials
5. New form of organization of industry
B. Risk-taking: Risk taking or uncertainty bearing
implies assuming the responsibility for loss that may
occur due to unforeseen contingencies of the future.

C. Organization building: implies bringing together the

various factors of production.
 organization and management of the enterprise is
considered as the main function of an entrepreneur.
 Thus, as an organization builder, the organization
and management function of an entrepreneur
includes
 (a) planning of an enterprise,
 (b) coordination, administration, and control; and
 (c) routine type of supervision.
1.10 Why do People Want to Become
Entrepreneurs?
Pull factor
Opportunity to gain control over your own
destiny
Opportunity to reach your full potential
Opportunity to reap unlimited profit
Opportunity to contribute to the society
Opportunity to turn previous work experience
into business for self and family.
Financial incentive
Push factor
Community attitude
Unemployment
Disagreement with the previous
employer.
1.11 Success Factors for Entrepreneurs
Uncertainty of income
Risk of losing entire capital
Psychological and Social Tensions
Long hours of hard work
Lower quality of life until the business gets
established
Complete responsibility on those issues
which you don’t have a complete
knowledge.
Tremendous competition
ASSIGNMENT 1
Distinction between manager and
entrepreneur.
Distinction between investor and
entrepreneur.
Distinction between innovation and
creativity.
List Role of Entrepreneurship in
Economic Development
1.12 Role of Entrepreneurship in Economic
Development
Taking to higher rate of economic growth by
creation of value.
Speed up the process of industrial use of the
factors of production.
Creation of employment opportunity.
Dispersal of economic activities to different
sectors of the economy and identifying a new
venues of growth.
Development of backward and tribal areas.
Better social changes.
Improvement of the standard of living of
different weaker section in the society
Bringing social change in the society
Develop technological know how
Improve culture of business and expand
commercial activities
Entrepreneurship acts as a change
agent to meet the requirement of the
change markets and customer
preferences.
1.13 Entrepreneurship, Creativity and Innovation

Entrepreneurship is adding or creating

value.
Creativity
is the ability to bring something new into
existence, whether a new solution to a
problem, a new method, or device or a new
artistic objects or form.
is the seed that inspires entrepreneurship
is the prerequisite to innovation.
Innovation
is the transition of creative idea into a
useful application.
is the process of entrepreneurship.
is the creation of new idea.
End of
Chapter
One