Smart Business Study

Entrepreneurial Process

Entrepreneurial Process

An entrepreneur is “the one who undertakes a venture, organise it, raises capital to finance it, and assumes all or a major portion of the risk.” He conceives of and provides a product or service that fills a need in the market place. An entrepreneur is either the originator of a new business venture or an improvement maker in the existing enterprise. He visualises the need and then bring together the manpower, materials and capital required to meet his need.

Thus. an entrepreneur is a risk-taker, a resource assembler, an innovator and an organisation-builder all combined into one.

Gifford Pinchot III, an American expert on management wrote his famous book Intrapreneuring in 1985. He used the term ‘Intrapreneur’ to refer to the person who as the senior manager functions like an 9 Entrepreneurial Process within his company. He serves as head of a semi-autonomous product division. For example, International Business Machine (IBM) of the USA has created Independent Business Units (IBUs) each headed and operated by a top ranking executive. In our own country HCL-HP, a computer corporation, is using the concept of intrapreneurship under the leadership of Shiv Nader.

Thus, an intrapreneur or internal corporate entrepreneur or corporateur is a person in an existing company who examines potential new markets, obtains resources to meet attractive opportunities and initiates production and sales. In short, “an intrapreneur starts a new business venture within the existing company.”

A distinction should be made between ‘intrapreneur’ and ‘entrepreneur’, though there is no major difference with regard to their personality and functions. First, an entrepreneur is an independent businessman whereas an intrapreneur operates within a given company. Secondly,a n entrepreneur himself raises the required capital and fully bears the risks of his venture. On the other hand, an intrapreneur may not be required to raise capital or to bear full risks of his efforts in the company.

Concept of Entrepreneurship

Entrepreneurship is the process of identifying opportunities in the market place, marshalling the resources required to pursue these opportunities and investing the resources to exploit the opportunities of long-term gain, it involves creating wealth by bringing together resources in new ways to start an enterprise that benefits the customers and the founder both.

According to Higgins, “Entrepreneurship is meant the function of seeking investment and production opportunity, organising an enterprise to undertake a new production process, raising capital, hiring labour, arranging the supply of raw materials, finding site, introducing a new technique, discovering new sources of raw materials and selecting top managers for day-to-day operations of the enterprise.”

This definition highlights risktaking, innovating and resource organising aspects of entrepreneurship. In the words of Kao, “Entrepreneurship is the attempt to create value through recognition of business opportunity, the management of risktaking appropriate to the opportunity and through, the communicative and management skills to mobilise human, financial and material resources necessary to bring a project to fruition.”

This definition recognises that entrepreneurship involves the fusion of capital technology and human talent to complete a project successfully and with reasonable degree of risk.

According to Cole “entrepreneurship is the purposeful activity of an individual or a group of associated individuals undertaken to initiate, maintain and aggrandize profit by production or distribution of economic goods and services.”

Entrepreneurship is the set of activities performed by an entrepreneur, Thus, entrepreneur precedes entrepreneurship. The relationship between entrepreneur and entrepreneurship is given in the following Table.

Entrepreneurial Process

Nature of Entrepreneurship

The main characteristics of entrepreneurship are as follows:

1. Economic Activity: Entrepreneurship involves the creation and operation of an enterprise. Therefore, it is essentially an economic activity. It involves creation of value or wealth.

2. Creative Activity: Entrepreneurship involves innovation or introduction of something new. It is a creative response to the environment. An entrepreneur recognises the need for change and initiates it. He does things in new and better ways.

3. Dynamic Process: Entrepreneur thrive on the changing environment which brings new opportunities for business. Flexibility is the hallmark of a successful entrepreneur.

4. Purposeful Activity: Entrepreneurship is the purposeful activity of an individual or a group of individuals who seek to earn profits through the production and distribution of economic goods and services.

5. Risk Element: Entrepreneurs make decisions in the face of uncertainly. Therefore, risk is an inherit and inseparable element of entrepreneurship. An enterprise is undertaken for profits but there is every possibility of loss.

6. Organisation Building: An entrepreneur assembles and coordinates other factors of production, i.e., land, labour and capital. Managerial skills and leadership are other important facts of entrepreneurship.

7. Gap Filing Function: It is the job of an entrepreneur to fill the gaps between needs and goods and services. He has to complete the inputs and provide the knowledge about the production process.

Thus, entrepreneurship is a multi-dimensional concept. it is both an art as well as a science. But it is more of an art than a science. There are very few principles or ground rules that apply to the creation and running of business enterprises. The environment in which entrepreneurs operate is very heterogeneous and dynamic. success depends on the ability of the entrepreneur to visualise the future correctly and to take effective measures to exploit the environmental changes. Favourable circumstances and background of the person, however, influence success or failure to some extent.

Steps in the Process of Entrepreneurship

The major steps involved in the process of entrepreneurship are as follows:

1. Deciding to Become an Entrepreneur: A person may decide to become an entrepreneur due to several reasons. Desire to be one’s own boss, desire to pursue one;s own idea, desire to become rich, loss of a job are some of these reason. Sometimes, an individual may inherit money for starting a business. A housewife may decide to launch her own small business once her youngest child is in school.

2. Developing Successful Business Idea: An entrepreneur recognises an opportunity and converts it into a successful business. An opportunity is a set of favourable conditions that creates the need for a new product or service. An opportunity is different form an idea. An idea is a notion, or a thought. An idea becomes an opportunity when it fulfills four essential requirements:

(a) It must be attractive.
(b) It must be timely.
(c) It must be durable.
(d) It must be anchored in a product or service that adds value for its buyer or end user.

People become entrepreneurs mainly due to three reasons:

(a) To be the Boss: Being one’s own boss is the foremost reason for becoming entrepreneur. An individual may went to be his own boss due to frustration of working for others. In some cases, people start their own business in order to achieve a significant personal or professional goal.

(b) To Pursue Own Ideas: Some individuals desire to realise their ideas. Intrapreneurs or corporate entrepreneurs who innovate within the context of an existing firm have this desire. When their ideas are resisted they leave the firm and start their own firms to pursue their ideas. They spend considerable time and energy to convert their ideas into successful products or services.

(c) To Earn Financial Rewards: The desire to earn wealth is another motive of entrepreneurs. N.R. Narayan Murthy, Shantanu Prakash (Educomp), Rana Kapoor (Yes Bank) and many other entrepreneurs have made a fortune by founding successful ventures.

There are three main approaches which entrepreneurs use to identify business opportunities:

(i) Observing Trends: Changes in he economic, social, technological and political environments create opportunities for entrepreneurs. Keen observation of these changes helps in discovering new business ideas. For example, increasing number of teenagers with higher disposable incomes created a huge demand for designers cloth, luxury travels, high end restaurants, etc. Similarly, Apple’s iPod is the outcome of economic (teenagers with greater disposable incomes), social (growing mobile population) and technological (miniaturisation of electronics) trends.

(ii) Solving a Problem: Recognising a problem and finding ways to solve it is another approach to identifying business opportunities. Personal experience, observing challenges faced by people in daily life and initiative help to identify problems. For example, online intuition was created to solve the problems of distance and time faced by students who needed coaching at their own convenience.

(iii) Identifying Gaps in the Market: Gaps in the market place is the third source of business ideas. Consumers need some products that are not available in a particular location or not available at all. For example, people in many small towns want slimming centres or beauty parlours but there is none.

3. Feasibility Analysis: A business idea is useless if it is either non-feasible or not commercially viable. Some entrepreneurs make the mistake of adopting an idea without proper analysis. Such ventures often fail. The process of determining whether or not a business idea is feasible is called feasibility analysis. It involves:
(a) Judging technical feasibility of the idea.
(b) Ascertaining commercial feasibility.
(c) Determining financial feasibility.
(d) Socio-economic desirability of the idea.

4. Project Appraisal and Project Report: Once the feasibility study is completed, an in-depth analysis is made to decide selection or rejection of the project. Such a critical analysis is known as project appraisal. After the feasibility study and project appraisal, the findings and recommendations are presented in a report known as Project Report. This report is helpful in getting clearance from the Government and also in applying for loans from financial institutions.

5. Preparation of Business Plan: The business plan is a written document prepared by the entrepreneur. It describes all the relevant internal and external elements involved in starting a new business enterprise. It is often an integration of functional plans such as marketing, finance, manufacturing and human resources. It also states both short-term and long-term decisions for the first three years of operation of the new venture. Potential investors, suppliers and other interested groups require a business plan. It serves as a road map in the journey towards success. According to Pearce and Robinson, “a business plan is a blue print for building or expanding a business. It is a written document articulating what the business opportunity is, why the opportunity exists, what strategic activities and resources are required to seize it and why the new venture team has what it takes to execute the plan.”

6. Launching the Enterprise: Once the promoter is convinced of the feasibility and profitability of the project, he assembles the necessary resources to launch the enterprise. He has to choose partners\collaborators, collect the required finances and acquire land and buildings, plant and machinery, furniture and fixtures, patents employees, etc. Decisions have to be made about the size, location, layout, etc. of the enterprise. The form of ownership organisation has to be selected. According to Shubhin “the firm is launched by assembling and organisation the physical facilities, developing operation and production processes, advertising its product and initiating a sales promotion campaign, recruiting labour and accumulating inventories.”

Once the project is commissioned, the operational phase starts. In the short run, smooth and uninterrupted operation of plant and equipment and maintaining productivity and quality standards are the main concerns of the operational phase. But in the long run, it is essential to accomplish the objectives of the project in terms of cost, time and performance.

Qualities of a Successful Entrepreneur

Several studies have been carried out to identify the qualities and traits of successful entrepreneurs. However, experts differ in their opinions and no single list is available. According to Prof. Tandon, a true entrepreneur should posses the following qualities:

1. Capacity to Assume Risk: a true entrepreneur should be able to assume a relatively high degree of risk. He has to guarantee wages to employees, interest on capital, rent to the landlord without any guarantee of returns. High degree of vision, foresight, and imagination are required to handle risks. Risk and reward are inseparable in business. A person who cannot manage high risk cannot earn high profits.

2. Technical Knowledge and Willingness to Change: Technological change is the prime mover in the process of economic growth. The success of an entrepreneur depends largely upon his ability to adopt and utilise new and better techniques of production and marketing of goods and services. It is also necessary to be able to initiate and adapt changes.

3. Ability to Marshall Resources: A true entrepreneur is one who has the ability to mobilise necessary resources at reasonable cost and time. Sound judgement, high ambition, the will to win and determination are required for this purpose.

4. Ability of Organisation and Administration: The ability of building a sound organisation is a critical skill. The organisation builder must be able to harness the new ideas. He has to select, train and develop the people who can share most of his burden. He must be able to develop motivation and loyalty among his staff.

Distinction between Entrepreneurship and Intrapreneurship

Intrapreneurship or intrapreneuring or corporate entrepreneurship is the process by which other new ventures are born within the confines of an existing corporation. It involves expansion by exploring new opportunities through new combinations of existing resources. The concept of intrapreneurship requires that top executives inside the company should be encouraged to be entrepreneurs within the enterprise rather than go outside.

Entrepreneurship can be differentiated from intrapreneurship in the following ways:

  1. An entrepreneur is an independent businessman whereas an intrapreneur is semi-dependent on the promoters/owners of the corporation.
  2. An entrepreneur himself raises the necessary capital from various sources and guarantees the return to investors/creditors. On the other hand, an intrapreneur neither raises the capital nor guarantees any returns to the suppliers of capital.
  3. An entrepreneur bears full risk of his business whereas an intrapreneur does not fully bear the risk of the business he develops and operates.
  4. An entrepreneur operate from outside whereas an intrapreneur is an organisation man operating from within the organisation.

Functions of an Entrepreneur

The main function of an entrepreneur are as follows:

1. Innovation: An entrepreneur introduces new combinations in any branch of economic activity. Innovation implies doing new things or doing things that are already being done in new ways. It may occur in the following forms:

(a) Introduction of a new product or new quality of an existing product.
(b) Introduction of a new method of production or distribution.
(c) Opening of a new market.
(d) conquest of a new source of raw material.
(e) New form of organisation of industry.

Invention and Innovation: Though both invention and innovation involve a tremendous amount of creativity, they are entirely different processes. Following figure illustrates this distinction. Invention is the discovery of something new. The resulting product of an inventor did not exist before. For example, mathematical calculators and microelectronics were inventions.On the other hand, innovation is a new combination of natural elements that results in a useful and commercially viable product. For example, micro-computer is an innovation made by combining the inventions mentioned above. Similarly, gasoline is an innovation,a derivative of a natural resource.

2. Risk Taking: An entrepreneur assumes the responsibility for loss that may arise due to unforeseen contingencies in future. He guarantees interest to creditors, wages to labour and rent to the landlord. After making payment to these persons little or nothing may be left for him.

3. Organisation Building: An entrepreneur brings together various factors of production, organises them properly the decision-making functions of administration. He determines the line of business, expansion and growth of the enterprise. as an organisation builder, an entrepreneur performs planning coordination and control functions.

Peter Kilby has identified the following functions of an entrepreneur:

(i) Perceiving market opportunities.
(ii) Gaining command over scarce resources.
(iii) Purchasing inputs.
(iv) Marketing the products.
(v) Dealing with bureaucrats.
(vi) Managing human relations within the firm.
(vii) Managing customer and supplier relations.
(viii) Managing finance.
(ix) Managing production.
(x) Acquiring and overseeing assembly of the factory.
(xi) Industrial engineering (minimising inputs with a given production process).
(xii) Upgrading process and product quality.
(xiii) Introducing new production techniques and products.

Generation of Business Idea

The first step in starting a business enterprise is the generation of an idea that is unique and appears worthwhile for implementation. The idea may relate to the starting of a new business or the takeover of an existing enterprise. The idea should be sound and workable, so that it may be exploited. It should yield a reasonable return on investment and the one which can be converted into a business. The promoter has to be imaginative and foresighted to discover a business idea. The entrepreneur has to be very careful while identifying a business opportunity.

The world of business offers a lot of opportunities but everybody cannot identify them. An entrepreneur has to collect necessary information from different sources in order to identify a business opportunity. Business opportunity refers to a business idea which can be converted into a profitable business. While selecting a business opportunity in the entrepreneur must ensure that:

(i) there is an adequate market for the proposed product or service, and
(ii) the rate of return on the estimated investment is sufficient.

Sources of Business Ideas

A business idea may be discovered from the following sources:

(i) Observing Markets: careful observation of markets can reveal a business idea. Market surveys can also reveals the demand and supply position for various products. It is necessary to estimate future demand and to take into account anticipated changes in fashions, income levels, technology, etc. In this connection, it will be useful to ascertain whether the demand is elastic or inelastic and whether the product is repeat purchase or not. Attempt should be made to determine the trend of demand and the composition and pattern of potential users of the product. A survey of the available channels of distribution should also be made so that the selling campaign can be properly planned well in advance of the production. Advice of professional experts like dealers, commercial consultants, bank managers, advertising agencies may also be obtained to supplement product analysis and market surveys.

Competition and price trends can also be found through market surveys. From the data collected through market observation, one can identify the products/industries which are in demand and which require increase in supply. A promoter can then find out the most profitable line of business. For example, the scarcity of edible oil prompted many firms to enter into the production/supply of edible oils in India.

(ii) Prospective Consumers: Consumer knows best what he wants and the habits/tastes which are going to be popular in the near future. Contacts with prospective consumers also reveals the features that should be built into a product/service. These days good business firms generally conduct a survey among prospective consumers before choosing the product to be manufactured. These firms also conduct a market test of the prototype product before launching it into the market. the consumer is the foundation of a business and it is he who keeps it going. Therefore, data on consumer needs and preferences must be collected. Initially, a new enterprise should concentrate on one or a limited range of products. More products can be added to complete the line later on as the business becomes well-established.

(iii) Developments in Other Nations: People in underdeveloped countries generally follow the fashion trends of developed countries. For example, video, washing machines, micro ovens, etc. which are now the ‘in things’ in India were being used in the United States and Europe before the eighties. Therefore, an entrepreneur can discover good business ideas by keeping in touch with developments in advanced nations. Sometimes, entrepreneurs visit foreign countries in search of ideas for new products/processes. Trade delegations of various chambers of commerce, etc. visit foreign markets collaborations and other types of business ideas.

(iv) Study of Project Profiles: Various government and private agencies publish periodic profiles of various projects and industries. These profiles describe in detail the technical, financial and market requirements and prevailing position. A careful scrutiny of such project profiles is very helpful in choosing the line of business. Technical and other types of experts may be employed to carry out a specialised study of project profiles and to suggest the most promising projects/industries for further evaluations.

(v) Government Organisations: Several government organisations nowadays assist entrepreneurs in discovering and evaluating business ideas. Development banks, state industrial development/investment corporations, technical consultancy organisations, investment centres, export promotion councils, etc. provide advice and assistance in technical, financial, marketing and other areas of business. Government also identifies the priority sectors for investment through five years plans, industrial policy resolutions and guidelines for industry. In this connection government publications on trade and industry can also be helpful in discovering business ideas. Items reserved for small sector will also indicate the potential areas.

(vi) Trade Fairs and Exhibitions: National and international trade fairs are a very good source of business ideas. At these fairs, producers and dealers in the concerned industry put up their products for display and/or sale. A visit to these fair provides information about new products/machines. Negotiations for the purchase promotion, collaboration, dealership, etc. may also be made at these fairs.

Trade Fairs have now become a regular feature. India Trade Promotion Organisation (earlier The Trade Fair Authority of India) established in December 1976 is the apex agency for the organisation and control of trade fairs and exhibitions in India and abroad. It periodically organises trade/industrial fairs at Pragati Maidan in New Delhi. Trade fairs and exhibitions provide opportunities for:

(i) Assessing the market trends in terms of demand potential and type of products required.
(ii) Meeting a large number of buyers from different State/Countries.
(iii) Assessing the attitude of the competitors in a particular product or marketing area.
(iv) Comparing the price and quality of similar product.
(v) Establishing personal contacts with dealers/importers/customers.
(vi) Projecting new ideas on commercial publicity for promoting sales in the country and abroad.

In addition to the above, business ideas can be discovered from other sources like a new invention awaiting commercial exploitation, an unexploited resource, an unsatisfied demand, an inferior product, etc.

Approaches to Generating Ideas

An entrepreneur may make use of one or more of the following approaches while exploring various sources of business ideas:

1. Brainstorming: Under this approach, all members of the group attempt to make suggestions. The ideas may be crazy but no evaluation or judgement is made at this stage. The process helps in generating a large number of product ideas. A worthwhile idea may ultimately be generated from the modification or combination of ideas that initially appeared wild. Brainstorming should be conducted by an expert.

2. Improvement of an Existing Product: A business idea may relate to removing shortcomings in an existing product by means of new technology. colour TV was an improvement over black and white TV.

3. New Ways of Doing Things: Another approach to generating a business idea is to develop new and better methods of making and/or marketing an existing product or service. ATMs are a new way of making money available to banks clients. Similarly, credit cards area better method of making payments.

4. Utilising waste Material: A useful product may be developed by recycling or using waste. Energy conservation and environmental protection are becoming more and more significant. Fuel efficient vehicles and non-polluting vehicles (CNG) have a better market.

5. Converting Hobby into business: A person may have the liking or skill for doing something. He/she can develop this hobby into a successful business venture. Photography, interior decoration, fashion designing, food processing are some examples. Lizzat Papd Udyog grew out of the hobby of a few women.

Selection of Project Idea

An entrepreneur has to screen all the generated business ideas on the basis of a well-defined criteria so as to select the best idea. While selecting the business idea, the following points need to be considered:

Feasibility Study

(i) The idea should match the resources, knowledge, skills and capabilities of the entrepreneur.
(ii) It should require such capital, technical know how, power, raw material and other inputs which the entrepreneur can mobilise.
(iii) The cost structure of the project must ensure a reasonable return on the investment.
(iv) The project should be compatible with government policies, environmental regulations, state of the economy, technological changes and other factors in the external environment.
(v) There must be sufficient demand for the proposed product or service.

Before making investment in a project, the entrepreneur must undertake a detailed study to ensure that the project is viable. Such s study is known as feasibility study. It involves analysis of the following aspects:

1. Technical Aspect: The technical feasibility of a project involves a critical study of the following:

(a) Location: The geographical area and the exact site on which the project is to be situated should permit cost effective operations of business.

(b) Size of the Plant: The scale of operations or plant capacity influences the economic viability of the project. In case the size of the plant is smaller than the economic size, cost of production increases and survival in a competitive market becomes difficult.

(c) Raw Materials and Labour: Availability of necessary raw material and technical skills at a reasonable cost is necessary for the success of the project.

(d) Plant and Equipment: The most appropriate technology, its cost and availability should be considered in the feasibility study. Necessary plants and equipments and their specifications, plants layout and proper balancing of different components of the plant are important considerations in feasibility study.

(e) Infrastructure: Transportation, power and fuel, warehousing, water supply and other infrastructural facilities must be adequate and efficient for the project.

(f) Effluent Treatment and Discharge: Regulations concerning pollution are becoming increasingly stringent. There should be proper arrangements for treatment and disposal of effluents produced by the project.

(g) Foreign Collaboration: In case the project involves a foreign collaboration, relevant details of the collaboration should be given. The terms and conditions of the collaboration should be in line with the Government policies guidelines.

2. Commercial Aspect: While judging the commercial viability of a project size of the market, volume of demand for the product or service, margin or profit, degree of competition, etc. need to be considered. A detailed market survey is required to assess sales volume, related aspects. The service of market experts may be needed for this purpose.

3. Financial aspect: In case of a new project, financial viability can be judged on the following parameters:

(a) Total estimated cost of the project.
(b) Financing of the project in terms of its capital structure, debt equity ratio and promoter’s share of the total cost.
(c) Existing investment by the promoter in other business.
(d) Projected cash flow and profitability.
(e) Estimated exports/import substitution, if any.

4. Socio-economic Aspect: Each and every project involves some costs to the country and creates certain benefits. Therefore, a Social Cost Benefit Analysis (SCBA) of the project should be made to judge the national utility of the project. In such an analysis the net contribution to the following should be considered:

(a) Development of infrastructure.
(b) Development of technology.
(c) Development of backward areas.
(d) Growth of ancillary and small scale industries.
(e) Employment generation.
(f) Foreign exchange earnings.
(g) Import substitution and self-reliance.
(h) Equitable distribution of income and wealth.
(i) Improvement in the quality of life.

Project Report

Once the feasibility study is completed, an in-depth analysis is made to decide selection or rejection of the project. Such a critical analysis is known as project appraisal.

After the feasibility study and project appraisal, the findings and recommendations are presented in a report known as Project Report. This report is helpful in getting clearance from the government and also in applying for loans from financial institutions. The General Format or contents of Project Report are given below:

1. Introduction– Name, address and other details of the entrepreneur.

2. Summary and Recommendations.

3. Product- Capacity,Chemistry of the product, Specifications, Properties, Applications and Uses.

4. Market Potential- Existing installed capacity and actual production for the last five years, New capacities under consideration/implementation and Demand pattern with specific reference to requirements in various regions based on desk research and field survey.

5. Process and Knowhow- Description of different processes available, Selection of the process for the project and the reason for the same, Selection of suitable knowhow for the said project based on technical and economic evaluation from available data.

6. Plant and Machinery- List of imported/indigenous machinery, Broad specifications of the machinery and List of machinery.

7. Location- Actual site selection survey: Availability of raw material, electricity, water, and other infrastructural facilities.

8. Plot Plan and and Building- Overall plot plan along building plan.

9. Raw Materials- Raw material requirements and their specifications, Availability and sources, imported and indigenous.

10. Utilities: Requirements of power, water and others including fuel, steam, inert gas, etc. and their specifications.

11. Effluents- Nature and type of effluent/specifications and quantity of effluent, Effect of effluent if discharged as such and effluent treatment suggested.

12. Personal Requirements- Manpower requirements (top, middle and bottom level) and Organisational structure.

13. Capital Cost- Project cost: giving break up details (based on budgetary estimates), Margin money for working capital in the project cost.

14. Working Capital- Details of requirements of working capital and norms.

15. Mode of Finance- Based on the debt-equity ratio and other financing norms followed by financial institutuions.

16. Manufacturing cost- Unit cost of production and Projected cost of production for 10 years.

17. Financial Analysis- Profitability statement for 10 years, Break-even and sensitivity analysis, Payback period and Projected balance sheet for 10 years.

18. Implementation Schedule- Time schedule for the implementation of the project.

Preparation of Business Plan

The business plan is written document prepared by the entrepreneur. It describes all the relevant internal and external elements involved in starting a new business enterprise. It is often an integration of functional plans such as marketing, finance, manufacturing and human resources. It also states both short-term and long-term decisions for the first three years of operation of the new venture. Potential investors, suppliers and other interested groups require a business plan. It serves as a road map in the journey towards success.

The entrepreneur prepares the business plan in consultation with lawyers, accountants, engineers, marketing consultants, etc. Different groups read the business plan for different purposes. Therefore, the plan must address to the needs and concerns of all. The entrepreneurs must clearly articulate what the venture is all about. He should view the venture through the eyes of customers and investors.

The depth and detail of the business plan depends upon the size and scope of the proposed new venture. For example, an entrepreneur planning to market a new personal computer will need a quite comprehensive business plan due to the nature of the product and market. On the other hand,a n entrepreneur who plans to open a retail video store will not need such a comprehensive business plan. Scope of the business plan will also depend upon nature of business (manufacturing/trading/service), size of the market, degree of competition, potential growth, etc.

Business plan serves the following objectives:

(i) It provides a self-assessment by the entrepreneur.
(ii) It helps to determine the viability of the venture in a designed market.
(iii) It helps the entrepreneur in raising necessary funds.
(iv) It indicates the actions to be taken to implement the project.
(v) It helps to judging the progress of the venture at successive stages.
(vi) It informs the investors, lenders, suppliers and other stakeholders the programme of the entrepreneur.

Basic Considerations in Setting Up a Business Enterprise

An entrepreneur has to take several decisions in order to establish an enterprise. Such desicions are known as entrepreneurial decisions. Entrepreneurial decisions are required to tackle the problems of launching a new enterprise. A promoter or entrepreneur who wants to establish a new business enterprise has to take the following decisions:

1. Selection of Line of Business: The first procedural decisions involved in setting up a new enterprise is to select the nature and type of business. The entrepreneur has to decide the line of business in terms of industrial, trading or service. Then he has to select the types of goods and services he will produce or distribute. He has to consider several factors, e.g., nature and source of raw materials, type of technology to be used, source of supply, distribution policy, etc. After deciding the nature of business activity, the promoter has to analyse and forecast the profitability of the proposed business on the basis of probable operating costs and sales revenues. Operating costs imply cost of procuring different inputs while sales revenue depends upon the size of the market, probable market share of the proposed undertaking, expected growth of total market, sales efforts and policies, etc. A market survey may be carried out to estimate these factors. Marketing research may be carried out to ascertain the number, location, needs, etc. of consumers. Then a product analysis is made to determine the design, quality and style of the product to be manufactured. Decisions regarding product design, pricing policy, distribution channel and publicity should be made from the viewpoint of prospective customers.

While selecting the line of business, a number of criteria or factors must be kept in view. First, the expected rate of return must be fair keeping in view risks involved and the amount of investment required in the enterprise. Secondly, the degree of risk involved should be such that the entrepreneur is wiling and able to undertake. Thirdly, line of business chosen must be technically feasible, i,.e., the requirements of finance, technology, skills, labour and materials should be within the reach of the promoter. The promoter may prepare a comprehensive report containing the conclusions of all his analysis. Such a report is called project report or feasibility report.

2. Size of the Unit: Determination of the size of the firm or scale of operations is an important decision in the establishment of a new enterprise. An attempt should be made to achieve the size at which the average cost per unit is minimum. In other words, the entrepreneur should aim at the optimum size keeping in view the extent of market, technique of production, nature of the product, Availability of finance, competence of management, etc. Large scale operations offer several economies of scale but require huge investment and expert managerial skills. Where the risks involved are high or a new idea is to tried, it is often preferable to start with a small size and to expand the firm gradually. According to Shubin,”The initial size of the establishment must be based on judicious sales estimates. With accurate sales estimate the firm can avoid investing in an establishment that is too large to take expensive to be profitable at the outest but can select a size sufficiently large to take care of the initial sales and their expected increase during the years immediately ahead.” However, the initial size of the entrepreneur can be large provided the entrepreneur is able and willing to afford the capital required and the risks involved. A careful analysis and reconciliation of technical, managerial , financial, market and such other factors should be made to determine the size of the firm.

3. Location of Business: The location of a business firm is an important decision as it influences the costs, profitability and growth of the enterprise. Moreover, once the site is selected, it is very difficult to change it. An unfavourable location may restrict the growth of the firm in addition to higher costs. The objective of location decision is to find out the optimum location so that the per unit costs of production and distribution are the lowest possible. Location is a three-stage process as it involves not only the selection of the region, but choice of locality and selection of the site. Region is selected on the basis of access to raw materials and markets, availability of labour, transportation, and banking facilities. Choice of locality or community is governed by local attitudes, managerial preferences, public facilities, climate, availability of site, financial inducements, etc. Selection of the site depends on cost of land, soil and surface, development costs, etc.

4. Choice of Form of Ownership: The choice of the form of ownership determines the division of profits, authority and liability of owner(s), continuity of business, transferability of interest, etc. A business enterprise may be organised in three forms, namely, sole proprietorship, partnership and joint stock company. The choice of the form of ownership depends on several factors such as the nature and size of the business, degree of risk or liability, continuity of business, capital and managerial requirements, tax burden, legal formalities, etc. A good form of ownership should be easy to form, simple to operate, durable, flexible, free from heavy taxation and legal requirements, etc. In some cases, the form pof ownership may be prescribed by law. For instance, banking and insurance business can be carried on only in the form of a joint stock company.

5. Financial Planning: Proper planning and control of finances is essential to success in business. Adequate funds must be provided at the right time for the start and continuity. Financial planning involves advance decisions in the following areas of business finance:

(a) Determination of the total amount of capital required for the business, keeping in view the cost of establishing the business (promotional expenses); costs of fixed assets like land, building, plant, machinery, furniture and fixtures, etc. (fixed capital); cost of current assets like stock of raw materials, cash, debtors inventory, etc. (working capital) and other operating costs. While estimating capital requirements, the present as well as future needs for expansion, modernisation, diversification, etc. should be considered. A proper amount of capitalisation should be fixed.

(b) Deciding the form and composition of the securities which are to be issued to raise the estimated capital. The source of finance have to be settled in terms of ownership securities and creditorship securities. This is the problem of deciding an appropriate capital structure.

(c) Deciding the time, price and method of marketing securities.

(d) Administration of funds.

6. Provision of Physical facilities: An important decision in launching a new enterprise is the selection of machines, equipments, plant, buildings, and other physical facilities. The nature and quantum of physical facilities depend upon the size of the firm (large, medium and small), nature of the business (manufacturing trading or service), Process of production (capital-intensive or labour-intensive), the availability of funds, etc. In the selection of a particular machine or equipment the relative cost and productivity, availability of repairs and maintenance services and spare parts, skills of workers, etc. should also be kept in view. Investment in a particular machine or equipment should be made to improve productivity and to reduce costs rather than in the name of modernity alone. The alternative source of supply of physical facilities should be considered.

7. Plant Layout: After selecting machinery and equipment, it is necessary to arrange them in an efficient manner. Arrangement of physical facilities in the plant is known as plant layout. Good layout is essential for efficient and economical operations. An efficient layout helps to reduce the costs of material handling, inventory, space, etc. The layout should be such that it results in the optimum utilisation of machines, equipment, work force and space. Machinery and equipment should be placed in a proper sequence so as to permit a smooth flow of materials through the necessary operations and in the most direct way possible. The layout should be flexible enough to adapt itself to changing conditions of business. Back-handling of materials and other bottlenecks and delays in production process must be kept to minimum. The type or pattern of plant layout depends upon the nature of production system, space available, volume of output, types of equipment, etc.

8. Internal Organisation: Another important managerial decision in the establishment of a new business enterprise is the creation and development of an internal structure. Work is divided among departments like production, marketing, finance, personal, etc. And arrangements are made for coordination among these various departments. An efficient network of authority-responsibility relationships needs to be created for successful operations. Internal organisations is a structural framework consisting of authority-responsibility relationships among members of the enterprise. It defines the official channels of communication and reporting relationships, i.e., who is responsible to whom. In a large enterprise, the authority-responsibility relationships are depicted formally on an ‘organisation chart’. A sound internal organisation facilitates efficient operations, avoids duplication of work, promotes mutual cooperation and coordination, and facilitates expansion and growth of business. It provides the arteries and nerves through which the organisation members communicate with one another. Creation of a sound internal structure involves problems like departmentation, delegation, decentralisation, span of control, etc.

9. Personnel: the next step is to estimate the needs of people or employees to perform different jobs in the internal organisation structure. The forecasting of the number and type of employees is known as manpower planning or human resource planning. After this, the procurement, development and motivation of the required managers and workers becomes necessary. Persons with required skills, aptitude and experience must be recruited and selected. Once the personnel are employed and placed on jobs, they must be motivated (through proper compensation and non-financial incentives) to make their best possible contribution towards the accomplishment of organisation objectives. Plans are prepared for all these activities at this stage.

10. Launching the Enterprise: The completion of physical, organisational and financial aspects leads ultimately to the actual launching of the enterprise. Acquisition of required materials, machinery, money, workers and managerial ability, start to production and advertising of products, etc. are functions performed at this stage. According to Shubin, “The firm is launched by assembling and organising the physical facilities, developing operation and production processes, advertising its product and initiating a sales promotion campaign, recruiting labour and accumulating inventories.”

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