enterpreneurship hnd

7/30/2019 Enterpreneurship Hnd

1/42

INTRODUCTIONThe ultimate measure of a manIs not where he standsIn moments of comfort and convenienceBut where he stands

At times of challenge and controversy.- Martin Luther King.The words entrepreneur, intrapreneur and entrepreneurship haveacquiredspecial significance in the context of economic growth in a rapidlychangingsocio-economic and socio-cultural climates, particularly in industry,both indeveloped and developing countries. Entrepreneurial development is acomplex phenomenon. Productive activity undertaken by him andconstantendeavor to sustain and improve it are the outward expression of thisprocessof development of his personality.

WHO IS AN ENTREPRENEUR?An entrepreneur is a person with a dream, originality and daring, whoacts asthe boss, who decides as to how the commercial organization shall run,whoco-ordinates all activities or other factors of production, whoanticipates the

future trend of demand and prices of products.An entrepreneur is one of the important segments of economic growth.Basically he is a person responsible for setting up a business or anenterprise.Infact, he is one who has the initiative, skill for innovation and wholooks forhigh achievements. He is a catalytic agent of change and works for thegoodof people. He puts up new green-field projects that create wealth, openupmany employment opportunities and leads to the growth of other

sectors.The entrepreneur displays courage to take risk of putting his moneyinto anidea, courage to face the competition and courage to take a leap intounknownfuture and create new enterprises/ business. This creative process isthe life


2/42

blood of the strong enterprise that leads to the growth and contributesto thenational development.The entrepreneur will always work towards the creation andenhancement of

entrepreneurial society.The best entrepreneur in any developing country is not the one whousesmuch capital but an individual who knows how to organize theemploymentand training of his employees.A classic example is that of Mr. Dhirubhai Ambani because he had allthedynamic qualities of a successful entrepreneur, as a result of whichtoday, hewas the owner of the largest private company in India. All decisions

which hehad taken to grow were instinct and no one had taught him to takedecisions.

We can define entrepreneur as one who innovates, raises money,assemblesinputs, choose managers and sets the organization going with hisability toidentify them.As per Peter Drucker- An entrepreneur is one who always searchesfor

change, responds to it as an opportunity. Entrepreneurs innovate.Innovationis a specific instrument of entrepreneurship.As perJoseph A. Schumpeter- Entrepreneur is one who innovates,raisesmoney, and assembles inputs, chooses managers and sets thecommercialorganization going with his ability to identify them and opportunitieswhichothers are not able to identify and is able to fulfill such economicopportunities.

As per Walker- An entrepreneur is one who is endowed with morethanaverage capacities in the task of organizing and co-coordinating thevariousfactors of production. He should be a pioneer, a captain ofindustry.


3/42

The process undertaken by an entrepreneur to augment his businessinterestsgave birth to ENTREPRENEURSHIP.

ENTREPRENEURSHIP DEFINED:

Entrepreneurship is an elusive concept.Entrepreneurship is based on purposeful and systematicinnovation. Itincluded not only the independent businessman but alsocompanydirectors and managers who actually carry out innovativefunctions.SchumpeterIn the above definition, entrepreneurship refers to the functionsperformed byan entrepreneur in establishing an enterprise. Just as management is

regardedas what managers do, entrepreneurship may be regarded as whatentrepreneurs do. In other words, entrepreneurship is the act of beinganentrepreneur. Entrepreneurship is a process involving various actionsto beundertaken to establish an enterprise. It is thus, process of giving birthto anew enterprise. Entrepreneurship is composite skill, the resultant of amix ofmany qualities and traits- these include tangible factors as

imagination,readiness to take risks, ability to bring together and put to use otherfactors ofproduction, capital, labour, land, as also tangible factors such as theability tomobilize scientific and technological advances. A practical approach isnecessary to implement and mange a project by securingthe requiredlicenses, approvals and finance from governmental and financialagencies.The personal incentive is to make profits from the successfulmanagement of

the project. A sense of cost consciousness is even more necessary forthe longtermsuccess of the enterprise. However, both are different sides of thesamecoin. Entrepreneurship lies more in the ability to minimize the use ofresources and put them to maximum advantage. Without anyawareness of


4/42

quality and desire for excellence, consumer acceptance cannot beachievedand sustained. Above all, entrepreneurship today is the product ofteamworkand the ability to create, build and work as a team. The entrepreneur

is themaestro of the business orchestra, wielding his baton to whichthe band isplayed.The basic two elements involved in entrepreneurship are as follows;-

INNOVATIONInnovation, i.e. doing something new or something different is anecessarycondition to be called a person as an entrepreneur. The entrepreneursareconstantly on the look out to do something different and unique tomeet the

requirements of the customers. They may or may not be inventors ofnewproducts or new methods f production but they possess the ability toforeseethe possibility of making use of the inventions for their enterprises. Inorder tosatisfy the changing preference of customers nowadays manyenterpriseshave adopted the technique of innovation. For instance, pidiliteindustriesinnovated the new 5.rs pack of fevi quick which was accepted by the

customers as it was easy to use when it was needed. Other examplewould beof the mobile enterprise which came up with the scheme for thecustomers ofrefill pack of 999.rs which says Zindagi bhar mobile raho which wasaccepted bye the customers. Since customers taste and preferencesalways


5/42

keep on changing, hence the entrepreneur needs to apply invention onacontinuous basis to meet the customers changing demand forproducts.RISK- BEARING

Entrepreneurship is the propensity of mind to take calculated risks withconfidence to achieve a predetermined business or Industrial objective.Thecapacity to take risk independently and individually with a view tomakingprofits and seizing the opportunity to make more earnings in themarket-oriented economy is the dominant characteristic of modernentrepreneurship.In fact he needs to be a risk taker, not risk avoider. His risk bearingabilityenables him even if he fails in one succeed. The Japanese proverb says

Fallseven times, stand up eight.Though the term entrepreneur isoften usedinterchangeably with entrepreneurship, yet they are conceptuallydifferent.The relationship between the two is just like the two sides of the samecoin.Thus, entrepreneurship is concerned with the performance and co-ordinationof the entrepreneurial functions. This also means that entrepreneurprecedes

entrepreneurship.NEED FOR ENTREPRENEURSHIPEntrepreneurship promotes small business in the society. Governmenthasaccepted the fact that small firms have a crucial role to play in theeconomicdevelopment of the country. Small businesses are an essential part ofourfuture economic prosperity because of the following reasons-

EMPLOYMENT GENERATION:Entrepreneurial development is looked at as a vehicle for employmentgeneration through promotion of small business. India, being far moredeveloped and forward looking country than some of the third worldcountries, can provide lead to entrepreneurial development activities.However, India can benefit from the well- documented successexperiences ofdeveloped countries like USA, Japan and UK in the field of employmentgeneration and small business promotion.


6/42

Steady growth in consumer spending, expanding retail sales, a stronghousing market, continued expansion of the service sector, low rates ofinflation and of labour cost increases and failing interest ratescontributed to ahealthy environment for small business.

In India, the government policies, political and economic environmentgreatlyencourage the establishment of new and small enterprises. Self-employmentand small scale industry schemes have been further liberalized duringthe lastdecade. The employment in the small-sector increased from 9.00millionpeople in 1984-85 to 13.9 million people in 1994-95. This indicates anincreaseof 5.4% p.a in employment in this sector.

SMALL BUSINESS DYNAMISM:Great dynamism is one of the qualities of the small and mediumenterprises.This quality of dynamism originates in the inherent nature of the smallbusiness. The structure of small and medium enterprises is lesscomplex than that of large enterprises and therefore facilitates quickerand smoothercommunication and decision- making. This allows for the greaterflexibilityand mobility of small business management. Also, small enterprises,more

often make it possible for owners, who have a stronger entrepreneurialspiritthan employed mangers, to undertake risk and challenges.

BALANCED ECONOMIC DEVELOPMENT:Small business promotion needs relatively low investment andtherefore canbe easily undertaken in rural and semi-urban areas. This in turncreatesadditional employment in these areas and prevents migration ofpeople fromrural to urban areas. Since majority of the people are living in the rural

areas,therefore, more of our development efforts should be directed towardsthissector. Small enterprises use local resources and are best suited torural andunderdeveloped sector. This in turn will also lead to dispersal ofindustries,reduction in concentration of economic power and balanced regional


7/42

development.

INNOVATIONS IN ENTERPRISES:Business enterprises need to be innovative for survival and betterperformance. It is believed that smaller firms have a relatively highernecessity and capability to innovate. The smaller firms do not face the

constraints imposed by large investment in existing technology. Thusthey areboth free and compelled to innovate.Entrepreneurship development is accelerating the pace of small firmsgrowthin India. An increased number of small firms are expected to result inmoreinnovations and make the Indian industry compete in the internationalmarket.

FACTORS INFLUENCING ENTERPRENURESHIPThe emergence of entrepreneurs in a society depends upon closely

interlinkedsocial, religious, cultural, psychological, and political and economicfactors.

FAMILY TRADITION:Individuals who for some reason, initiate, establish maintain andexpand newenterprises generate entrepreneurship in society. It is observed thatentrepreneurs grow in the tradition of their families and society andaccept certain values and norms from these sources.

RELIGIOUS, SOCIAL AND CULTURAL FACTORS:Religious, social and cultural factors also influence the individual takingupan entrepreneurial career, in some countries there is religious andculturalbelief that high profit is unethical. This type of belief inhibits growth ofentrepreneurship.

PSYCHOLOGICAL FACTORS:The psychological factors like high need for achievement,determination ofunique accomplishment, self confidence, creativity, vision, leadershipetc,

promote entrepreneurship among individuals. On the other handpsychological factors like security, conformity and compliance, needforaffiliation etc restrict promotion of entrepreneurship.

POLITICAL FACTORS:The political and also the political stability of country influence thegrowth ofentrepreneurship. The political system, which promotes free market,


8/42

individual freedom and private enterprise, will promoteentrepreneurship.

ECONOMIC POLICIES:The economic policies of the government and other financialinstitutions and

the opportunities available in a society as a result of such policies playacrucial role in exerting direct influence on entrepreneurship.In view of the haphazard development of economic zones, Governmentisencouraging the entrepreneurs to establish their business in backwardandtribal areas. This is primarily to arrest the migration of people from thevillages to cities and to create employment opportunities locally.Governmentis promoting such development by giving incentives like tax holidays

(bothsales and income), subsidized power tariff, raw materials,transportation costetc.QUALITIES OF AN ENTREPRENEUR

The skills required by entrepreneurs can be classified in to three mainareas:1. Technical skills involve such things as writing, listening, oral presentations,coaching, and technical know-how.2. Business management skills include those areas involved in starting,developing and managing any enterprise.3. Personal entrepreneurial skills differentiate an entrepreneur from amanager and include inner control (discipline), risk taking, innovativeness,persistence, visionary leadership, and being change oriented.

The qualities that contribute to the success of an entrepreneur are asfollows: -1. Risk Taking: - Entrepreneurs are moderate risk takers. They enjoyheexcitement of a challenge, but they do not gamble. Entrepreneursavoidlow- risk situations because there is a lack of challenge. They avoidhigh risk situations because they want to succeed. They like achievablechallenges. They do not tend to like situations where the outcome of aquest depends upon a chance and not on their efforts. They like toinfluence the outcome of their quest by putting in more efforts andthen experiencing a sense of accomplishment. A risk situation occurswhen an entrepreneur is required to make a choice between two ormore alternatives whose potential outcomes are not known and mustbe evaluated in advance, with limited information. A risk situation


9/42

involves potential gain and potential loss. As the size of the businessexpands the problems and opportunities become more numerous andcomplex. Business growth and development require an entrepreneurnot to be afraid of taking decisions and certain risks. Most people areafraid to take risks because they want to be safe and avoid failure. An

entrepreneur always takes a calculated risk and is not afraid of failure.2. Self- Confidence: - A man with self confidence has clear thoughtsand well- defined goals to achieve in his life. An entrepreneur gets intobusiness or industry with a high level of self- confidence. He is able toevaluate his competencies and capabilities in a realistic manner. Hecan set realistic and challenging goals. He is confident of achievingthese goals. He possesses a sense of effectiveness, which ultimatelycontributes to success of his venture. He puts forward his caseconfidently and gets needed help from concerned agencies/authorities.3. Optimist: - An entrepreneur is able to visualize the hidden

opportunities in the environment and translate them into businessrealities. An entrepreneur exhibits a positive and optimistic attitudetowards such opportunities. The entrepreneur approaches his task withthe hope of success and not with a fear of failure. In the process ofaccomplishing his task he may also fail but the failure experience doesnot change his thinking. He is always an optimist in his outlook. Thepositive outlook develops a drive in the entrepreneur to attempt newthings and innovate.4. Need for achievement: - The need to excel known asachievement is a critical factor in the personality of an entrepreneur.People with high need for achievement have desire for success in

competition with others or with a self imposed standard of excellence.They try to accomplish something new and try to innovate themselvesin long term goals. They try to accomplish challenging tasks. Theyknow their own strengths and weaknesses, the facilitating factors andconstraints in the environment and the resources needed toaccomplish their tasks. If the objectives are accomplished they feelelated.5. Need for independence: - The need for independence is the primecharacteristic that has driven the entrepreneurs to start their ownbusiness. These entrepreneurs do not like to be controlled by others.They do not wait for direction from others and choose their own course

of action. They set their own challenging goals and put efforts toachieve this goal. The independence provides opportunity for tryingout new ideas and helps them achieve their goals.6. Creativity: - Entrepreneurs are highly creative people. They alwaystry to develop new products, processes or markets. They areinnovative, flexible and are willing to adopt changes. They are notsatisfied with conventional and routine way of doing things. They


10/42

involve themselves in finding new ways of doing the things for thebetter.7. Imaginative: - Successful entrepreneurs possess a high degree ofimagination and foresightedness. Entrepreneurs have a great vision.Knowing the present and the past the entrepreneur is able to predict

the future events the business more accurately than others. It isbecause of their visionary nature and power of imagination that helpsthem in anticipating problems and evolving actions strategies for suchproblems.8. Administrative ability: - A successful entrepreneur is always agood administrator. He knows the art of getting things done by otherpeople without hurting their feelings of self- respect. He has strongmotivation towards the achievement of a task and puts in necessaryefforts in getting things done by others.9. Communication ability: - Communication ability is the ability tocommunicate effectively. Good communications also means that both

the sender and the receiver understand each other and are beingunderstood. An entrepreneur who can effectively communicate withcustomers, employees, suppliers and bankers will always succeed intheir business.10. Clear objectives: - An entrepreneur has clear objectives as to theexact nature of the business, the nature of the goods to be producedand the subsidiary activities to be undertaken. A successfulentrepreneur has the objective to establish the product to make profitor to render social service.11. Business Secrecy: - An entrepreneur who is successful alwaysguards his business secrets. Leakage of business secrets to trade

competitors is a serious matter; therefore an entrepreneur shouldcarefully guard it. An entrepreneur must be able to make a properselection of his assistant since most of the time it is the assistant wholeaks the trade secret.12. Emotional stability: - The most important personality factorscontributing to the success of an entrepreneur are emotional stability,personal relations, consideration and tactfulness. An entrepreneurmust maintain good relations with the customers if he wishes to enjoytheir continued patronage. He must also maintain good relation withhis employees, whom he shall motivate to perform their jobs at a highlevel of efficiency. An entrepreneur who maintains good human

relations with customers, employees, suppliers and the community hasa better chance to succeed in his/ her business.13. Open-mindedness: - Open- mindedness means a free and frankapproach in accepting ones own errors and change for the better. Anentrepreneur must be willing to learn from his past experience,mistakes and moulds himself for better.14. Technical knowledge: - Technical knowledge implies knowledgeabout the product, process or technology used in manufacturing. An


11/42

entrepreneur who has reasonable level of technical knowledge willalways be successful. Technical knowledge is easy to acquire if theentrepreneur tries hard to acquire it.15. Patience: - Patience means ability to wait. Patience also meansdoing the work and waiting for the result. A certain amount of patience

is necessary in any type of vocation. An entrepreneur should not waitfor actions but can certainly wait for result for his efforts.16. Hard working and energetic: - Ability and willingness to workhard is an important quality of an entrepreneur. A person havingphysical and mental stamina to cope with the hard work and humanrelation is fit to become a successful entrepreneur. By carrying outwell- planned and systematic work, success is always the end result.17. Good organizer: - Entrepreneurs are good organizers of resourceslike men, machines, materials and money needed to start and run thebusiness smoothly. They can convince the employees, investors,customers and co- ordinate the activities of individuals and groups in

the accomplishment of business objectives. An entrepreneur works likea coordinating force among the resources, mould and manages themeffectively.

ENTREPRENEURIAL FUNCTIONSAn entrepreneur is said to perform the following functions:1. Assumption of risk: - Risk bearing or uncertainty bearing is themost important function of an entrepreneur which he tries to reduce byhis initiative, skill and good judgment.2. Business decisions: - The entrepreneur has to decidea. To enter the industry this offers him the best prospectsb. To produce goods that he thinks will pay him the most

c. To employ those methods of production which seem to him the mostprofitable.d. To effect suitable changes in the size of the business , its

locationthat are needed for the development of his business.3. Managerial Functions: -The entrepreneur performs themanagerial functions such asa. Formulating production plansb. Overseeing financesc. Dealing with the purchases of raw materialsd. Providing production facilities

e. Organizing salesIn large establishments these management functions are delegated toprofessional managers an entrepreneur performs many usefulfunctions such as

Undertakes a venture

Assumes risk and

Earns profits


12/42

Identifies opportunities to start business either as a manufacturer ora distributor.The entrepreneurship exists in every field of economic endeavor.Entrepreneurship has also been developed in the trading sector. Amanufacturing entrepreneur demonstrates his entrepreneurial talents

by bringing out new products while a trading entrepreneur performshis entrepreneurial functions in creating demand for the business hedeals.

ENVIRONMENTAL SCANNINGAND SECTORAL STUDIESSwot Analysis

Entrepreneurial Environment

Environmental AnalysisScope for Entrepreneurship in small businesssector

Entrepreneurship process of liberalization

Changing Role of Entrepreneurship in the era ofliberalization, privatization and globalization


13/42

Entrepreneurship as a Catalyst for meeting globalchanges

Creativity & Innovation

Key sectors for the new age EntrepreneursSWOT ANALYSISThe business environment keeps changing. Government policies andregulations, economic conditions, social conditions, technologicalfactors,competitive situation etc. Undergo changes. The environmentalchanges mayopen up new opportunities or pose new threats.Constant monitoring of the environment is therefore, necessary toidentify theemerging opportunities and threats. In order to understand to what

extent afirm will be able to exploit the opportunities and fight the threats, it isnecessary to evaluate the strengths and weaknesses of the firm. Thus,ananalysis of the strengths and weaknesses of the firm and theopportunitiesand threats in the environment that is the SWOT analysis is essentialforframing the business strategies.

S- Strengths.W- Weaknesses.

O- Opportunities.T-Threats.

STRENGTHS AND WEAKNESSES:Strengths and weakness analysis is a real test for management. Thestrengthand weaknesses would decide whether a company should continue in abusiness, take up new lines of business, as well as the strategy to beemployedin doing so.For e.g. in case of some products, small scale units have definite

advantageover large- scale units in costs. If a large scale unit were not able tocompetewith the small- scale units, in such a case, it would be wise on the partof thelarge unit to give up the business of such products.The strengths and weakness analysis is done by functional audit ofdifferent


14/42

areas like marketing, finance, design/ engineering, operations etc. Theauditis to be done on the basis of the quantity and quality of skills and theinfrastructures support 3 available facilities in terms of physicalfacilities,

resource available, speed and flexibility in arranging them.

OPPORTUNITIES AND THREATS:Monitoring of the environmental changes is necessary to reshape thecompanys business and products, if needed, to ensure survival andgrowth.Certain changes in the environment may bring about newopportunities forsome companies while they pose new threats for some others.For e.g. the new industrial policy of India has brought about enormousnewbusiness opportunities but at the same time it poses new threats orchallengesto many existing firms because of the increase in competition. Theexistingfirms should therefore, frame strategies to effectively fight theincreasingcompetition.The primary reason of the environmental analysis is to identify thethreats aswell as the opportunities developing in the business environment. Thesearchfor opportunities may start on account of increased aspiration forperformance of the organization. While the analysis of threat is toexamine thedevelopment in the environment that may affect the current strategiesineffective and irrelevant and thus, affect the survival of theorganization. Thethreats or opportunities for any business developed because the needsof thecustomer keep on changing. For e.g. a customer who was happy withthe

product now wants another because of change in his needs. In view oftheabove, many companies have to reframe their objectives andstrategies inorder to survive in the changing business environment.

ENTREPRENEURIAL ENVIRONMENTEntrepreneurship environment refers to the various facets within whichenterprises- big, medium and small and others have to operate. The


15/42

environment therefore, influences the enterprise. By and large, anenvironment created by political, social, economic, national, legalforces etcinfluences entrepreneurship.

INTERNAL ENVIRONMENT (Micro Environment)

A) PRODUCT:The business has to produce a product that people want to buy. They

have to decide which market segment they are aiming at age,income,geographical location etc. They then have to differentiate their productso thatit is slightly different from what is on offer at present so that peoplecan bepersuaded to give them a try.In other words product is a bundle of satisfaction that a costumer buys.Itrepresent solution to a customers problem .It is in this context thatmarketing definition of a product is more than just what the

manufacturerunderstand it.B) PRICE:To a manufacturer, price represent quantity of money received by thefirm orseller .To customer, it represent sacrifice and hence his perception ofthe valueof product.


16/42

The price must be high enough to cover costs and make a profit butlowenough to attract customers. There are a number of possible pricingstrategies.The most commonly used are:

PENETRATION PRICING charging a low price, possibly not quitecovering costs, to gain a position in the market. This is quite popularwith new businesses trying to get a toehold. CREAMING the opposite to penetration pricing, this involvescharging a deliberately high price to persuade people that the productis of high quality. Luxury car makers often use this strategy COST PLUS PRICING this is the most common form of pricing.Costs are totaled and a margin is added on for profit to make the totalprice.C) PLACE:The business must have a location that it can afford, and that isconvenientand suitable for customers and any supplier.D) PROMOTION:Promotion means moving from one end to another. Promotion meansallthose tools that a marketer uses to take his product from the factory tothecustomer and hence involves advertising, sales promotion, personalselling,

public relations publicity and merchandising.Customers have to be made aware of the product. The two mainconsiderations are target market and cost. A new business will not beable toafford to advertise on national television, for instance and would notwish tobecause its market will be local to start with. Leaflets, billboards,advertisements in local newspapers, Yellow Pages and word of mouthwould be more appropriate.

EXTERNAL ENVIRONMENT (Macro Environment)External Environment:

Also known as Macro Environment, are the uncontrollable factorswhich acompany must monitor and respond to. They consist of economic,political,technological, social-cultural and legal.Economic Environment:It consists of factors that affect consumer purchasing power andspending


17/42

patterns. Markets require purchasing power as well as people.Economicconditions, economic policies and economic systems are the importantexternal factors that constitute the economic environment of abusiness.

For example, the economic conditions of a country, the nature of theeconomy, the stage of development of the economy, economicresources, thelevel of income, the distribution of income and assets etc. are amongveryimportant determinants of business strategies.Technological Environment:Technology is the most dramatic force shaping peoples lives. Factorssuch astechnological development, stages of development, change and rateof

change in technology and research and development affect marketingstrategies. Also the cost of technology acquisition, impact oftechnology onhuman beings and the environmental effects of technology affectmarketingdecisions.Political environment:Political environment is composed of laws, government agencies andpressuregroups that influence and limit various organizations and individuals ina

society. The main political trends are:(a) Substantial amount of legislation regulating business.(b) Growth of public interest groups and(c) Changing government agency enforcement.Socio-cultural environment:The basic beliefs, values and norms shape the society and its people.Evenwhen people of different cultures use the same basic product, themode ofconsumption, condition of use, purpose of use or the perception of theproduct attributes may vary so much so that the product attributes,

method ofpromoting the product may have to be varied to suit thecharacteristics ofdifferent markets. Even the value and beliefs associated with colourvarysignificantly between different cultures.Legal environment:


18/42

Government all over the world are an important aspects of theireconomy andeven in the so called free economy, viz.US, government intervention inindustry is a reality. The extent of intervention varies .while in US thisis

relatively low; in developing countries this is quite high. India ,forexample,has had a history of a controlled economy with the governmentdeciding therules of the game ,be it the extent of foreign private investment ,orgoods to beexported or imported or even whether a unit can be allowed toproduce aproduct Regulation in advertising ,like ban on advertising a specificproductlike cigarettes, pan masala, liquor and distribution of goods as in the

case ofkerosene and earlier in case of food product too, is the reality of Indianscenario.

ENVIRONMENTAL ANALYSISThis integrated approach which is the key to the development ofbackwardareas implies a very careful environment analysis or research study ofthetarget groups of beneficiaries, their activities and differential needsand thepractical modes of operation by which their activities can be linked

with thecovering enterprise. Unless these studies are made meticulously, theentireplanning will only give unproductive results. Most of the developmentschemes fail to benefit the target clientele because elaborate linkagesare notidentified and built up. An imaginative study should1. Identify the beneficiaries or target groups.2. Analyze the environment for immediate feasible enterprises in anintegrated manner.3. Delineate the linkages and institutional arrangements.4. Recommend appropriate organizational structures to providenecessary promotional support.Unfortunately, in most of the studies on backward areas, there is atendencyto make generalizations and ignore the specific details of feasibleprojects. Asa result, immediate perception of concrete opportunities by interested


19/42

entrepreneurs is left in confusion. Sometime! Area studies make ageneralstatement of demand and resources and recommend certainenterprises,which are not immediately feasible due to important reasons

unaccounted forin such studies. It is also not seriously contemplated whether therecommended enterprises are feasible within the capabilities andinvestmentcapacity of the target- group.In short, most of the studies fail to disconcern the real issues of growthin thetarget area and fail to identify the concrete and specific needs of theseendowments like resource skill etc. to flourish. Enunciation of generalobjectives, generic beneficiaries tend to blur the distinct contours ofone

homogeneous group from the other. Also, the extension of certainstandardfacilities or services does not serve their actual needs. All this possiblyhappens because in such basic studies we fail to identify clearly thetargetgroupsand their specific problems, and make theoretical studies on resourcesand demand in an impersonal manner, as a result of which even theschemesdevised on the basis of such studies tend to become too impersonaland rigid.Sometimes, the scheme become so flexible on account of a

standardizedpetrified approach that in some most genuine cases demanding acertaindeparture from the fixed framework, the scheme is incapable of givingrequisite help. It is therefore, absolutely necessary that any action planfor abackward area must first identify the target- group, identify thespecific services they need for monitoring their enterprises and devisean appropriatestructural support for comprehensive coverage of their needs.

SCOPE FOR ENTREPRENEURSHIP IN SMALLBUSINESS SECTORSmall- scale business provides good scope for the growth ofentrepreneurialactivities .An entrepreneur has good opportunity and vast scope inselling


20/42

service rather than manufacturing a product. The entrepreneur canachievebetter results if the size of the business is small. It is for this reasonthat smallfirms have higher productivity, greater efficiency and low labour

turnover.The scope for entrepreneurial activities in small business sector canbroadlybe classified into:1. Industrial sector2. Agricultural and allied industrial sector3. Service sector

INDUSTRIAL SECTORSmall scale industries occupy an important place in the industrialsector. Theyhave contributed over 40% in the gross industrial production in 1998.

Small- scale industries:The basic objectives underlying thedevelopment ofsmall- scale are the increase in the supply of manufactured goods,promotionof capital information the development of indigenous entrepreneurialtalentsand skills and the creation of broader employment opportunities. Thissectorprovides a wider scope for the potential entrepreneur to develop his orherown industry. There is a good scope and enormous potential to use

technology based products in the small- scale sector. An entrepreneurcanexploit a profitable venture in any of the industries reserved forexclusivedepartment under the small- scale sector. There are as many at 384items forexclusive purchase from the small- scale industries.Small- scale industries play an important role in increasing the nationalincome, in meeting the shortage of consumers goods, in promotingbalancedregional development, in reducing inequalities in the distribution of

incomeand wealth and in relieving the economic pressure on land and overcrowding in urban areas. Outdated technology, shortage of finance,shortageof raw material and inadequate marketing facilities are some of theproblemsfaced by small entrepreneurs.


21/42

AGRICULTURAL AND ALLIED INDUSTRIAL SECTORThere is a vast cope for entrepreneurial activities in the agriculturalsector. Byestablishing a link between agriculture and allied industries, the rural

entrepreneur can exploit opportunities in areas of farming, agriculturalprocessing and marketing. The government has given priority to IRDPprogramme and ensured adequate flow of credit to small and marginalfarmers through re-financing facilities and by establishing nationalbank foragriculture and small development.Trade:Trading takes place in wholesaling and retailing. It may be indomesticor overseas market. The retailer entrepreneur makes the goodsavailable at thetime and places the consumer wants them. He may decide to start

single linestore, specialty shop, departmental store etc. trade in overseas marketis inwholesale. The business environment directly influences the growth ofentrepreneurship in a particular line of trade. The trade policy of Indiahasbeen directed to promote export. Hence incentives and facilities havebeenprovided to the entrepreneurs to motivate them to develop export.

SERVICE SECTORThe service sector has gained importance for the entrepreneursbecause of itsrapid expansion. Service sector includes all kinds of business andprovidesopportunities to the entrepreneurs in business such as hotels, touristservices,personal services such as dry cleaning, beauty shops, photographicstudies,auto repair, electric repair shops, wielding repair etc.Transport:They provide time and place utilities in urban and ruralareas to

both men and material. The different modes or transport are ofimmenseimportance in the areas, which are not served by roads and railways.There isa scope for entrepreneur to design prototypes of new carts with theapplication of indigenous technology so that they may have bettermobilityand greater carrying capacity. The primary need in the rural area is an


22/42

efficient system of road transport.The rural economy has a good opportunity for an entrepreneur todevelopsome business. They can exploit possibilities for a venture in someshops or

services. Entrepreneurship flourishes in small business sector for theyhaveenormous opportunities in manufacturing and non- manufacturingactivities.The government is keen in encouraging the competitive strength of thesmallscale producers and it has taken a number of measures such as:-

The establishment of a network of industrial estates through oughtthecountry where work sheds equipped with the necessary facilities made

available to prospective entrepreneurs on subsidized rental basis.

The reservation of a number of products for the exclusive productionto small sector

The introduction of ancillarization programme under which large andsmall industries are to be linked in a harmonious productiverelationship

The supply of machines on hire purchase basis to the smallentrepreneurs on easy terms of payment

Technical counseling to small units so as to improve their efficiencyand viabilityThese are golden opportunities for the prospective entrepreneurs toselfemployedindependent businessman. The future is very bright.

Everyone has wants some are for things like food orclothes, others are forentertainment, leisure, travel etc. In order to satisfy thesewants we have to consume goods and services. It is throughbusiness activity that goods and services are provided.

Business activity is any kind of activity that results in goodsor services being provided that satisfy consumers wants.Goods are tangible while services are intangible. Goods soldto the public are consumer goods things like cars, sportsequipment and games consoles, which are durable.


23/42

Consumer goods can also be non-durable like newspapers,magazines and chocolate.

You use durable goods over a long period of time, whereasyou use up non-durable goods quickly.

Services are things like facilities to the public such ashairdressing, window cleaning, and receiving loans frombanks.Business activity creates wealth the more goods that areproduced, the greater amount of wealth. Wealth is notsimply money, but the total of goods and services that canbe given a monetary value.Goods and services are the outputs of business activity. Inorder to produce an output, the business has to useresources, or inputs people, buildings, machinery etc.

These resources can also be called factors of production.These factors fall into four categories:LandAll the natural resources mineral deposits, the site of thefactory, water, timber etc.LabourAll the human resources employees.Capital

Tools, machinery and equipment, finance that the owner

invested in the business.Enterprise

The business ideas the entrepreneur has on how to use theabove resources in order to produce a good.Sectors of BusinessBusinesses are grouped into sectors, according to the typesof products and services that they provide.Primary sector businesses

These grow products or extract resources from the ground.Examples are mining, farming, forestry.Secondary sector businesses

These manufacture products from raw materials. Examplesare construction of new buildings, factories and ships, as wellas products ranging from tinned food to TV sets.Tertiary sector businesses


24/42

These do not produce a product theyprovide a serviceinstead. Examples are shops, hotels, banks, insurancecompanies.

Private Sector OrganisationsThere are many different types of organizations operating inthe world . A definition of an organisation is a group ofpeople who come together and use their resources andknowledge to achieve a common goal.Private sectororganisations are sole traders, partnerships,limited companies and franchises.Sole Proprietorships (traders)

These are one-owner businesses (owned and controlled bythe one person). There are bound to be many examples ofsole traders in your local area like retail stores or cornershops, hairdressers, workshops, bakeries,restaurants, laundries, tailoring and draper shops, dry-cleaners and dyers and other enterprises requiring smallcapital, catering to local markets, involving limited risks andthe use of personal knowledge and skills , etc.

Advantages

The owner retains all the profits.

You have complete control over all the decisions that

have to be made.

You can choose your own hours of work and vacation

time.

There is a greaterpersonal service offered to your

customers.

This type of organisation is very cheap to set up.

Disadvantages

You have unlimited liability you carry all the

businesss debts if it fails, even if this involves selling allyour personal possessions in order to pay it off.

Restricted sources of finance banks will charge you

high rates of interest ifthey will commit to a loan at all.

You have no one to share decisions with and you

cannot share your workload with other people.


25/42

The business has to shut down when you are on

vacation or ill.

Possible Sources of Finance

Your own personal savings.

Retained profits (profit kept back from the previoustrading period and ploughed back into the business).

Bank loans.

Overdrafts.

Government grants.

Trade credit.

Debt factoring.

Objectives

Survival

Profit maximisation

Create a good image.

Improve your personal circumstances.

Satisfying (generating a sufficient level of profit to

satisfy the owner, while not making a high level ofprofit).

PartnershipsPartnerships are businesses with 2 to 20 partners peoplewho own and control the business together. A PartnershipAgreement is drawn up, stating the rights of partners andprocedures to be followed upon the death of a partner, anew partner joining the business or a partner leaving.Allowances are made for solicitors, accountants andmembers of the Stock Exchange, meaning they can havemore than 20 partners.

You could also have sleeping partners people who investin the business but have no control over the way it is run,the advantage being that they usually have limited liability,and will only lose their investment in the business if it fails(although sometimes this may not be the case if thesepeople have been regular partners before becoming sleeping


26/42

partners, as any decisions made by them beforehand maystill have an impact).

These include medium sized service and trading concerns,like wholesalers, hotels, transporters, hire-purchase firms,

confectioners, and professionals like attorney, lawyers,chartered accountants, architects, consultants, etc. Also,small manufacturing firms requiring simple techniques andprocesses.

Advantages

Partners may have different areas of expertise

operations, finance, human resources, marketing etc.

More finance is available to the business you can pool

capital from all the partners.

You can share the workload with other partners.

You can raise finance from lenders more easily than

sole traders can there is less risk involved.Disadvantages

Unlimited Liability (possibly even for sleeping

partners).

Profits need to be shared (or appropriated) between

partners.

Disagreement may occur, with people having different

methods and ideas.

A new Partnership Agreement has to be drawn up every

time a partner joins, leaves or dies due to the change incircumstances.

Sources of Finance

Personal savings.

Retained profits. Inviting new partners to join (increases investment).

Bank loans.

Overdrafts.

Government grants.

Trade credit.


27/42

Debt factoring where a specialist factorprovides

finance against any invoices which have not been paid(around 80% of the total amount due), the balance(20%) being paid back when the customers settle the

invoices. An administrative charge and service fee ispayable by the business to the factor.Objectives

These are the same as a sole traders objectives. Sole

traders and partners are often referred to as being self-employed, as they own the business that they also workfor.

Private Limited CompaniesPrivate limited companies are companies whose shares areowned privately not available to the public on the StockMarket. There is a minimum of one shareholder (owner) in aprivate limited company, and a directoror most commonly, aboard of directors runs the business. A shareholder can be adirector, and there must be at least one director and onecompany secretary (who keeps all the company records).

The company must produce a Memorandum of Associationand Articles of Association that state the details of thecompany, responsibilities of its directors and the rights of itsshareholders. Private limited companies tend to be family

businesses, although this is not always the case. Examplesof private limited companies areArnold Clarkand Baxters(soup).

Advantages

Shareholders have limited liability they only lose their

invested capital if the business fails.

More finance can be raised from shareholders and other

sources.

Control of the business is not lost to outsiders who haveno knowledge of it (like public limited companies).

Disadvantages

Profits are shared among more people.

A legal process has to be adhered to when setting the

company up.


28/42

Shares cannot be sold to outsiders it might be more

difficult to raise finance.

You have to abide by the Companies Actrequirements.

Annual accounts have to be published for the business,

although these do not have to be made available to thegeneral public.

Sources of Finance

Company profits.

New shareholders joining the company.

Bank loans.

Overdrafts.

Government grants.

Trade credit.

Debt factoring.

Objectives

Profit maximisation.

Growth.

Status.

Sales maximisation.

Public Limited Companies

A public limited company, or plc, is a company whose sharesare available to be purchased on the Stock Market. You needto have at leasttwo shareholders and 50,000 of sharecapital to start one up. The same legal documents as aprivate limited company have to be drawn up. A board ofdirectors appointed by shareholders controls thecompany. Public limited companies can also be called

corporations.

Examples of public limited companies include the mobilephone giants Vodafone and TMobile.

Advantages


29/42

You can raise immense amounts of finance.

Plcs are usually market leaders.

You can borrow money from lenders easily due to the

size of the business.

Disadvantages

There are a lot of set-up costs involved prospectuses

and underwriting (an insurance against some sharesremaining unsold, meaning fees have to be paid to theunderwriter who must buy these unsold shares) need tobe set up before gaining the interest of investors.

The Companies Act must be adhered to.

The business has no control over who buys the shares

on the Stock Exchange in the long term, although theycan choose whom they wish to sell to when tradingbegins.

You must publish annual accounts and make them

available to the general public upon request.Sources of Finance

Retained profits.

Selling shares to the public.

Bank loans.

Overdrafts. Debentures.

Government grants.

Trade credit.

Debt factoring.

Objectives

Profit maximisation.

Growth.

Maximise sales.

To be dominant in their market.

Image.

Plcs may be global companies, or multinationals (havingmanufacturing plants in more than one country. In doing so,they can:


30/42

Take advantage ofeconomies of scale buying more

products at a lower unit cost.

Avoid legislation in the home country that might have a

negative effect on the businesssprofitability.

Avoid restrictions on quotas (number of importsbrought into the country).

Receive tax benefits and government grants from more

than one country.

FranchisesA franchise is an agreement that allows an individual orgroup to use another businesss name and sell their productsand services. The individual is called the franchisee, and the

business selling their name is called the franchiser. A smallpercentage or fixed sum is given to the franchiser in returnfor using their name and products/services.Examples of franchises are the BSM (British School ofMotoring) and McDonalds.

Advantages (to the Franchiser)

You can increase your market share without a great

deal of investment.

Revenue is reliable (you get a set payment or a

percentage of profits each year).

Risks are shared between the franchiser and

franchisee.

Advantages (to the Franchisee)

The franchiser will undertake its own marketing strategy;

therefore you will not have to carry out much advertisingon your own.

The franchiser may train you in the operation of

machinery or the routine that you must follow.

The risk of failing will be reduced because the business

already has a good reputation.

Disadvantages (to the Franchisee)


31/42

You have to pay the franchiser a percentage of profits or a

royaltypayment.

The franchiser might not renew the franchise after a

certain period of time, leaving you without the backing

and permission to continue. The products you sell, the price you sell them at, and the

layout of the shop may be dictated by the franchiser,meaning you will be less able to make your own decisions.

Voluntary OrganisationsCharitiesA Register of Charities is kept by the government, which alsoregulates the activities of charities. Professionals working for

them often run charities, and the charity is usually exemptfrom paying some taxes.Examples of charities include Capability Scotland and CancerResearch UK.Sources of Finance

Public and private donations.

Government grants.

Lottery grants.

Profits from sales in charity shops, raffles, jumble sales

and mail order goods.

ObjectivesTo be recognised as a charity they must have one of thefollowing aims:

To relieve poverty.

To advance education.

To advance religion.

To carry out activities beneficial to the local community.

Voluntary OrganisationsThese are usually run and staffed by volunteers. Examplesinclude the Scouts, local youth clubs and some sports clubs.Voluntary organisations bring together people with similarinterests, and are run by a committee of elected volunteers.


32/42

Sources of Finance

Grants from the Lottery, sports councils or local

authorities. Fees payable upon joining or for use of facilities.

Public Sector OrganisationsPublic sector organisations are owned and controlled byeither local or central government.Local Government OrganisationsLocal authorities/councils provide services including:

Education.

Recreation.

Housing.

Refuse collection.

They are set up by central government and are run by locallyelected councillors. The dayto- day running of the servicesare organised by council employees. A local council aims tomeet the needs of the local community and providesservices that might be considered unprofitable if handled byprivate firms, for example libraries and archives.

Sources of Finance

Central government.

Business rates.

Council tax.

Charges for using services, e.g. leisure centres and

parking.Objectives

To meet the needs of the local community.

To make cost-savings. To stick to budgets set down by central government

and at local level.Central Government Organisations

The House of Senate and National House Assembly provideimportant services nationallyfrom departments such as the


33/42

Treasury, Trade and Industry, Health, Transport andDefence.Politicians are elected to be overall in charge of thedepartments in line with the best interests of the population,

however employed civil servants run them.Sources of Finance

Taxation

Objectives

To improve society.

To make best use of the funds available to them.

To manage taxation to protect people who are in a less

favourable position.

Public CorporationsCorporations are companies that are owned by centralgovernment. A government minister appoints a chairpersonand board of directors, or governors, to run them on thebehalf of the government. The Post Office and the BBC areexamples of public corporations.

Sources of Finance

Central government.

The public TV licensing, merchandise etc.

Objectives

To provide a quality service.

To manage their funds efficiently to make the best use

of them.

To serve the interests of the public.

PrivatisationThe last 10 years has seen the government selling off keypublic corporations as a cost cutting measure. BA (BritishAirways) used to be run by the government, as well asBritish Rail, which has been split up into two components Network Rail (which used to be Railtrack), the companywhich manages the lines across the UK, and franchises who


34/42

run trains on Network Rails lines, e.g. Stagecoach, VirginTrains, etc.The government has sold these companies off because:

The Treasury can receive a huge amount of income

from the selling of these corporations. They were very poorly managed and did not make a

profit; they could be profitable if someone elsemanaged them.

They wanted to increase share ownership and let the

public have a chance to benefit from the success of theeconomy by buying into these businesses.

However, they were, according to business analysts, sold offtoo cheaply because this was the only kind of price thought

possible and privatising them has not always led to greatercompetition or efficiency.The BBC might be the nextcorporation to be sold off as a private company, since it nolonger has the leading market share of television and radio.With so many smaller entertainment channels setting up,their share has decreaseddramatically.


35/42

CHOICE OF FORM OF ORGANISATIONAs explained earlier, a business enterprise can be organised intoseveral forms.Every form of organisation has its own merits and demerits. Abusinessman has to keep in view these merits and demerits whileselecting an appropriate form of organisation. The choice has to bemade both at the time of setting up a new enterprise and at the timeof expansion and growth of an existing concern.At the time of launching a new business enterprise, the choice of the

form of ownership is dictated by several factors as given below :1. Nature of business Service, trade, manufacturing.2. Scale of operations Volume of business (large, medium, small) andsize of the market area (local, national, international) served.3. Degree of direct control desired by owners.4. Amount of capital required initially and for expansion.5. Degree of risk and liability and the willingness of owners to assumepersonal liability for debts of business.


36/42

6. Division of profits among the owners.7. Length of life desired by the business.8. Relative freedom from government regulations (flexibility ofoperations).9. Scope and plan of internal organisation.

10. Comparative tax liability

It must be noted that these factors are interrelated andinterdependent. For instance, the amount of capital required and thedegree of risk involved depend upon the nature and volume ofbusiness operations. The degree of control and the division of profitsare both related to risk and liability. Therefore, an entrepreneurdivision of profits are both related to risk and liability. Therefore, anentrepreneur should not consider these factors in isolation. Theinterrelationship between these factors should be duly considered. Theimpact of each one of these factors on the choice of a suitable form of

ownership is described as follows.

1. Nature of BusinessThe nature of business has an important bearing on the choice of theform of ownership. Business providing direct services, e.g., smallretailers, hair-dressing saloons, tailors, restaurants, etc., andprofessional services, e.g., doctors, lawyers, etc., depend for theirsuccess upon personal attention to customers and the personalknowledge or skill of the owner and are, therefore, generally organisedas proprietary concerns. Business activities requiring pooling of skillsand funds, e.g., wholesale trade, accounting firms, tax consultants,

stock brokers, etc., are better organised as partnerships.Manufacturing organisations of large size are more commonly set upas private and public companies.

2. Size and area of operationsLarge scale enterprises catering to national and international marketcan be organised more successfully as private or public companies.The reason is that large sized enterprises require large financial andmanagerial resources which are beyond the capacity of a single personor a few partners. On the other hand, small and medium scale firmsare generally set up a partnership and proprietorship. Small scale

enterprises like generally hair-dressers, bakeries, laundries,workshops, etc. cater to a limited market and require small capital. Therisk and liability are not heavy and the management problems caneasily be handled by the owner himself. Therefore, the owner likes tobe his own master by organising as a sole proprietor. He can maintainfact-to-face relationship with his customers which is important in smallservice enterprises like painters, decorators, repair shops, beautyparlours, etc. Medium-sized enterprises and professional firms, e.g.,


37/42

health clinics, chartered accountants, etc. are predominantlypartnerships. They pool their capital and expertise to operate on alarger scale and to avail of the benefits of specialisation. Large scaleenterprises and enterprises involving heavy risks, e.g., engineeringfirms, departmental stores, five star hotels, chain stores, etc., are

normally organised as companies. These enterprises require hugecapital, heavy risks and expert managers. Proprietary and partnershipforms are unable to provide these resources. The company form is,therefore, best suited to large scale enterprises.Similarly, where the area of operations is widespread (national orinternational), company ownership is appropriate. But if the area ofoperations is confined to a particular locality, sole proprietorship orpartnership will be a more suitable choice.

3. Degree of Control DesiredA person who desires direct control of business prefers proprietorship

rather than the company because there is a separation of ownershipand management in the latter case. In case the owner is notinterested in direct personal control but in large scale operation, itwould be desirable to adopt the company form of ownership.

4. Amount of Capital RequiredThe funds required for the establishment and operation of a businesshave an important impact on the choice. Enterprises requiring heavyinvestment, i.e., iron and steel plants, etc., should be organised as jointstock companies. A partnership has to be converted into a companywhen it grows beyond the capacity and resources of a fewpersons.

Requirements of growth and expansion should also be considered inmakingthe choice. There is maximum scope for expansion in case of apublic company.Where the funds required initially are small and scope for expansion incase of public company. Where the funds required initially are smalland scope for expansion is not desired, proprietorship or partnership isa better choice.5. Degree of risk and liabilityThe volume of risk and the willingness of owners to bear it, is animportant consideration. A single individual may have large financialresources sufficient for a medium scale enterprise but due to unlimited

personal liability he may not like to organise as a proprietor or apartnership. Due to limited liability and a large number ofshareholders, there is maximum diffusion of risk in a public company.But an enterprising individual not afraid of unlimited liability may go infor sole proprietorship.6. Division of SurplusA sole trader receives all the profits of his business but be also bearsall the risks. If a person is ready to bear unlimited personal liability and


38/42

desires maximum share of profits, proprietorship and partnership arepreferable to company form of organisation.7. Duration of BusinessTemporary and a hoe ventures can be organised as proprietorshipsand partnerships as they are easy to form and dissolve. But they lack

continuity and stability. Enterprises of a permanent nature can bebetter organised as joint stock companies and co-operative becausethey enjoy perpetual succession. A business requiring a long period forestablishment and constitution should be organised as a corporatebody.

8. Government regulation and controlProprietorships and partnerships are subject to little regulation andcontrol by the Government. Companies and co-operatives are, on theother hand, subject to several restrictions and have to undergo severallegal formalities. But this face is not very important and it can behelpful in making the choice only when all other factors are unable to

indicate a clear-cut choice.9. Managerial RequirementOrganisational and administrative requirements depend upon the sizeand nature of business. Small businesses using simple processes ofproduction and distribution can be managed effectively asproprietorships and partnerships. On the other hand, giant enterprisesinvolving the use of complex, techniques and procedures requireprofessional management. Such enterprises can be managedefficiently only as joint stock companies. Due to identity of ownershipand management, motivation is very high in proprietorships andpartnerships. Such motivation is lacking in a company due to

separation of ownership from management.10. Flexibility of OperationsBusiness which require a high degree of administrative flexibilityshould better be organised as proprietorships or partnerships.Flexibility of operations is linked with the internal organisation of abusiness. The internal organisation of sole proprietorship andpartnership is much more simple and less elaborate than the internalorganisation of a joint stock company. Moreover, the objectives andpowers of a company cannot be changed easily or without legalformalities.11. Tax burden

Various forms of ownership are taxed differently under the Income-taxAct in Nigeria. If the expected volume of profit is very high it may beprofitable to start a company. A company is taxed at a uniform rate,i.e., the rate of tax remains the same irrespective of the volume oftaxable income.

DEFINITION, CHARACTERISTICS AND BENEFITS OF SMEs


39/42

Definition:

The concept of SMEs is relative and dynamic. The definitions change over a period of

time and depend, to a large extent, on a countrys level of development. Prior to 1992,different government agencies in Nigeria such as the Central Bank of Nigeria tended to

adopt various definitions to reflect differences in policy focus. However, in 1992, the

National Council on Industry streamlined the various definitions in order to removeambiguities and agreed to revise them every four years. Small Scale Enterprises were

defined as those with fixed assets above N1 million but not exceeding N10 million,

excluding land but including working capital, while Medium Scale Enterprises are thosewith fixed assets, excluding land but including working capital, of over N10 million but

not exceeding N40 million. The definitions were revised in 1996 with Small Scale

Industry defined as those with total cost, including working capital but excluding cost of

land above N1 million but not exceeding N40 million with a labour size of between 11and 35 workers; while Medium Scale Industry was defined as those with total cost,

including working capital but excluding cost of land, above N40 million, but not

exceeding N150 million with a labour size of between 36 and 100 workers. And at the

13th Council meeting of the National Council on Industry held in July, 2001 Micro,Small and Medium Enterprises (MSMEs) were defined by the Council as follows:

Micro/Cottage Industry

An industry with a labour size of not more than 10 workers, or total cost of not more than

N1.50 million, including working capital butexcluding cost of land.

Small-Scale Industry

An industry with a labour size of 11-100 workers or a total cost of not more thanN50million, including working capital but excluding cost of land.

Medium Scale Industry:

An industry with a labour size of between 101-300 workers or a total cost of over N50million but not more than N200 million, including working capital but excluding cost of

land.

Large Scale

An industry with a labour size of over 300 workers or a total cost of over N200 million,including working capital but excluding cost of land.

Characteristics:

The SMEs are characterized by limited access to financial capital, simple management

structure resulting from the fusion of ownership and management by one person or veryfew individuals. SMEs tend to strongly revolve around the owner-managers, rather than

as a separate corporate entity. There is often greater subjectivity in decision taking, and

prevalence of largely informal employer - employee relationships. As a result of theirgreater use of local resources, they are widely dispersed throughout the country. They are

also closely attached to the products that launched them; many are labour-intensive

although modern SMEs are increasingly employing reasonably high technology.


40/42

Entrepreneurship Development in Nigeria

Small and Medium Industries (SMIs) have been widely acknowledged asthe springboard for sustainable economic development. In particular,

developing countries including Nigeria, have since the 1970s shown

increased interest in the promotion of small and medium scale enterprisesfor three main reasons: the failure of past industrial policies to generate

efficient self-sustaining growth; increased emphasis on self-reliant

approach to development and the recognition that dynamic and growingSMIs can contribute substantially to a wide range of developmental objectives.

These objectives include efficient use of resources, employment creation, expansion and

development of indigenous entrepreneurship and technology as well as incomedistribution, among others. Consequently,

programmes of assistance in the areas of finance, extension and advisory

services, training and provision of infrastructure were designed by the

government for the development of SMEs to enhance the attainment of

these objectives. However, the full potential of the SMIs in thedevelopmental process have not been realized, owing to various constraints.

A major gap in Nigerias industrial development process in the past yearshas been the absence of a strong and virile small and medium enterprises

sub-sector (SMEs). The little progress recorded from the courageous

efforts of the first generation of indigenous industrialists were almostcompletely wiped out by the massive dislocations and traumatic

devaluation which took place under the Structural Adjustment Programme

(SAP). The policies of SAP are rooted in the neo-classical theory of

perfect competitive markets whose assumptions do not adequately reflectconstraints on SME in developing countries.

With over 120 million people, productive farmlands, rich variety ofminerals deposits, Nigeria should be a haven for Small and MediumIndustries. The human and natural resources base is a significant feature

that gives the country a special status in Africa. However, like most less

developed countries, the country is witnessing a rapid population growth and thiscontrasts with the less than average rate of development in

communication, technological and social infrastructure. Instability and

high turn over have impacted negatively on the performance of primaryinstitutions responsible for policy monitoring and implementation,

resulting in distortions in the macro economic structure, and low

productivity. These problems constitute hindrance to the development of Small and

Medium Enterprises.The problems of SMEs in Nigeria are enormous and ranges from:

(1) Inadequate and inefficient infrastructural facilities which tend to

escalate costs of operation, as SMEs are forced to resort to privateprovisioning of utilities such as road, water electricity, etc.

(2) Lack of adequate credit for SMEs, traceable to the reluctance of

banks to extend credit to them owing, among others, to poor documentation at projectproposals as well as inadequate collateral


41/42

by SME operators.

(3) Bureaucratic bottlenecks and inefficiency in the administration of incentives which

discourage rather than promote SME growth.(4) Weak demand for products, arising from low and dwindling consumer purchasing

power. Lack of patronage for locally produced goods by those in authority.

(5) Incidence of multiplicity of regulatory agencies and taxes which has always resultedin high cost of doing business and poor management practices and low entrepreneurial

skill arising from inadequate educational and technical background or many SME

promoters.The historical experience of economic development in the developed

countries is replete with success stories of the role of SMEs in industrial

development, technological innovation and export promotion. The

Industrial Revolution (1760 to 1850) is a testimony of the innovative spiritof SMEs, which is increasingly challenged in the present century

particularly after winds of economic change and industrial liberalisation

have swept various economies of the world.

Contrary to the general impression, SMEs are as much an importanteconomic catalyst in industrialised countries as they are in the developing world. In many

developed countries, more than 98% of all enterprisesbelong to the SME sector. 80% of the total industrial labour force in Japan,

50% in Germany and 46% in USA are employed in smaller firms. In USA,

small business contributes nearly 39% to the national income. Figures inmany developed countries are even higher.

Many studies have indicated that the revival of interest in SMEs in the

developed economies is due to technological as well as social reasons,

namely, the growing importance of knowledge and skill-based industry asagainst material and energy-intensive industry. This is also due to a

paradigm shift to new processes of manufacturing based on flexible systems

of production. The social reasons include the need of generation of moreemployment through self-employment ventures and decentralised work

centres.

In the absence of a universal definition of small enterprises, it is difficult toobtain exact and comparable figures on SMEs for developing countries.

Nevertheless, it is obvious that the role of small business is equally

important in the economies of developing and developed countries. Small

domestic markets, inadequate infrastructure, high transport costs, shortageof capital and foreign exchange as well as surplus of low quality labour are

the general characteristics of developing countries.

Table below gives a broad overview of the contribution of SMEs in some Asianeconomies.


42/42

Exports of the SME sector range from 30 to 50 percent in developed and developingcountries. In tune with the latest developments in the global economy, their role in future

is likely to be even greater and more pervasive with a demonstrable impact on the

emerging world trading order.Almost every country provides some assistance to small-scale enterprises.

The emphasis is more on facilities and supportive services than on

protection and subsidies. This is generally a hallmark of an effectivestrategy for promoting the SME sector. Assistance provided by

governments is making available commercial finance, venture capital,information, training and retraining, R & D support and infrastructure. The

facilities are provided through local authorities and industry associations

with increasing involvement ofnon-governmental organisations (NGOs).

enterpreneurship hnd

Documents