Chapter one

Introduction to Entrepreneurship
1.1 The concept of entrepreneurship, definition and historical development
Entrepreneurship is the symbol of business strength and achievement. Entrepreneurs are
the founders of today's business success; their sense of opportunity, their drive to innovate
and their capacity for accomplishment have become the standard by which free enterprise
is measured. Entrepreneurs will continue to become critical contributor to the economic
growth through their innovation, research and development effectiveness, job creation,
competitiveness, productivity, and formation of new industry.
The words entrepreneur and entrepreneurship have acquired special significance in the
context of economic growth in rapidly changing socio-economic and socio-cultural climates
both in developed and in developing countries.

Entrepreneurship is one of the four mainstream economic factors: land, labour, capital and
entrepreneurship. The word which is derived from 17th century French entreprendre,
refers to individuals who were “undertakers”, meaning those who “undertook” the risk of
new enterprise. They were “contractors” who bore the risk of profit or loss, and many early
entrepreneurs were soldiers of fortune, adventurers, builders, merchants etc. Earlier
references to the entreprendeur in the 14th century spoke about tax contractors-
individuals who paid a fixed sum of money to a government for the license to collect taxes
in their region.

The concept of entrepreneurship varies from country to country as well as from period to
period and the level of economic development thoughts and perceptions; a concise and
universally accepted definition has not yet emerged.
Example
 In the earliest period: An entrepreneur was viewed as a go- between, who attempt to
establish trade routes and signed contracts with many persons (forerunners of today's
venture capitalist) to sell goods. While the capitalist was a passive risk bearer, the
merchant adventure took the active role in trading, bearing all the physical and
emotional risks.

Entrepreneurship & Small Business Management Page 1

 In the Middle Ages: The term entrepreneur used to describe a person managing large
production projects. In this case, the person would not take any risks but would merely
manage the project using the resource provided. In the 18th century, The Irishman
named Richard Cantillon, who was living in France, credited to being the first to use the
term entrepreneur in the business context. He viewed the entrepreneur as a risk taker,
seeing the merchants, farmers, crafts men, and other sole proprietors buy products at
certain price –therefore, operating at a risk condition.

Karl Vesper: has researched entrepreneurship and explained that its nature is a matter of
individual perception.
 To an economist: an entrepreneur is one who brings resources; labor, materials, and
other assets in to combination that makes their value greater than before.
 To a psychologist: such a person is typically driven by behavioral forces like need to
obtain, to experiment, to accomplish something, or perhaps to escape authority of
others.
 To capitalist philosophers: an entrepreneur is the one who creates wealth for others
as well, who finds better ways to utilize resources and reduce waste and who
creates job that others are glad to get.
Fundamentally, entrepreneurship is a human creative act, involved building a team of
people with complementary skills and talents. And there have been hundreds of definitions
in dozens of books. Such definitions include:
 A decision maker whose entire role arises out of his alertness to hitherto unnoticed
opportunities (kirzner-1973).
 Who uses available resources in novel ways (Schumpteter-1934).
 Are action oriented, highly motivated individuals who take risk to achieve goals.
 Are people who have the ability to see and evaluate business opportunities, the
ability to gather resources to take advantage of them; and the ability to initiate
action to insure success?
 Is someone who always searches for change, responds to it, and exploits it as an
opportunity (Peter Drucker).
The concept entrepreneurship has wide rages of meanings. On one extreme, an
entrepreneur is a person of very high aptitude who pioneers change, possessing
Entrepreneurship & Small Business Management Page 2
characteristics found in only a very small fraction of population. On the other extreme of
definition, any one who wants to work for is considered an entrepreneur.
In almost all of the recent definitions, there is an agreement that we are talking about a
kind of behavior that includes:
 Initiative taking
 The organizing and reorganizing of social/economic mechanisms to turn resources
to practical account, and
 The acceptance of risk or failure, etc.

In this regard Robert Hisrich (1985), for example, defined entrepreneurship in a relatively
comprehensive way as a process of creating something different with value by devoting the
necessary time, and effort assuming the accompanying financial, psychological, and social
risks, and receiving the resulting rewards of monetary and personal satisfaction.
1.2. Personality Traits of Successful Entrepreneurs
A common stereotype of the entrepreneur emphasizes such characteristics as a high need
for achievement, willingness to take moderate risk, and strong self-confidence. Go through
the following listed characteristics and compare them with what you have identified.

A). Need for Achievement:

David C. McClelland, a Harvard psychologist, discovered a positive correlation between the
need for achievement and entrepreneurial activity. According to McClelland, those who
become entrepreneurs have, on the average, a higher need for achievement than do
members of the general population. Entrepreneurs are driven by a need to achieve more
and more.
B). Willingness to take risk:
The risks that the entrepreneur takes in starting and or operating their own business are
varied. By investing their own money, they assume a financial risk. If they leave secured
jobs, they risk their careers. The stress and time required in starting and running a
business may place their families at risk. In addition, entrepreneurs who identify closely
with particular business venture assume psychic risk as they face the possibility of
business failure.

Entrepreneurship & Small Business Management Page 3

David C. McClelland discovered in his studies that individuals with a high need for
achievement also have moderate risk taking propensities. Often enough entrepreneurs are
calculated risk takers. They enjoy the excitement of a challenge

C). Self-Confidence:
Studies show that successful entrepreneurs tend to be confident individuals who see the
problem in launching a new venture but believe in their own ability to overcome these
problems. Some studies of entrepreneurs have measured the extent to which they are
confident of their own abilities. According to J.B.Rotter, those who believe that their
success depends upon their own efforts have an internal locus of control. In contrast, those
who feel that their lives are controlled largely by luck or chance or fate have an external
locus of control. External locus of control believing that ones life is controlled more by luck
or chance than ones own efforts. Based on research to date, it appears that entrepreneurs
have a higher internal locus of control than is true of the population in general.
D). Innovation and creativity:
Innovative activity is a hallmark of entrepreneurship. The entrepreneurial manager is
constantly looking for innovations, not by waiting for a flash of inspirations, but through an
organized and continuous search for new ideas. Entrepreneurship is not so much an art
that either you have, or you do not, but rather a practice, which you constantly follow or
you choose to ignore. It thus can be developed and learned; its core activity is innovation
and a continuous, purposeful search for new ideas, and their practical applications. Doing
things differently is part of entrepreneur's nature. It is how they create a market
opportunity and differentiate themselves from the multitude. Innovation can be based
upon many factors from marketing to technology.
E). Total commitment:
Hard work, energy, and single mindedness are all essential elements in the entrepreneurial
profile.

F). Effective time management:

Entrepreneurs are well aware that time is something that cannot be saved if every single
minute is not used worthy enough. Establishing goals, determining deadlines, allocating
time for each and every important activity are personality traits entrepreneurs are
identified with.

Entrepreneurship & Small Business Management Page 4

G). An Ability of leadership:
Successful entrepreneurs are successful leaders, whether they lead few employees or
hundreds or thousands. By the very nature of their of their work , entrepreneurs are
leaders because they must seek opportunities ; initiate business enterprises; gather the
physical, financial and human resources to carry out their enterprise; set goals for
themselves and for others, and direct and guide others to accomplish goals.
To be aware of better ways to accomplish tasks is to be an effective leader. You are likely to
be successful leader if you believe in continuous growth, improved efficiency and the
continued success of your organization.

H). An ability of decision making:

Successful entrepreneurs are creative decision makers. Looking matters from different
angles, gathering relevant information for decision making and consistency are crucial in
entrepreneurial decision making.

I). Desire for Independency:

They wish for autonomy believing that independency of action is the only sure way to get
what they need. Note that whilst entrepreneurs may share some of these characteristics, no
one single trait can be said to be secret of entrepreneurial success.

1.3. Entrepreneurial motivation: why people consider setting up their own

businesses?

Business academics have two classes of theories of how people become entrepreneurs;
supply and demand theories.
In the demand theory, anyone could be recruited by circumstance or opportunity to
become entrepreneur. A more general held theory is that entrepreneurs emerge from the
population on demand, from the combination of opportunities and people well-positioned
to take advantages of them. The entrepreneur may perceive that they are among the few to
recognize or be able to solve a problem.
Several research studies have shown that entrepreneurs are convinced that they can
command their own destiny. Behavioral scientists express this view by saying that:

Entrepreneurship & Small Business Management Page 5

“entrepreneurs perceive the" locus of control" to be themselves”. It is this-belief, which
stimulates the entrepreneur, according to the supply-side theorists.
In general the factors for business formation can be divided between "Pull" and" Push"
influences.
1.3.1: "pull' Influence
Some individuals are attracted towards business ownership by positive motives such as:
 Independence: In several research studies, this feature is prominently taken as the
key motivator. Many studies singled out the need to gain and keep independence as
a distinguished feature of small business owner managers. A study of female
entrepreneurs in Britain found that women were motivated particularly by the need
for autonomy, which had been frustrated by the individuals’ prior training and
background.
 Market opportunity: The identification of a perceived gap in the market place
through personal observation or experience is also a common reason for starting a
business. Entrepreneurs may seek to exploit this opportunity through special
knowledge, product development or they may hire the appropriate technology and
skills.
 Financial incentives: The promise of long-term financial independence can clearly
be a motive in starting a new firm, although it is usually not quoted as frequently as
other factors.
 Community service: - Sometimes individuals with an entrepreneurial ability may
come across some needs and wants of the community and they may think that they
can provide it with an exchange of value. This community serving motive may
provide an advantage.
1.3.2: "Push" influence
Many people are pushed into founding a new enterprise by variety of factors including;
 Unemployment: job insecurity and unemployment varies in significance by region,
and by prevailing economic climate. The latest researches shows that at least 50%
of entrepreneurs are pushed in this way to the entrepreneurial ventures.
 Disagreement with previous employer: Uncomfortable relation at work has also
pushed new entrants into small business.

Entrepreneurship & Small Business Management Page 6

  Challenge: - a challenge is most of the time a good motive for success. And only the
toughest entrepreneurs come to be successful in the ever-challenging environment
of the business world. A success advantage is exploited from the motive to
challenge. Overcoming Challenge gives psychological satisfaction.
The dividing line between those “pulled and those pushed” is often blurred. Many people,
considering an opportunity or having a desire for independence, still need some form of
push to help them make their decision. What is clear is that the diversity of motivations for
starting a business will influence the owner manager once they have set up.
1.4. Entrepreneurship versus Intapreneurship

Intrapreneurship: (Entrepreneurship within an existing business structure).

Sharma and Chrisman describe intrapreneurship as “. . . the process whereby an individual
or a group of individuals, in association with an existing organization, create a new
organization, or instigate renewal or innovation within that organization” (Sharma and
Chrisman; 1999:18).
Intrapreneurship can bridge the gap between science and the market place. Existing
business have the financial resources, skills, and the marketing and distribution system to
successfully commercialize innovation.
Entrepreneurship: Another method for bridging the gap between science and market
place is entrepreneurship. Many entrepreneurs have a difficult time bridging this gap and
creating new ventures. They frequently lack managerial skills, Marketing capability, and
finances. Their innovations are frequently unrealistic and thus need significant
modification to be marketable. In addition, entrepreneurs often do not know how to
interface with necessary entities such as banks, suppliers, customers, venture capitalists,
distributors, and advertising agencies.

1.4. The Entrepreneurs versus the Owner manager

Entrepreneur:
Entrepreneurial function is the organization of production; Entrepreneurship is an
economic concept. Economics describes four factors of production, namely, land, labor,
capital, and entrepreneurial ability (organizational skill). The entrepreneur combines
various factors of production, processes the raw material, creates utility in the product, and
converts the raw material in to a finished product, organizes the marketing function and

Entrepreneurship & Small Business Management Page 7

sells the product in the market in order to earn profit. Thus, the entrepreneur organizes the
function of production that represents the input-output relationship.
Decision-making and calculated risk bearing: While organizing the production function, an
entrepreneur plays a significant role. He/she is decision maker, risk-taker, and goal setter.
He/she is responsible for taking decisions about product selection, size of investment, type
of organization, technology, and price determination. Every decision may result in success
or failure. However, the risk is limited and calculated.
An entrepreneur has an all-round personality: An entrepreneur possesses knowledge and
insight about the quality and type of raw materials, machinery, work force and their
behavioral patter, government machinery, labor laws, taxation, production process and
marketing network.
Owner Manager
They may or may not be entrepreneurs. They usually own and manage a small enterprise;
which fits with their personal motivations. They are concerned more about survival than
seeking innovative changes and growth. They are therefore, characterized by:
 Limited scope for innovativeness, creativity, and imagination
 Managerial jobs are transferable.
 As a manager in the organization, his job is transferable from office to office
from one unit and location to another location.
 Managers do not bear-risk.

1.5. Classification of Entrepreneurs

The entrepreneurs have been broadly classified according to the type of business, use of
personal skills, motivation, growth, and stages of development and gender.

1.5.1: Entrepreneur according to the type of business

According to the type of business, entrepreneurs are classified as follows:
1). Business entrepreneur; are individuals who conceive an idea for a new product or
services and then create a business to materialize their idea in to reality.
2). Trading entrepreneur: is one who undertakes trading activities and is not
concerned with the manufacturing. She or he identify potential markets, stimulate

Entrepreneurship & Small Business Management Page 8

 demand for his product line and create a desire and interest among buyers to go in his
product.
3). Industrial entrepreneur: is essentially a manufacturer who identifies the potential
needs of the customers and tailors a product or service to meet the marketing needs.
She or he is a product-oriented man who starts in an industrial unit because of the
possibility of making new product.

4). Corporate entrepreneur: is a person who demonstrates his innovative skill in

organizing and managing corporate undertaking. A corporate undertaking is a form of
business organization, which is registered under some statute or act, and which gives it
is a separate entity.
A corporate entrepreneur is, thus. An individual who plans, develops, and manages a
corporate body.
5). Agricultural entrepreneur: is the entrepreneur who undertakes agricultural
activities such as raising and marketing of crops, fertilizers and other inputs of
agriculture through mechanization, irrigation and application of technologies for dry
land agricultural products.

1.5.2: Entrepreneurs based on technology

The application of new technology in various sectors of the national economy is essential
for the future growth of business. From this perspective, entrepreneurs are classified as
follows:
1. Technical entrepreneur- is a "Crafts man" with skill in production techniques.
2. Non-technical entrepreneur- is a person who is concerned with developing
alternative marketing and distribution strategies to promote his business.
3. Professional entrepreneur- is a person who is interested in establishing a
business but does not have interest in managerial or operating it once it is
established.
1.5.3: Entrepreneurs based on motivation:
Motivation is the force that influences an entrepreneur to achieve his or her objectives.
1. Pure entrepreneur- is an individual who is motivated by psychological and
economic rewards. She or he undertakes an entrepreneurial activity for his or her
personal satisfaction.

Entrepreneurship & Small Business Management Page 9

 2. Induced entrepreneur- is one who is induced to take up an entrepreneurial task
due to the policy measures of the government that provides assistance, incentives,
concessions and necessary overhead facilities to start a venture (business).
3. Spontaneous entrepreneurs- are persons with initiative, boldness, natural talents
and confidences in their ability, which motivate them to undertake entrepreneurial
activity.

1.5.4: Entrepreneurs based on stage of development:

Based on stage of development, entrepreneurs are classified as follows:
1. First-generation entrepreneur- starts an industrial unit by innovative skill.
She/he is essentially an innovator, combining different technologies to produce a
marketable product or service.
2. Modern entrepreneur – is a person who undertakes ventures that go well along
with the changing demand in the market. She or he undertakes those ventures,
which suit the current marketing need.
3. Classical entrepreneur- is a person concerned with customers and marketing
needs through the development of a self-supporting venture. She or he is a
stereotype entrepreneur whose main aim is to maximize her/his economic returns
at a level consistent with the survival of the firm with or without an element of
growth.
1.5.5. Entrepreneurs based on Idea generation:
Based on this criterion, there are three types of entrepreneurs.
1. Technological entrepreneur- a one who innovates using a technology to produce
new products or new process for producing old product. Fore instance, a broker
who starts to apply online brokerage job by digitalizing the work..
2. A geographical entrepreneur- is one who moves technology, products, and
process that go with it from one place to another. It is common to introduce new
products or services from more advanced nation to developing nation.
3. A sociological entrepreneur- is one who finds a new situation in which to sell an
old product (existing products) .Simple example, could be in cafeteria to render
service while the customers are being in their car, door to door service etc... This is
usually associated with changing mode of delivering the service or product.

Entrepreneurship & Small Business Management Page 10

 1.5.6: Based on source of capital:
Based on source of capital an entrepreneur is classified as:
1. private entrepreneurs- it is when an individual on the basis of his or her own
property start up a new venture where as,
2. Collective entrepreneurs- when a venture is created in a grouped based on
collective property or contribution.

1.5.7: entrepreneurs based on the reason to start-up:

Based on the reason to start-up, entrepreneurs are classified as follows:
1. Opportunity-driven entrepreneurs- they start a company because they see clear
market opportunities to exploit. For instance, the Ethiopian millennium was found
to be a best opportunity to start up a lot of business.
2. Necessity-driven entrepreneurs- go in to business to create self-employment and
to win a living. For instance, a multitude of government sponsored cooperatives and
associations are started all across the country to reduce unemployment through
growth oriented small and micro enterprises.
1.6. Success factors of entrepreneurs
The following are success factors:
1. The entrepreneurial team: the term "team" is used because entrepreneurs do not
start business by themselves; they have teams, parents, close associates, or extensive
network of advisors. Thus in as much as the talent and commitment of the leading
entrepreneur matters , the same does to his/her team.
2. Venture product and service: Nearly all successful ventures start from score small
and then grow incrementally; few" gear-up" with substantial organizations for a big-
bang start. Incremental expansion of products and services also tend to stay within
the bounds of positive cash flow.
3. Marketing and timing: successful entrepreneurs tend to have a clear vision of both
existing and potential customers. There are no short cuts; innovation requires
market demand, not simply good ideas.
4. Market potential of the business activity is critically influenced by timing of new
products or services. Timing pertains when product or services are to be introduced,
how they are priced, how they are distributed, and how they are promoted.

Entrepreneurship & Small Business Management Page 11

 5. Business Ideology: From an entrepreneur's perspective, every venture has an
ideology, a philosophy or rationale for existence. A business ideology is defined as a
system of beliefs about how one conducts an enterprise. These beliefs include a
commitment for providing customers with value, the ability to take calculated risks,
the determination to grow and to control the fate of the business, and the
perspective of creating wealth realistically.

1.7. Benefits and Limitations of Entrepreneurship

People start their own business for a Varity of reasons. Some have a bright idea that they
think will make them rich, others find themselves unemployed and start their own business
to survive; some only are happy when they are their own boss; others want to make a
particular contribution to their community and can see no other way of doing it except by
setting upon their own business. Generally, even though people start business for various
reasons, the following are considered as the benefits of entrepreneurship:

1.7.1. Benefits of Entrepreneurship

1. Opportunity to gain control over your destiny: owning a business provides
entrepreneurs with independency and the opportunity to achieve what is important
to them. Entrepreneurs want to "call the shots" in their live, and they used their
business to bring this desire to life. They reap the intrinsic rewards of knowing they
are driving forces behind their business.
2. Opportunity to reach your full potential: Too many people find their work boring,
unchallenging, and unexciting. But to most entrepreneurs their is little difference
between work and play. The two are synonymous. Entrepreneurs business becomes
the instrument for self-expression and self-actualization. That is his/her talent,
energy, limits entrepreneurs growth and that...means entrepreneurial situations.

3. Opportunity to reap unlimited profits: The profits their business can earn are an
important motivating factor in the entrepreneur's decisions to launch companies.
One venture capitalist that has financed many small companies says, "Starting your
own company has always been the best way to create wealth. And even if you do not
get rich doing it, you will still have more fun.

Entrepreneurship & Small Business Management Page 12

 4. Opportunity to contribute to society and recognized for your effort: Often,
small business owners are among the most respected and most trusted members of
their communities. Business deals on trust and mutual respect are the hallmark of
many established small companies. These owners enjoy the trust and recognition
they receive from the customer whom they have served faithfully over the years.
Playing a vital role in their local business systems and knowing that their work has a
significant impact on how smoothly the nation's economy functions is yet another
reward for small business managers.

5. Opportunity to do what you enjoy: A common sentiment among small business

owners is that their work is no work. Most successful entrepreneurs choose to enter
their particular business fields because they have an interest in them and enjoy
those lines of work. They have their avocation (hobbies) their vocations (work) and
are glad they did "find a job doing what you love, and you will never have to work a
day in your life".

1.7.2. The potential limitations of entrepreneurship

Although owning a business has many benefits and provides many opportunities, any
one planning to enter the world of entrepreneurship should be aware of its potential
drawbacks.
1. Uncertainty of income: Opening and running a business provides no guarantees
that an entrepreneur will earn enough money to survive. Some small business barely
earns enough to provide the owner manager with an adequate income. In businesses
early days, the owner often has trouble meeting financial obligations and may have to
live on saving. The steady income that comes with working for someone else is absent
and the owner is always the last one to be paid.
2. Risk: Starting or buying a new business involves risk, and the higher the rewards, the
greater the risk entrepreneurs usually face. This is why entrepreneurs tend to evaluate
risk carefully. It should be noted, "People who successfully innovate and start
businesses come in all shapes and sizes but they do have a few things others do not. In
the deepest sense, they are willing to accept risk for what they believe in”. They have
the ability to cope with a professional life riddled by ambiguity, a consistent lack of
clarity. Most have a drive to put their imprint on whatever they are creating. And while

Entrepreneurship & Small Business Management Page 13

 unbridled ego can be a destructive thing, try to find an entrepreneur whose ego is not
wrapped up in the enterprises. Entrepreneurs face a number of different types of risk.
These can be grouped in to four basic areas.

A. Financial Risk: In most new ventures, the individual puts a significant portion of his
or her saving or other resources at stake. This money or resources will, in all likelihood,
be lost if the venture fails. The entrepreneur also may be required to sign personally on
company obligations that far exceed his or her personal bankruptcy. Many people are
unwilling to risk their savings, house, property and salary to start a new business.

B. Career Risk: a question frequently raised by would-be entrepreneurs is whether

they will be able to find a job and go back to old job if their ventures fail. This is a major
concern to managers who have a secure organizational job with a high salary and a
good benefit package.
To reduce such risk, starting a part time business is popular gateway to
entrepreneurship. Part-time entrepreneurs have the best of best worlds; they can ease
in to business for themselves with out scarifying the security of a steady paycheck and
benefits. A major advantage of going in to part-time business is the lower risk in case
the venture flops. Many par timers are "testing the entrepreneurial waters" to see
whether their business ideas will work and whether they enjoy being self-employed. As
they grow, many part-time enterprises absorb more of the entrepreneurs time until
they become full-time business.

C. Family and Social Risk: Starting anew venture uses much of the entrepreneur's
energy and time. Consequently, his or her other commitments may suffer.

Entrepreneurs, who are married, and specially those with children, expose their
families to risk of an incomplete family experience and the possibility of permanent
emotional scars. In addition, old friends may vanish slowly because of missed ‘get-
togethers’.

D. Psychic Risk: The greatest risk may to the well being of the entrepreneur. Money can
be replaced, a new house can be built, children, and friends can be adapted. However,

Entrepreneurship & Small Business Management Page 14

 some entrepreneurs who have suffered financial catastrophes have been unable to
bounce back, at least immediately. The psychological impact has proven to be too
severe for them.

3. Long hours and hard work: Business start-ups often demand that owners keep
nightmarish schedule. In many start-ups, six or seven day workweeks with no paid
vacations are that norm. When the business closes, the revenue stops coming in and the
customers go elsewhere. Even when you own your own business, you still always are
working for some one else ‘your customer and clients’.

4. Lower quality of life until the business gets established: The long hour and
handwork needed to launch a business can take their toll on the rest of the
entrepreneurs’ life. Business owners always find that their roles as husband or wives
and fathers and mothers take a back seat to their roles as a business founders. Part of
the problem is that most entrepreneurs launch their business between the age of 25
and 39, just when they start their families. It is very tough to give the amount of work
that is required to build a company with out slighting your family. As a result, marriages
and friendships are too often casualties of small business ownership.

5. High level of stress: starting and managing a business can be an incredibly

rewarding experience, but it also can be a highly stressful. Entrepreneurs often have
made significant investments in their companies, have left behind the safety and
security of a steady paycheck and have mortgaged everything they own to get in to
businesses. Failure may mean total financial run, and that creates intense level of stress
and anxiety.

6. Complete Responsibility: It is great to be the boss, but many entrepreneurs find that
they must make decisions on issues about which they are not knowledgeable. When
there is no one to ask, the pressure can build quickly. The realization that the decisions
they make are the cause of success or failure has a devastating effect on some people.
Small business owners discover quickly that they are the business.

Entrepreneurship & Small Business Management Page 15