Entrepreneurship and New Enterprise Creation - Essay Example

? Program Master of Business Administration (MBA) Module and Number: of the Assignment: Entrepreneurship and New Enterprise Creation Submitted By: Faisal Student Number: Submission Date: 27 April 2011 Statement of Originality I confirm that I, Faisal, am the sole author of this work and have prepared the same solely for the purpose of this assignment. All the work and samples are original, and I have assured the owner of the small business I have interviewed that it will be kept confidential and used only by my professor for the purpose of evaluation and thereafter been made part of the assignment records of the University and retained or destroyed as per the University’s policy. Dated: _________________ Student’s Signature Entrepreneurship and New Enterprise Creation Introduction We cannot help acknowledging as we look around ourselves that everything we own, eat, drink and make use of for different daily activities are the products of some business enterprise or the other. This fact being established as an irrefutable truth, it shows the power and importance that businesses, large or small, have in our lives. Even if we are not in the least concerned with the nuts and bolts of how a business operates in the real world, we must nevertheless go out of our houses and buy or sell something of value to the world in order to survive. Few of us have the satisfaction of running our own business enterprise or marketing our own services or products. The vast majority of humankind chooses to work for a business enterprise or an entrepreneur who pays them a weekly, fortnightly or monthly remuneration for rendering their services in his business enterprise. From this perspective, the world and its human population may be divided into (A) capitalists and entrepreneurs, the owners and operators of land, capital and enterprise- from which all business activities emanate; and (B) laborers and wage earners, who form the working classes of society and apply for and get employed in different positions in the organization, some directly connected with business output and others having a supporting and administrative role. Karl Marx referred to them as the bourgeoisie and the proletariat, but no matter what we call them, it is clear that they have clear and distinct roles in society (Swedberg, 2000, p23). Entrepreneur or Business Owner- Is There a Difference? Although most of us would assume that entrepreneurs and the owners of a business are very much the same, the truth could be remarkably different. In the last 100 years or so, capitalists have used their wealth to accumulate more wealth and prosperity by investing in a good business idea or capitalizing upon an opportunity to fulfill a need. They usually use the services of entrepreneurs to hit upon a good idea. Indeed some of these people even ask for good ideas through the newspaper- they are known as venture capitalists. Let us consider an inventor or scientist who has invented a system to convert waste water into drinking water. He wants to perfect this system and patent and market it on a large scale. If he does not have any assets and is finding it difficult to raise a bank loan for this purpose, he can go to a venture capitalist and show that person his idea (Sahlman et al, 1999). If deemed practicable and profitable, the venture capitalist may buy out his idea, get it patented and marketed on a large scale so that it is useful and profitable. Here the venture capitalist is playing the role of both capitalist and entrepreneur- getting a useful idea out into the world stage. Good and innovative ideas worth patenting are worth millions of dollars sometimes. At other times, business operations may be contracted out to other experts who have the skills but no access to capital. So it is not necessary that the business owner and entrepreneur be one and the same. I have asked Mr. Andrew Cavendish, owner and partner in the business Creative Furnitures, whether he regards himself as an owner or an entrepreneur. Andrew feels he started out as more of an owner and less of an entrepreneur, although the decision to enter into business was entirely his idea. He points out that he often passed a furniture shop on the way to and from work, which was what gave him the idea to enter into business. After being inside the business for a number of years he has now also begun to think of opportunities and threats and strengths and weaknesses of the firm and how to achieve the targets so he has developed into an entrepreneur today. The Role of the Entrepreneur The word entrepreneur comes from the French language and usually means ‘risk taker’. Today and always, entrepreneurs have occupied an important position in our market economy. For it is the entrepreneurs provide the impetus that starts the economy's engine, activating and stimulating any kind of economic activity. It is surprising but true that the economic success of every nation is the result of encouraging and rewarding the entrepreneurial instinct (Stokes, 2010). It is notable that a society becomes prosperous to the extent that it rewards and encourages entrepreneurial activity. It is the potential profits from a venture that are the entrepreneur’s reward for risk taking. It is the entrepreneurs and their activities that are the critical determinant of the level of success, prosperity, growth and opportunity in any economy. The most dynamic societies of the world are the ones that have the most entrepreneurs, as well as the economic and legal structure to motivate and encourage entrepreneurs towards more activity. While the early economists viewed entrepreneurship as a small part of economic activity, it was in the 1800s that the Austrian School of Economics was among the first to recognize the entrepreneur as the person having a central role in all economic activity. Entrepreneurs are unique because they're capable of bringing together most or all of the resources that are required to produce a product or service. They are also usually capable of arranging the marketing, sales and distribution of that product or service. Entrepreneurs are optimistic and future oriented, fast moving and willing to try many different strategies to achieve their goals of profits. They have to be alert and flexible as well, willing to change the game plan quickly as they get and use new market information. Entrepreneurs must be skilled at selling against the competition by creating perceptions of difference and uniqueness in their products and services. They spend their lives in seeking out customer needs that the competition is not satisfying and finding ways to offer their products and services in such a way that it seems that what they're offering is more attractive than anything else available. All through history it has been the entrepreneur that has made business opportunities possible. The same is true today (Sarasvathy, 2008). How Decisions are Made in Small Business Organizations Given that Creative Furnitures can clearly fit into the mold of the small business enterprise, we note that there is a certain way of managing the organization that reflects its readiness and ability to react and respond to new and uncertain future conditions. This is because in the small or medium business classification, nearly all the important decisions are taken by the owners or managing partners. Of course there would be some input by the departmental or functional heads of the various departments/ areas being affected by the decision, but the final path to be taken would undoubtedly be decided by Andrew Cavendish and Stanley Giles. For the financial and accounting aspects, they would look to the expertise and opinion of the recently hired Chartered Accountant and his assistant. Similarly, if there are any manufacturing or quality control issues, it will be addressed to William Foster. So the division of responsibilities is very clear. Recently, Andrew Cavendish had received an offer to sell the business to one of the larger furniture manufacturers in England but he categorically refused. Andrew envisions further growth and prosperity for the business in certain areas but this will need time and effort which Andrew and Giles are determined to invest. As such there is no reason to divest or sell off any part of the business in part or in whole. Even with the competition from China and India, Andrew is determined to survive in spite of it. The staff members are paid a good wage a little above the competition in view of their hard work and loyalty- it is hoped that they will not switch in such trying circumstances. This strategy has worked to date and there has been very little attrition. Now let us see how a typical decision is taken at Creative Furnitures. Let us suppose that the firm wants to increase its capital base because it needs to expand rapidly. In this scenario, the firm can go to venture capitalists, private lenders of capital, and explain their plans, provide proof of their profitability and assets and see if a private lender is interested. The second option would be to go to a bank. Here also they would have to provide proof of their business existence, its profitability and reasons for asking for the loan. The rate of interest and terms of repayment will have to be noted very carefully. The firm will also have to have an asset mortgaged, pledged or hypothecated to the Bank in exchange for taking the loan amount. The asset’s possession is transferred back to the owners when the loan and interest thereon has been fully repaid. Other options to increase the additional capital needed are to borrow it from neighbors and friends but I doubt that this is possible considering the amount that is needed is quite large. The remaining possible scenario would be to raise it from the general public, either in the form of a loan or a share in ownership. In the first instance, we would be looking at a public debt or bond issue. In the second instance, we would be considering an issue of equity shares (Steyaert & Hjorth, 1987). While a cursory look at the issue would seem to indicate that it is primarily a financing problem, a detailed analysis would show that it would impact nearly all aspects of the business. Once the loan is taken, there is a commitment to the bankers or the debenture holders to pay a certain sum of money as interest, usually once every six months. This is a fixed cost, in addition to making arrangements for the repayment of the principal amount after the term of the loan has expired. It will take some money out of the profits of the firm. Lenders looking to take up debentures would look at the rate of interest being offered, the firm’s debt to asset and debt to equity ratio, its interest coverage ratio and also the length of the operating cycle as well as the salability of its products. The liquidity ratios and working capital would also give important details about its short term viability and survival capacity. The state of the competition, its position in the industry and the current and future trends of the business would also have to be seen. Thus it is a complex rather than a simple decision. From the owners or entrepreneurs point of view, he or she would really like to retain control and ownership of the business as much as possible. As such Andrew and Giles would prefer a private loan or a Bank loan. They realize that going public would take control away from them. It would be good to call a management and staff meeting and fill them in on what needs to be decided. We could also take their opinion via opinion poll. Sometimes employee buy-into an idea can be the most important hurdle to be crossed. Once the loan has been obtained, the next point will have to be decided as to in which area is the investment to be done. Will it be in production and materials management and inventory? Will additional space have to be rented or is the current facility adequate? Will additional staff have to be hired and in which areas? Can emoluments be increased to motivate employees, or a pay incentive system created to increase output? There will be questions of quality control, and the need to monitor usage and wastage in material and parts inventory. There will be budgets and estimates for the goals of each department. Some of the problems that have emerged in recent discussions relate to the pilferage of materials and spare parts, late deliveries of orders and a manufacturing fault in the design of a mass produced beach chair for vacations and use in summer residences. Regarding the instances of pilferage, it has been seen that sometimes the matching of parts and inventories don’t tally and there is shortage in some items. To circumvent such an instance in future, Andrew told Stanley confidentially that they would need to install a security camera system which would hopefully take care of the situation as well as monitor the workings of the departments. The case of changing manual locks to automated system was also considered and implemented. Finally, a check was being made as to the roster of the guards on duty after which the thefts were reported. A close check on transport in and out of the factory was also to be maintained. Regarding the manufacturing fault, the firm had been receiving some complaints from some unfortunate customers who explained that the catch on the beach chairs was faulty and it was a challenge to unfold them especially after they had been unused for a few months. The problem was escalated to William Foster, head of the manufacturing unit and he has already determined after investigation that a faulty clasp is the reason behind the problem. He has worked out that if they replace the steel clasps with plastic ones, the problem would be resolved. He has happily reported that the problem has not been recurring since they have changed the clasps to plastic ones. Regarding the problem of late deliveries, it is mainly an administrative problem due to rush of work or mismanagement. The owners have looked once again at the entire delivery process and have directed that each sale consignment should be checked and clearly marked as to the name of the buyer, quantity, quality, address and also the name of the delivery man be mentioned on the package. In this way responsibility for the delivery could be ascertained and monitored. The customer would also have to sign when the package was accepted. The IT department can also play a very important role in this process through creating reports of inventory control, usage and wastages. Where targets have not been met, the exception reports should be produced and management called to explain the reasons. As a firm expands, automation in processes and reporting becomes both necessary and is a blessing. It helps management respond before a problem can escalate to undesirable proportions. Business in the Twentieth Century and Beyond In the UK in the new millennium, the concepts of online business and increased customer involvement and service delivery stand out as important. It is very necessary to keep engaging with both present and new customers, suppliers, dealers and distributors because the world is changing around us and it is more about the word on the street and the impression that a business creates in the mind of a consumer that influences his decision to buy or become a fan of the product or service (Burns, 2007). We have moved beyond the bricks and mortar business to cyberspace, creating impressions through websites and online offers, using Facebook and Twitter to appeal to the youth, for that is where the next generation of buyers will come from, if they are not already our customers (Parker, 2004). Decisions Made by the Entrepreneur: Have They Changed or Remained the Same? I have asked this question of Mr. Andrew Cavendish, the owner of Creative Furnitures, a small furniture manufacturing outlet in Devonshire. In his opinion, the decisions that are made by the entrepreneur have remained the same; rather their complexity has increased somewhat in the present era. For example, those who are not tech savvy will not know so much about how to go about advertising and promoting the furniture business online, or setting up a website for this furniture business. They may have to take help from computer professionals and usually do. Similarly, taking a decision as to how to finance the operations through a bank loan involves negotiating for the best rates and presenting the firm’s balance sheet, income statement and cash flows to the bankers for analysis on the basis of which they will make a recommendation. This is a very important aspect for a growing business and the entire plans and vision for the future might depend on the outcome of this decision. The books need to be audited by a firm of reputed accountants and auditors and the firm’s own accountant or Chief Financial Officer in the case of a large firm may be needed to negotiate the terms of the loan, interest rate and terms of repayment as well as what is being kept as collateral by the Bank. All these aspects need professional help and the entrepreneur must enlist the aid of his able accountant and Information Technology expert to tackle the finance, software and hardware aspects of the firm. Similarly the entrepreneur or owner of the business may require help from other people in regard to cost control and budgeting, production scheduling, materials handling and storage etc. As a business expands, he cannot do everything himself. Handing over parts of the overall work to seasoned and intelligent subordinates will free up time and space at the enterprise manager’s end to think about the next steps to be climbed or how to sidestep or avoid a mishap or business problem. Thus the entrepreneur is free to concentrate on more important matters (Storey et al, 2007). Adopting a Management Style Whether a business succeeds or fails depends to a large extent on how it is planned, managed and controlled. True, there are internal strengths and weaknesses that have to be controlled as well as external opportunities and threats that have to be met by every firm in a particular industry, but it is the shrewd management of resources and strategic maneuverability of a business that is important to business survival and continuity. The skills and knowledge of the managers of a business can be put to good use in developing alternative plans and scenarios should there be a setback to the firm or industry in meeting its objectives. Sometimes we have to change our strategy and plan something new on the fly as information is received that makes our original plans or estimates redundant or unfeasible (Sarasvathy, 2008). There are a number of management styles that can be adopted by an entrepreneur. We can be faced with a tough uncompromising style that lays down the law and gives little leeway to the subordinate managers. This ‘fight or flight’ approach may lead to stress and employee turnover. At the other end we might have a manager that gives the others too much leeway in making decisions and avoids conflict- such a person is a loser in the long run as he loses his authority and assertiveness as a leader. The accommodating style of management is adopted by those that want to respect the feelings of the managers, but the goal here is to achieve the business objective. Sometimes a compromising style may have to be adopted for the good of the organization, in which the views and experience of the other managers have to be respected. Finally, what works best in most situations is an attitude of collaboration, where the managers viewpoints are listened to, evaluated and the best path is chosen that gets the most votes of support. This ensures a buy in at all levels and is the surest way to progress and achieving the business goals (Glancey & McQuaid, 2000). The Case of a Small Business Entrepreneur As I have indicated, I have interviewed Mr. Andrew Cavendish, the owner of Creative Furnitures in Devonshire. He started off his business ten years ago and progressed from building furniture by hand for neighbors and relatives as a hobby, to a full time business entrepreneur. He had previously been teaching Economics at a University, but always dreamed of a more hands on approach to business. Andrew got together his best friend and confidante, Stanley Giles, who taught Mathematics and Finance at the University and inspired him to take a well planned risk into the world of owning and operating a business enterprise. The result has been Creative Furnitures, a partnership venture. The business had started with a total capital of ?10,000, of which ? 6,000 was contributed by Cavendish. Andrew has been known to have an innovative and business minded streak, while Giles has been entrusted with keeping an eye on the financial aspects of the enterprise. Meanwhile they have employed William Foster, a recent technical graduate with a degree in Civil Engineering and an experience of three years in Upholstery at a plant in Leeds to be in charge of the Production aspect of the business. Jenny Macmillan has just joined them four months ago as an Administrative Secretary – she will handle routine day to day matters as well as the increasing amount of correspondence that the business is faced with as it plans to expand and prosper. And of course there is Keith Davies, recently hired as an assistant to Stanley Giles, just to look after the cash, accounting and materials ordering aspect of the business. He has just completed his Chartered Accountancy from Leeds. The rest of the outfit consists of staff numbering 37 in all, spread over the various areas of the enterprise functions. The Production Decision At the beginning of the year, all the owners and managers get together and review the performance for the last year, as well as make their plans for the present year. The accounts for the year are usually finalized by February 15 of the next year, and at this time a yearly event is also held with all the employees informing them of last year’s results as well as the plans for the present 12 months (Parker, 2004). Outstanding performances are appreciated and rewarded. The production decision in terms of units is stated for the year, as planned in the managers meeting. The target is set based on demand forecasts, confirmed orders and anticipated new level of business for the year (Bridge, 2009). The Sales and Marketing Decision Andrew Cavendish is the final authority on the sales and marketing decision. A few years ago, he noticed that there was considerable demand for both office furniture as well as furniture like tables, chairs and benches for schools, colleges and kindergartens. Accordingly he set up a line of furniture production that dealt with just this aspect, and it has been quite successful (Beaver, 2002). Andrew himself designed the brochures while Giles helped with the pricing aspect as well as negotiations with companies and schools for delivery and credit terms. Another aspect of the business deals with custom made furniture, which Andrew himself started after hiring artisans that had been laid off from a competing firm that closed down several years ago. Unfortunately the readymade furniture business is at present facing competition from cheap imports from India and China (Stokes, 2010). The Financing Decision The financing decision is getting to be more and more important as the company expands. Andrew also foresees a good market for the kitchen, bedroom and hall room furniture business. This could take the shape of sofas, beds, side tables, stools, chairs, cupboards, closets, pantry shelves- in fact there are numerous possibilities. Andrew wants to capitalize on this opportunity before there is more competition in these sectors, but the business would also need more finance and he will be discussing this with Giles and Davies before approaching their bankers for a business loan (Stokes & Wilson, 2010). Business Planning, Implementation and Control I have already indicated how the major business decisions are made at the beginning of the year, when annual targets are set. It is important to have targets that are challenging yet achievable. There must be space for an alternative plan should something occur that puts the firm or the industry in jeopardy (Burns, 2007). The implementation lies in the hands of the partners or managers looking at the various aspects of the business. Establishing a Management Information System One of the most engaging aspects of the business has been the need for an MIS or management information system. Experience has shown that every business, large or small, can benefit from an MIS. This is because we get indications of exception reporting or deviations from the norm, in every department or different aspects of the business. It depends on where we have set targets and priorities. We can then decide how to handle the situation as soon as we are alerted to it (Timmons, 2008, p56). Safety and Security Aspects of the Business Sometimes small businesses can have more need of safety and security than larger businesses. For example, not having an adequate insurance coverage for raw materials in storage may cause irreparable losses in case of a fire. At the same time, proper controls and systems must be in place so that a fire is prevented and controlled should it occur. The doors of the materials storage should be made of steel and the entire area should be a No Smoking zone. Learning from Past Successes and Failures Nearly every business learns from its past successes and failures. It would like to repeat the successes and omit the failures, but survival and prosperity is what a business is all about. No one can be successful all the time- the law of averages mixes the good with the bad and hopes we can learn from the experience (Wickham, 2006, 23). Some of life’s best lessons come from failure rather than success. I tried to get some instances from the managers but they just mentioned lack of foresight in entering in the new kitchen, bedroom and hall room furniture markets and a gradual decrease in custom furniture due to cost considerations to be worrisome at present. Another worrying factor was the cheap competition from India and China which would attract only cost conscious customers. The Importance of a Vision for the Future One of the most important factors in any business venture is for the leader or CEO to have vision or foresight. This is a plan for where the business will be in future. Otherwise if a business is stagnant and not growing in different areas, any unfortunate circumstance can reduce the opportunities for it (Glancey et al, 2000). Andrew Cavendish hopes that he can branch out the business into a regional one three years from now and then go national in another five years. Achieving Internal Satisfaction In the case of the partners and owners Cavendish and Giles, there is an inherent measure of self satisfaction for a job well done (Kirby, 2002). This is stated by many to be the best reward that an entrepreneur or business owner can get. The business has a good name and reputation in the market; it is respected by buyers as well as suppliers for good furniture manufacturing as well as good and ethical business practices. If the business is making a profit, that is all that the owners want to complete their sense of satisfaction for having engaged in this business venture (Sahlman et al, 1999). Conclusion I would like to conclude by pointing out some of the most redeeming features of Mr. Andrew Cavendish, who has impressed me immensely. 1. Robust Health: Andrew has by his own account been blessed with good health all through his life. He seldom takes leave for health reasons, and is used to working long hours for the benefit of the business. 2. Authority and Responsibility: You will notice that Andrew is keenly interested in every aspect of the business right from the time he steps in the office. He loves taking control, making decisions and has the authority and responsibility to do so. 3. Self Confident: Andrew is highly self confident, and is growing even more so with the experience he has of running the business in collaboration with Giles and the other managers (Blake, 2008). 4. Comprehensive Awareness: Andrew has surprised me by his detailed knowledge about key aspects of the furniture business, his firm, his competition and his vision for the future. His knowledge makes me believe in him. 5. Objective Approach: Andrew has a habit of dealing with situations that need to be corrected without laying the blame on the person. He makes the person concerned realize his own mistake, which serves to make them doubly careful in future (Storey & Green, 2010). 6. Risk taking ability: Andrew thrives on accepting challenges. He never takes unnecessary risks but plans how to handle them in advance. This is the sign of a great entrepreneur. References Beaver,G. (2002). Small Business, Entrepreneurship and Enterprise Development. FT Prentice Hall. Blake, C. 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