FUNDAMENTALS OF ENTREPRENEURSHIP - 2

Prof. Sonam Bhayani (B.com/Mba)

ESTABLISHMENT OF INDUSTRIAL ENTERPRISE

Introduction

Who is an Entrepreneur ?o Entrepreneurship is concerned with an

individual and person having entrepreneurship is an Entrepreneur.

o Special qualities, skills or cleverness.o “He gets employment by establishing business,

gives employment to others and tries to get economic reward by proper management of the business or industry”

o Entrepreneurship development is considered a very important activity regarding economic growth and development of human civilization.

Forms Of Industrial Enterprise

Industrial activities

Business (commercial)

activities

Services related to commerce

Personal services

Professional services

A. Industrial activities :- Utility is created by transferring raw material into ready goods under production process e.g. cloth from cotton, grain from seeds, machines from steel, etc.

Classification of Industrial activities :1. Natural Industry :

-Depends on natural factors eg. Agriculture industry, animal husbandary, paultry farm, etc.

-Development of these industries depend on the favourable or unfavourable natural factors.

2. Mineral Industry :- Extraction of minerals from

underground e.g. Coal, steel ore, natural oil, etc.

- It goes on reducing with extraction and cannot be reproduced.

3. Machine Industry :- Finished goods are manufactured

from raw material with the help of machines- Includes industries like textile,

cement, automobile, chemical, iron-steel etc.

4. Construction Industry :- Includes residencies, business

houses, canals, dams, etc. which are constructed with the help of construction materials like bricks, lime, cement, wood, etc.

5. Handicraft Industry :- Here industrial activities which

are dependent on personal skill are included. E.g. carpentary, weaving, etc.

Characteristics of Industrial Activities : Element of risk. Industrial industry – permanent capital

investment required. Complex problems of management Units established doing Industrial activity are

large in size.

B) BUSINESS (COMMERCIAL) ACTIVITIES :- Sales of goods produced by the

manufacturers is done. E.g. seller of cloth, seller of steel, seller of medicines, etc.

Departmentation of Business Activity:i. Departmentation Concerning Quantity:

Wholesale business and retail business are included.

ii. Departmentation concerning product differenciation:

Business of one or more than one thing is included.

Characteristics of Business Activities: Less risky than industrial activity Proportion of bank investment and current assets

is more than of stable assets Less managerial problems Government interference is limited Started with few financial means One or minimal number of persons can manage

business

3) SERVICES RELATED TO TRADE :- Abstract services are provided and

charges are taken from the receiver of the services.

- Provide services to industrial and business activities.

Departmentalization of Commercial Services: a. Banking Servicesb. Insurance Servicesc. Storage Servicesd. Transport Servicese. Communication Servicesf. Agency Services

4) PERSONAL SERVICES :- Social requirement fulfilled at a personal level.- services like tailor’s, dance, music, tuition, class, etc.- Customers are directly in contact.- Can’t be run at large scale and its market is limited to the local level.

5) PROFFESSIONAL OR VOCATIONAL SERVICES :- Eligibility needed.- An individual have to become the member of that business association to run this activity at a proffessional level.- Services of doctors, lawyers, accountants, company secretary are included

Establishment of Industrial Enterprise

An entrepreneur has to undertake the following activities for the establishment of industrial enterprise :

I. Search for Professional IdeasII. Analysis of IdeasIII. Choice of the Best IdeaIV. Concentration of Output Components

A) Search for Professional Ideas :- Succeed or fail- Start with the invention of proper business idea- Idea can be found from various sources- Ideas should be true and practical- Entrepreneur should have farsightedness.

Sources for Getting Ideas :i. Market Observationii. Future customersiii. Development in other countriesiv. Study of outline of the projectsv. Government Organizationsvi. Trade Fairs and Exhibitions

B) Analysis of Ideas :i. Primary Analysis and Analysis of Ideas:

-Technical Knowledge- Commercial Sustainability

ii. Detailed Analysis:Minute informations are required

C) Choice of the Best Idea :- Import of the product prohibited by government- Product profitably exported- Demand should be more than supply- Experience- More profitability- Expansion and diversification- Licence policy or industrial policy

Selection Matrix of Entrepreneur

Order Details Project - A Project - B

1. Product Industry having priority

Reserved for Small Scale Industries

2. Requirement of raw-material

Imported Domestic

3. Machines Imported Domestic

4. Market Defence Department

Local

5. Technical Information Trained abroad

Domestic

6. Selection of place Free Trade Zone

Backward Area

7. Profitability High Low

D) Concentration of Output Components:- Once the entrepreneur agrees with practicality and profitability of the project, he concentrates on collecting required means for the establishment of the enterprise.- Take decisions regarding the size of business, choice of location and construction, etc.- According to the opinion of John. A. Shubin, “Establishment of an enterprise takes place by concentration of materialistic facilities, production process and development, advertisement of product and campaign for sales increase, appointment of labours, gathering material, etc.”

For the establishment of new enterprise, following outputs are necessary :I. Data Collection :

In aggressive commercial atmosphere, information and its collection or knowledge is a key factor in the success of an entrepreneur.

To get information and disseminating it, an entrepreneur should develop solid system. This system is known as information management.

Solid information system provides proper information at proper time to proper person.

II. Financial system:- Credit is the lifeblood of any business enterprise and it works as lubricant for the wheels of trade machines.- Business enterprise requires credit for raising permanent capital and working capital.- There are two main methods for getting estimation of the requirements of capital for an enterprise:i. Cost Theory: Permanent assets, current assets,

intangible assets like goodwill, cost related to establishment and development of business enterprise, etc. are included.

ii. Earnings Theory:- Capitalization of the unit is equal to the estimated return of capital investment value of the unit.- More realistic based. But difficult to get a true estimation of future return for enterprise.- Decisions of capital structure are very important because they affect the real capital and the return to be received by the owner of the enterprise.- After deciding capital structure, capital is raised and efficient management and control system are created for working capital and return.

III. Employees:- Employees are valuable assets of business enterprise, which is not affected by depreciation.- Various decisions have to be taken by an entrepreneur regarding employees.

Reward and incentive :- An entrepreneur faces high risk and difficulties. So, a successful entrepreneur gets reward and economic benefit.- Following things are included in this benefit:• Substantial wealth• Social status and reputation• Financial freedom and power• Conciousness regarding achievement and pride• Satisfaction of providing employment to others• Bright career of his children

Role of Industrial fairs :• In Industrial fair, industrialist exhibits his product.• Fairs are held at regional, national and international levels.• Give and take of industrial information helps an

entrepreneur in product improvement and sustain the product.

• Benefits of Industrial fairs are:Information can be spread Order received Product sold on spot Better Idea Foreign co-operation obtainedCompetition tendencies known Import-Export Contracts signed.

Thus, any entrepreneur has to pass through many ideological practicable and stages, before starting a business venture.

ANALYSIS OF INDUSTRIAL OPPORTUNITIES

An Entrepreneur should have the capacity to identify opportunity and grab it in time.

“Opportunity indicates such condition that in ordinary circumstances whatever is not seen by others is seen by an entrepreneur”.

Entrepreneurs capacity to identify business opportunities and his skill of turning those opportunities into commercial possibility are important.

What is Opportunity ?• Condition emerging from the change in

situation or circumstances.• Economic Profit.• Its universal but everyone cannot see it.• Everyone should take advantage of it.

Characteristics of Opportunities:

1. Born from change in internal and external environment

2. Recognition3. Benefit of status 4. Extraordinary benefit5. Threat in opportunities

Identification of Opportunities :(A)Opportunities Resulting from the change of

Internal Environment :i. Sudden Opportunity :

Under the control of destinyii. Opportunities Resulted from the Vast Difference Between Real and Expected Results :

- Inevitable to get estimation about future events

- On the basis of expected supposition, decisions at present are taken.

iii. Opportunities Resulted from the Innovation in the Production Process :

- Change introduced in working production system is called “innovation”.

- Innovation is possible in 5 ways:oAdd total new product or introduce new element in the

current producto Adopt a new method that has not been used

previously like mobile bank serviceo Enter in totally new marketo Use cheap raw material by price analysiso Create a new system

iv. Opportunities Resulting from the Change in Industrial or Market Related Structure :

- There is a demand of certain product in which producers have different shares.

- On the basis of share of producers in the total demand of the product, type of market structure can be known. E.g. Monopoly, Perfect competition, Imperfect competition.

(B) Opportunities resulting from change in the external environment :i. Opportunities resulting from Technological inventionii. Opportunities resulting from the change regarding populationiii. Opportunities resulting from Government controls and Encouragementsiv. Opportunities resulting from the change in the habits, attitude and values of the people

Practical use of opportunities in Business Enterprise:

• If one is afraid of risks, opportunities cannot be used in a profitable manner.

• An entrepreneur estimates opportunities and threats resulting from internal and external changes and by adapting it with his own strength, capacities and weaknesses, he gets benefits.

• SWOT Analysis:S = StrengthsW = WeaknessesO = OpportunitiesT = Threats/risks

• Opportunities and threats are external events and are uncontrolled. While Strengths and weaknesses are personal characteristics of an entrepreneur.

• Schemes regarding production management, marketing management, financial management and employees management are developed under ‘SWOT’ analysis.

1) Strategies related to production :i. Obtaining uptodate machinesii. Production process and arrangement of

machinesiii. Maximum use of production capacity of

machinesiv. Obtaining other output components like raw

material, spare parts, electricity, water and other means according to requirements

v. Proper localization of the unit

2) Strategies related to marketing :i. Change in prevailing product or absolutely new thingii. Change in priceiii. Production distributioniv. Production increase

3) Financial Strategies :I. Capital investmentII. Proportion of debt in comparision to equity

capitalIII. Proportion of permanent and working capitalIV. Dividend policy and re-investment of profit in

business

4) Strategies related to Human Resources:I. Employees selection training and promotionII. Reward and encouragement to employeesIII. Development of employees work capacity and its

practical useIV. Employee-industrial relations

Result of Opportunities

1) Creation of new and diversified values2) Creation of diverse satisfaction3) Appreciation by change in factor form4) Large automatic production system and

possibilites of Global market

Method of Identifying Opportunity for Enterprise

An entrepreneur’s opinion about following matters is important like :(1) Type of opportunity :

(A) Production of a thing : Make any service available Selling of anything Getting money by having work from

others Only selling

(2) Types of customers or market :(1) According to the level of income :

- having high income- having medium income- having very low income- having very very low income

(2) According to Market area :- Sales at local Taluka level- Sales at district or state level- Purchase of government or other

institutes- Purchase of businessmen and vendors- Only people or customers’ purchase

(3) Selection for plant location :- In one’s own house- In rented house- In village-city or out of village-city- At other place- By building a plant or shed

(4) Choice of Technology :- Local or imported raw material based

on electricity or without electricity

(5) Future development opportunities :- Competition increases in the market- Rapid change in fashion and interest- Things which are always in demand- Things produced in totally ne technology

(6) Regarding Technical skill :- What types of machines or tools- Only based on skill

(7) Choice of time :- Estimated period (days/months)- Establishment of enterprise in how much time ?- Beginning of profit making in how much time ?Thus, if decision regarding establishment of enterprise is

taken keeping in mind above matters, it would not be extraordinary risk but it would be risk with proper calculation.

Forms Of Business Enterprise

Four forms of business enterprise :1) Sole Proprietorship2) Partnership firm3) Company4) Co-operative society

1) Sole proprietorship :- Managed by only one person.- Appoints salaried employees if required.- Not compulsory to have registeration of enterprise.- As the owner is one, use of capital is limited.- Many sources to get capital such as friends, relatives, banks or other institutes giving loans.- A sole proprietor cannot collect financial factors from public as company does.- Placement of ownership can be done by exchange of part or by selling to other entrepreneur.-Responsibility is unlimited.- If debts occurred, than private assets can be confiscated.- Loss beared by one person, but if profit than he himself enjoys the profit.- Life of sole proprietorship is short.- No legal process required while shutting the business.

2) Partnership firm :- 2 or more than 2 persons are included.- In ordinary enterprise, maximum 20 and in money lending enterprise maximum 10 members are included.- All the partners are owners.- Here also registeration is not compulsory, but voluntary.- Registeration gets certain benefits. So if done than it is good.- Can collect more capital factor compared to sole proprietorship.- Sources of capital : Friends, relatives, financial institutes and banks.- If the firm is indebted, private property of every partner is confiscated in order to pay debts.- Personal and collective responsibility.

- According to partnership act of 1992, profit and loss are distributed among all partners in decided proportion.- Life period is less compared to company.- Partnership relation ends when new partner enters or old partner dies.- Partnership firm can be closed or dissolved by the permission of all partners or according to the contract of partnership or under the order of court.

3) Company :- For private company, minimum number of people is 2 and maximum is 50.- While in Public Ltd. Company minimum is 7 and maximum is unlimited.- Management of company is done by the directors elected by shareholders.- Under companies act 1956, registeration is compulsory.- Memorandum of association and articles of association are to be prepared and got registered before the registerar of that state.- By releasing bond or debentures or through deposit, company can borrow financial factors from the public.- Replacement of companies share is done by specific processs.

- The responsibility of a company towards shareholders is equal to the original price means the printed price. E.g. If the price of share is Rs. 10, the company has to pay at most Rs. 10 to the shareholders. So, there is no risk for the privet asset of the company.- Certain profit earned by company is distributed among sareholders and remaining is re-invested.- Dividend paid is decided by Board Of Directors.- As the form of a company is obstract, its existence is permanent.

4) Co-operative Society :- It can be established by minimum 10 persons who are not the members of one family and limit of maximum members has not been fixed still.- Financial factors are received in the form of equity and accordingly shareholders become the owners of that Co-operative society.- Management is done by managing committee elected by the members.- Registeration is compulsory under the Co-operative society act of Gujarat State 1961 and Central Co-operative Society Act 1912.- Contract can be made as it has separate existence.- A Co-operative society is mostly established by economically weak or middle class of the society, by equal shares of less value the capital is collected. So, the equity of co-operative society is less than equity of company.

- They can get deposits from the members of society but like company, it does not have power to get money from public.- Like a company, liability of the members of society is limited to the printed value of the share. So if the company makes loss, or is liquidated members private properties are not damaged.- More than 12% of dividend cannot be distributed under the Gujarati Co-operative society Act.- Additional profit of the society is used for welfare fund.- Co-operative society exists for a long time.- It exists through legal process, and can be ended or closed through legal process only.

Selection of Plant Location

• Selection of plant location becomes pre-condition for the success or failure of an enterprise.

• Plant is directly related to the production cost of the product.

• 10% of the cost is reduced if selection of plant is done appropriately.

• It is mostly done in suburb or backward areas.• Such places are near the city, selling of the

products becomes convenient.

• When such areas are chosen, the enterprise gets subsidy and other financial benefits from the government.

• Decision should be taken keeping in mind liberal point of view and farsightedness.

• Following things are kept in mind while decision regarding selection of plant location is required:

1. Selection of the region2. Selection of the locality3. Selection of the site

• Selection of plant is important not only while establishing the enterprise but also in the extension diversification or at the time of strategic development.

• Thus selection of plant is not the decision taken at the initial stage only.

Meaning and Importance of Location :

• “Plant Location means localization of machines, other material, human power, services of units and employees in such a way that as a result production of the product or services can be done in an efficient manner.”

• Production work becomes easy when the location chosen is near to the place where these means are available.

• Ofcource, sales of product or service is also considered very important.

• Chosing of location should be done in such a way that it proves profitable in economic return, concerning availability of production factors, distance of the place, transfer of material, the form of product and types, transportation costs, etc.

Importance of Plant Location

• Selection of Plant Location is very important matter regarding success or failure of an enterprise. Location is to be selected in such a manner that

Transportation cost should be reduced at long term Just In Time (JIT) method should be taken into

consideration. That means raw material should be taken at production place only when the things are to be produced.

Distance of selling centre or market place should be short from the plant.

When the raw material depends on natural factors like agricultural product, mines, etc. and the transformation of ready material from the raw material is less, than the plant location is selected near the place where the raw material is available.

For selling of fruits, vegetables, eggs, etc. it is better to select the plant location near the market.

Approach of local government, tax policy, bi-national or multinational contracts etc. are very important.

Stages of Localization

1) Selection of Region2) Selection of locality3) Selection of site

1) Selection of Region :o Natural property plays an important role in determining

whether a nations is agrarian or industrial.o Mines and minerals are basic requirements of an industrial

country.o Rains, water, fertile land, convenient climate are basic

requirements of an agricultural nation.o Any nation divides the nation into states, districts, Talukas,

cities and rural areas according to its economic and political policy.

o Every region offers certain attractions to take itself towards the directions of progress but at the same time, it forces certain prohibitions too.

o Eg. To develop backward region in India, subsidy, tax relief, etc. benefits are given to industries. While in city areas prohibitions are enacted by urban authorities to stop industrialization in urban areas.

o Thus, first of all localization of region is given a proper thought.

2) Selection of the Locality :Three sections :A Urban areaB Rural areaC Suburban area

Every area described above has certain characteristics on the basis of which that area is chosen for the plant location where comparatively there is more profit.

Factors like required material and expense of availability of means, near-ness of market and restrictions of the local government are important for selection of a locality.

(A) Urban Area : Advantages of Urban Areas :

Transportation of raw material and ready material is easy. Communication facilities easily available. Sources and alternatives available for required financial factors. Insurance facilities. Storage of goods, godown, warehouses and cold storage facilities

available. Skilled and unskilled labour available. Facilities of subordinate units available. For selling ready stock developed and large market available. Training facilities. Facilities for education, health and entertainment available. When required, fire brigade and police services available.

Disadvantages of Urban Area : Price of land in urban areas are high compared to

rural and semi-urban areas. Costly labour Rival enterprise might attack and take away its

employees in competitive market. Labour unions might prove obstructive as they

are active. Rates of local taxes are high. Problems of disposal of garbage or affluents

become serious and problemetic. Dirty slums are created which is a social problem.

(B) Rural Area :

Advantages of Rural Area : In comparison to urban area, land is available at a

very reasonable price. No problem or question of getting labourers for

enterprise. Relation of labourers, employees and owners are

comfortable. Local taxes are less in rural areas. Social problems donot become serious in rural

areas.

Disadvantages of rural areas : Facilities of transportation and communication

not available. Depend on nearby cities for facilities of banking

transaction. Insurance facilities against risk is not easily

available. Enterprise has to setup its own storage facilities. Transportation not available for labourers. Local facilities like training centres, trainee labour,

water, fir brigade or facilities related to entertainment, education and health are not available.

(C) Suburbun Area :

- Suburbun area is the middle path between two ends of rural and urban areas.- Suburban areas are far and yet get advantages that are available to the urban areas and also remove disadvantages of rural areas.- So, in the present time, entrepreneurs select subutitan areas for the establishment of their enterprise.

Advantages of suburban Area : Sufficient and cheaper land available as per

requirement. Facilities like bank, insurance, storage, water, fire

brigade service, etc. are available as per requirement.

Trained and untrained labourers are available. Training centres available for untrained labors. Market for selling of finished material is available

in the city area. Transportation expense is comparatively less.

Industrial enterprises are getting centralized even in suburban areas. So, in the long term, all the disadvantages urban area proves obstructive under the dynamic process of development, suburban areas become a part of city.

Modern Trends for the Choice of Plant Location :

1) Priority to Suburban Area in selection2) Establishment of Enterprise in industrially

Backward Area3) Industrial Decentralization4) Competition between the government and

local institute5) Industrial Colonies

Factors Affecting the Selection of Plant Location of Industrial Enterprise

1) Availability of Raw Material Near by2) Nearness of Sales Centres3) Availability of Labour Force4) Infrastructural Facilities5) Commercial Facilities6) Social Facilities7) Approachment of Government8) Facility of Disposal for Industrial Wastes9) Strategic Factors10) Other Factors