Entrepreneur

Enterprise = the ability to handle uncertainty and deal with effectively with change

Entrepreneur = someone who starts and runs a business and has responsibility for
the risks involved. In order to do this, an entrepreneur has to be able to manage
the 4 factors of production effectively: land, labour, capital and enterprise

Entrepreneur Skills
– Innovative, imaginative, creative – in order to come up with an idea for a
business / new products / services.

– Passionate (about their business idea) – This is important in providing the

internal motivation / drive and commitment to turn their idea into a
successful business. It will also be important in convincing others to lend
money or invest in the idea, if external finance is required.

– Willing to take responsibility – Entrepreneurs are responsible for organising

the resources (e.g. people, finance, equipment, stock, etc) to see the idea
through.

– Willing to take calculated risks and tolerant of uncertainty – Entrepreneurs

often invest their own personal funds in an idea for which there is no
guarantee of success. Possibly the most important quality of an entrepreneur

– Hard working, determined, persistent and energetic – A great deal of time,

effort and commitment is generally required to set up and establish a
business on a sound footing.

– Self-confident – This is important in inspiring confidence in and motivating

others, including employees, lenders / investors, suppliers.
 Entrepreneur Cont.
– Optimistic – Setting up a business can be tough and not always go
according to plan. An optimistic nature will help to ensure an
entrepreneur does not give up on the idea at the first hurdle they face.

– Flexible – External, uncontrollable and, often, unforeseeable factors

such as the arrival of a competitor, changes in taxation and interest
rates can affect the potential success of an idea and plans for its
achievement. Entrepreneurs need to be willing and able to adapt their
original idea / plans, and make timely and appropriate responses to any
changes.

– Decisive – Numerous timely decisions are required at the start-up stage

and on-going, for example, over what prices to charge, where to locate,
what promotion to use and when, and how to respond to any problems
and challenges, etc.

The motives for becoming an entrepreneur:

• To escape an uninteresting job
• To pursue an interest or hobby
• To exploit a gap in the market
• To market a new or innovative product
• To be innovative in terms of the process of making a product
• To be their own boss, be creative and make decisions
• To work from home and reduce travelling time
• To have a second career
• To provide a service or product not for profit
• To make more money
• To have a big business one day
 Risks
Risk = The possibility of an event or condition occurring that will have a negative
impact (eg cause damage, injury, loss) on something perceived to be of value

Risk taking is a key feature of entrepreneurship and economists define

entrepreneurs as risk takers. You should note, however, that successful
entrepreneurs are most likely to be the ones that take ‘calculated’ risks where
there is a strong possibility of success.

If the risks fail, this can lead to…

financial loss…
• own savings invested in business lost.
• ongoing debt from any borrowing.
non financial…
• emotional suffering
• confidence ‘knocked’.
• low self-esteem.
• Risk of not getting another job or having to face the stigma of “failure”

Reward is the expected return which is either financial, or other, based on the risk
taken.

Profit is the reward for risk; the excess of sales revenue over costs.
 Minimising Risks
• undertaking initial (and ongoing) market research. This is more likely to
detect problems / weaknesses with particular decisions / strategies, as well as
potential threats (e.g. new competition, changes in the economy affecting the
level of customer demand) and, where possible, enable timely response to
such threats.

• drawing up a detailed business plan. The actual process of creating a business

plan should ensure the business idea is properly thought through, and help
to ensure that the right resources are in the right place, at the right time to
meet customer expectations. The completed plan should also provide a
means of monitoring performance and activities, enabling timely and
appropriate action to be taken as required.

• keeping investment in fixed assets to a minimum. For example, by renting

and leasing as opposed to purchasing land and buildings or vehicles and
equipment outright.

• setting up the business as a limited company. This limited liability protects

the personal assets of the owner(s) in the event of failure.

• taking out insurance e.g. buildings and contents, public liability, professional
indemnity, to insure against the risk of things such as fire and theft, personal
injury, and errors and omissions (in the case of advisory / consultancy
services).

• ensuring adequate training and supervision of any labour employed – so that

business activities comply with legislation and, of course, meet customer
expectations.

Although the risks associated with setting up and running a business can be
minimised, they cannot entirely be eliminated. This is because there are
numerous factors over which the business has little or no control (eg political,
economic, social, technological and competitive), which cannot always be
foreseen, and which can seriously impinge upon its success. Thus, despite the
best market research available, some products unexpectedly fail. This is
something appreciated by entrepreneurs. They are, however, prepared to
take that risk, in return for the potential financial and other rewards
associated with starting and running a business.
 Rewards for taking Risks
Financial

Financial reward comes in the form of profit and capital gains (made by selling
the business)

Without the prospect of profit, an entrepreneur is not likely to enter the

market and, unless the entrepreneur achieves a level of profit considered
satisfactory to him or her then he or she will, in the long run, leave the market
Profit is, therefore, essential as a motivating force in business, and financial
reward is frequently cited as the main reason why people decide to set up
and run their own business.

The incentive to earn higher income must, however, be tempered by the fact
that running one’s own business requires considerable effort which can
impinge upon one’s home life. Indeed, working as a business owner needs
many more hours and intense, prolonged commitment. If the only reward
were extra money, few people would set up in business. There are, in fact,
many non-financial rewards that entrepreneurs might gain from setting up
their own business.

Non-financial

Non-financial rewards mainly concern the fact that:

• being one’s own boss can provide a great deal of freedom and flexibility that
working for someone else might not provide.
• establishing and building up a business over a period of time can provide a
tremendous sense of achievement.
• Self-esteem
• Personal development
• Sense of control
 Importance of Risks and
Rewards
In the UK, people tend to be risk averse they are afraid of failure. As the majority
of new businesses fail, such fears are well placed.

Failure occurs for a number of reasons:

– lack of finance
– skills shortages
– poor infrastructure
– complexity of regulations or red tape

However, the ability to evaluate the risks and uncertainty that are an integral part
of almost all business decisions is an important element of successful
entrepreneurship.

Most entrepreneurs are happy to take risks if the potential rewards are great
enough. Of course, this depends on them doing their research to ensure that all
reasonable steps are taken to minimise the probability of failure. The outcome of
successful risk-taking will be a profitable venture.

Any decision to enter into business should involve an assessment of the risk and
rewards. In all business decisions and business investment scenarios, there is a
trade-off between risk and reward; in general, the higher the risk undertaken, the
higher the expected reward which must compensate for the risk.

Disadvantages of taking risks

– Occasional loneliness and isolation.
– Can’t blame others when things go wrong
– Financial pressure
– Hard work
– Strain on family and social life
– Higher stress levels
– Needs to multi-tasking
– Difficult to take a “sickie” when you work for yourself!
– Roller-coaster of emotions
 Opportunity Cost
In simple terms, opportunity cost is what we sacrifice (or forego) when we
decide to take one course of action over another.

In business terms, opportunity cost is the value of the benefit(s) of the next
best alternative course of action forgone, when making a choice between
alternative courses of action.

Entrepreneurs have to take decisions – every decision involves opportunity cost.

Resources are nearly always limited – particularly cash for a start-up. So a decision
to take one action means that an alternative choice is missed

What might an entrepreneur forego?

Loss in earnings from previous job.

Reduction in leisure time to spend with family / friends.

There are four key points to emphasise about opportunity cost:

The cost is not the sum of the benefits forgone of all the alternative courses of
action, but the sum of the benefit(s) forgone of the action considered to be the
next best alternative.

The ‘cost’ does not have to be in monetary terms, it concerns anything

considered to be of value to the party / parties concerned, for example, their
time and enjoyment.

If the consequences of alternative courses of action can be expressed in

monetary terms, the opportunity cost of taking one course of action over
another is not the difference in value between the chosen action and the next
best alternative it is the total value relating to the next best alternative.

Even if it can be expressed in monetary terms the ‘cost’ is not listed as an

actual cost in any financial statement.

Finally, it should be appreciated that opportunity cost is not a discrete topic

within the specification. Instead, it is an underlying concept which should be
the basis of all decision making. Businesses should always take into account
the cost of the alternative(s) that will be sacrificed when choosing between
different courses of action.
 Motives
Motives are the reasons behind human behaviour. People set up their own
business for a variety of reasons which can broadly be divided into two sets of
factors – push and pull factors.
People may be ‘pushed’ into becoming an entrepreneur because of the
unacceptability of any alternative and / or ‘pulled’ into entrepreneurship by the
attractions of running their own business.

The UK is becoming an increasingly entrepreneurial place and more people are

interested in setting up businesses. Possible reasons for this include:

– long-term low interest rates that make it easier to borrow money to start a
business
– a change in the political climate so that the government supports enterprise
and the entrepreneurial spirit
– increasing affluence, which often means that people start to look for
meaning in their lives
– doing this is to try to fulfill the dream of starting their own business
– to pursue an interest or a hobby
– to escape an uninteresting job
– to exploit a gap in the market
– to be their own boss
– More control over working life
– Need for flexible working
– Frustration with unfulfilled potential
– Escape an uninteresting job or career
– Satisfaction from building something
– Want rewards from effort
– Dislike bureaucracy of hierarchy
– Change in personal circumstances – e.g. redundancy, bereavement

Entrepreneurs engage in entrepreneurial activity for a variety of reasons. Most will

want to make money. Some will want to gain more freedom at work, or sustain a
going concern such as a family business. Others may be concerned with providing
employment for the local community, sometimes in the form of social enterprises.
 Push and Pull Factors
People are ‘pushed’ into setting up their own business by factors such as:
– Redundancy and unemployment (or fear of it).
– The inability to find employment which is sufficiently satisfying, rewarding or
challenging.
– Disagreement with management / management styles and/or conflict with
work colleagues.
– Lack of interest in, and commitment to, organisational goals.
– In each of the above people set up in business because of dissatisfaction with
the alternatives.

There are many attractions to running your own business. These are what make
up the ‘pull’ factors. Many people are ‘pulled’ into entrepreneurship by the desire
to:
– exploit identified business opportunities.
– turn a hobby or an interest into a business.
– create something truly their own.
– achieve and be recognised for their achievement.
– be their own boss and make their own decisions.
– enjoy more flexible working hours.
– create employment for their family.
– have something to leave to their children.
– And, of course, by the prospect of profit and making more money than they
could from working for someone else.
 Government Support
Government support for enterprise and entrepreneurs within the UK mainly
comes in the form of information and advice, financial assistance, tax concessions
and regulatory reform.

The aims of government support are to:

– Provide free information & support
– Reduce burden of regulation (“red tape”)
– Encourage innovation & job creation
– Incentives for investment (e.g. tax breaks)
– Financial support for assisted areas (e.g. grants) and certain industries (e.g.
renewable energy)

Main sources of Support

Business Link Advice on how to start, run or grow a business

Department for Business, The main government department that coordinates the
Enterprise and Regulatory support provided to businesses. BERR also provides
Reform (“BERR”) funding for various business support organisations

Companies House Manages the formation, administration and closure of

UK Trade & Investment
Competition Commission &
Office of Fair Trading
companies, including the provision of company
information
Provides business opportunities, expert trade advice and
support to UK-based companies wishing to grow their
business overseas
Manage competition regulation and provide support and
advice regarding the treatment of consumers

Regional Development Nine regional organisations (in England) that channel

Agencies government investment and support into key priorities
Government Grants Not available to all businesses. Grants are available from
several sources, such as the government, European Union,
Regional Development Agencies, Business Link and local
authorities
 Ways to identify a
business opportunity
Method Advantages
Knowing the Entrepreneur will have a good
product or knowledge of the features of the
service product
Entrepreneur may have a passion
or interest in the product so will
be motivated to do well
Good contacts in an established
market
Entrepreneur may already have a
good reputation in the market
that he/she can use
Spotting a gap in Entrepreneur is basing idea on the
the market customer’s needs rather than their
own, which might improve the
chances of success
More likely to enjoy “first mover
advantage” – the benefits of being
first in the market
Little or no competition in the
early stages when a business start-
up is most vulnerable
Easier to market a new idea than
to persuade people to buy an
established idea from one
business rather than another
Disadvantages
There may not be room for
another competitor
The entrepreneur’s passion for the
product might not be shared by
anyone else
The entrepreneur’s passion may
overestimate the size of the
potential market
Knowledge of the product or
service is not the only skill needed
- the person may not possess the
other skills needed for successful
entrepreneurship
Entrepreneur will have little or no
expertise in the product/service or
market – prone to mistakes
The gap in the market may have
already been exploited in the past
but the businesses failed
Competition may enter quickly
and capture market share – how
long can “first mover advantage”
last?