The Role of Entrepreneurship in Small Business - Article Example

THE ROLE OF ENTREPRENEURSHIP IN SMALL BUSINESS Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Insert Date Here (Day, Month, Year) The concept entrepreneurship has evolved in economic circles since eighteenth century.Since then, it has been an exponent for organizational growth for the nation . Entrepreneurship denotes innovation, an urge to take risk in face of uncertainties, and cultivates intuitive power for new inventions and development process. With innovations and added skills’, it adds value to the organization’s propositions. Therefore entrepreneurship is not simply as an emblem of innovation but also a prime contributor in the overall process of business organizational structure and economic development. The role of entrepreneurship is as equal in maintaining the growth process in the large-scale industries as in the growth of small-scale industries. There are different functions that entrepreneurs have to perform. They have to develop their innovative and organizational skills as well as follow the current market trend to enable their organizations to beat their competitors. The set up of small-scale industries is different from the large scale and their issues if not very different yet are not similar too then the issues facing large scale industries, and so are the responsibilities of an entrepreneur. There are various ways through which an entrepreneur with minimum resources at his disposal can turn unfortunate situations and hurdles towards the organization’s advantage and here the ability of an entrepreneur is judged. It is competencies, which enable him to handle contemporary issues and create an environment for future entrepreneurial development programs. Before answering the questions to the above answers there is a need to understand the way entrepreneurship has developed itself. There are indications that entrepreneurship began to make its presence felt in the fourteenth century itself when there was a system of collecting taxes. Collecting taxes was the duty of the tax contractor when he was collecting taxes at his own risk. If they collected the taxes more than the sum paid for their licenses, they would make profits by keeping the excess themselves. This was the process of entrepreneurship but they were unaware of the word and its concept. It was in the 18th century that French economist Richard Cantillon coined the word entrepreneur and since then it has become the most important topic of discussion among the contemporary economists. He defined entrepreneur as an “agent who buys means of production at certain prices in order to combine them” into a new product. (Schumpeter, 1989, p. 254) J.B. Say, the French economist soon thereafter, improvised definition of Cantillon’s by bringing in the idea that entrepreneurs should be leaders. Say added that an entrepreneur was a person whose job was to bring other people onto one platform to form a single productive organism. (Schumpeter, 1989) By the nineteenth century, British economists like Adam Smith, David Ricardo, and John Stuart Mill also described entrepreneurship, but they explained it under the broad perspective namely business management. On the other hand, Smith and Ricardo did not give much important role to entrepreneurship, while for Mill entrepreneurship was very crucial aspect for the overall growth of economy. It was Alfred Marshall who first officially recognized the importance of entrepreneurship in any production process in 1890. Marshall made us realize that there are four factors of production: land, labor, capital, and organization, but it is an organization that co-ordinates different factors of production and it is an entrepreneur that is a driving force between different factors of production. To fulfill this aim, Marshall believed that entrepreneurs must have a thorough understanding about their industries and must have a natural capacity to lead. Besides, they must have an ability to perceive the changes in the supply and demand and take risks accordingly. (Marshall, 2006) How entrepreneurship develops and takes the small-scale industries forward needs to be understood in the light of the specific problems being faced by the small-scale industries in the economic set up of the developed as well as in the developing nations. In developing nations, there are number of baffling problems. These problems are of over population, unemployment, under employment and other similar problems and the solution to solve these problems lies in the hands of the small-scale industries. Inversely, these industries too have to cross number of hurdles to reach their goals including inadequate infrastructure facilities, shortage of capital, technical knowledge, limited resources and bureaucratic hurdles besides others and here the role and skill of entrepreneurship comes in. Constant change and innovations have become a necessity for entrepreneurs to survive in the global economy. It is increasingly being realized that today’s managers and businessmen need not only managerial skills but entrepreneurial skills as well. Skill of entrepreneurship can turn an ordinary corporation into an entrepreneurial organization. People within an organization can be trained to detect the opportunities, to pursue them, and reduce the consequences or results in case of failures. Classical economists like Adam Smith, Richard Cantillon and others never recognized entrepreneurship as an economic activity still since last few decades this concept is catching up. This is because it is the most important economic function as it involves creation and operation of an enterprise. Cantillon pointed out that it involves continuous decision-making process on resource allocations, and best opportunities for using resources for high commercial yields. For Adam Smith, there is no difference between an entrepreneur and an industrialist as both are innovators and agreed to the fact that economic change can only be brought through the entrepreneurship. Entrepreneur’s role in the organizational behavior is equally important helping in cultivating the firms in achieving the goals and is based on few fundamental concepts, which can revolve around the nature of people and organization. He can use various traits like leadership qualities, decision-making, innovation and managerial caliber. We can say entrepreneur exceeds entrepreneurship. The main features that form part of the entrepreneurship are economic endeavor, innovational activities, functional of high achievement, creativity and entrepreneur as an organizer and a risk bearer. Entrepreneurship has become the most crucial economic endeavor as these entrepreneurs are only who are involving themselves in the conscious decision making process. Schumpeter posited his view that an entrepreneur set off all-important changes in the economy and these changes slowly work themselves through economic system in the form of business cycle. These changes occur due to the innovations carried out by him and to these innovations Schumpeter called Gales of Creative destruction. (Swedberg, 2006) He said that any novelty added to the old inventions, ideas, technological development, skills, and equipment would eventually get outdated giving space to new inventions and products. Emergence of new markets within the domestic territory or in the world outside, and the inventions and developments from simple craft shop and small industries to big firms follow the same process of industrial mutations- bringing in the revolution of the economic structure from within, constantly destroying the old and constantly creating a new. This continuous process of creative destruction is the most important component of capitalism. As rightly said, “It is what capitalism consists in and what every capitalist concern has got to live in…” (Swedberg 2006: 22) and entrepreneur is part of the conscious process of this creative destruction. These innovations are the brainwork and efforts of entrepreneurs who make the use of inventions not only by putting how to make best of innovations but also by creating new methods of production, bringing out new products and different forms of organization and this process evolves from five stages and these are “idea germination, preparation, incubation, illumination and verification”. (Holt, 1991, p. 32) The study of entrepreneurism is interdisciplinary in approach and therefore it is difficult to label it in the context of economic or sociological perspective. Yet the theories of entrepreneurship have been designated into four main categories or we can also say that four thought processes framed in the caricature of the economic and social processes. The first is economic theory developed within the parameter of contemporary economic reality. The most important person to promulgate the economic theory was Joseph Schumpeter. There is versatility and multi disciplinary character in his theoretical disposition. For him, all the problems of the economic theory could be solved with the help of equilibrium theory. Whereas, other economists asserts that economic growth takes place where the economic conditions are most conducive to take the entrepreneurship initiative forward. Economic incentives bring forward a favorable drive for entrepreneur activities. These incentives in the form of economic policies, and favorable market conditions induce vigor in the entrepreneurial skill. Secondly, entrepreneurship also moves around in the other spheres of the society as well. This role of entrepreneurship is termed by economists as sociological theory. (Swedberg, 2000) Proponents of the theory suggest that culture also has a profound effect on the entrepreneurial development. Building trust and cultural values is as important in the organization behavior and setup as it is important in building of society and family. Here the strong family feelings can also turn any business into any advantageous position. In any social groups or societies, it is very difficult for isolated people to develop the trust and confidence. According to Hoselitz, “a deviant always engages in behavior which constitutes in certain sense a breach of existing order and is contrary to or at least not positively weighed in the hierarchy of existing social values.”(Swedberg, 2000, p.117) He says culturally marginal groups promote entrepreneurship and economic development and further says that such groups because of their ambiguous position are peculiarly suited to make creative adjustments and develop genuine innovations. Associated with it is a psychological theory, which is derived from the fact that entrepreneurs are motivated and driven by three things: 1 the drive and a will to found a private ownership; 2. the will to conquer; 3. the joy of creating. (Smith-Cook, 1992) These are the intuitive powers, which Schumpeter defined as the desire for power and independence, the will to succeed and satisfaction of getting things done. In short, what makes organization behavior unique is the way entrepreneurs analyze the behavior of the employees in the traditional environment set up and creates an environment for innovation and motivation. The motivations drives can be in form of incentives, bonuses, promotions etc. As said, “Entrepreneurship researchers examine emerging organizations--as-yet-unformed, or newly formed organizations” (Smith-Cook, 1992, p. 2). As written by Justine Goodryl Longenecker (2006), small business can develop a sense of responsibility in special ways for e.g. sometimes in the way of volunteering for a social cause or helping families of own employees but as compared to the large scale companies, they are less sensitive and very less focused on profits. In one of the studies that compared the small business entrepreneurship with large business, CEO’s concluded that “The entrepreneurial CEO’s are more economically driven and less socially oriented than their large firm counterparts. Apparently, corporate social responsibility is a luxury many small growth firms believe they cannot afford. Survival may be the first priority.” (Longenecker, 2006, p. 33) The biggest challenge in front of entrepreneurs is their ability to understand the weaknesses and hurdles faced by the small entrepreneurs and remove them accordingly. The biggest hurdle is the lack of funds and low specialized staff including in the areas of marketing research, financial analysis, advertising, and human resource management. Entrepreneurs have to make decisions without any expert guidance, but this limitation can be solved with an outside assistance. (Longenecker, 2006, p. 402) Financing of working capital requirements is one of the biggest problem area involving the problems related to securing loans from financial institutions, pressures for the extension of credit to customers, accumulating trade deficits, and shortages recurring to internal funds. Finance always comes with risk and uncertainties. For an example a person is going to start a new business and have a great idea for the same. With this idea he approaches the bank for finance, and suddenly would be disappointed to know the fact that his idea has been laughed at. He also comes to know the fact that venture capitalist’s expectation is the high rate of interest, a prerequisite to finance business. Now he must be wondering what is happening and why it is happening? The answers to the question is as an entrepreneur he has to take risk and invest and alternatively as written by Acs & Audretsch, “entrepreneurs seeking funding think they are selling US treasury bill while investors think they are buying pre-Castro government bonds.” (Acs & Audretsch, 2003, p. 37) That means there are many uncertainties and risks in entrepreneurship. It is uncertainty that entails entrepreneur to get motivated for the development process. This is because if all the entrepreneurs in an industry are equally aware of uncertainties, then soon all the chances that enable to gain profit would be harnessed instantly and no importance or role of entrepreneurship would be held or accounted for. Some risks associated with finance are development risks, which an entrepreneur has to encounter at the time of conceptualization of the proposed task. He makes assessment of the scope of the venture, conducts study to evaluate its feasibility, market prospects as well as the likelihood of securing appropriate financing arrangements. Number of times construction and the start up phase risk is so long that entrepreneur has to pay penalty payments without any earnings . He may get financial institution or supplier to participate in the equity of this venture, which dilutes his control in the project. In fact, entrepreneurship must foresee the possible timing risk. (No need to define here). Another set of risk is operational risk, which may arise due to faulty engineering and designs, maintenance of cost, increase in price of raw materials, quality of labor and instability of labor that can cause high labor turnover. Another is market risk, which relates to the future demand for the product or services expected as a result of implementation of new project. There are several minor risks and these are environment risks, natural risks, political risks, borrower risks and strategic risks. Therefore, it is said that uncertainty and risks are too very important and entrepreneur is often seen as bearer of the risk as far as future outcome of his entrepreneurship efforts are concerned. Many small businesses are not entitled for loans on account of their credit standing. As reported by Paul Rauseo, managing director of George S May claims, “about 20% of our clients are having their notes called. Out of the blue, they’re receiving a letter either reducing their credit lines or calling in their notes.” (Klein, 2008, p. 2) An established small business having good repayment record does not find trouble of repayment. For the best small credit customer, money is always available but if you are just starting the small business like running a restaurant, a company or as a wholesale supplier to the retail market, then it is bit difficult to get a loan. (Klein, 2008) The rural industries are facing their own set of problems and it is to the skill of entrepreneurship that can handle problems and bring the rural industries in the main streamline for e.g. Entrepreneurs have to handle the labor which is often in short supply in the resource industries like fishing, farming and forestry. (Diochon, 2004) On owing to their smaller size and lack of diversity, single industry based rural economies cannot compete with the competitive world of urban economies. (Diochon, 2004). These are the small problems but the problems that are found in the large –scale were coded on the basis of two dimensions by a survey in small business firms organized by the Los Angeles Times. During the overall sample survey of 1686, 1300 people answered the questions on problems and 1024 answered the questions on opportunities. The first opportunity and the first problem mentioned were each coded on the basis of two dimensions: locus of casualty and stability. (Acs & Audretsch, 2003) More than half of the people who gave the answer to the both items described about the problems that were external but at the same time variable. For all the 261 people, there was growth in the past and expected growth in the future. They said that they had stable opportunities and the problems they were facing were all variable. (Acs & Audretsch, 2003) They were all following what was known as traditional attribution theory with the expectations that in case of the changes in stable situation, there are expectations for the future success. According to the attribution theory, the explanations people make for their success or failure can be analyzed in the form of three sets of characteristics: Firstly they think that their success or failure depends on the internal causes or external repercussions. (Acs & Audretsch, 2003)In other words, the success or failure depends on the factors that we may think are within us or cause of our environment. (Acs & Audretsch, 2003)In Secondly they also have a belief that the success or failure can be either stable or unstable. If we adopt this belief in our mind that cause is stable then the result would be same even though we perform the same behavior in another case. If it is unstable then the outcome could be different. (Acs & Audretsch, 2003) Thirdly the cause of the success or failure could be controllable or uncontrollable. (Acs & Audretsch, 2003)A controllable situation is the one that we think we can change if we want to and an uncontrollable factor is one we do not believe we can easily change. (Acs & Audretsch, 2003). The solution to all the problems lies in the leadership skills exhibited by an entrepreneur. . In this fast paced world , there is a need to recognize and foresee opportunities and threats, and to concentrate on an organization’s resources. The very basic functions like organizing, leading, planning and controlling require new definitions and have become very arduous to practice, but thanks to the past endeavors the companies persist on to lay the foundation for the future. Leaders adopt the process of the creation and management in 3 processes: Ready, Aim and Fire. (LaRusso, 2005) Ready means process of thinking, making plans and communicating. Aim means to bring into focus and organize and Fire means to make commitments, implementation, and keeping the others involved. (LaRusso, 2005) Being Ready means every day to give the start by brainstorming, morphological analysis, and making collages and lateral thinking. Skills involved in the Aim are to develop a common understanding, collective insight and various other factors and, skills for the Fire, another endeavoring technique to establish firmly in the future and obtain your objectives as quickly as possible. To put the experienced person in the market is to gain access to the market position and give out best what is required for the market. This means to develop a strategy to deliver the quick results is the main aim of the organization. The ability to focus and organize objectives and aims to achieve the goals is another basic trait that is required by an entrepreneur and thirdly there should be fire in you to make full preparation and take action at the right time. The main essence of the business is to maintain the business ethics in any area of operation. The ethics are the guidelines that define the companies position and attitude, and with process of Ready, Aim and Fire, any market position can be overcome to the fruitful succession of the aims of the organization. It is popular saying that chance bestows favor to the prepared mind. In other words, chance favors the entrepreneur who has a prepared mind and is able to take the company towards the profitable venture against all odds. A prepared mind needs eight “mental skills” like observing, reasoning, imagining, challenging, deciding, learning, enabling, and reflecting and if such mind gets a chance, then the success is unstoppable. (LaRusso, 2005) The word entrepreneurship typically means to undertake, and owes its origin to the western societies. But, here too and with the passage of time, entrepreneurship has undergone number of changes. In the 16th century, the term was used to address army leaders and in the 18th century, the word was used to denote a dealer who can buy goods and services. Till recently it was considered as an attribute of an efficient manager, but the success achieved by entrepreneurs in developing countries demolishes the contention that entrepreneurship is a rare animal and an elusive character. Naturally entrepreneurship is the backbone of the economy and of small-scale industry. Entrepreneurship means innovation, an enthusiasm to take risk in face of uncertainties and otherwise and possess intuitive power for inventions and development process. To run small-scale industry, it is very important to cultivate and make all fruitful use of entrepreneur’s skills and his mind power. Entrepreneur has to deal with financial aspects, labor problems and has to adopt the great leadership qualities and skills and his efficiency lies in the way he creates a balance between all these aspects and make the small-scale industry run smoother. Annotated Bibliography Acs, Z. J. & Audretsch D.B. (2003). Handbook of entrepreneurship research: An interdisciplinary survey and introduction. Dordrecht, Netherlands: Kluwer Academic Publishers.  The purpose of the International Handbook of Entrepreneurship is to bring together leading scholars from each of these disciplines such as management, finance, economics, sociology and psychology to provide an overview of what the issues are for entrepreneurship when viewed through the lens provided by the academic disciplines as well as a synthesis about what has been learned and what questions should be high on the agenda for future research. In short this book is a view of an emerging complex but intriguing field of entrepreneurship.  Diochan, M.C. (2004). Entrepreneurship and community economic development. Toronto, Canada: McGill-Queen's Press – MQUP.  In Entrepreneurship and Community Economic Development, Monica Diochon examines the development processes adopted by two rural, single-industry Canadian communities confronting the collapse of their economic bases. She argues that a community's effectiveness in influencing economic development depends on the extent to which entrepreneurship is encouraged and shows that, while a number of factors influence enterprise, economic activities that are community-determined and provide varied opportunities to participate in achieving short-term self-sustaining strategic outcomes are particularly important.  Holt, D. (1991). Entrepreneurship: New venture creation. New Delhi: Prentice-Hall of India. The purpose of this book is to enrich us with an understanding of the entrepreneurial process. This book has been written in a manner to explore the nature of entrepreneurship, provide models for new venture creation, and describe ways to help entrepreneurs succeed.   LaRusso, A.C. (2005). Management: Ready aim fire. Bloomington, IN: Author House. MANAGEMENT: READY AIM FIRE - Managing innovation is more critical for competitive advantage and growth than ever before. There is now more innovation everywhere by others, and you need to insure your company is in the game. LaRusso shows us how and why managers must seek feedback from colleagues and customers to question and change their own assumptions and ways of doing things. He pictures managerial strength, as decision making that is informed by a commitment to learn, change and grow. Anthony C. LaRusso argues convincingly that with the speed and breadth of change in our lives and in the market place, we need to improve and even redefine the basic functions of how we manage. Ready-Aim-Fire.  Marshall, A. (2006). Elements of economics of industry: Being the first volume of elements of economics. New York: Cosimo, Inc.  British economist ALFRED MARSHALL (1842-1924) was one of the most prominent thinkers of his age on the philosophy of finance, and his groundbreaking Principles of Economics (1890) was for years the standard text on the subject. Elements of Economics of Industry was first published in 1892 and is still relevant today and covers vast areas in terms: economics as part of the study of humanity; the development of economic laws from the beginning of civilization; how capital yields income; how consumer demand creates markets; land, labor, capital, and organization as agents of production; the balance of supply and demand; the interplay of labor and earnings; the impact of trade unions and many more. Klein, K. E. (2008). Small business owners deal with the financial crisis. Business Week. Retrieved on October 8, 2008 from W.W.W: http://www.businessweek.com/smallbiz/content/sep2008/sb20080919_661168.htm Here Klein from Business Week asked several experts to weigh in on the short- and long-term impact of financial free fall on small business owners and presented their thoughts and predictions in areas of concern such as banks, credit unions, labor, and pricing, insurance, private capital investments.    Longenecker, J.S. (2006). Small business management: An entrepreneurial emphasis. Mason, OH: Thomson South-Western.  Small Business Management has been the best-selling small business management text for more than three decades and helps to guide readers into the ranks of business owners and entrepreneurs. The authors' diverse academic backgrounds in management, marketing and finance bring a balanced approach to covering all aspects of starting and running a small business. It also has amazing collection of business owners whose unique insights into how to start, run, and grow a business help to identify and explore the full range of issues facing today’s business owners.  Schumpeter, J.A. & Clemence R.V. (1989) Essays: On entrepreneurs, innovations, business cycles, and the evolution of capitalism. Edison, NJ: Transaction Publishers. This book constitutes articles, which give an introduction to Schumpeter’s thoughts relating to entrepreneur, innovations, business cycles and evolution of capitalism. The Essays have been compiled by Clemence who is also a coauthor of The Schumpeterian System written in1950. The book will be very useful for those who want an introduction to Schumpeter’s work and for those also who have developed an interest in his work and want to pursue it further. Smith-Cook, D. (1992). Entrepreneurship theory from an interdisciplinary perspective: Volume II. Retrieved on October 8, 2008 from W.W.W: http://www.allbusiness.com/management/benchmarking-strategic-planning/348527-1.html   Volume II of two-volume series aims at furthering the development of theories of entrepreneurship. It examines the special contributions to entrepreneurship literature of views developed within the realm of business administration itself (organization behavior, marketing, finance, and strategic management), and concludes with an article on methodologies appropriate to the furthering of entrepreneurship research.  Swedberg, R. (2006). Social entrepreneurship: the view of young Schumpeter. In C.Steyaert & D. Hjorth, Entrepreneurship as social change: A third movements in entrepreneurship book (pp.21-34). Northampton, MA: Edward Elgar Publishing. This book provides an in-depth study of the social aspects of entrepreneurship, illustrating how entrepreneurship affects society. The book shows that entrepreneurship is a society-creating force and as such, it evokes new questions for entrepreneurship research and attempts to engage with new theoretical formulations. Discussions on early Schumpeter and a rhetorical analysis of the current academic literature on social entrepreneurship are made.  Myriad contextual examples of how entrepreneurship can shape social change and how this is initiated through various social settings, relationships and communities are presented.  Swedberg, R. (2000). Entrepreneurship: The social science view. New York: Oxford University Press. This book looks at the culture and role of the entrepreneur from an interdisciplinary perspective. The purpose is to show that the social sciences have an important contribution to make both to the theoretical understanding of entrepreneurship and enterprise in practice. Underlying this view is that the social sciences can provide new and fresh ideas about the theory and practice of entrepreneurship.  Read More