Entrepreneurial Theories and Practices CBMED3T03

Syllabus topics (RTMNU)

• Entrepreneur: Meaning, definition and features of entrepreneurship
• Entrepreneurship process
• Qualities of Entrepreneurs
• Role of Entrepreneur: Role of an entrepreneur in economic growth as an innovator
• Generation of employment opportunities
• Complementing and supplementing economic growth
• Bringing about social stability and balanced regional development of industries
• Types of Entrepreneurships: Clarence Danhof Classification
• Arthur H. Cole Classification
• Classification on the Basis of Ownership
• Classification Based on the Scale of the Enterprise
• Development of entrepreneurship in India: Startup India Scheme, Make in India, Atal Innovation Mission (AIM), etc.

Entrepreneur: Meaning and Definition

The word entrepreneur comes from the French word entreprendre, which means "to undertake". An entrepreneur is a person who gets an idea, collects money, men, material and machines, takes risk and starts a new business to earn profit.

Definition: An entrepreneur is a person who identifies a business opportunity, organises the needed resources and bears the risk of running a new enterprise for profit and growth.

• J.A. Schumpeter: An entrepreneur is an innovator who brings new combinations of production into the economy.
• Peter F. Drucker: An entrepreneur always searches for change, responds to it and exploits it as an opportunity.

Entrepreneurship is the process or activity of creating and running a new enterprise. Entrepreneur is the person; entrepreneurship is the process.

Features of Entrepreneurship

1. Creative activity – it creates new products, services or methods.
2. Risk bearing – the entrepreneur bears the risk of loss and uncertainty.
3. Innovation – doing things in a new or better way.
4. Organising function – combining land, labour, capital and machines.
5. Profit and growth oriented – profit is the reward for risk.
6. Goal oriented and purposeful – every step is planned towards a goal.
7. Dynamic process – it keeps changing with markets and technology.
8. Can be learnt – skills can be developed through training (EDPs).

Entrepreneurship Process

1. Identifying the opportunity – spotting an unmet need in the market.
2. Evaluating the opportunity – checking market size, profit and risk.
3. Preparing the business plan – a written plan of marketing, production, finance and people.
4. Arranging resources – finance, land, machines, staff, licences.
5. Launching and managing the enterprise – starting operations and controlling them.
6. Growth or exit – expansion, diversification, or selling/closing the business.

Qualities of Entrepreneurs

• Vision and initiative – sees an opportunity and acts first.
• Risk-taking ability – takes moderate, calculated risks.
• Self-confidence and hard work.
• Need for achievement – strong desire to succeed.
• Creativity and innovation.
• Leadership and decision making – guides the team and takes quick decisions.
• Flexibility – adjusts to change; learns from failure.
• Communication and networking skills.

Role of Entrepreneur in Economic Growth

1. As an innovator – brings new products and new technology, which raises productivity (e.g. UPI-based fintech start-ups).
2. Generation of employment opportunities – every new unit creates direct and indirect jobs; MSMEs are among the largest employers in India after agriculture.
3. Complementing and supplementing economic growth – entrepreneurs fill gaps left by the government and large firms, supply inputs to big industries and increase national income.
4. Bringing about social stability – self-employment reduces poverty, unemployment and social unrest; wealth spreads to more people.
5. Balanced regional development of industries – setting up units in backward and rural areas (helped by state subsidies) reduces concentration of industry in big cities.
6. Other roles: capital formation (mobilising savings), export promotion, better standard of living, use of local resources.

Types of Entrepreneurs

(A) Clarence Danhof Classification (based on a study of American agriculture):

(B) Arthur H. Cole Classification:

• Empirical – works on rule of thumb; little innovation.
• Rational – well informed about economic conditions; takes logical decisions.
• Cognitive – uses expert advice and outside knowledge (consultants, engineers).

(C) Classification on the basis of Ownership: private entrepreneur (individual owner), public/State entrepreneur (government enterprise, e.g. BHEL), joint entrepreneur (private + government) and co-operative entrepreneur (e.g. Amul).

(D) Classification on the basis of Scale of Enterprise (MSMED Act, revised criteria):

Development of Entrepreneurship in India

• Startup India Scheme (16 January 2016): recognition of start-ups by DPIIT, self-certification under labour and environment laws, faster and cheaper patent filing, Fund of Funds through SIDBI, income-tax exemption for 3 years (for eligible start-ups), easy exit.
• Make in India (25 September 2014): aims to make India a global manufacturing hub; easier FDI, ease of doing business, Production Linked Incentive (PLI) schemes.
• Atal Innovation Mission (AIM, 2016, under NITI Aayog): Atal Tinkering Labs in schools, Atal Incubation Centres, Atal New India Challenges to promote innovation.
• Others: PM MUDRA Yojana, Stand-Up India, Skill India, Digital India, Udyam registration for MSMEs, EDI Ahmedabad and MSME-DFOs for training.

Likely exam questions

1. (Long, 8/16 marks) Define entrepreneur. Explain the role of an entrepreneur in the economic growth of a country.
2. (Long, 8/16 marks) Explain the classification of entrepreneurs given by Clarence Danhof and Arthur H. Cole.
3. (Short, 4 marks) State any four features of entrepreneurship.
4. (Short, 4 marks) Explain the entrepreneurship process in brief.
5. (Short, 4 marks) Write a short note on the Startup India Scheme.

Syllabus topics (RTMNU)

• Entrepreneurial View: Meaning
• Evolution
• Characteristics
• Nature
• Functions of an Entrepreneur
• Distinction between an Entrepreneur and a Manager
• Indian perspective: Concept
• Growth of Entrepreneurship in India
• The entrepreneurial decision process
• Creating Entrepreneurial Venture: Identifying Business Opportunities
• Team Building
• Planning and Strategy Development
• Resource Mobilization for entrepreneurship: Meaning and importance
• Types of resources
• Process of resource mobilisation

Entrepreneurial View: Meaning and Evolution

Meaning: The entrepreneurial view is a way of thinking in which a person looks at every problem or change as a chance to create something new and valuable, and is ready to take the risk of acting on it.

Evolution of the concept:

• Early period: In the 16th–17th century the French word "entrepreneur" was used for army leaders and contractors who undertook government work.
• 18th century – Richard Cantillon: first used the term in economics; entrepreneur is a person who buys at a certain price and sells at an uncertain price, so he bears risk.
• 19th century – J.B. Say: entrepreneur is the person who combines land, labour and capital.
• 20th century – Schumpeter: entrepreneur is an innovator; Frank Knight: entrepreneur bears uncertainty.
• Modern view – Drucker: entrepreneurship is a practice of searching for change and using it as an opportunity; it is found in start-ups, big companies (intrapreneurship) and social work also.

Characteristics and Nature

1. Opportunity-seeking – looks for unmet needs.
2. Innovative – new product, process or market.
3. Calculated risk-taking – neither gambling nor avoiding risk.
4. Future oriented – plans for long-term growth.
5. Value creation – creates value for customers, workers and society.
6. Universal – needed in every field: business, agriculture, education, government.
7. Dynamic and continuous – never ends; the firm must keep adapting.
8. Both art and science – needs creativity (art) and planning methods (science).

Functions of an Entrepreneur

• Idea generation and opportunity identification.
• Determining business objectives and preparing the business plan.
• Risk and uncertainty bearing.
• Raising and managing finance.
• Organising factors of production – land, labour, capital, machines.
• Innovation – new product, technology or market.
• Decision making and management – production, marketing, HR.
• Dealing with government – licences, taxes, approvals.

Distinction between an Entrepreneur and a Manager

Indian Perspective: Concept and Growth of Entrepreneurship in India

Concept: In India, entrepreneurship is seen as a tool for self-employment, job creation, removal of poverty and balanced regional growth, and not only as profit making.

1. Ancient and medieval period: India was famous for textiles, metal work and trade; merchant communities ran trade networks.
2. British period: traditional industries declined; some Indian pioneers started modern industry (e.g. Jamsetji Tata – Tata Steel 1907).
3. After Independence: Industrial Policy Resolutions 1948 and 1956, focus on public sector and small-scale industries, licence system.
4. After 1991 (LPG reforms): liberalisation removed most licences; private entrepreneurs grew fast in IT, pharma and services (Infosys, Wipro).
5. Present period: Startup India, MUDRA, Digital India and UPI have created a large start-up ecosystem; many first-generation and women entrepreneurs, and start-ups in Tier-2 cities like Nagpur.

The Entrepreneurial Decision Process

It explains how a person decides to leave his present activity and become an entrepreneur.

1. Change from present lifestyle – a push factor (job loss, dissatisfaction) or pull factor (attractive opportunity).
2. Desirability of new venture – family, culture, role models and education make the idea of business attractive.
3. Possibility of new venture – availability of finance, government support, skills, market and partners make it practical.
4. Decision – when the venture is both desirable and possible, the person decides to start it.

Creating Entrepreneurial Venture

(a) Identifying Business Opportunities: study customer problems, market trends, government policies, new technology, imports that can be replaced, and local resources. Screen each idea for demand, cost, profit and risk.

(b) Team Building: choosing people with skills that complete each other (technical, marketing, finance), clear roles, common goals, trust and fair sharing of ownership. A good founding team is a key reason investors fund a start-up.

(c) Planning and Strategy Development:

• Set vision, mission and measurable goals.
• Do SWOT analysis (Strengths, Weaknesses, Opportunities, Threats).
• Choose a strategy – low cost, differentiation or focus on a niche.
• Prepare functional plans – marketing, production, finance, HR.
• Review and change the plan as the market changes.

Resource Mobilization for Entrepreneurship

Meaning: Resource mobilisation means collecting and arranging all the resources – money, people, materials, machines and information – needed to start and run an enterprise.

Importance: converts an idea into a working unit; ensures smooth production; reduces cost by right use of resources; builds confidence of investors and banks; supports growth.

Types of resources:

• Financial – own capital, bank loans, MUDRA, venture capital, angel investors, crowdfunding.
• Physical – land, building, machinery, raw materials.
• Human – skilled and unskilled workers, managers.
• Technological – know-how, patents, software.
• Informational and social – market data, contacts, mentors, networks.

Process of resource mobilisation:

1. Estimate the requirement of each resource from the business plan.
2. Identify the sources (own, family, banks, government schemes, investors).
3. Compare cost, terms and risk of each source.
4. Prepare documents – project report, applications, pitch.
5. Acquire the resources and allocate them to activities.
6. Monitor their use and arrange more resources when needed.

Likely exam questions

1. (Long, 8/16 marks) Explain the meaning and evolution of the entrepreneurial view. Describe the functions of an entrepreneur.
2. (Long, 8/16 marks) What is resource mobilisation? Explain the types of resources and the process of resource mobilisation for an entrepreneur.
3. (Short, 4 marks) Distinguish between an entrepreneur and a manager.
4. (Short, 4 marks) Explain the entrepreneurial decision process.
5. (Short, 4 marks) Write a short note on team building in a new venture.

Syllabus topics (RTMNU)

• Schumpeter’s Innovation Theory: Schumpeter’s five types of innovation
• Schumpeter’s role of creative destruction and its role in economic development
• Four dimensions
• Criticism of the theory
• McClelland's theory-Psychological theories of Entrepreneurship: concept, meaning
• Need for Achievement (nAch), Need for Affiliation (nAff), and Need for Power (nPow)
• Rotter's locus of control theory: Concept, Background
• Locus of Control, Internal Locus of Control, External Locus of Control
• Other Theories: Economic theories of entrepreneurship
• Classical theories of entrepreneurship
• Neo-classical theories of entrepreneurship
• Australian market process

Schumpeter's Innovation Theory

Joseph Alois Schumpeter (1883–1950), an Austrian-American economist, gave this theory in his book The Theory of Economic Development (German 1911; English 1934). According to him, the entrepreneur is an innovator, and innovation is the main cause of economic development.

Innovation means bringing a "new combination" of factors into use in business. It is different from invention (discovery of something new); innovation is the commercial use of an idea.

Schumpeter's five types of innovation:

1. New product – a new good or a new quality of a good (e.g. electric scooter).
2. New method of production – a new process not yet tested in that industry (e.g. robots in car plants).
3. New market – opening a market not entered before (e.g. Indian generic medicines in Africa).
4. New source of raw material or semi-finished goods.
5. New organisation of an industry – creating or breaking a monopoly position.

Creative destruction and its role in economic development: The term was explained in Schumpeter's book Capitalism, Socialism and Democracy (1942). New innovations destroy old products, firms and methods and create new ones (e.g. digital cameras replaced film cameras; UPI reduced use of cheques). This process:

• breaks the "circular flow" (stationary state) of the economy;
• brings new investment, often financed by bank credit;
• gives the innovator temporary profit; imitators then follow, which spreads growth;
• causes business cycles – a boom when innovations cluster, and a slowdown when the gains are absorbed;
• raises productivity and living standards in the long run.

Four dimensions of the theory (as commonly taught):

1. Invention – a new idea or discovery.
2. Innovation – the first commercial use of the idea by the entrepreneur.
3. Imitation / Diffusion – other firms copy it and it spreads through the economy.
4. Credit and profit – banks finance the innovator; profit is the reward for innovation and disappears as imitation spreads.

Criticism of the theory:

• Gives too much importance to innovation and ignores risk-taking and organising functions.
• Ignores imitative entrepreneurs, who are very common in developing countries like India.
• Gives too much importance to the individual; today innovation is done by big companies' R&D teams.
• Over-stresses bank credit; ignores own savings and other sources.
• Does not explain the role of social, cultural and psychological factors.

McClelland's Theory – Psychological Theory of Entrepreneurship

Concept and meaning: David C. McClelland, an American psychologist, explained in The Achieving Society (1961) that entrepreneurship depends on a person's inner motives (needs). Psychological theories say that personality traits, not only economic conditions, create entrepreneurs.

McClelland found that high nAch is the most important trait of successful entrepreneurs, and that societies with high nAch grow faster. He held that nAch can be developed through training; his Kakinada experiment (Andhra Pradesh, 1960s) trained small businessmen and many later expanded their businesses. This idea is the base of Entrepreneurship Development Programmes (EDPs) in India.

Criticism: ignores economic, social and political conditions; nAch is hard to measure; training results were not the same everywhere.

Rotter's Locus of Control Theory

Background: Julian B. Rotter, an American psychologist, developed this idea from his social learning theory (1950s) and published a locus of control scale in 1966.

Concept – Locus of Control: "Locus" means place. Locus of control is a person's belief about who or what controls the results of his life – himself or outside forces.

Research based on Rotter's idea shows that people with an internal locus of control are more likely to start and succeed in a business. Training and successful experience can shift a person towards internal control.

Other Theories: Economic, Classical and Neo-classical Theories

(a) Economic theories: entrepreneurship grows when economic incentives exist – market demand, availability of capital, tax benefits, infrastructure and government policy. Economists such as Papanek and Harris held that economic gain is the main motive. Weakness: ignores psychological and social factors.

(b) Classical theories (18th–19th century):

• Richard Cantillon – entrepreneur is a risk taker who buys at a known price and sells at an unknown price.
• Adam Smith – the entrepreneur is mainly the owner of capital (capitalist); markets work by self-interest.
• J.B. Say – entrepreneur is the co-ordinator who combines factors of production.

(c) Neo-classical theories (late 19th–20th century):

• Alfred Marshall – added "organisation" as the fourth factor of production; the entrepreneur organises and supervises.
• Frank H. Knight (Risk, Uncertainty and Profit, 1921) – profit is the reward for bearing uncertainty that cannot be insured.
• Focus on demand–supply equilibrium, marginal analysis and rational decision making. Weakness: assumes perfect information and does not explain innovation well.

Australian Market Process (Austrian Market Process)

The syllabus says "Australian", but the theory is the Austrian school's market process theory (Ludwig von Mises, Friedrich Hayek, Israel Kirzner).

• The market is a continuous process, never in perfect equilibrium.
• Knowledge is incomplete and spread among people; prices carry information.
• Kirzner: the entrepreneur is alert to profit opportunities others have missed (e.g. buying cheap in one market, selling dear in another), and by acting on them moves the market towards balance.
• Human action, discovery and learning drive the economy.

Likely exam questions

1. (Long, 8/16 marks) Explain Schumpeter's innovation theory of entrepreneurship. Discuss the five types of innovation and the role of creative destruction in economic development.
2. (Long, 8/16 marks) Explain McClelland's theory of achievement motivation with reference to nAch, nAff and nPow.
3. (Short, 4 marks) Distinguish between internal and external locus of control.
4. (Short, 4 marks) Write a short note on the classical theories of entrepreneurship.
5. (Short, 4 marks) Give any four criticisms of Schumpeter's theory.

Syllabus topics (RTMNU)

• New Business Idea: Sources of new ideas
• Methods of generating ideas
• Creative problem solving
• Opportunity recognition
• Product planning and development: Idea Generation
• Concept Development and Testing
• Market and Competitive Analysis
• Product Design
• Marketing Strategy
• Product Lifecycle Management
• Business Plan: Creating a Business Plan
• Market Research
• Market Size Analysis
• E-commerce and Startups
• Legal Issues & Solutions: Legal issues in setting up the organisation
• Patents
• Business methods patents
• Trademarks
• Copyrights

New Business Idea: Sources of New Ideas

• Consumers – their complaints, needs and suggestions (e.g. need for quick home delivery led to grocery apps).
• Existing products and services – study competitors' products and find gaps.
• Distribution channels – dealers and retailers know what customers ask for.
• Government – new policies, schemes, patents filed, and import substitution needs.
• Research and development – new technology from labs, universities, incubators.
• Personal experience, hobbies and skills – e.g. a home baker starting a cake brand.
• Media, trade fairs and exhibitions.

Methods of Generating Ideas

1. Brainstorming – a group gives as many ideas as possible without criticism; ideas are judged later.
2. Focus groups – 6–12 customers discuss a product under a moderator.
3. Problem inventory analysis – customers list problems with existing products; each problem is an idea.
4. Checklist method – asking set questions: can it be made smaller, cheaper, combined, reused?
5. Mind mapping and free association – linking one word or idea to the next.
6. Surveys and observation of customer behaviour.

Creative Problem Solving and Opportunity Recognition

Creative problem solving is a step-by-step way to find new solutions: (1) define the problem clearly, (2) collect facts, (3) generate many ideas, (4) evaluate and choose the best, (5) implement and review. Techniques: brainstorming, reverse brainstorming (asking "what can go wrong?"), attribute listing, Gordon method.

Opportunity recognition means spotting an idea that has real market demand, can earn profit and can be done with available resources. An idea becomes an opportunity when it is attractive, durable, timely and adds value for the buyer. Factors that help: prior knowledge, alertness, social networks and creativity.

Product Planning and Development

1. Idea Generation – collect ideas from the sources above; then screen them to drop weak ideas.
2. Concept Development and Testing – convert the idea into a clear product concept (what it is, for whom, benefits, price) and test it with a group of target customers for their reaction.
3. Market and Competitive Analysis – estimate demand, growth, customer segments, competitors' products, prices and strengths; also check the business case (cost, sales, profit).
4. Product Design – features, quality, shape, packaging and brand; build a prototype and test it technically and with customers (test marketing).
5. Marketing Strategy – target market, positioning and the 4Ps: Product, Price, Place (distribution), Promotion.
6. Product Lifecycle Management (PLM) – managing the product through all stages of its life.

Business Plan: Creating a Business Plan

Definition: A business plan is a written document that describes the business idea, its goals and the plan of marketing, operations, people and finance needed to reach them.

Contents: executive summary; description of the business; product/service; market research; marketing plan; operations plan; management team; financial plan (cost, sales forecast, break-even, funds needed); risk analysis; appendix.

Importance: gives direction, helps to get bank loans and investors, helps control and reduces risk.

Market Research and Market Size Analysis

Market research is collecting and analysing information about customers, competitors and market conditions. Primary data – surveys, interviews, observation. Secondary data – government reports, industry reports, websites.

Market size analysis estimates how many buyers and how much sales value exist:

• TAM (Total Addressable Market) – total demand for the product.
• SAM (Serviceable Available Market) – the part your product and area can serve.
• SOM (Serviceable Obtainable Market) – the share you can realistically win.

Example: a tiffin service in Nagpur – TAM = all people eating outside food in Nagpur; SAM = working people and students in 3 nearby areas; SOM = the 500 customers the firm can actually serve in year one.

E-commerce and Startups

E-commerce means buying and selling goods and services through the internet. Models: B2B, B2C, C2C, D2C (direct to consumer brands). Start-ups use e-commerce because it needs low investment, reaches all India, and gives customer data. Indian examples: Flipkart, Nykaa, Meesho. Support: ONDC (Open Network for Digital Commerce), UPI payments, Startup India. Rules to follow: Information Technology Act 2000 and Consumer Protection (E-Commerce) Rules 2020.

Legal Issues & Solutions

Legal issues in setting up the organisation: choice of form (proprietorship, partnership under the Partnership Act 1932, LLP under the LLP Act 2008, company under the Companies Act 2013); PAN, GST registration, Udyam registration for MSMEs, shop and establishment licence, trade licence, pollution and fire clearances, labour law compliance, contracts with partners, suppliers and customers. Solution: take advice of a CA or lawyer, use single-window portals, keep documents in order.

Business method patents: a patent on a new way of doing business (e.g. "one-click" online ordering). They are granted in the USA in some cases, but in India Section 3(k) of the Patents Act says a business method, mathematical method, algorithm or computer programme per se is not an invention, so it cannot be patented by itself. A start-up can still protect its software through copyright and its brand through a trademark.

Likely exam questions

1. (Long, 8/16 marks) What are the sources of new business ideas? Explain the methods of generating ideas.
2. (Long, 8/16 marks) Explain the stages of product planning and development. Add a note on product lifecycle management.
3. (Short, 4 marks) What is a business method patent? Is it allowed in India?
4. (Short, 4 marks) Distinguish between a trademark and a copyright.
5. (Short, 4 marks) Explain market size analysis with an example.