EN6502 Introduction to Entrepreneurship Teachers' Note PDF

EN6502 Introduction to Entrepreneurship BIT – 3nd Year Semester 6 EN6502 - Introduction to Entrepreneurship Section 3: Explore the Environment of an Entrepreneur (4 Hrs) UCSC-2016 2 EN6502 - I...

EN6502 Introduction to Entrepreneurship BIT – 3nd Year Semester 6 EN6502 - Introduction to Entrepreneurship Section 3: Explore the Environment of an Entrepreneur (4 Hrs) UCSC-2016 2 EN6502 - Introduction to Entrepreneurship Lecture Outline 1. Importance of studying the business (organization) environment 2. Classification of organizational environment 3. Types of external environment and its influence 4. Analysis of the business environment 5. Strategies of approaching the market when starting a new business 6. Types of business organizations 7. Basic points to be considered before starting a business UCSC-2016 3 EN6502 - Introduction to Entrepreneurship Learning Outcome After successful completion of this course students will be able to:  Identify the classifications of organizational environment  Identify different types of the environments  Describe the business environment using various strategic tools  Identify strategies of approaching the market when starting a new business  Identify various types of business organizations  Explain some of the basic points which will be useful before starting a business UCSC-2016 4 EN6502 - Introduction to Entrepreneurship 1. Importance of Studying the Business Environment  Business environment can be defined in simple terms as all the factors and forces that influence the business activities positively and negatively, from within the business and from the outside.  Business environment keeps on changing. If one identifies these changes and responds appropriately to them, he/she can run a business easily.  By studying the changes in the Sri Lankan business environment, many creative business ideas or opportunities can be generated in the different sections of the environment.  Identifying the favourable and unfavourable influences of the business environment is useful to achieve the business goals and objectives. UCSC-2016 5 EN6502 - Introduction to Entrepreneurship 1. Importance of Studying the Business Environment Cont… Understanding the changes in the modern business environment is very useful for an entrepreneur. Given below are some advantages that can be gained this way:  Identifying the strengths and weaknesses of the business  Identifying the various business opportunities available in the environment  Identifying the threats faced by the business  Conducting the production and sales activities according to the changes in the environment  Formulating plans and determining strategies according to the changes in the environment UCSC-2016 6 EN6502 - Introduction to Entrepreneurship Differences between the Business Environments in the Past and in the Present UCSC-2016 7 EN6502 - Introduction to Entrepreneurship 2. Classification of Organizational Environment Business environment can be divided into two principal parts, to make it easier to study. These are: a. Internal environment (MICRO) b. External environment (MACRO) UCSC-2016 8 EN6502 - Introduction to Entrepreneurship a. Internal Environment (MICRO)  All the factors which are found within the business and which influence the functioning of the business organization are referred to as the internal environment.  The major factors of the internal environment are as follows: – Business owners – Managers – Employees – Resources UCSC-2016 9 EN6502 - Introduction to Entrepreneurship a. Internal Environment (MICRO) Cont.. Internal Environment and its Influence Internal environment factors of an organization influence its business activities and that they help to identify the strengths and weaknesses of the business. Internal environmental factors can be controlled by the business itself. Some of the factors are: Owners: The persons who provide capital for the business are the owners. Employees: Employees are the persons who are engaged in the business activities of the organization. Managers: It is the managers who manoeuvre the human and physical resources of the business and lead the way to attain the goals and objectives of the organization. Resources: Resources refer to all physical and financial resources that are relevant for the business activities. UCSC-2016 10 EN6502 - Introduction to Entrepreneurship b. External Environment (MACRO)  Factors which exist outside the business organization but which can influence its functioning are called external environmental factors. UCSC-2016 11 EN6502 - Introduction to Entrepreneurship 3. External Environment and its Influence Types of the external environment and their impact. i. Demographic environment ii. Economic environment iii. Political and legal environment iv. Scientific & Technological environment v. Natural environment vi. Social and culture environment vii. Global environment UCSC-2016 12 EN6502 - Introduction to Entrepreneurship i. Demographic Environment  The population of a country and the factors associated with their lives are included in the demographic environment.  The market for goods and services is organized on the basis of the demographic environment. When the population grows, the market becomes broader, and more goods and services will have to be produced. Forces such as population growth rate, population’s composition and age-wise distribution etc.. have an impact upon businesses. Examples :- – When there is a greater population of children, it is a good opportunity for toy manufacturers. – When there is a greater population of adults in a country, it is a threat for the businesses producing goods for children. UCSC-2016 13 EN6502 - Introduction to Entrepreneurship ii. Economic Environment  Factors that determine the economic conditions of a country are taken under the economic environment.  Factors of the economic environment, such as fluctuation of interest rates, changes in the price levels, rate of employment, salary level, foreign exchange rates etc can have favourable or unfavourable impacts upon business activities. It is useful for an entrepreneur to be aware of the opportunities and threats that can arise out of these factors. Examples :- – When the rate of employment is high, people earn a better income, which can broaden the market. This is an opportunity. – A rise in the interest rate for loans is a threat for businesses. UCSC-2016 14 EN6502 - Introduction to Entrepreneurship iii. Political and Legal Environment  State economic policies and the laws relevant for their implementation are referred to as the political and legal environment.  International treaties, foreign trade, state policies and laws are the factors of the political and legal environment. They have much influence over the success of business activities as well as over the economic development of the country. Examples: – When the country enters into international agreements, it opens up opportunities for the local exporters. – When the government raises the tax rates, it is a threat for businesses. UCSC-2016 15 EN6502 - Introduction to Entrepreneurship iv. Scientific & Technological Environment  The use of scientific methods and new technology, as well as the impact of research upon business activities, is considered as the scientific and technological environment.  New scientific discoveries, research and development, new goods and services, and information and communication are factors of the scientific and technological environment.  With the development of technology, new products enter the market. When new goods and services are introduced, some products may go out of the market. Examples :- – Internet provides an opportunity for businesses to enter the foreign market. – Due to the use of digital cameras, there is less need of studios. This is a threat for studio owners. UCSC-2016 16 EN6502 - Introduction to Entrepreneurship v. Natural Environment  The influence of natural phenomena upon business activities is considered as the natural environment.  It is from the natural environment that the raw material and resources are obtained for businesses. We can identify natural resources and natural disasters as the factors of the natural environment. Some of the valuable resources of this environment have been used for business activities while there are some that have not.  If natural resources are used in a manner that does not harm the environment, many opportunities can be gained. On the other hand, natural disasters can prove a threat to businesses as well. Example :- – The demand for herbal products made from indigenous herbs is a business opportunity. – Natural disasters such as droughts and floods are a threat to agricultural activities. UCSC-2016 17 EN6502 - Introduction to Entrepreneurship vi. Social and Cultural Environment  It is the attitudes, values and life style of the people that are included in the social and cultural environment.  Traditions, values, beliefs and changes in the life style are taken as the factors of the social and cultural environment. In a country where there are people of different races, religions and cultures, it is important to be aware of the opportunities and threats that may come up for businesses. In addition, social and cultural values should be upheld through business activities. Example :- – Foreigners come to watch the annual Kandy Perahara. This is a business opportunity. – When the number of vegetarians increases, it is a threat for manufacturers of meat-related products. UCSC-2016 18 EN6502 - Introduction to Entrepreneurship vii. Global Environment  There is a tendency for the countries of the world to forego their borders and be linked together. This is referred to as the global environment. Example :- – Greater possibility of entering the international market is an opportunity. – The local market gets flooded with products manufactured in other countries. This is a threat for local businesses. UCSC-2016 19 EN6502 - Introduction to Entrepreneurship 4. Analysis of the Business Environment 1. Internal environment - SWOT analysis 2. External environment - PEST analysis and Porter' 5 force analysis UCSC-2016 20 EN6502 - Introduction to Entrepreneurship SWOT Analysis UCSC-2016 21 EN6502 - Introduction to Entrepreneurship PEST Analysis  A PEST analysis is a business measurement tool.  PEST is an acronym for Political, Economic, Social and Technological factors, which are used to assess the market for a business or organizational unit. UCSC-2016 22 EN6502 - Introduction to Entrepreneurship PEST Analysis Cont…  Political – Here government regulations and legal factors are assessed in terms of their ability to affect the business environment and trade markets. – The main issues addressed in this section include political stability, tax guidelines, trade regulations, safety regulations, and employment laws.  Economic – Through this factor, businesses examine the economic issues that are bound to have an impact on the company. – This would include factors like inflation, interest rates, economic growth, the unemployment rate and policies, and the business cycle followed in the country. UCSC-2016 23 EN6502 - Introduction to Entrepreneurship PEST Analysis Cont…  Social – With the social factor, a business can analyze the socio-economic environment of its market via elements like customer demographics, cultural limitations, lifestyle attitude, and education. – With these, a business can understand how consumer needs are shaped and what brings them to the market for a purchase.  Technological – How technology can either positively or negatively impact the introduction of a product or service into a marketplace is assessed here. – These factors include technological advancements, lifecycle of technologies, the role of the Internet, and the spending on technology research by the government. UCSC-2016 24 EN6502 - Introduction to Entrepreneurship Porter' 5 Force Analysis  Porter's five forces analysis is a framework that attempts to analyse the level of competition within an industry and business strategy development. UCSC-2016 25 EN6502 - Introduction to Entrepreneurship Porter' 5 Force Analysis Cont.…  The threat of new entrants (how easy or difficult is it for new entrants to start to compete, which barriers do exist)  The threat of substitutes (how easy can our product or service be substituted, especially cheaper)  The bargaining power of customers (how strong is the position of buyers, can they work together to order large volumes)  The bargaining power of suppliers (how strong is the position of sellers, are there many or only few potential suppliers, is there a monopoly)  The rivalry among the existing players (is there a strong competition between the existing players, is one player very dominant or all equal in strength/size) UCSC-2016 26 EN6502 - Introduction to Entrepreneurship 5. Strategies of Approaching the Market When Starting a New Business i. Ansoff matrix ii. Porter’s generic strategies UCSC-2016 27 EN6502 - Introduction to Entrepreneurship i. Ansoff matrix UCSC-2016 28 EN6502 - Introduction to Entrepreneurship i. Ansoff matrix Cont.. a. Offering an existing product or a service to the existing market.  Many entrepreneurs follow this method. But the risk of this option is high. The reasons are that there are lots of competitors who offer the products to the market and consumers are used to the products of them.  As a result the new entrepreneur has to incur a greater cost and put a considerable effort to attract the consumers for his/her product. Hence the cost of attracting consumers increases while earning profits becomes uncertain. Example :- – People need detergents. Already they are using soap. Hence many laundry soaps are available in the market. The new entrepreneur too enters the market offering a washing soap to the market. – Starting a beauty saloon which is exactly similar to an existing one UCSC-2016 29 EN6502 - Introduction to Entrepreneurship i. Ansoff matrix Cont.. b. Offering an existing product or a service to the a new market  There can be a group of consumers who are not used to consume an existing product or a service in the market. By offering an existing product or a service to them, the entrepreneur can enter the market. In other words, under this method a new customer base is created by offering the product to non-consumers, non consuming region or a country. Example :- – Accepting orders and delivering products and services to residences and offices – Offering the product during a period or at a time when the competitors do not sell the products (fruit cultivation during off season) UCSC-2016 30 EN6502 - Introduction to Entrepreneurship i. Ansoff matrix Cont.. c. Offering a new product or a service to the existing market  Many entrepreneurs enter the market through this method. It is possible to enter the market by making a certain change to an existing product or a service and adding a new kind of utility. Even though there is a risk due to the large number of competitors, acting strategically will help to win the market since there is a substantial customer base. Example :- – Introducing Smart phones to the mobile phone market – Withdrawing money from the ATM machine without the ATM card – Special footwear, foods and beverages for diabetic patients UCSC-2016 31 EN6502 - Introduction to Entrepreneurship i. Ansoff matrix Cont.. d. Offering a new product or a service to a new market  The main advantage for the entrepreneur who enters the business under this method is having no competitors. Hence, the entrepreneur can achieve greater success by acquiring 100% of the market share within a definite future. Yet there is a high risk since the consumer is totally unaware of the product.  Further the target consumers are not precisely identified. Success can be achieved by accurately studying the market, working according to a plan and increasing the consume awareness. Example :- – Starting space tourism – Different products to reduce the elderly look – Producing a motor vehicle which runs using wind-power UCSC-2016 32 EN6502 - Introduction to Entrepreneurship ii. Porter’s Generic Strategies UCSC-2016 33 EN6502 - Introduction to Entrepreneurship ii. Porter’s generic strategies Cont.. Cost Leadership Strategy  This is used to penetrate the industry by using the cost of company’s products or services.  This is useful for those who want to penetrate a targeted market that’s dominated by high cost companies.  Some of the ways by which a company can acquire cost advantages are: – Improving process efficiencies – Gaining access to lower cost material – Making optimal outsources – Vertical integration decisions – Avoiding some cost altogether UCSC-2016 34 EN6502 - Introduction to Entrepreneurship ii. Porter’s generic strategies Cont.. Differentiation Strategy  This means the development of such products and service which offers unique attributes that are valued by customers.  So, companies need to develop and design such products and services which differentiate it from competitors. Focus Strategy  Focus strategy includes the division of your target market into specific sections.  Then a company needs to develop specific business marketing strategies for each section.  In simple words we can say that focus strategy target segments to apply both cost leadership and differentiation strategies. UCSC-2016 35 EN6502 - Introduction to Entrepreneurship 6. Types of Business Organizations i. Sole proprietorship ii. Partnership iii. Franchising iv. Limited liability v. Corporation vi. Public limited company UCSC-2016 36 EN6502 - Introduction to Entrepreneurship 6. Types of Business Organizations Cont.. i. Sole proprietorship  A business that legally has no separate existence from its owner. Income and losses are taxed on the individual's personal income tax return.  Difficulty in raising capital-this can be a problem since an individual's resources are typically less than the pooled resources of partners.  Minimum legal restriction-fewer reports have to be filed with government agencies. There are no charter restrictions on operations. UCSC-2016 37 EN6502 - Introduction to Entrepreneurship 6. Types of Business Organizations Cont.. ii. Partnership  A legal form of business operation between two or more individuals who share management and profits.  The federal government recognizes several types of partnerships. The two most common are general and limited partnerships. iii. Franchising  A franchise is a business system in which private entrepreneurs purchase the rights to open and run a location of a larger company.  The franchising company, or franchisor, signs a contractual agreement with the franchisee, explaining in detail the company's rules for operating the franchise. UCSC-2016 38 EN6502 - Introduction to Entrepreneurship 6. Types of Business Organizations Cont.. iv. Limited liability  A private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.  Allow greatest flexibility for customizing the structure of the business  Requires comprehensive operating agreement because of the high degree of variability/flexibility v. Corporation  A corporation is a legal entity that is separate and distinct from its owners.  Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.  The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company's debts. UCSC-2016 39 EN6502 - Introduction to Entrepreneurship 6. Types of Business Organizations Cont.. v. Corporation cont…  A corporation is a legal entity that is separate and distinct from its owners.  Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.  The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company's debts. UCSC-2016 40 EN6502 - Introduction to Entrepreneurship 6. Types of Business Organizations Cont.. vi. Public limited company  A company whose securities are traded on a stock exchange and can be bought and sold by anyone.  Public companies are strictly regulated, and are required by law to publish their complete and true financial position so that investors can determine the true worth of its stock (shares). Also called publicly held company.  Public limited company and its abbreviation Plc are commonly used in the UK in the way that corporation and Inc. is used in the United States. UCSC-2016 41 EN6502 - Introduction to Entrepreneurship 7. Decisions that should be taken when starting a business i. To which extent the person can dedicate for the business? ii. On which product or service the business is based? iii. Who is the target consumer? iv. What is the nature of the competition? v. Are earnings adequate? vi. How to find the required capital? vii. How to start the business, individually or with partners? viii. What is the nature of the business location? UCSC-2016 42 EN6502 - Introduction to Entrepreneurship i. To which extent the person can dedicate for the business?  When running the initiated business ,entrepreneur has to engage in activities relating to different roles. Examples:- – Acquiring raw materials – Finding employees and directing them – Acquiring and maintaining machineries and equipments – Obtaining and the required money and managing it – Tasks relating to procurement and selling – Production – Fulfilling legal requirements  If such activities are to be carried out fruitfully, entrepreneur should entirely dedicate his effort and time to the business. Similarly the entrepreneur has to engage in the daily affairs and social relationship activities.  Hence, whether the entrepreneur is capable of balancing his effort and time to make the business a success should be decided. UCSC-2016 43 EN6502 - Introduction to Entrepreneurship ii. On which product or service the business is based?  One of the key factors which affect the success of the business is the product or the service offered to the market. Example :- – Satisfy the needs and wants of the consumers – Have unique/distinctive features compared to other products and services UCSC-2016 44 EN6502 - Introduction to Entrepreneurship iii. Who is the target consumer?  This emphasizes the target group of consumers to whom the product or the service of the entrepreneur is offered.  In other words this is the total of current consumers (who are currently consuming the product) and the potential consumers (who may consume the product in the future).  Products and services can be offered targeting different consumer groups and their likes/ dislikes and the purchasing power should be inquired. Example :- – Children ,youth and adults – Women and men – Low income earners and high income earners – Internationally dispersed Sri Lankan consumer groups UCSC-2016 45 EN6502 - Introduction to Entrepreneurship iii. Who are the target consumers?  In order to identify target consumers, businesses can segment the market.  Some of the major bases for market segmentation are as follows: – Geographic Segmentation – Demographic Segmentation – Psychographic Segmentation – Behaviouristic Segmentation UCSC-2016 46 EN6502 - Introduction to Entrepreneurship iv. What is the nature of the competition?  Competition is an essential feature of the today’s market. Sum of individuals or organizations who offer different products and services to the market to satisfy a certain need or a want are considered as competitors.  It is important to get an understanding of the current competitors and the potential competitors who may enter the market in the future when assessing the competition. Example :- – There are many organizations which offer different products and services mentioned below to satisfy the need of cleaning clothes. Washing soaps Washing powder Washing liquids Laundry service UCSC-2016 47 EN6502 - Introduction to Entrepreneurship v. Are earnings adequate?  The entrepreneur starts the business expecting a return. It should be sufficient to cover all the expenses of the business. That is,  Earnings should be capable of settling the expenses like, – cost of purchasing – taxes – rentals and – salaries Similarly  Earnings should be adequate enough to, – provide a sufficient profit to the owners – reinvest in the business for future improvements UCSC-2016 48 EN6502 - Introduction to Entrepreneurship Vi. How to find the required capital?  Generally, an initial capital is required to start a business. The capital requirement differs depending on the nature of the business. Some businesses can be initiated with a less capital while some require a considerable investment even at the beginning. There can be different alternatives to fulfil that capital requirement.  Sources of capital for a new entrepreneur – Own savings – Deploying own assets or selling them – Relatives and friends – Bank loans and leasing – Getting advances from customers  Even though there are alternative sources of capital, attention should be paid to their advantages and disadvantages Example :- When a bank loan is obtained, interest should be paid for that UCSC-2016 49 EN6502 - Introduction to Entrepreneurship vii. How to start the business, individually or with partners?  The entrepreneur can start the business individually or he/she can get the involvement of a member of the family or other external party.  The most appropriate method should be selected after considering the advantages and disadvantages to the entrepreneur of starting a business individually or as a partnership.  You will get the opportunity to further study this later. UCSC-2016 50 EN6502 - Introduction to Entrepreneurship viii. What is the nature of the business location?  The critical factor which affects the success of certain businesses is the business location. The location of the business has to be decided by considering the following factors. – Number of customers and their dispersion – Ease of getting resources – Convenience of acquiring labour – Convenience of getting the infrastructure facilities like electricity, – water, and communication – Facilities which can be provided to the consumers (e.g.: parking – and sanitary facilities) – Cost of land/ premises( price/rental) UCSC-2016 51 EN6502 - Introduction to Entrepreneurship End of the section 03 UCSC-2016 52