FUNDAMENTALS OF
ENTREPRENEURSHIP - 2
Prof. Sonam Bhayani
(B.com/Mba)
ESTABLISHMENT OF INDUSTRIAL ENTERPRISE
Introduction
 Who is an Entrepreneur ?
o Entrepreneurship is concerned with an
individual and person having
entrepreneurship is an Entrepreneur.
o Special qualities, skills or cleverness.
o “He gets employment by establishing
business, gives employment to others and
tries to get economic reward by proper
management of the business or industry”
o Entrepreneurship development is considered
a very important activity regarding economic
growth and development of human
civilization.
Forms Of Industrial Enterprise
Industrial
activities
Business
(commercial)
activities
Personal
services
Services
related to
commerce
Professional
services
A. Industrial activities :
- Utility is created by transferring raw
material into ready goods under production
process e.g. cloth from cotton, grain from
seeds, machines from steel, etc.
 Classification of Industrial activities :
1. Natural Industry :
-Depends on natural factors eg. Agriculture
industry, animal husbandary, paultry farm, etc.
-Development of these industries depend
on the favourable or unfavourable natural
factors.
2. Mineral Industry :
- Extraction of minerals from
underground e.g. Coal, steel ore, natural oil,
etc.
- It goes on reducing with extraction
and cannot be reproduced.
3. Machine Industry :
- Finished goods are manufactured
from raw material with the help of machines
- Includes industries like textile,
cement, automobile, chemical, iron-steel etc.
4. Construction Industry :
- Includes residencies, business
houses, canals, dams, etc. which are
constructed with the help of construction
materials like bricks, lime, cement, wood, etc.
5. Handicraft Industry :
- Here industrial activities which are
dependent on personal skill are included. E.g.
carpentary, weaving, etc.
 Characteristics of Industrial Activities :
 Element of risk.
 Industrial industry – permanent capital
investment required.
 Complex problems of management
 Units established doing Industrial activity are
large in size.
B) BUSINESS (COMMERCIAL) ACTIVITIES :
- Sales of goods produced by the
manufacturers is done. E.g. seller of cloth,
seller of steel, seller of medicines, etc.
Departmentation of Business Activity:
i. Departmentation Concerning Quantity:
Wholesale business and retail
business are included.
ii. Departmentation concerning product
differenciation:
Business of one or more than one
thing is included.
 Characteristics of Business Activities:
 Less risky than industrial activity
 Proportion of bank investment and current
assets is more than of stable assets
 Less managerial problems
 Government interference is limited
 Started with few financial means
 One or minimal number of persons can manage
business
3) SERVICES RELATED TO TRADE :
- Abstract services are provided and
charges are taken from the receiver of the
services.
- Provide services to industrial and
business activities.
 Departmentalization of Commercial Services:
a. Banking Services
b. Insurance Services
c. Storage Services
d. Transport Services
e. Communication Services
f. Agency Services
4) PERSONAL SERVICES :
- Social requirement fulfilled at a personal
level.
- services like tailor’s, dance, music, tuition,
class, etc.
- Customers are directly in contact.
- Can’t be run at large scale and its market is
limited to the local level.
5) PROFFESSIONAL OR VOCATIONAL SERVICES :
- Eligibility needed.
- An individual have to become the member of
that business association to run this activity at
a proffessional level.
- Services of doctors, lawyers, accountants,
company secretary are included
Establishment of Industrial Enterprise
An entrepreneur has to undertake the
following activities for the establishment of
industrial enterprise :
I. Search for Professional Ideas
II. Analysis of Ideas
III. Choice of the Best Idea
IV. Concentration of Output Components
A) Search for Professional Ideas :
- Succeed or fail
- Start with the invention of proper business
idea
- Idea can be found from various sources
- Ideas should be true and practical
- Entrepreneur should have farsightedness.
 Sources for Getting Ideas :
i. Market Observation
ii. Future customers
iii. Development in other countries
iv. Study of outline of the projects
v. Government Organizations
vi. Trade Fairs and Exhibitions
B) Analysis of Ideas :
i. Primary Analysis and Analysis of Ideas:
-Technical Knowledge
- Commercial Sustainability
ii. Detailed Analysis:
Minute informations are required
C) Choice of the Best Idea :
- Import of the product prohibited by
government
- Product profitably exported
- Demand should be more than supply
- Experience
- More profitability
- Expansion and diversification
- Licence policy or industrial policy
Selection Matrix of Entrepreneur
Order Details
Project - A
Project - B
1.
Product
Industry
having
priority
Reserved for
Small Scale
Industries
2.
Requirement of rawmaterial
Imported
Domestic
3.
Machines
Imported
Domestic
4.
Market
Defence
Department
Local
5.
Technical Information
Trained
abroad
Domestic
6.
Selection of place
Free Trade
Zone
Backward
Area
7.
Profitability
High
Low
D) Concentration of Output Components:
- Once the entrepreneur agrees with practicality
and profitability of the project, he concentrates
on collecting required means for the
establishment of the enterprise.
- Take decisions regarding the size of business,
choice of location and construction, etc.
- According to the opinion of John. A. Shubin,
“Establishment of an enterprise takes place by
concentration of materialistic facilities,
production process and development,
advertisement of product and campaign for sales
increase, appointment of labours, gathering
material, etc.”
For the establishment of new enterprise,
following outputs are necessary :
I.
Data Collection :
In aggressive commercial atmosphere,
information and its collection or knowledge is a
key factor in the success of an entrepreneur.
To get information and disseminating it, an
entrepreneur should develop solid system. This
system is known as information management.
Solid information system provides proper
information at proper time to proper person.
II. Financial system:
- Credit is the lifeblood of any business
enterprise and it works as lubricant for the
wheels of trade machines.
- Business enterprise requires credit for raising
permanent capital and working capital.
- There are two main methods for getting
estimation of the requirements of capital for
an enterprise:
i.
Cost Theory: Permanent assets, current assets,
intangible assets like goodwill, cost related to
establishment and development of business
enterprise, etc. are included.
ii. Earnings Theory:
- Capitalization of the unit is equal to the
estimated return of capital investment value
of the unit.
- More realistic based. But difficult to get a
true estimation of future return for enterprise.
- Decisions of capital structure are very
important because they affect the real capital
and the return to be received by the owner of
the enterprise.
- After deciding capital structure, capital is
raised and efficient management and control
system are created for working capital and
return.
III. Employees:
- Employees are valuable assets of business
enterprise, which is not affected by
depreciation.
- Various decisions have to be taken by an
entrepreneur regarding employees.
 Reward and incentive :
- An entrepreneur faces high risk and
difficulties. So, a successful entrepreneur gets
reward and economic benefit.
- Following things are included in this benefit:
•
•
•
•
•
•
Substantial wealth
Social status and reputation
Financial freedom and power
Conciousness regarding achievement and pride
Satisfaction of providing employment to others
Bright career of his children
 Role of Industrial fairs :
• In Industrial fair, industrialist exhibits his product.
• Fairs are held at regional, national and international
levels.
• Give and take of industrial information helps an
entrepreneur in product improvement and sustain the
product.
• Benefits of Industrial fairs are:
Information can be spread
 Order received
 Product sold on spot
 Better Idea
 Foreign co-operation obtained
Competition tendencies known
 Import-Export Contracts signed.
Thus, any entrepreneur has to pass through many
ideological practicable and stages, before starting a business
venture.
ANALYSIS OF INDUSTRIAL
OPPORTUNITIES
 An Entrepreneur should have the capacity to
identify opportunity and grab it in time.
 “Opportunity indicates such condition that in
ordinary circumstances whatever is not seen
by others is seen by an entrepreneur”.
 Entrepreneurs capacity to identify business
opportunities and his skill of turning those
opportunities into commercial possibility are
important.
•
•
•
•
What is Opportunity ?
Condition emerging from the change in
situation or circumstances.
Economic Profit.
Its universal but everyone cannot see it.
Everyone should take advantage of it.
Characteristics of Opportunities:
1. Born from change in internal and external
environment
2. Recognition
3. Benefit of status
4. Extraordinary benefit
5. Threat in opportunities
Identification of Opportunities :
(A)Opportunities Resulting from the change of
Internal Environment :
i. Sudden Opportunity :
Under the control of destiny
ii. Opportunities Resulted from the Vast
Difference Between Real and Expected
Results :
- Inevitable to get estimation about
future events
- On the basis of expected
supposition, decisions at present are taken.
iii. Opportunities Resulted from the
Innovation in the Production Process :
- Change introduced in working
production system is called “innovation”.
- Innovation is possible in 5 ways:
o Add total new product or introduce new element in the
current product
o Adopt a new method that has not been used
previously like mobile bank service
o Enter in totally new market
o Use cheap raw material by price analysis
o Create a new system
iv. Opportunities Resulting from the
Change in Industrial or Market Related
Structure :
- There is a demand of certain
product in which producers have different
shares.
- On the basis of share of producers
in the total demand of the product, type of
market structure can be known. E.g.
Monopoly, Perfect competition, Imperfect
competition.
(B) Opportunities resulting from change in the
external environment :
i. Opportunities resulting from Technological
invention
ii. Opportunities resulting from the change
regarding population
iii. Opportunities resulting from Government
controls and Encouragements
iv. Opportunities resulting from the change in
the habits, attitude and values of the people
Practical use of opportunities in
Business Enterprise:
• If one is afraid of risks, opportunities cannot
be used in a profitable manner.
• An entrepreneur estimates opportunities and
threats resulting from internal and external
changes and by adapting it with his own
strength, capacities and weaknesses, he gets
benefits.
• SWOT Analysis:
S = Strengths
W = Weaknesses
O = Opportunities
T = Threats/risks
• Opportunities and threats are external events
and are uncontrolled. While Strengths and
weaknesses are personal characteristics of an
entrepreneur.
• Schemes regarding production management,
marketing management, financial management
and employees management are developed
under ‘SWOT’ analysis.
1) Strategies related to production :
i. Obtaining uptodate machines
ii. Production process and arrangement of
machines
iii. Maximum use of production capacity of
machines
iv. Obtaining other output components like raw
material, spare parts, electricity, water and other
means according to requirements
v. Proper localization of the unit
2) Strategies related to marketing :
i.
ii.
iii.
iv.
Change in prevailing product or absolutely new thing
Change in price
Production distribution
Production increase
3) Financial Strategies :
I. Capital investment
II. Proportion of debt in comparision to equity
capital
III. Proportion of permanent and working capital
IV. Dividend policy and re-investment of profit in
business
4) Strategies related to Human Resources:
I. Employees selection training and promotion
II. Reward and encouragement to employees
III. Development of employees work capacity and
its practical use
IV. Employee-industrial relations
Result of Opportunities
1)
2)
3)
4)
Creation of new and diversified values
Creation of diverse satisfaction
Appreciation by change in factor form
Large automatic production system and
possibilites of Global market
Method of Identifying Opportunity
for Enterprise
An entrepreneur’s opinion about following
matters is important like :
(1) Type of opportunity :
(A) Production of a thing :
Make any service available
Selling of anything
Getting money by having work from
others
Only selling
(2) Types of customers or market :
(1) According to the level of income :
- having high income
- having medium income
- having very low income
- having very very low income
(2) According to Market area :
- Sales at local Taluka level
- Sales at district or state level
- Purchase of government or other
institutes
- Purchase of businessmen and vendors
- Only people or customers’ purchase
(3) Selection for plant location :
- In one’s own house
- In rented house
- In village-city or out of village-city
- At other place
- By building a plant or shed
(4) Choice of Technology :
- Local or imported raw material based on
electricity or without electricity
(5) Future development opportunities :
- Competition increases in the market
- Rapid change in fashion and interest
- Things which are always in demand
- Things produced in totally ne technology
(6) Regarding Technical skill :
- What types of machines or tools
- Only based on skill
(7) Choice of time :
- Estimated period (days/months)
- Establishment of enterprise in how much
time ?
- Beginning of profit making in how much time ?
Thus, if decision regarding establishment of
enterprise is taken keeping in mind above matters, it would
not be extraordinary risk but it would be risk with proper
calculation.
Forms Of Business Enterprise
Four forms of business enterprise :
1)
2)
3)
4)
Sole Proprietorship
Partnership firm
Company
Co-operative society
1) Sole proprietorship :
- Managed by only one person.
- Appoints salaried employees if required.
- Not compulsory to have registeration of enterprise.
- As the owner is one, use of capital is limited.
- Many sources to get capital such as friends, relatives,
banks or other institutes giving loans.
- A sole proprietor cannot collect financial factors from
public as company does.
- Placement of ownership can be done by exchange of
part or by selling to other entrepreneur.
-Responsibility is unlimited.
- If debts occurred, than private assets can be confiscated.
- Loss beared by one person, but if profit than he himself
enjoys the profit.
- Life of sole proprietorship is short.
- No legal process required while shutting the business.
2) Partnership firm :
- 2 or more than 2 persons are included.
- In ordinary enterprise, maximum 20 and in money
lending enterprise maximum 10 members are included.
- All the partners are owners.
- Here also registeration is not compulsory, but
voluntary.
- Registeration gets certain benefits. So if done than it
is good.
- Can collect more capital factor compared to sole
proprietorship.
- Sources of capital : Friends, relatives, financial
institutes and banks.
- If the firm is indebted, private property of every
partner is confiscated in order to pay debts.
- Personal and collective responsibility.
- According to partnership act of 1992, profit
and loss are distributed among all partners in
decided proportion.
- Life period is less compared to company.
- Partnership relation ends when new partner
enters or old partner dies.
- Partnership firm can be closed or dissolved
by the permission of all partners or according
to the contract of partnership or under the
order of court.
3) Company :
- For private company, minimum number of people is 2
and maximum is 50.
- While in Public Ltd. Company minimum is 7 and
maximum is unlimited.
- Management of company is done by the directors
elected by shareholders.
- Under companies act 1956, registeration is
compulsory.
- Memorandum of association and articles of
association are to be prepared and got registered
before the registerar of that state.
- By releasing bond or debentures or through deposit,
company can borrow financial factors from the public.
- Replacement of companies share is done by specific
processs.
- The responsibility of a company towards
shareholders is equal to the original price
means the printed price. E.g. If the price of
share is Rs. 10, the company has to pay at
most Rs. 10 to the shareholders. So, there is
no risk for the privet asset of the company.
- Certain profit earned by company is
distributed among sareholders and remaining
is re-invested.
- Dividend paid is decided by Board Of
Directors.
- As the form of a company is obstract, its
existence is permanent.
4) Co-operative Society :
- It can be established by minimum 10 persons who are not
the members of one family and limit of maximum members
has not been fixed still.
- Financial factors are received in the form of equity and
accordingly shareholders become the owners of that Cooperative society.
- Management is done by managing committee elected by
the members.
- Registeration is compulsory under the Co-operative
society act of Gujarat State 1961 and Central Co-operative
Society Act 1912.
- Contract can be made as it has separate existence.
- A Co-operative society is mostly established by
economically weak or middle class of the society, by equal
shares of less value the capital is collected. So, the equity of
co-operative society is less than equity of company.
- They can get deposits from the members of
society but like company, it does not have power
to get money from public.
- Like a company, liability of the members of
society is limited to the printed value of the
share. So if the company makes loss, or is
liquidated members private properties are not
damaged.
- More than 12% of dividend cannot be
distributed under the Gujarati Co-operative
society Act.
- Additional profit of the society is used for
welfare fund.
- Co-operative society exists for a long time.
- It exists through legal process, and can be ended
or closed through legal process only.
Selection of Plant Location
• Selection of plant location becomes pre-condition
for the success or failure of an enterprise.
• Plant is directly related to the production cost of
the product.
• 10% of the cost is reduced if selection of plant is
done appropriately.
• It is mostly done in suburb or backward areas.
• Such places are near the city, selling of the
products becomes convenient.
• When such areas are chosen, the enterprise
gets subsidy and other financial benefits from
the government.
• Decision should be taken keeping in mind
liberal point of view and farsightedness.
• Following things are kept in mind while
decision regarding selection of plant location
is required:
1. Selection of the region
2. Selection of the locality
3. Selection of the site
• Selection of plant is important not only while
establishing the enterprise but also in the
extension diversification or at the time of
strategic development.
• Thus selection of plant is not the decision
taken at the initial stage only.
Meaning and Importance of Location :
• “Plant Location means localization of machines,
other material, human power, services of units
and employees in such a way that as a result
production of the product or services can be
done in an efficient manner.”
• Production work becomes easy when the location
chosen is near to the place where these means
are available.
• Ofcource, sales of product or service is also
considered very important.
• Chosing of location should be done in such a
way that it proves profitable in economic
return, concerning availability of production
factors, distance of the place, transfer of
material, the form of product and types,
transportation costs, etc.
Importance of Plant Location
• Selection of Plant Location is very important
matter regarding success or failure of an
enterprise.
 Location is to be selected in such a manner that
Transportation cost should be reduced at long term
 Just In Time (JIT) method should be taken into
consideration. That means raw material should be
taken at production place only when the things are to
be produced.
 Distance of selling centre or market place should be
short from the plant.
 When the raw material depends on natural
factors like agricultural product, mines, etc. and
the transformation of ready material from the raw
material is less, than the plant location is selected
near the place where the raw material is available.
 For selling of fruits, vegetables, eggs, etc. it is
better to select the plant location near the
market.
 Approach of local government, tax policy, binational or multinational contracts etc. are very
important.
Stages of Localization
1) Selection of Region
2) Selection of locality
3) Selection of site
1) Selection of Region :
o
o
o
o
o
o
o
Natural property plays an important role in determining
whether a nations is agrarian or industrial.
Mines and minerals are basic requirements of an
industrial country.
Rains, water, fertile land, convenient climate are basic
requirements of an agricultural nation.
Any nation divides the nation into states, districts,
Talukas, cities and rural areas according to its economic
and political policy.
Every region offers certain attractions to take itself
towards the directions of progress but at the same time,
it forces certain prohibitions too.
Eg. To develop backward region in India, subsidy, tax
relief, etc. benefits are given to industries. While in city
areas prohibitions are enacted by urban authorities to
stop industrialization in urban areas.
Thus, first of all localization of region is given a proper
thought.
2) Selection of the Locality :
Three sections :
A Urban area
B Rural area
C Suburban area
Every area described above has certain
characteristics on the basis of which that area
is chosen for the plant location where
comparatively there is more profit.
Factors like required material and expense
of availability of means, near-ness of market
and restrictions of the local government are
important for selection of a locality.
(A) Urban Area :
 Advantages of Urban Areas :





Transportation of raw material and ready material is easy.
Communication facilities easily available.
Sources and alternatives available for required financial factors.
Insurance facilities.
Storage of goods, godown, warehouses and cold storage
facilities available.
 Skilled and unskilled labour available.
 Facilities of subordinate units available.
 For selling ready stock developed and large market available.
 Training facilities.
 Facilities for education, health and entertainment available.
 When required, fire brigade and police services available.
 Disadvantages of Urban Area :
 Price of land in urban areas are high compared to
rural and semi-urban areas.
 Costly labour
 Rival enterprise might attack and take away its
employees in competitive market.
 Labour unions might prove obstructive as they
are active.
 Rates of local taxes are high.
 Problems of disposal of garbage or affluents
become serious and problemetic.
 Dirty slums are created which is a social problem.
(B) Rural Area :
 Advantages of Rural Area :
 In comparison to urban area, land is available at a
very reasonable price.
 No problem or question of getting labourers for
enterprise.
 Relation of labourers, employees and owners are
comfortable.
 Local taxes are less in rural areas.
 Social problems donot become serious in rural
areas.
 Disadvantages of rural areas :
 Facilities of transportation and communication
not available.
 Depend on nearby cities for facilities of banking
transaction.
 Insurance facilities against risk is not easily
available.
 Enterprise has to setup its own storage facilities.
 Transportation not available for labourers.
 Local facilities like training centres, trainee labour,
water, fir brigade or facilities related to
entertainment, education and health are not
available.
(C) Suburbun Area :
- Suburbun area is the middle path between
two ends of rural and urban areas.
- Suburban areas are far and yet get
advantages that are available to the urban
areas and also remove disadvantages of rural
areas.
- So, in the present time, entrepreneurs select
subutitan areas for the establishment of their
enterprise.
 Advantages of suburban Area :
 Sufficient and cheaper land available as per
requirement.
 Facilities like bank, insurance, storage, water, fire
brigade service, etc. are available as per
requirement.
 Trained and untrained labourers are available.
 Training centres available for untrained labors.
 Market for selling of finished material is available
in the city area.
 Transportation expense is comparatively less.
 Industrial enterprises are getting centralized
even in suburban areas. So, in the long term,
all the disadvantages urban area proves
obstructive under the dynamic process of
development, suburban areas become a part
of city.
Modern Trends for the Choice of Plant
Location :
1) Priority to Suburban Area in selection
2) Establishment of Enterprise in industrially
Backward Area
3) Industrial Decentralization
4) Competition between the government and
local institute
5) Industrial Colonies
Factors Affecting the Selection of
Plant Location of Industrial Enterprise
1) Availability of Raw Material Near by
2) Nearness of Sales Centres
3) Availability of Labour Force
4) Infrastructural Facilities
5) Commercial Facilities
6) Social Facilities
7) Approachment of Government
8) Facility of Disposal for Industrial Wastes
9) Strategic Factors
10) Other Factors