Unit 3: The Environment for Entrepreneurship Ace Institute of Management BBA 6th Semester

Small Business Venturing A small business may be defined as a business with a small number of employees or with limited capital. Normally privately owned corporations, partnerships or sole proprietorship Examples: Convenience stores, restaurants, guests houses, hairdressers, tradesmen, solicitors, accountants They are Independent and mostly managers are owners

Small Business Venturing According to Industry Act of Nepal: Industry with fixed assets up to an amount of thirty million shall be defined as Small Industry Accroding to Longenecker, Moore and Petty A small business has financing supplied by one individual or a small group, has geographically localized operation expect marketing, is small compared to the biggest firms in industry and has employees usually fewer than hundred

Small Business Venturing Characteristics of Small Business Management is independent Closely held ownership Local operations Small size in terms of numbers of employee, turn over, fixed assets and capital

Small Business Venturing Types of Small Business Activities Manufacturing Wholesaling Retailing Services Financial Services Professional Services Transport Services Repair Services

Small Business Venturing Importance Innovation Complementary to Large Business Flexibility Job creation and Satisfaction Close Relation Competition Higher Financial Reward

Small Business Venturing Advantages and Disadvantages Advantages Disadvantage Independence Risk of Failure Innovation Inadequate Management Responsiveness Laws and Regulations Employment Creation Marketing Problems Financial Performance Technology Interdependence Poor Financial Management

International Entrepreneurship Opportunities

International Entrepreneurship is the process of an entrepreneur conducting business activities across national boundaries. When an entrepreneur executes his or her business model in more than one country, international entrepreneurship is occurring.

Importance of International Business to the firm. International business has become increasingly important to firms of all sizes particularly today due to intense competition leading to hypercompetitive global economy. But before entering into international business entrepreneur must fully understand how international business differs from purely domestic business and an entrepreneur should be able to respond it accordingly.

Questions for Entrepreneur before venturing into international Market 1) Is managing international business different from managing domestic business? 2) What are the strategic issues to be resolved in international business management? Eg. Allocation of responsibility, planning and control, structure, standardization 3) What are the options available for engaging in international business? 4) How should one assess the decision to enter into an international market? Eg. Profits, market share, competition

International Versus Domestic Entrepreneurship Economical Stage of Economic Development: Relate income of people, infrastructure, banking facilities Balance of Payment: difference between import and exports Type of system Political and Legal Environment Cultural Environment Technological Environment

Entrepreneurial Entry into International Business Three options of entering into international business market – 1) Exporting 2) Nonequity arrangements 3) Direct Foreign Investment

Disadvantages: the intermediary still requires sales support, Exporting Selling goods made in one country to another country. Usually an entrepreneur starts doing international business through exporting. Two general classification of exporting – Indirect : Involves a foreign purchaser in the local market or using an export management firm. Requires least amount of risk and knowledge about market Disadvantages: the intermediary still requires sales support, The intermediary takes a margin, You have no direct contact with the end customer, You will have less control over the actual final transaction, You don’t get to learn about the overseas market, which could slow down longer term expansion plans.

Direct exporting: Through independent distributors or through one’s own overseas sales office is another entry method. An independent foreign distributor directly contacts foreign customers and takes care of all technicalities.

Direct Exporting Advantage Disadvantages You are in control of pricing You are in full control of your brand You get a direct understanding of buyers' or end users' needs and an ability to customize accordingly You maintain the customer relationship You are able to identify possible new opportunities Your customers may prefer dealing dire it will take a lot of time, energy, staff resources and money competitors with a local presence will be perceived as lower risk to buy from after-sales commissioning and service may require local language capability prompt troubleshooting may not be able to be done remotely and will require additional visits growth will be slower

2) Non Equity Arrangement Doing international business through an arrangement that does not involve any investment Entrepreneurs who either cannot export or make direct investment go for non equity arrangement Types of Non equity arrangements Licensing Gives rights to use patent, trademark and technology In return takes royalty Appropriate where market is difficult to enter Low risk Should be careful as several pitch falls ( fare of licensing largest competitors)

Turn key Projects Management Contracts Appropriate for least developed or developing countries Foreign partners builds the facility, train employee and management to run the instalment Once the operation is in line then is given to the local owner Financing is normally local owner or government Initial profits can be made and follow up export sales can be made Management Contracts Entrepreneurs contracts management skill and techniques Allows purchasing country to gain foreign expertise with turning ownership to foreigner Sometimes follows the turn key projects where foreign owners wants to use the management.

3) Direct Foreign Investment Where an entrepreneur himself invests capital in international markets Methods of Direct Foreign Investment – Minority Interests – Having less than 50% ownership position (E.g Standard chartered), provide the firm with either a source of supply or captive market for product, done to gain a foothold in the market before making major investment.

Joint venture – Two Company Forming a Third Company (E Joint venture – Two Company Forming a Third Company (E.g Surya Nepal Ltd). JVs are formed when entreprenerus want to purchase local knowledge and an established facility Majority Interests – Having more than 50% ownership position (e.g Dabur Nepal Ltd), Allows the entrepreneur to obtain managerial control while maintaining the company’s local identity

100 percent Ownership: Ensures complete ownership and Control. Goes into 100 % ownership only entrepreneur has technology, capital and Marketing Skills Merger and acquisition: Basically 5 types of mergers Horizontal Merger: Combination of two firms doing similar business in same market level Vertical Merger: Combination of two firms in successive stage of production. Product extension Merger: Combination of two firms with non competing product Market extension Merger: Combination of at least two firms with similar product in two different geographic location Diversified activity Merger: Combination of at least two totally unrelated products

Franchising A franchise is an arrangement by the manufacturer or sole distributor of trademarketed product or service that provides exclusive rights of local distribution to independent retailers in return for their payment of royalty. Franchising is a marketing system revolving around a two party legal agreement, whereby the franchise conducts business according to terms specified by the franchisor.

Franchising Characteristics of franchise – It is a marketing system for well known brands or trade mark It involves two parties – franchisor and franchise. It provides exclusive rights for local distribution of specific products or service to franchisee It covers a specific territory.

Franchising Advantage of Franchising – to the Franchisee Product Acceptance Management Expertise Capital Requirements Knowledge of the market Operating and Structural Control Advantage of Franchising – to the Franchisor Expansion Risk Cost Advantages

Disadvantages of Franchising- to the Franchisee Unfulfilled promises Franchise Fees Franchisor Control If the Franchisor business fails then Franchisee will be left with nothing Disadvantages of Franchising- to the Franchisor Poor Mgmt of Franchisee Negative effect on entire franchise system

Franchising Types of Franchises Distributorship Chain- Style operation Service franchises- income tax preparation companies, real estate agencies

Defining Ethics Basic rules or parameters for conducting any activity in an acceptable manner Set of principals prescribing a behavioral code that explains what is right or wrong Outlines moral duties and obligation Entrepreneurs faces many ethical decisions especially during early stages of their new venture Conflict over the ethical nature is very prevalent.

Ethics and Law Legal Vs Ethical Law provides what is illegal but it does not prove what is ethical considerations. It is managerial rationalization about the justifying the conduct. Four Rationalization are Activity is not really illegal Individual or corporation best interest Will never be found It helps the company

Ethics and Law Within the rationalization framework there exists four distinct managerial roles Types Direct Effect Examples Non role Against the firm Expense account cheating, Embezzlement. Stealing supplies Role Failure Superficial performance appraisal, Not confronting expense account cheating Role Distortion For the firm Bribery, price fixing, manipulation suppliers Role assertion (allegation ) Using nuclear technology for energy generation, Not withdrawing product line in face of initial allegation of inadequate safely

Ethics and Law Economic Tradeoff In some cases there exist trade off between profit and social welfare. For example Cigarette Advertisement Running toxic water in the river Lay offs during Economic downturn

Establishing a strategy for ethical responsibility Ethical Practices and Code of Conduct Code of conduct is a statement of ethical practices or guidelines which an enterprise adheres Covers multitude of subjects, ranging from misuse of corporate assets, conflict of interest, falsification books etc This is becoming more prevalent in organization They are also becoming implemented these days

Establishing a strategy for ethical responsibility Approaches to Managerial Ethics Should understand own ethical norms, motives, goals, orientation toward law and strategy towards immoral, amoral and moral management. Moving from immoral to moral management can be done by conduction seminars and trainings

Establishing a strategy for ethical responsibility Holistic Approach: Entrepreneurs should try holistic approach that allows personnel understand what they can do and cannot do To apply entrepreneurs can develop specific principles Principle 1: Hire the right people Principle 2: Set standards more than rules Principle 3: Don’t get yourself get isolated meaning be informed Principle 4: Let your ethical example at all times be absolutely impeccable

Establishing a strategy for ethical responsibility Ethical Consciousness: The awareness about ethics should come from the entrepreneur himself Ethical Process and Structure: Refers to procedure, positions, statements and announced ethical goals designed. Institutionalization: Deliberate step to incorporate the entrepreneurs ethics.

Social Responsibility Business obligation towards society Extends to different areas: Environment, Energy, Fair Business Practices, Human Resources, Community Involvement, Products Social action of Businesses can be classified into three categories. Social Obligation: Simply react to social issues through obedience of law Social Responsibility: Responses more actively accepting responsibility for various programs Social Responsiveness: Highly proactive and also willing to be evaluated by public for various activities.

E-entrepreneur An e-entrepreneur is defined as an individual willing to take the risk of investing time and money in an electronic business that has the potential to make a profit or incur a loss. E-entrepreneurship is the act of managing an electronic enterprise that has the potential to make a profit or incur a loss.

Some of Famous E- Entrepreneurs Chad Hurley and Steve Chen – You tube Mark Zuckerberg – Facebook Sergey Brin and Larry Page- Google Kevin Rose - Digg

Bricks and Mortar Business Has a material presence Has a tangible location where potential customers can actually walk in and interact with employees Examples: storefront, storage facility, office space, or manufacturing facility

Virtual Business Does not have a material space designed to receive customers Transacts most of its business online Can deal with customers from any location that offers Internet capability

Why E- Entrepreneurship Approximately 75 percent of Americans have access to the Internet from home. That means over 200 million people are potential customers for the entrepreneur with an Internet site. Cost of starting up and operating cost are usually lower than those in a brick and mortar business Do not incur cost such as relocation cost Ability to monitor price fluctuations that competitors are offering Assistance may be provided instant

E- Commerce Electronic commerce refers to the buying and selling of products or services over electronic systems such as the Internet and other computer networks. However, the term may refer to more than just buying and selling products online. It also includes the entire online process of developing, marketing, selling, delivering, servicing and paying for products and services. The amount of trade conducted electronically has grown extraordinarily with widespread Internet usage

Internet Impact Most Impact Less Impact Financial Services Retailing Entertainment Manufacturing Health Care information Travel Education Power Government

Ecommerce Advantage Ability of small firms to compete with other companies both locally and internationally Creation of possibility and opportunity for more diverse people to start a business Convenient and easy way of doing business transaction Higher revenues for small businesses that utilize the internet Minimizes the marketing cost reaching to boarder markets

Challenges Managing upgrades Assuring security for a website Avoid being a victim of fraudulent activities online Handling the cost required to maintain the site Finding and retaining qualified employees

Components of e-commerce Front End Operations: Website functionality, Search capabilities, shopping cart and secure payment Back-End Operations Operations that happens beyond the web page Seamless integration of customers orders Distribution channels, manufacturing capabilities Integration of Front and Back end Operation is a Challenge but provide opportunity for developing competitive advantage

Business Models and Strategies A business Model is a plan for earning profit and the configuration of a business B2C ( Business to Consumer) Business Model: Selling directly to the final consumer and end user. It is sometimes called e-tailing B2B ( Business to Business ) Business Model: Final user is not an individual consumer but another company. Saves back office bookkeeping, sales, and admin cost as they are industry specific

Business Models and Strategies B2B2C Business Model: Produces a product for another business that then markets it to the consumers. Niches: Niche business on the web can be defined as a firm that targets a very specific market segment, provides that segment with a complete vertical supply chain or specializes in a very specific kind of product Click and Bricks: Combination of a physical presence business and an Internet business. Roll-Ups business Model: Buying of many of smaller competitors.

Business Models and Strategies Advertising Models: Earnings through advertising on others site Pay for the content Model: Users must pay to access a website.

Business Incubation Most of the creative idea are never taken up to development stage They have difficulty in starting up the business. Business Incubation is the process of assisting new venture to getting started. The basis purpose of incubator is to increase the chances of survival for new start up businesses. They provide services from physical amenities to support services

Business Incubation Business Incubator provide facility with adaptable space that small business can lease on flexible terms and at reduced rents Also provides services technical, financial, managerial and administrative These are available and shared, depending on the size and nature of tenants needs

Service Benefits Below the market rate rental space on flexible terms Elimination of building Maintenance responsibilities Sharing of equipment and services that would otherwise be unavailable or unaffordable. Access to various types of financial and technical assistance Provision of an environment where small business are not alone, thereby reducing the anxiety of starting a new venture

Business Incubation: Amenities Centrex Phone System Staffed Reception Area Business Ref Library Mail room Federal Express Shipping/ Receiving Facsimile Typing and Secretarial Data and Word Processing Notary Public Translation Services Conference Rooms Child Day Care Center Coffee Shop Affordable Space Flexible Space Flexible Leases

Business Incubation: Services Accounting Services Business and Financial Planning Marketing and Advertising Loan Packaging Legal Services Tax and Financial Services Seminars

Types of Incubators Publicly Sponsored Non Profit Sponsored: Organized through Government, city economic development departments, urban renewal authorities, regional planning and development commission Job creation is main focus Non Profit Sponsored: Organize and managed through industrial development association of private industry, chamber of commerce or community based organizations Area development is major objective

Types of Incubators University Related: Privately Sponsored: They are spin off of academic research projects Mostly science and technology incubators Main focus to translate findings of basic research into development of new product Privately Sponsored: Organized and managed by private corporations Main objective to make profit

The Environment for Entrepreneurship These are the factors effects the business operations and decisions Two types External Environment: (Opportunities and threats ) Outside the organization Not within the short run control of the entrepreneur Has two parts: Task environment ( elements that directly affect and are affected by organizations operations ), Societal environment ( that do not directly touch short run activities of the business but can and often do influence long run decisions

The Environment for Entrepreneurship Internal environment: Strengths and weaknesses They exists within the organization it. These variables form the context within which work is done. Includes venture’s structure, culture and resources.

Internal Environment Structure, objective, Finance, R and D, Culture Resource Task Environment Stock holders Suppliers Competitors Intermediaries Comsumers Societal Environment Socio-cultural forces Economic Forces Technological Forces Political and Legal Forces

PEST-N Political Env Economic Env Socio-Cultural Env Technological Natural Business Legislation Purchasing Power Demography Pace of Technological Development Supply of Raw Material Changing Legislation Spending Pattern Cultural Env R and D Cost Cost of Energy Enforcement Agencies Consumer Movement Regulations Increased Pollution Power Blocks Govt Interventions Increased Social Responsibility

Environmental Analysis: Analysis of business environment includes Scanning to detect Change: Identifying key elements and theirs characteristics Monitoring to track development: Evolution, development and sequence of critical events that affect the survival and profitability Forecasting to project future: To develop projections eg,. Direction of interest rates, level of prices Assessing to interpret data:

Political and Governmental Analysis Political analysis gives the entrepreneur a feeling for what is possible, what is probable and what is unlikely. It is a segment where different interest groups compete for their interest to establish their own values and their own goals. An organized group of entrepreneurs can influence the political sector

Political and Governmental Analysis Three issues should be analyzed Global and International Issue Trade barriers and Tariffs: Hinders free flow of resources across national boundaries Trade Agreements: Political Risk National Issues Taxation Regulations Patent Protection Government Spending

Political and Governmental Analysis State, Regional and Local Issues Licensing Securities and Incorporation Law Incentives

Government Policies Policy is generally made or initiated by government . Policy is interpreted and implemented by public and private actors. Policy is what the government intends to do but chooses not to do Government’s deliberate plan of action to guide decisions and achieve rational outcome(s).

Government Policies and Entrepreneurship Entrepreneurial activity leads to economic growth and helps to reduce poverty and foster stability. It is in the interest of all that governments implement policies to foster entrepreneurship and reap the benefits of its activity. Promotes entrepreneurship through industrial policy, industrial act, commercial policy

Government Policies and Entrepreneurship Government should make following changes in policies to create positive business environment Simplification of labour policies Reforms in the tax policy Streamlining legal framework for enterprise creation, operation and liquidation Make efforts to create competitive market: remove monopolies

Condt…. Simplification of regulation for investment, production, marketing, prices, FDIs and technology transfer The policies should be formulated after discussion with parties likely to be affected Transparency of policies and their implementation should be there.

Government Policies and Entrepreneurship Strategies for encouraging entrepreneurship are: changes in tax policy regulatory policy access to capital the legal protection of property rights.

Tax Policy Taxes increase the cost of the activity taxed, thereby discouraging entrepreneurship Therefore, policymakers need to balance the goals of raising revenue and promoting entrepreneurship Corporate tax rate reductions and tax deductions for businesses are methods for encouraging business growth.

Regulatory Policies The simpler the regulatory process, the greater the likelihood of small business expansion Reducing the cost of compliance with government regulations is also helpful. To promote entrepreneurs governments can provide one-stop service centers where entrepreneurs can find assistance

Access to Capital If the government has policy to assist potential entrepreneurs with finding money for start-ups, then climate for entrepreneurship becomes favorable In the United States, the Small Business Administration (SBA) helps entrepreneurs get funds.

Protection of IPR If innovations are not legally protected through patents, copyrights, and trademarks, entrepreneurs are unlikely to engage in the risks necessary to invent new products or new methods

Business Env. In Nepal Economic Environment Began in 1950 with mixed economic model. By then it was largely rural and agro based. Recent liberalization economic policy has enhanced linkages to rest of work with MNC’s entry Monetary and Fiscal Policies: NRB prescribes the monetary policies and affects demand and supply of money. Objective of MP is economic growth and stability Income Distribution: Poor- US$ 250 to US$ 300 per capita income and highly skewed.

Economic Environment Industrial policies: aims at increasing contribution of industries to GDP, Create employment opportunities, promote balanced regional development, encouraging FDI Privatization Policies: Aims at increasing productivity of public enterprise, decrease financial and admin cost of govt and encourage private to take public undertakings Trade and Transit Policies: Encourage private sector for export and promotion, Increase employment in export industries

Socio Cultural Education: Half of population illiterate. Privatization of education is increasing the literacy rate Demography: Population about 24 million. Majority are below 14 of age, internal migration high, Religion/Beliefs:

Technological Env Level of Technology: Labor intensive, Have understood the importance of having capital intensive technology Pace of Technological Change: Slow Change, Due to high cost of technological replacement the the change is slow Research and Development: Very minimum R and D, Companies allocate very little budget

Political Environment Multi-party parliamentary political system in 1990. Very unstable government Political parties: Various party with different ideologies, they are increasingly power centric functioning, intra party conflicts. Legal Framework Administrative Policies:

Legal Acts in Nepal General Business Legislation Private Firms Registration Act Partnership Act Company Act Cooperative Act Industrial Enterprise Act Contract Act Arbitration Act

Legal Acts in Nepal Labour Legislation Bonus Act Industrial Training Act Labour Act Trade Union Act Labour court Regulation Act Child Labour Act

Legal Acts in Nepal Finance and Investment Legislation Foreign Investment and Technology Transfer Act Foreign Exchange Regulation Act Taxation Acts : Income tax Act, Value added Tax Act, Customs Act Export- Import Act

Legal Acts in Nepal Social and Consumer Protection Legislation Patent, Design and Trademark Act Copyright Act Black Market and some other social crime and Punishment Act Food Act Nepal Standardization Act Consumer Protection Act Environmental acts

Incentives and Facilities 10 % deduction shall be allowed on deduction against taxable income for incorporating new technology, product development and efficiency development Excise duty shall be reimbursed for industries utilizing locally available raw materials, chemicals and packing materials Customes duty and excise duty on raw materials shall be reimbursed on the basis of quantity to exprot No royalty shall be imposed of any industry generating electricity for its use

Concession and facilities of tax Expenses occurred to reduce pollution, minimize the adverse environment effects and R and D expenditure are deductible from taxable income Manufacturing industry providing 500 citizens shall get tax rebate of 10 percent Industry established in certain under developed remote and semi developed area are given rebates ranging from 20 to 30 percent 10 year tax holiday in industries established in certain under developed area

Concession and facilities of tax Five years tax holiday for industries established in special economic zone and 50 percent tax rebate after five years 10 years income tax holiday for industries established in hilly region

Strategic Alliance A strategic alliance is a business arrangement in which two or more firms cooperate for their mutual benefit. Created for sharing knowledge, expertise, and expenses as well as to gain entry to new markets or to gain a competitive advantage in one Strategic alliance may turn actual or potential competitors into partners working toward a common goal. Use of strategic alliances has become a major tool for businesses that are internationalizing their operations

Strategic Alliance JOINT VENTURE-BASED STRATEGIC ALLIANCES A joint venture is created when two or more firms work together to form a new business entity that is separate from its "parents." (Not all joint ventures fit this definition, joint ventures by acquisitions are exceptions.) Joint Venture through subsidiary: Most common Joint venture through acquisition Joint venture through Merger

Strategic Alliance STRATEGIC ALLIANCES NOT BASED ON JOINT VENTURES. Formed for a limited purpose and is more narrow in its operations Tend to be less stable and last for shorter terms

Strategic Alliance Benefits MARKET ENTRY: Standard bank of british south Africa and Chartered bank of India, Australia and China SHARING RISKS AND EXPENSES SYNERGISTIC EFFECTS OF SHARED KNOWLEDGE AND EXPERTISE GAINING COMPETITIVE ADVANTAGE

Networking Networking is the process of creating alliance with people and organization beyond the immediate boundaries of the venture. Linking up with right people to get things done It opens channels to resources, market and expertise

Networking Entrepreneurs generally creates two types of networks. Personal Networks: Within immediate circles of daily relationships Social Networks: Loosely connected affiliations within the community or industry,

Questions What do you mean by e-commerce? Explain the opportunities and challenges of e-commerce in the context of Nepalese business What do you understand by environment for entrepreneurship? Briefly explain the provision made by the Nepalese Government in providing environment for entrepreneurship in Nepal. Define e-entrepreneurship? Describe the challenges and opportunities of e-entrepreneurship

Questions Explain exporting and franchising as international opportunities for an entrepreneur Which are the major areas, where the entrepreneurship need government support? Discuss in Nepalese context Discuss the use of exporting as a method of entering into global market Environment is a dynamic factor which provides strengths, weaknesses, opportunities and threats. Explain the statement in context of entrepreneurship

Questions Discuss the use of franchising as a method of entering into international market What are the major factors, which positively influence the development of entrepreneurship in Nepal