Lecture 08a GEB 1011 Chapter 5 Entrepreneurship

Rev. 01/28/2011

1.0 Entrepreneurship as one of the four economic factors of production. Factor of roduction Land La"or Capita% Entrepreneurship Economic a!ment Rent #a$es &nterest Economic rofit

2.0 E'p%ain ho( )economic profit* differs from )accountin$ profit* + ,ota% Revenue - Cost of Goods .o%d /i.e. a%% direct costs0 1 Gross 2ar$in /e'p%ain (h! )$ross mar$in* is a "etter term than )$ross profit*0 ,hen from this !ou - Genera% and 3dministrative E'penses /i.e. a%% indirect costs0 1 rofit Before ,a'es From this !ou - &ncome ,a'es 1 4et rofit /this is (hat !ou can pa! dividends from or ta5e to retained earnin$s0 &n order to $et to )Economic rofit* !ou - 6pportunit! Cost of Capita% Emp%o!ed in the "usiness /E'p%ain0 1 Economic rofit /a%(a!s %ess than accountin$ profit0 7.0 8istor! of the use of the (ord )entrepreneur* and )entrepreneurship* a0 Richard Canti%%on /ear%! 1900:s0 - Economist that )coined* the (ord )entrepreneur* /French0 (hich %itera%it! trans%ated is )"et(een-ta5er*; or ta5in$ on an active )ris5-"earin$* ro%e in pursuin$ opportunities. .erved as a "rid$e "et(een someone (ho had the capita%; or mone!; (ho chose not to persona%%! pursue those opportunities. /3ristocrac!0 "0 <ean Baptiste .a! /mid 1800:s0 - Economist that proposed that the profits of entrepreneurship (ere distinct and separate from the profits arisin$ from the o(nership of capita%. /,his is sti%% re%evant toda! in re$ards to the ro%e of the venture capita%ists0 ,his %ed to the distin$uishin$ "et(een those (ho supp%ied funds and earned interest; from those (ho profited from entrepreneuria% a"i%ities earnin$ economic profit. c0 3%fred 2arsha%% /18=00 - Economist (ho in 18=0 first pu"%ished in his te't"oo5 that )entrepreneurship* (as a necessar! )Factor of roduction*

d0 <oseph .chumpeter /1=70:s0 - Economist (ho proposed that entrepreneurship invo%ved innovation or (hat he ca%%ed )creative destruction*; (hich he defined as the process (here"! e'istin$ products; processes; ideas; and "usinesses are rep%aced "! "etter ones. e0 eter >ruc5er /1=?0:s0 - Business (riter that added the concept that entrepreneurs reco$ni@e and act upon opportunities. A.0 >efinition of entrepreneurship B&.&64 C Entrepreneurs )reco$ni@e* and )act* opportunities that encompass hu$e potentia% not )mar$ina%*. 6thers %oo5 at the same environment and see nothin$.

For this c%ass )entrepreneurship* is $oin$ to "e defined as "ein$ re(arded (ith )economic profit*. Dou can o(n a "usiness and not "e an entrepreneurE Loo5 "ac5 at the factors of production. &f !ou are se%f emp%o!ed (ithout emp%o!ees and !ou are not ma5in$ )economic profit* then !ou are a )se%f-emp%o!ed %a"orer* pa!in$ !ourse%f )(a$es* and a sma%% component of )interest* for the )capita%* or too%s !ou have in order to do !our (or5. #hen !ou hire emp%o!ees and in particu%ar (hen !ou stop doin$ an! of the (or5 !ourse%f and !our not ma5in$ )economic profit* !ou are then a )capita%ists* and !ou are earnin$ a sma%% )(a$e* for !our administrative (or5 and a %ar$er amount for )interest* for a%% the )capita%* )too%s* !ou provide for !our emp%o!ees to use (hen (or5in$ for !ou. Entrepreneurship can "e found in %ar$e or$ani@ations as (e%% as sma%% or$ani@ations. Lar$e or$ani@ations can "e )capita%ists* too. 4ot a%% "usinesses are entrepreneuria% (hether sma%% or %ar$e. 5.0 Five >imensions of Entrepreneurship a. Strategic Orientation -- this descri"es the factors that drive a compan!:s formu%ation of strate$!. a0 a )trustee* or an )administrator:s* mindset -- reco$ni@es the need to e'amine the environment for opportunities that e'ist; "ut is sti%% constrained "! a trustee-%i5e focus on resources on hand. ,heir focus is ho( do & uti%i@e the resources & contro%; and protect themE "0 an )entrepreneuria%* orientation -- p%aces the emphasis on the )opportunit!* and (i%% not "e constrained "! the %ac5 of resources on hand. ,he! (i%% find them if the opportunit! is a $ood oneE ". Commitment to Opportunity C as (e e'p%ore this dimension it "ecomes c%ear that the definition of the entrepreneur as )creative* or

)innovative* is not sufficient. ,here are man! innovative thin5ers (ho never $et an!(here. ,here are man! patents for products that never $et to mar5et. Entrepreneurs; are fami%iar (ith their chosen fie%d. ,his means that the! have the a"i%it! to reco$ni@e patterns as the! deve%op and the confidence to assume that missin$ e%ements (i%% ta5e shape as the! foresee. ,his ear%! reco$nition ena"%es them to $et a Fump on others in commitment to action. ,he! do not (ait for a sure thin$ to deve%op. ,he! ma5e it deve%op. c. Commitment and Control of Resources -- entrepreneurs %earn to use other peop%e:s resources (e%%; and the! decide over time (hat resources the! need to "rin$ in-house. ,he! 5no( e'act%! (hat resources are necessar! to pursue a $iven opportunit!. ,he entrepreneur attempts to ma'imi@e va%ue creation "! minimi@in$ the resource set; and "! doin$ so has to accept more ris5. Entrepreneurs reGuire that !ou %earn to do a %itt%e more (ith a %itt%e %ess. &n times of rapid chan$e this mu%ti-sta$e commitment or resources is a definite advanta$e in respondin$ to chan$e in competition; the mar5et; or techno%o$!. d. Management Structure -- entrepreneuria% companies are more f%e'i"%e (ith a f%at and informa% or$ani@ation; ho(ever; (ith the entrepreneur a%(a!s firm%! in contro%. 3uthorit! (ithin the structure is "ased on competence and persuasion rather than "! hierarchica% position. e. Re(ard hi%osoph! -- entrepreneuria% companies differ from administrative%! mana$ed ones in their phi%osoph! re$ardin$ re(ard and compensation. ,he! are more e'p%icit%! focused on the creation and harvestin$ of va%ue creation. ,he! tend to "ase compensation on performance that is c%ose%! re%ated to va%ue creation. 3dministrative%! mana$ed companies are more often $uided in their decision ma5in$ "! their desire to protect their position and securit! rather than capture va%ue. ?.0 ,he ro%e of entrepreneurship in economic deve%opment. a0 >efine economic $ro(th C increase in output; "ut it is %imited "! certain constraints "0 Factors 1. ne( sources of additiona% ra( materia%s 2. %a"or increase in %a"or force increase in productivit! 7. capita% increases due to savin$s/investment ne( techno%o$! A. entrepreneurship

ne( products; processes; mar5ets techno%o$!/productivit!

9.0 Conditions that support entrepreneurship a0 o%itica%/Le$a% individua% freedom; ri$ht to o(n private propert! %e$a% s!stem that protects private propert! re%ative%! %o( ta'es %imited re$u%ations "! $overnment <ust %i5e in the 4B3 !ou do not (ant a referee that is (hist%e happ! nor do !ou (ant a referee that is too comp%acent and %ets the $ame $et out of hand. "0 Cu%tura% individua% achievement supports ne( products; and processes; /i.e. chan$e0 8.0 Lets ta%5 a"out )entrepreneurship* and the (ord )intrapreneurship* found in "usiness te't"oo5sE #e"ster:s >ictionar! does not reco$ni@e intrapreneurship 2icrosoft #ord:s spe%% chec5 does nor reco$ni@e it either Dour instructor does not reco$ni@e it ,here is one and on%! one factor of production and it is )entrepreneurship* =.0 Concept of )entrepreneurship* in not-for-profit or$ani@ations entrepreneurship is a"out reco$ni@in$ )opportunit!* entrepreneurship is a"out $ro(in$ an or$ani@ation non-profit or$ani@ations need these Gua%ities 10.0 ,he ro%e of the )entrepreneur* and the ro%e of the )mana$er* entrepreneurs create )ne( va%ue* throu$h $ro(th; contend (ith ris5 mana$ers protect )status Guo* resources; and are ris5 adverse ,!pes of "usiness firms a0 se%f emp%o!ed %a"orer performs the actua% (or5 pa!s se%f a )(a$e* "0 capita%ists does not perform the (or5 "ut hires %a"orers to do it provides the )too%s* )capita%* for the %a"orers

11.0

c0 entrepreneuria% &dentifies )ne(* opportunit!; and e'p%oits it Creates ne( economic va%ue Encoura$es others to see5 ne( ideas; and ta5e ris5