Chapter -3 Entrepreneurship, Franchising and Small Business This chapter discusses the entrepreneurial and small-business spirit. First, we examine entrepreneurships and the risks that entrepreneurs take, Then we examine franchising, ooking at both the advantage and disadvantage of franchising agreements. Finally, we discuss the important role of small business. The Entrepreneur The word “entrepreneur” came from the French word “Entreprendre” which means ‘to undertake’. An entrepreneur is a person who takes initiatives and the risks necessary to 01 nize and manage a business and receives the financial profits and non-monetary rewards. But entrepreneurship is the job or vision of an entrepreneur. It is an effort that is made by an entrepreneur for creative, innovative activities. According to French economist J.B. Say, “the entrepreneur is a person who shifis economic resources out of an area of lower and into an area of higher productivity and yield.” According to Adam Smith, “entrepreneur is a proprietary capitalist a supplier of capital and at the same time working as manager intervening between the labour and the consumer”. So, entrepreneur is the individual who creates something new with value by devoting the necessary time and efforts, assuming the accompanying financial, psychological and social risks and receives the resulting monetary rewards, satisfaction and freedom. Roy Kroc is an example of an entrepreneur because he founded and established Mc Donald’s. His hamburgers were not a new idea, but he applied new techniques resource allocations and organizational methods in his venture. This is what entrepreneurs do, and this is what entrepreneurship means. ‘The Growth-or nted Entrepreneur The obvious question may ai e, why do entrepreneurs continue to emerge when significant risks, time and energy are needed to be successfull? The researchers haveidentified some interesting characteristics of growth oriented entrepreneurial personality: ¥ Innovativeness: The famous economist Joseph A. Schumpeter said that “entrepreneurship is an innovative work”, ‘An entrepreneur is an innovator who tries to innovate something ew or add something new to the existing things, Y Need for achievement Growth-oriented entrepreneurs have a high need for achievement. They have a strong desire to succeed, to grow, to accomplish challenging task. Their perseverance and determination to work make them suecessfl in the business world, Y¥ Low need to confirm: Growttvoriented entrepreneurs listen, but they are able to ignore other's advice. They are quite capable to take decisions and run the business by their own. Y Persistence. They work hard on the details and relentlessly attempt to find ways to become more profitable. Y High energy level: In order to run the business venture entrepreneurs have to perform all the necessary works i, € planning, organizing, directing, motivating, and financing on a demanding schedule. All these acti ies require high mental and physical energy. Risk-taking tendency: Growth-oriented entrepreneurs are risk takers and they believe so strongly in their ability to achieve that they do not see much possibility of failure. Thus, they accept risk and find it motivating. Y Optimistic attitude: Entrepreneur usually works in a dynamic new environment. For this reason the growth-oriented entrepreneur must have optimistic attitude. Business experts have lentified “the successful entrepreneurs are not disturbed by the present problemsfaced by them. They are optimistic for fure that the situations will become favourable to business in future” Y Foresighmess: ‘The growth-oriented entrepreneurs have a good foresight to know about future business environment. In other words, they wi H visualize the likely changes to take Place in market, consumer's attitude, technological development ete, and take timely action accordingly. Risks of Entrepreneursh ‘An entrepreneur faces so many risks in his career these include: Business risks: 'n launching a business, the entrepreneur usually faces substantial business risk ie risk of failure, Financial risks: The entrepreneurs face significant financial risk, since they invest most of their financial resources in the business: Career risks They may take a career risk by leaving a secure job for a venture with a high uncertain future, Family and social risks. They also incur family and social risks because the demands of starting and running a business allow little time for attention to family and friends, Causes of Business Failures Experts have identified some specific reasons why thousands of businesses fail each year,- People fail because they jump into a business too quickly. They do not analyse their own strengths and weaknesses. They do not know who am 1? What do I want? What are my goals? » Businesses also fail because they run out of money. Estimates of cash requirements are a top priority before starting the venture. > Business may fail because of inadequate and ineffective planning. Some businesses are not able to detect market and competitive charges and not plan for emergency situations. v Unvwillingness t0 work hard, lack of ability to deal with people, unwillingness to delegate authority and responsibility etc. are another important reason for business failure. Franchising Wy franchising is a type of licensing agreement where a franchisor gives right to the franchisee to use business name, trade mark etc. and to sell the goods and services in a specific region or country. For example, Pizza Hut, KFC, Wimpy, Ramada Inn etc. ‘The speciality of franchise business is that the franchisor monitors and controls franchisee’s operation in order to ensure the international quality. Today, franchising is an attractive and easiest opportunity to become the owner of a business. A franchise business includes the following feature YA contractual agreement between the franchisee (person) and franchiser (company). Y A branded good or service Operation by a businessperson for the purpose of earning a profit and Y Monitoring by the franchisor so that standard procedures and a standardized product or service are used. Many people assume franchising is of recent origin, but this is not so. The first franchise operation in the United States was Coca-Cola. In the 1950s, franchising es touch every type of spread across the United States. Now franchise opportu business: motels, fast foods, drugstores, variety stores, training programs etc.Advantages of Owing a Franchise Following are the main reasons why Appeals to people: > Guidance: 4m conducting business the main problem is the lack of ‘managerial ability. Many franchisors try to overcome managerial def iclencies or inexperiences. by providing some form of taining. > Brand name: ‘The investor who owns a franchise business njoys the right to use nationally promoted brand name, > Proven product: ‘The franchisor ean offer the franchisee proven quality product and method of operating the business. > Financial assistance: By joining a franchise company, the individual investor may be able to secure financial assistance, Disadvantages of Owing a Franchise As does any business venture, franchising has some disadvantages. Some of the more pressing negative features of franchise business are: > Costs, As mentioned earlier, franchisees must pay franchise fees. In return, the franchisor provide training, guidance, and other forms of support that would otherwise nal activities, financial records, opment.> Franchise Disclosure: Because of the nature of the franchising business, evaluation an opportunity carefully before signing an agreement is important. It requires every franchise firm to provide franchisor with deta information inclu ng a financial statement, company history review, fees, investment requirements, and litigation history. The large number of franchise companies makes the task difficult, Small Business Definition of Small Enterprise What characterizes small business? There are so many disagreements regarding the defini of small business. The Small Business Act of 1953 defines small business as “one which is independently owned and operated and not n and characteristi domain in its field of operation.” The definition and criteria of small business differs from economy to economy. Existing definition of SME is recommended by Better Business Forum and accepted as a uniform one by Ministry of Industry and Bangladesh Bank. Criteria of the definition of SME are given below: Small Enterprise refers to the firm/business which is not a public limited company and complies the following criteria: Serial [Fixed Asset other than [Employed Manpower No. Sector |Land and Building (Tk.) |(not above) jo Service [s0,000-50,00,000 25 loz. Business {50,000-0,00,000 25 (03. Industrial [50,000-1,50,00,000 503.2. Definition of Medium Enterprise Medium Enterprise refers to the establishment/firm which is not a public limited company and complies the following criteria: Ro [Seer iba ear tae, moped Manpower 01. Service {50,00,000-10,00,00,000 50 2. Business |50,00,000-10,00,00,000 50 103. Industrial 1,50,00,000-20,00,00,000 | 150 Role of SME The role of Small and Medium Enterprises (SMEs) is indispensable for overall economic development of a country particularly for developing countries like Bangladesh. Since this sector is labor intensive with short gestation period, it is capable of increasing national income as well as rapid employment generation; achieving Millen m Development Goals (MDGs) especially eradication of extreme poverty and hunger, gender equality and women empowerment. SME sector has played a vital role in economic development of some prosperous countries of Asia. Our neighbouring countries have also given due importance on SME. Terming SME as ‘employment generating machine’ they stressed on SME development for higher economic growth, narrowing the gap of income inequality and poverty alleviation. The present government has also put much empha on the development of SME sector considering it as ‘the driving force for industrialization: Steps/Measures taken by Bangladesh Bank for SME Development Bangladesh Bank has already introduced several schemes and programmes to flourish and expand SME Enterprises. Refinance scheme funded by Bangladesh Bank, IDA and ADB has been facilitated for the development of SME Sector. Besides, to ensure institutional financial facili ies under easy conditions Bangladesh Bank has taken diverse steps; like opening of ‘Dedicated Desk’ for SME and 'SME Service Centre’ in the banks and special facilities for the women entrepreneurs. But reality is that expected outcome has not been achieved so far in this sector.In the back drop of recent global recession and changed circumstances, it has become essential to include all segments of people in the growth process through facilitating credit to the sectors where less attention has been given due to present market mechanism, specially. in agriculture and SME sector. Reasonably, a ew department namely ‘SME and Special Programmes De (ment has been established in Bangladesh Bank recently which will be solely responsible for policy formulation, facilitating fund, monitoring and development of entrepreneurship in the SME sector, The guidelines formulated by the newly created department for compliance of the banks and financial institutions for the development of SME sector are enumerated below: ¥ For the first time in Bangladesh, an indicative target for SME loan disbursement has been set for 2010 by the banks and financial institutions considering SME development as one of the most important development agenda of the country. According to the target, SME loan shall be disbursed to the small, medium and women entrepreneurs. ¥ Following the ‘Area Approach Method’ banks/financial institutions will try to attain their indicative targets separately by dividing it as branch wise, region wise & sector wise. v Each bank/financial institution shall follow a separate business strategy in financing SME loan with least formalities in executing documentation to ensure easy and speedy loan sanction and disbursement process. ¥ Priority shall be given to small entrepreneurs. Y For small entrepreneurs credit limit will be ranged from Tk. 50,000 (Fifty thousand) to Tk. 50,00,000 (Fifty lac). ¥ Por more participation of women entrepreneurs in industrial development of the country and for conducting business activities by women entrepreneurs in large number, priority shall have to be given to potential women entrepreneurs in respect of SME credit disbursement.¥ Banks & Financial Institutions shall put highest priority in receiving loan application from small and medium women entrepreneurs and settle the loan disbursement process within very reasonable time from the date of acceptance of the application. ¥ Each bank and financial institution shall establish a separate ‘Women Entrepren 1's! Dedicated Desk’ with necessary and suitable manpower, provide them training on SME financing and suiltably appoint a lady officer as chief of dedicated desk. Branch wise list of "Women Entrepreneurs’ Dedicated Desk’ should be sent to SME and Special Programmes Department of Bangladesh Bank within two months from the date of declaration of this policy and programme. ¥ Banks and financial tions may sanction up to Tk. 25,00,000 to women cntreprencurs against petsonal guarantee. In that case, group security/social may be considered. ¥ The success in SME loan disbursement will be considered as yardstick for further approval of new branches of the concemed bank. License for New Branches will be issued for financing the priority sectors like SME. and agriculture from 2010 in the name of 'SME/Agriculture Branch’ instead of ‘SME Service Centre; in order to involve banks in financing priority sector like SME and Agriculture: ¥ Each bank/financial institution shall fix the interest rate on SME loan sector/subsector QUESTIONS ROR DISCUSSION AND REVIEW <2/vho isan entrepreneur? Why do some firms encourage entrepreneurship? 2 piscuss the charactristies ofa successful entrepreneur. <2 Explain the various risks of entrepreneurship. 4. Why would a young person (21t045) start her own business? An older person (over 45) start his own business 5. Why do some small businesses typically fail to achieve their goals? V6, What is franchise business? Distinguish between franchising and licencing. Explain the advantages and disadvantages of franchising 8. Ifyou were a franchise owner, would paying a royalty to the franchisor be a major issue and concern? Why or why not? 9. Why would a person want to own a franchise of a major, well-known franchisor? 10. Define small business. Explain the role of SME in the perspective of Bangladesh. Il. Identify the Measures taken by the Bangladesh Bank for SME Development in Bangladesh,