CHAPTER Al PERSPECTIVE ON ENTREPRENEURSHIP Entrepreneurship is a very important component of a capitalist economy like the Philippines. It thrives in economic systems that support innovation and hard work. When entrepreneurs become successful, the nation is immensely benefited. What is entrepreneurship and how does it affect the economic well-being of many people? What is the task of the entrepreneur regarding economic development? This chapter attempts to provide answers to concerns like those stated above. Entrepreneurship and Economic Development Econoinic development is a scheme aimed at improving the living standards of the nation’s citizenry. To achieve economic development goals, proper management of the following elements is necessary: * 1. human resources (labor supply, education, discipline, motivation); . 2. natural resources (land, minerals, fuel, climate); . 3. _ capital formation (machines, factories, roads); and 4, technology (science, engineering, management, entrepreneurship). The effective and efficient utilization of the various resource elements contrib- ute to the economic growth. This happens when the element of entrepreneurship is performed well by the players. The abundance of natural resources like fertile land, minerals, fuels, and good climate aré plus factors but are not guarantees for positive economic development. There is a need for entrepreiteurs to perform the function of harnessing the potentials of any or all of the various elements, determining the right quantity of resources needed, and applying the elements at the right time. ‘The peiformance of the entrepreneur, however, will depend much on the support provided by the government. Apart from other obstacles, government restrictions limit the effectiveness of entrepreneurs. What is Entrepreneurship Entrepreneurship refers to the economic activity of a person who starts, manages, and assumes the risk of a business enterprise. The person who undertakes entrepre- neurial activities is called an entrepreneur. The entrepreneur identifies an economic need, considers offering a business solution, proceeds to assemble the resources required, and assumes the risk of either succeeding or failing. An example of these activities is properly shown on Table 1.neuen nner lahageneny Table 1. An Example of Entrepreneurship Activity Entrepreneur's Concern Problem at Hand Entrepreneur's Action 1. Identifying an 1. High income families | 1. Establish a high school economic need are not satisfied with education with higher the services provided by standards than the current high schools in their area high schools are providing, 2, Assembling resources | 2, Resources must be made | 2. Acquire funds, hire people, required available. construct buildings, and the like. 3. Assuming risk 3. Venture must be made. | 3. Prepare project study, adver- tise, maintain good relation- ship with employees and customers, among others. The Entrepreneur's Task If all the requirements in a capitalist economy are in place, the entrepreneur can assume his assigned role in the development of the economy. A review of the contri- butions of entrepreneurs will reveal that no business, big or small, started without the hand of the entrepreneur. Even if many of these businesses failed to survive, still a sizable number developed and proceeded to make the capitalist economy a viable concern. This is made possible because the surviving enterprises are responsible for providing the following: 1. _ products and services for customers and producers; 2. employment; 3. taxes; 4, demand for suppliers’ products and services; and 5. _ training facilities for future entrepreneurs. An inspection of the array of products offered for sale in a typical supermarket reveals a wide choice provided to the consumer. When a consumer is making a decision on which brand of soap he is going to buy, for instance, he will be choosing from as many as 10 different brands. Many years ago, his choice was limited to one or two brands, Much earlier, soap was not even available for sale, The consumer had to produce his own requirement. What brought the consumer to the situation where he has the luxury of choosing from many options? And this does not refer to soaps alone but other products as well. Services which were not previously available are now at the beck and call of the consumer. The fastfood canteen at the corner, parcel delivery, communication through ellphones, cable television, short-term credit through credit card, money remittance, and the like, are among the many services made possible by entrepreneurs. A review of the statistical reports prepared by the government shows that business organized by entrepreneurs employs millions of people.The taxes paid to the government in the form of licenses, fees, and permits applicable to the enterprises, as well as income taxes applicable to the employees and entrepreneurs, easily amount to billions of pesos. The taxes collected are, in turn, poured into development projects of the government The entrepreneurs also make sure that the suppliers will have a ready market for their products and services, The retailers, for instance, assure the viability of big companies like San Miguel Corporation and Purefoods Company. Hollow block manufacturers utilize the output of big cement factories. VCD and DVD shops provide the necessary linkage between consumers and producers of movies and recorded music. s provide a training ground for future entrepreneurs. employees of enterprising persons. Many of s. Some even improved on Lastly, business enterpri A number of entrepreneurs them used their acquired skills in starting new busin the entrepreneurial skills passed on to them. Land Labor Capital (Natural Resources) (Human Resources) (Financial Resources) | Entrepreneur Production Process Finished Goods and Services Figure 1, The Entrepreneur's Task In the attempt to make profits, the entrepreneur performs the following specific functions: 1. tosupply the necessary capital; 2. to organize production by buying and combining inputs like materials and labor; 3. ‘to decide on the rate of output, in the light of his expectation about demand; and 4, to bear the risk inherent to the venture.Any business enterprise must offer products or services to the buyers whethe, these buyers are consumers or producers. The products or services that will be sold, the buyers must be bought or manufactured, In any case, there will be a need to hir the services of employees, laborers, and managers. Equipment, furniture, and mack; nery must be acquired. All of these will need funds which the entrepreneur must pr duce, in addition to whatever fund reserves are required. The next specific function of the entrepreneur is to assemble a production ur complete with manpower and equipment, the quality and quantity of which hav been predetermined by him. The entrepreneur will also determine and make decisions on the rate of outp the firm must produce. This will have to be tied up with demand. Finally, whatever risk is involved in the entrepreneurial activity, he must sufi the consequence of losses if he fails, but he will enjoy the profits as a reward if t succeeds. Entrepreneurship and Innovation, The freedom of competition afforded by the capitalist economy serves to drive the entrepreneur to innovate and get ahead of his competitors lest he is driven out cf the market. Buyers of commodities have a tendency to patronize innovative offerings of any kind and if one wants patronage, he must remember this motivation. Innovation may be defined as the introduction of a new method, procedure, custom, device, among others. Innovation could be any of the following: 1. new product; 2. new process of production; 3. _ substitution of a cheaper material in an unaltered product; 4. reorganization of production, internal function, or distribution arrangement leading to increased efficiency, better support for a given product, or lower costs; or 5. _ improvement in instruments or methods of doing innovation. Innovatios may also be viewed as the last stage in an important process consisting ¢! the following: a. Invention - which refers to the discovery or devising of new products and processes; b. Development - which refers to the process by which the ideas and pri ciples generated from the stage of invention are embodied in concrett products and techniques; and c. Innovation - which refers to the actual introduction of a new producto! process. Innovation, if it must be made successful, must provide value to the buyers ove! and above those offered by competitors. To achieve this, innovation must reduce cos? or improve the quality of products or services offered for sale.Manes Mn Examples of succe sful innovations are the following; cordless microphone; microwave oven; cellular phone; karaoke music appliance; and use of computers by engineers and architects in the design of buildings. use of Laser in the treatment of eye conditions 1 2, 3, 4, kung fu fight scenes developed by Bruce Lee in the movies; 5 6, 7, New Ventures and Long-term Enterprises A new venture cannot remain as such forever. The entrepreneur must develop it into a small business or make it grow into a mature and bigger company if he is to recoup the cost of opening a new venture and take advantage of the opportunities presented by a mature business. The transition from a new venture to a successful long-term enterprise consists of at least four major stages. The stages are as follows: 1. prestart-up stage; 2. start-up stage; 3. early growth stage; and 4, — late growth stage. The prestart-up stage happens when the entrepreneur starts to question the feasibility of an idea, product, or service. He seeks answers to questions regarding potential markets, production, and financing. This is a very important stage that the entrepreneur must consider. If he errs in his evaluation, he will fail before considerable growth is attained. In the start-up stage, the following activities are undertaken: formation of the business; generation of necessary capital; purchase of facilities and equipment; constructing prototype products; and testing the market. PPS Pe No full-scale activity must be undertaken at this stage for the simple reason that feasibility must be established and verified. The carly growth stage follows after establishing feasibility. Activities will be on a small scale, i.e., selling to limited markets with limited resources. If losses occur, it will naturally be limited also. If the enterprise is successful at this stage, the option to move to the next stage can be exercised.em VEE ‘The late growth stage is the final stage before the new venture matures into a stabj, enterprise. This is when management is structured, long-term financing is established, and facilities planning are undertaken. This is also the stage where the skills of th. entrepreneur are less needed. Instead, the skilled manager begins to take over. Rewards for Successful Entrepreneurship The use of any of the factors of production deserves to receive some form of com. pensation. The factors referred to as “things required for making a commodity” con. sist of land,-labor,'and capital. To make them work, however, a fourth factor becomes necessary and this is the entrepreneur. When land is used in production activities, the owners of land are paid a com- pensation called rent. The term “rent” refers specifically to the price paid per unit of time for the services of a durable good, which, most often, refers to land or buildings. For the effort of laborers, they are paid wages ot salaries. Wages may be deter- mined on a piece-rate basis, while salary is based on time-rate. Interest is the compensation paid to owners of invested capital. When all the factors of production are properly compensated, whatever is left as profits are regarded as income and they accrue to the account of the entrepreneur. The rates of compensation provided to the factors of production are limited to a large extent by either industry norms or market forces. Legislation, however, have modified the rates like the minimum wage rates and mandated interest rates on capital. The profits accruing to the entrepreneur, on the other hand, are limited only"by his skill and industry. He may reap huge amounts of profits, but he may also lose large amounts in the exercise. .As the landowner earns rent for allowing use of his property, the owner of capi- tal earns interést for allowing use of his capital, The laborer on duty earns wages fot his effort; while the entrepreneur earns profits for deciding how the business shall bk run. If he succeeds, he is compensated for his vision, originality, and bold undertaking (Table 2). Table 2. The Factors of Production and Their Rewards Be 4 Limiting Factor for Factors Se ie ieuaea peta Rewards Received Land rent supply and demand Capital interest industry rates/ government mandated rates Labor wages/salary supply and demand legislation Entrepreneur profits skill of entrepreneurThe Entrepreneur's Predicament In the race for winning the all-important consumers’ pesos, the bi to offer products or services that have certain advantages over the comps ess will have on’s wares. In the creation of a new venture, the entrepreneur may be successful in offering, innovative products or services, At this stage, he will reap the profits for being ahead of the competitors. This situation may be temporary because the competitor may attempt to improve his position by making moves to outpace the entrepreneur in the race. The competitor may either imitate or offer better innovations. If the competitor is successful, the profits of the entrepreneur will decline (Table 3), To be ahead again, the entrepreneur will consider offering newer and better innovations. The cycle continues until one or both find a reason to stop. Table 3. Innovation and Its Possible Effects on Competing Firms Entrepreneur Entrepreneur Entrepreneur 1 2 sd | Year 1 introduce inactive inactive innovative product Year 2 reap introduce inactive moderate innovative profits product Year 3 maximize reap introduce profits moderate innovative profits product Year 4 profits maximize reap decline profits moderate profits Year 5 introduce profits maximize innovative decline profits product Entrepreneurship and Business Size To many people, entrepreneurship means running a small business. New busi- ness ventures, however, can also be undertaken on a large scale. Both small and large businesses are confronted by problems that are entrepreneurial in nature. To effectively compete, business of whatever size must adapt innovative ap- proaches to its activities. Examples of innovations are the following: 1, offering business services during Sundays and holidays; 2, manufacture and sale of new products; and 3. selling on a deferred payment scheme.ntrepreneurship and Small Business Management { i Small businesses have the advantage of switching to another business concept whenever necessary. Large businesses cannot do the same without spending much To offset the disadvantage, however, large businesses have started to engage in “en- trepreneurship” where a person with entrepreneurial skills and is employed by the corporation is tasked to launch new products. This person is responsible for creating innovation of any kind in the organization. Summary Entrepreneurship is an activity that assures the viability and growth of the eco- nomy. Through entrepreneurship, goods and ‘services are produced, employment is * provided to many people, taxes are paid to the government, the products and services of suppliers are bought, and future entrepreneurs are provided with venues for training. ‘The entrepreneur's task consists of assembling the resources consisting of land, labor, and capital for the purpose of producing goods and services. The entrepreneur is also responsible for deciding on the rate of output his venture must produce. He also bears the risk inherent to the venture. If the entrepreneur’s task appears to be a great burden, the prospect of profits make it bearable. Innovation is an important aspect of entrepreneurship. It is defined as the intro- duction of anew method, procedure, custom, device, among others. New ventures must develop into small business or grow into a mature and bigger company. This is because the entrepreneur must récover the cost of opening the venture. The transition from a new venture to a long-term enterprise consists of the pre- start-up stage, start-up stage, early growth stage, and late growth stage. The factors of production are rewarded accordingly and if the entrepreneur is successful, he receives profits. The entrepreneur cannot feel secure of continuous success in his new venture. There are competitors he must contend with. Although entrepreneurship is generally regarded as a useful means of running a small business, it is also conducive in maintaining the growth of large corporations. Questions for Review and Discussion Why is entrepreneurship an important component of economic development? What is entrepreneurship? Who is the entrepreneur? What role does the entrepreneur play? In what ways are entrepreneurs useful to suppliers? To make profits, what specific functions are performed by the entrepreneur? Why is innovation an important entrepreneurship activity? NAEP epe What does “innovation” consist of?