CHAPTER 2: THE ENTREPRENEURIAL DECISION AND PROCESS

The decision to start an entrepreneurial venture

consists of several sequential decisions
2.2.1 The decision to leave a present career or life
style.
2.2.2 The decision that an entrepreneurial venture
is desirable.
2.2.3 The decision that both external and internal
factors make the venture possible.
 2.2.1 Change From Present Life-style

The two forces driving a person to leave a present life-style

and start a business are;
Pull factors are those which encourage individuals to
become entrepreneurs by virtue of the attractiveness of the
entrepreneurial option. Some of the most important pull
factors are:
• The financial rewards of entrepreneurship
• The freedom to work for oneself
• The sense of achievement to be gained from running one’s
own venture
• The freedom to pursue personal innovation
• A desire to gain the social standing achieved by
entrepreneurs.
Push factors are those which encourage
entrepreneurship by making the conventional
option less attractive. Push factors include.
• The limitation of financial rewards from
conventional jobs
• Being unemployed in the established economy
• Job insecurity
• The inability to pursue a personal innovation in
a conventional job
• Being a misfit in an established organization
 2.2.2 The Decision that an Entrepreneurial Venture is Desirable

 The perception that starting a new company is desirable

results from an individuals culture, subculture, family,
teachers, and peers.
 

Culture
•A culture that values an individual who successfully
creates a new business will spawn more company
formation than one that does not
. For example, the American culture places a high value on
being your own boss, having individual opportunity, being a success, and
making money – all aspects of entrepreneurship.
On the other hand, in some countries (Ethiopia is included) successfully establishing a
new business and making money is not as highly valued and failure may be a disgrace.
 
Family
• Family traits play an important role in entrepreneurship.
• The independence achieved by being company owners, professionals, artists, or
farmers permeates the entire family life, giving encouragement and value to the
company formation activity.
Teachers
• Encouragement to form company is further gained from teachers,
who can significantly influence individuals regarding not only business careers but
entrepreneurship as one possible careers path.
• Schools with exciting courses in entrepreneurship and innovation
tend to spawn.  
Peers
• Finally, peers are very important in the decision to form a company.
• An area with an entrepreneurial pool and meeting places where
entrepreneurs and potential entrepreneurs meet and discussion
ideas, problems and solutions spawn more new companies than an
area where this does not occur.
 2.2.3 Possibility of an Entrepreneurial Decision
 what makes it possible to form a new company?
Several factors – government, background, role models, and finance –
contribute to the creation of a new venture.
 
Government
• The government contributes by providing the infrastructure to
support a new venture.
 
Background
• Here the entrepreneur must have the necessary background needed to
make the company formation possible and keep it running.
• This can be knowledge acquired from formal education or previous
business experience.
 
Marketing
• There must be a sufficient market size for the
products or services of the new venture
• A company is more easily formed in an area where
there is a market demand.
 
Role Models
• That is, to see some one else succeed makes it easier
to picture yourself doing a similar activity better.
• “If that person could do it, so can I”
 Finance
• More new companies are formed when seed (startup)
capital is readily available.
 THE ENTREPRENEURIAL PROCESS
• An entrepreneur must find, evaluate and develop
opportunities by overcoming the strong forces
that resist the creation of something new.
• Taking an idea, working with it, and eventually
turning it into a business or product usually is
not an orderly process
• An idea’s movement form something a person
thinks up to a functioning business can be
thought of as a four-stage model.
 1 Pre-Startup Stage
• Entrepreneurs have already begun to believe
that their ideas are feasible and they become
fascinated by visions of their enterprise.
• without much considerations taken with the
ambition of “finding a gap and filling it”.
• This lack of preparation too often leads to early
failure. Having a gap and filling it are important,
but seldom sufficient for success.
 Four Essential Pre-Start-Up Activities

Business Concept Defined

What is the purpose of the business? What does the
entrepreneur want to accomplish with the business?
Product-market study
Product research: is the product or service needed? Realistic?
Market research. Who will buy? Where are they? What
competitors exist?
Financial plan
• Financial projections: What cash is needed?
• How will income be generated?
• What expenses are expected?
• What is invested? Borrowed?
• What is needed to meat operating requirements?
Pre startup implementation
Getting ready to start:
 The entrepreneur must find resources,
 purchase beginning inventory,
 hire those needed at startup,
 obtain necessary licenses, premises leases,
facilities, and equipment.
3.2.2 Start-Up Stage

• For companies with products or services to sell, it is the first

stage into revenue-generating activity.
•The start-up stage has no definite time frame and there are no
models to describe what a business does during this stage:
however, there are two benchmark considerations.
1st Meeting operating objectives
•Ideally the venture will generate projected sales or do slightly
better.
• If sales are significantly below projections the venture risks of
running out of cash and closing.
•If sales are substantially wider than projections the firm may
find itself equally in distress and unable to either finance
growth or replenish inventory.
 2nd. Positioning the Enterprise

• Every successful business starts with a pre conceive business

idea, which includes a concept of the product or service,
markets and growth potential. However, entrepreneurs
often find that reality is quite different from what was
envisioned/projected.
Two conditions are important here;
(1) The business must survive in the short run, and
(2) The business must be positioned to achieve long-term
objectives.
• From a survival viewpoint the start-up stage is crucial period
when adjustments of prices, inventory, debt structure, etc
are made.
• This means that the enterprise must be positioned to take
advantage of growth markets.
 3.2.3 Early Growth Stage

Once the venture is positioned, successful

businesses will experience a stage of early
growth.
This is a period of intense monitoring, and growth
can occur at different rates along a long
continuum, ranging from slow growth through
incrementally higher sales to explosive growth
through important /major changes in consumer
demand
• Very low perceived confront zone very rapid

Sales increases slowly
because of the nature of the
product or the limited market
Incremental growth is
within a comfort zone Sales increases rapidly as
of the venture’s new products gain wide
resources and owner’s acceptance in new markets.
resources and owner’s
profit objectives
3.2.4 Later Growth Stage 
• If the enterprise proves successful in the early growth stage and has
momentum, it can find itself in competition with larger companies.
 Companies reaching this stage often “go public” with stock offerings.
 Family wealth turn into corporate equity positions, private investors
convert their holding into publicly traded securities, and
management teams replace the entrepreneurial cadre.
 In many instances, founders lose the personal identity they had with
their firms, and if they are not ready to adapt to corporate
management, they leave.
 Those who do adapt enjoy the benefits of corporate management
and the profits of being major stockholders.
 A few ventures become large without losing control or going public.
 Their founders continue to manage their corporations, finance
growth through earnings and avoid the complexities of publicly traded
stock.