Chapter 1

BASIC CONCEPTS IN ENTREPRENEURSHIP

Intended Learning Outcomes: At the end of this chapter, the students are expected
to:
1. define key terms in entrepreneurship;
2. discuss entrepreneurship’s contribution to the economy and the entrepreneur’s
tasks;
3. explain the importance of small business; and
4. identify the advantages and disadvantages of operating a small business.

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 1.1 Entrepreneurship and Economic Development

What is Entrepreneurship?
Entrepreneurship refers to the ability of an individual to determine and come up with
the proper combination of the resources available in his environment and transform this into
an output of either goods or services and obtain a fair profit at the price the entrepreneur
sets.
It also refers to the economic activity of a person who starts, manages, and assumes
the risk of a business enterprise.
Entrepreneurs identify an economic need, considers offering a business solution,
proceeds to assemble the resources required, and assumes the risk of either succeeding or
failing.
It is a very important component of our capitalist economy. It thrives in economic
systems that support innovation and hard work. When entrepreneurs become successful, the
nation is immensely benefitted.

How does entrepreneurship benefit the economy?

1) Entrepreneurs make productive use of otherwise non-productive resources.
2) They provide employment opportunities (and trainings) to various individuals. It also
contributes to professional growth and skills enhancement.
3) Entrepreneurship is the backbone of economy. If people loses employment
opportunities during economic slowdowns, business is a logical choice of livelihood.
4) Their ability to innovate goods and services make our lives more comfortable and
convenient.
5) They have ability to gain international popularity and prestige for their country.
6) Taxes paid by the businesses (e.g. licenses, fees, permits, income taxes) to the
government.

Entrepreneur’s Task
1. Assembling the resources (land, labor, capital) for purpose of producing goods and
services.
2. Responsible for deciding on the rate of output his venture must produce.
3. Bears risks inherent to his business venture.
4. The consumer has the luxury of choosing from many options of products.
5. Services which were not previously available are now at the beck and call of the
consumer.
6. Business organized by entrepreneurs employs millions of people.
7. Taxes paid easily amount to billions of pesos. An in turn poured into development
projects by gov’t.
8. Entrepreneurs make sure that the suppliers will have ready market for their products
and services. (retailers & SMC)
9. Business enterprise provide training ground for future entrepreneurs.

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Enterprises are responsible for providing the following:
1. Products and services for customers and producers.
2. Employment
3. Taxes
4. Demand for supplier’s products and services
5. Training facilities for future entrepreneurs.

Entrepreneurship and Innovation

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.
5. Improvement in instruments or methods of doing innovation. May also be viewed as
the last stage in an important process consisting of the following:

Invention Development Innovation

 Invention - discovery or devising of new products & processes.

 Development - process by which the ideas ad principles generated from stage of
production are embodied in concrete products and techniques.
 Innovation - actual introduction of a new product or process

New Ventures and Long-term Enterprises

New venture cannot remain as such forever. It must develop into a small business or
make it grow into mature and bigger company. Transition of new venture to successful long-
term business consists of:
1. Prestart-up stage - feasibility of idea/goods/services seeks answer to questions on potential
markets, production, financing.
2. Start-up stage - (establishing feasibility) formation of business, generation of
necessary capital, purchase of facilities & equipment, constructing.
3. Early growth stage - activities will be on a small scale (selling to limited markets with limited
sources)
4. Late growth stage - final stage before new venture matures into a stable enterprise;
management is structured, long-term financing is established, undertaken facilities

1.2 The Nature of Small Business

What is small business?

A small business may be defined by using two approaches:
1. Market share approach – one which is independently owned and operated and which
is not dominant in its field of operation.

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 2. Total Assets Approach – one having total assets that fell w/in a certain bracket.

Characteristics of Small Business

1. Independent management
– Owner is also the manager.
2. Small capital requirement
– Requires only small capital and this can be supplied by single/few individuals.
3. Mostly local operation
– Operates in small locality.

Types of Small Business

1. Manufacturing
– Involved in the conversion of raw materials into products needed by society.
2. Service
– Those that provide service in one way or another.
– Classified into: business services, personal services, repair services,
entertainment and recreation, hotels and motels, and education services.
3. Wholesaling
– Activities of persons/establishments w/c sell to retailers and other merchants,
and/or to industrial, institutional, and commercial users, but who do not sell
in large amounts to final consumers.
4. Retailing
– Covers all activities involved in the sale of goods and/or services to the final
consumers.
5. General construction firms
– Those engaged in the construction of buildings whether for private individuals
or firms, or for government. Many perform subcontracting jobs for bigger
contractors.

Economic Importance of Small Business

1. Providers of economic opportunities for entrepreneurs.
2. Providers of products and services to consumers.
3. Suppliers of products and services to other businesses.
4. Distributors of products and services of other businesses.
5. Supporters of government.
6. Providers of employment.

Advantages of Operating a Small Business

1. Opportunity to gain control over your destiny
2. Opportunity to reach your full potential
3. Opportunity to reap unlimited profits
4. Opportunity to contribute to society and be recognized for your efforts

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Disadvantages of Operating a Small Business
1. Uncertainty of Income
2. Risk of losing your entire capital investment.
3. Lower quality of life until the business gets established.
4. Complete responsibility.
5. Having to serve undesirable customers.
6. Paperwork and other chores.
7. Long hours of work and demanding work condition.

1.3 The Ethical and Social Responsibilities of Entrepreneur

Every now and then, newspapers file reports on corruption, deception, and illegality
committed by various personalities including entrepreneurs. It may be in Accounting, Social
Media, Harassment and Discrimination, Health and Safety, Technology/Privacy.

Facebook–Cambridge Analytica data scandal in 2018

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What is Ethics?
Ethics is the study of moral obligation involving the distinction between right and
wrong. Because of ethics, we establish and adapt the general rules of conduct in society. The
following determine ethical behavior from the entrepreneurs:
 public;
 interest groups (e.g. Society of prevention of cruelty to animals);
 business organizations; and
 individual’s personal morals and values.

Ethics also pertains to adherence to ethical standards contributes to smooth flow of

business exchanges.

Figure 1. The Effect of Adherence to Ethical Standards

Factors affecting unethical behavior

• The expectation of high rewards for committing unethical behavior motivates a
person to do it.
• People are different from one another and that includes differences in reacting
different situations.
• When a person is in competition with others, and he wants to be sure of winning, he
is more inclined to adapt unethical behavior.
How Ethical Behavior is Encouraged
Ways in encouraging ethical behavior among employees:
1. Adaption of code of ethics
2. Institution of rewards and punishments concerning ethical behavior
3. Adaption of internal programs resolving conflicts
4. Creation of ethics review committees

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 5. Provision of training in ethics for employees
6. Top management support.
Code of Ethics
• A formal document indicating the entrepreneurship’s adapted principles of
appropriate behavior.
• Very useful to the firm espousing ethical behavior.
• Serves as a basic reference for employees who make big or small decisions.
Relations with customers
Entrepreneurs should provide support for consumer rights w/c are as follows:
1. The right to be safe.
2. The right to be informed.
3. The right to choose.
4. The right to be heard.
Relations with Personnel and Employees
Good ethical conduct requires entrepreneurs to be aware of their responsibilities to
employees.
1. Workplace safety
2. Quality of life issues
3. Avoiding discrimination
4. Preventing sexual harassment.
Relations with Investors and the Financial Community
• The degree of trust (investors and other players place in firms) is maintained at a high
level if the investors and the financial community feel that business firms practice
good business ethics, especially if they think that their investments are well protected.

Companies Gain investors’ Stable Entrepre-

behave trust & financial neurs are
ethically confidence system benefited

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 Philippines’ financial system survives partly because investors and other players have
place a certain degree of trust in firms they deal with. Trust and confidence are eroded by
wrongdoings of some firms.

1.4 Entrepreneurship Personality

Some are highly, moderately or slightly successful. Those who failed also differ in
terms of degree of failure. How do we know that a person is a good prospect? What
determines success or failure?

Entrepreneurial Personality
Operating a business enterprise is a very challenging occupation – the rate of failure
among those who dared make attempts is high. Two (2) complementary factors that
determine success or failure in entrepreneurship:
1. Environment
2. Personality of entrepreneur

Environment as a Factor
• An entrepreneurship will survive and grow in an environment that is friendly or akin
to it.
• Entrepreneurship will survive and grow only in economic environments of free
enterprise.
Figure 2. Economic Environment and the Entrepreneur

The Entrepreneur’s Personality

Every person has a personality that is unique and different from others. Each
personality type has a corresponding type of job that fits it. A certain personality, however,
may fit in more than one type of job, although the level of fitness will be different with each
job.

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What is personality?
Personality refers to the pattern of characteristics that distinguishes one person from
another. It includes the person’s traits, values, motives, genetic blueprints, attitudes,
emotional reactivity, abilities, self-image, intelligence, and visible behavior patterns.

Table 1. Holland’s 6 personality types

Characteristics of Entrepreneurs
Based on research, these traits are considered vital to the successful career in
entrepreneurship.
1. Drive
2. Thinking ability
3. Human relations ability
4. Ability to communicate
5. Technical knowledge
6. Reasonable risk-taker
7. Self-confident
8. Goal setter
9. Accountable
10. Innovative

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 Table 2. The Entrepreneur Compared w/ Other Risk Takers

Entrepreneur vs. Manager

For the business to get along in the first 3 stages, the entrepreneur’s skill is required.
The last two stages require the skills of the manager.

• Major distinction: orientation

– Entrepreneur (promoter) feels confident of his ability to seize a business
opportunity regardless of the resources under his current control.
– Manager (trustee) emphasizes the efficient utilization of resources.

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Complementary functions of entrepreneurs and managers.

Step 1. Identify and seize opportunity

Step 2. Assemble resources Entrepreneur’s Turf
Step 3. Start operation

Step 4. Expand operation

Step 5. Maximize profits Manager’s Turf
Step 6. Meet competition

What is a sound business idea?

Sound business idea is the economic opportunity which is within the reach of the
entrepreneur and which will provide him with a desirable value. An entrepreneur who is
well grounded in the concept of sound business ideal will be able to save time, effort, and
money in pursuing his goals.
Business ideas differ in form such as:
– An old type of business can be professionalized.
– A standard product can be customized.
– New technology can be adapted to manufacture an old product.
– Imported products can be replaced by local products.
– Business operations can be internationalized.
Figure 3. Importance of Sound Business Ideas

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Product or Service offering may be improved in terms of:
1. Performance – e.g. a chair that can carry more weight.
2. Maintenance cost – e.g. car battery that requires less servicing than competing
brands
3. Acquisition cost – latest low priced model of a certain brand of cellphone compared
to competition.
4. Salvage value - e.g. steel cabinet that has higher salvage value
5. Uses – e.g. flypaper that can be used as mousetrap
Improvements in service and in doing business:
 Service:
 Faster delivery
 Prompt after-sales service
 In doing business:
 Transactions were entertained 24 hours a day

Figure 4. Procedure in Determining the Best Business Idea

 Business ideas may be generated by anyone connected with the firm, but its is very
important that the most applicable idea to the firm’s objectives and resources is
chosen.

1) Preparation of the List

of Business Ideas
2) Screening 3) Final Selection

1. Preparation of the List of Business Ideas

– Unanticipated means
– Deliberate search
2. Screening. Criteria in screening ideas include consideration of the results of:
– Market feasibility
– Technical feasibility
– Financing feasibility
– Financial feasibility
3. Final Selection

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