Year: 2020

Ancillarisation

An ancillary unit is defined as an Industrial undertaking having investment in fixed assets, in plant & machinery whether held on ownership or on hire purchase not exceeding Rs. 100 crore & engaged in:

• Manufacturer of parts & components, sub-assemblies, tooling or intermediates
• Rendering of service or proposing to supply or render not less than 50 % of his production or service to one or more other industrial undertaking for production.

Major difference between SSI & ancillary is that unit setup which can be recognised as a full fledge large company can be a part of ancillary but under SSI such unit can get transformed into medium or large-scale sectors.

Major benefits of Ancillarisation drive to a country is that:

• Growth of employment
• Growth of GDP
• Growth of entrepreneurship

Advantages of Ancillarisation

• Minimise investments of setting up of large units as the required as the required production can be sourced a lower at rate with same quality through subcontracting from an ancillary unit
• Ancillary unit’s JIT concept helps the large companies to bring down the inventory level and saves a lot of money.
• Sourcing is economical from ancillary units that are normally located near the companies
• Ancillary units work with the parent companies in the process & product development

Disadvantages of Ancillarisation

• Delay in payments puts ancillary companies in big trouble. If the parent co. is big then the ancillary co. finds it difficult to take any legal action
• When parent companies revise the specification, ancillary units are sometimes not given the expected support for adopting the higher technology, not given sufficient time to bring changes in the technology to match that of parent co.
• Multiplication of suppliers makes the ancillary units operate below BEP(Breakeven point) as a result these units incur losses because of capacity utilisation.

BPO

Business Process Outsourcing, popularly known as BPO, is the business strategy where one company hires another company to perform a certain task for them, i.e. they outsource a certain job.

Say for example a manufacturing company will outsource their supply chain management to another company who specializes in supply chain management. So it essentially entails outsourcing one or more non-core business activities or processes to an external service provider. So there are two parties involved, the client company (the outsourced) and the external service provider or the vendor (the outsourcer)

One point to note that only non-core activities are usually outsourced. The companies do not part with their core competencies, they maintain all their focus on these like manufacturing, marketing etc.

However non-core services like after sales service, customer relations, supply chain management, real-time accounting etc. can be outsourced to BPOs.

Advantages of a BPO

1. Flexibility

Outsourcing non-core activities to a BPO allows a company to be far more flexible. Firstly, the company does not have to invest in additionally fixed assets and can convert them to variable costs. It also increases flexibility in resource management of the client company and helps in adapting to changes in the environment much faster.

2. Cost Effective

Outsourcing some of the business processes and activities can be very cost effective for the client company. They save on investing in fixed assets and fixed costs. And they can redirect these funds for their core activities.

Also outsourcing to developing countries proves to be very cost saving for these companies. For example, if any large MNC was to outsource their IT services to India, they would save an average of 30% of the company’s expenses. This is quite a significant difference.

3. Speed

One of the biggest advantages of BPOs is that they increase the speed of the business processes outsourced to them. They have a very good response time and the clients can focus on the core activities. This fragmentation of activities speeds up the whole process and is very important in cases like customer service.

4. Skilled Manpower

When you outsource one of your business activities to a BPO, you are insured of exemplary services provided by skilled manpower. So if you outsource your supply chain management, rest assured your supply chain will be handled by skilled supply chain managers who are experts in their field. Same goes for IT services or accounting etc.

Franchise

Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isn’t easy to pin down. In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller represents that it will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable.

Here are other key factors:

• A business opportunity doesn’t generally feature the seller’s trademark; buyers operate under his or her own name.
• Business opportunities tend to be less expensive than franchises and generally don’t charge ongoing royalty fees.
• Business opportunities allow buyers to proceed with no restrictions as to geographic market and operations.
• Most business opportunity ventures have no continuing supportive relationship between the seller and the buyer; after the initial package is sold, buyers are on their own.

The Pros

The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize; and the advantages of group advertising and purchasing make operations more profitable. In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.

The Benefits

• Reduction of risk
• Turnkey operation
• Standardized products and systems
• Standardized financial and accounting systems
• Collective buying power
• Supervision and consulting readily available
• National and local advertising programs
• Point-of-sale advertising
• Uniform packaging
• Ongoing research and development
• Financial assistance
• Site selection guidance
• Operations manual provided
• Sales and marketing assistance

M&A

The terms “merger” and “acquisition” are often confused and used interchangeably by business and financial executives. On the face of it, the difference may not really matter since the net result is often the same: Two companies (or more) that had separate ownership are now operating under the same roof, usually to obtain some strategic or financial objective. However, the strategic, financial, tax and even cultural impact of the deal may be very different, depending on how the transaction is structured. Merger refers to two companies joining (usually through the exchange of shares) to become one. Acquisition occurs when one company, the buyer, purchases the assets or shares of another company, the seller, paying in cash, stock or other assets of value to the seller.

In a stock-purchase transaction, the seller’s shares are not necessarily combined with those of the buyer’s existing company. They may be kept separate as a new subsidiary or operating division. In an asset-purchase transaction, the assets to be conveyed by the seller to the buyer become additional assets of the buyer’s company, with the hope and expectation that the value of the assets purchased will, over time, exceed the price paid, enhancing shareholder value as a result of the transaction’s strategic or financial benefits.

Reasons for Merger-mania

There is no single explanation for the current resurgence of merger and acquisition activity, and the full impact on the economy is complex and remains to be seen, but certain themes and trends have emerged. The key reasons deals are getting done are:

• Mergers and acquisitions are clearly more strategically motivated now than were their counterparts of the 1980s and early 1990s. Jobs are often being added, not lost, as a result of these deals. Companies are being built up, not busted up.
• The financing behind deals is sounder and more secure than ever before. Buyers are using their stock as currency and sellers are gladly accepting this form of payment, in lieu of or in addition to cash, which forces both parties to work together on a post-closing basis to truly enhance shareholder value.
• Industry trends. These include rapidly-changing technology (computer industry), (fierce competition (telecommunications and banking), (changing consumer preferences (food and beverage industry), pressure to control costs (healthcare) and reduction in demand, (aerospace and defense contracts).
• Need to transform corporate identity. For example, the airline ValuJet began looking for a merger partner to provide a new image that could offset the negative publicity caused by a major crash and revelations about its spotty safety records.
• Spread risks and costs. Developing new technology (as in the communications and aerospace industries, researching new medical discoveries (medical device and pharmaceutical industries) or gaining access to new sources of energy (oil and gas exploration and drilling) account for a number of recent acquisition and merger deals.
• Develop an international presence and expand market share. This market-penetration strategy is often more cost-effective than trying to build an overseas foothold from scratch.
• Remain competitive or offset seasonal or cyclical market trends. The retail, hospitality, food and beverage, entertainment and financial services industries carried out mergers and acquisitions in response to the consumer’s demand for “one-stop shopping.”
• The IPO boom of the late 1990s in the technology and Internet sectors contributed to the merger and acquisition frenzy. Proceeds from IPOs created large pools of cash earmarked for acquisitions, and sellers became more willing to take the buyer’s stock as currency in the transaction.

Women Entrepreneurs may be defined as the women or a group of women who initiate, organize and operate a business enterprise.

Government of India has defined women entrepreneurs as an enterprise owned and controlled by a women having a minimum financial interest of 1% of the capital and giving at least 51% of employment generated in the enterprise to women.

Entrepreneurship is necessary to initiate the process of economic development of both developed and developing countries as it is the back bone of economy of any country.

Entrepreneur is a catalytic agent of change. It is also instrumental in sustaining the process of economic development. Every country tries to achieve economic development for prosperity and better life standard of its people. Development has economic, social and political dimensions and is incomplete without the development of women who constitute about 50 per cent of total population. So, contribution of women is essential in economic activities for healthy nation building.

Women Entrepreneurs

In this golden age of globalization, digitalization and start-up booms, India is clearly seeing a revolution vis-à-vis women entrepreneurs. Today’s women entrepreneurs do not come only from the established business families or from the higher-income sections of the population, they come from all walks of life and from all parts of the country.

From running sports media firms to construction companies and security and detective agencies, women are dabbling into fields that have traditionally been bastions of male domination.

The role of women in our society has changed drastically in the past few decades and for the better. Women are now occupying the corporate positions previously regarded as masculine and are outpacing their male counterparts in some areas. The gender stereotypes which were more prevalent in the society decades ago are breaking slowly.

Women bring a different set of perspectives to problem solving that can enhance the quality of the solution. Women bring a unique set of issues and experiences that can help in decision making enhancing the quality of the decision.

Women entrepreneur has been recognized during the last decade as an important untapped source of economic growth. Women entrepreneurs create new jobs for themselves and others and by being different solutions to management. In today Indian scenario when India is turning out to be an economic power house the recent financial crisis which has affected countries has had its impact on the minds of women as they have understood the need to earn more.

In Indian scenario, women have to face many problems in carrying out any economic activities or undertaking any entrepreneurial task. Women have to face various socioeconomic and other problems as entrepreneurs as they are not treated equally to men due to social and cultural traditions.

Now in recent India, it is observed that there has been an increasing trend in number of women-owned enterprises as the result of drastic change in the present world. Women are participating in large number in the present world of business.

Woman Entrepreneurs in India: Importance

It is an extension of kitchen activities. In certain businesses, women entrepreneurs are doing exceedingly well and even they have exceeded their male counterparts. Women are successful not only in law, science, medical, aeronautics and space exploration and even in police and military services, but now they are showing their might even in business and industry. They have proved that they are no less them men in the efficiency, hard-work, or intelligence, provided they are given proper scope.

Women entrepreneurs tend to be highly motivated & self-directed, they also exhibit a high internal locus of control & achievement. Researchers contend that women business owners possess certain specific characteristics that promote their creativity and generate new ideas and ways of doing things.

Why India needs more Women Entrepreneurs

Women entrepreneurs have the unique tendency to build and maintain long-term relationships. They have more effective communicational, organizational and networking skills than their male counterparts.

Moreover their fiscally conservative approach reduces the risk of failure of their organizations. Women entrepreneurs account for improved economic growth and stability within a country. Women entrepreneurs inspire other women to start businesses. This leads to more job creation for women which ultimately helps in reducing the gender gap in the workforce. When women become successful in a field, the next generation of women is more likely to emulate their success.

According to studies, it has been observed that Women are very good entrepreneurs as they can maintain work balance in life. These factors may vary from place to place and business to business but women entrepreneurship is necessary for the growth of any economy whether it is large or small.

It is observable that women entrepreneurs have proved to be a strong driving force in today‘s corporate world. They are competent to balance their duties of both motherhood and entrepreneurship but they comprise of almost half of all businesses owned today. Woman can pick up a job any day, but if she becomes an entrepreneur she can provide a livelihood to 10 more women at least..!!

Highly educated, technically sound and professionally qualified women must be encouraged for managing their own business, rather than being employed in any outlets. The uncultivated talents of young women can be identified, trained and exploited for various types of industries to increase the productivity in the industrial sector as well as the nation. Now a days even after facing so many obstacles The Indian women is now becoming an educated and economically independent.

The word “entrepreneur” is derived from the French verb “entreprendre”, which means ‘to undertake’. This refers to those who “undertake” the risk of new enterprises. An enterprise is created by an entrepreneur. The process of creation is called “entrepreneurship”.

Meaning

Entrepreneurship is a process of actions of an entrepreneur who is a person always in search of something new and exploits such ideas into gainful opportunities by accepting the risk and uncertainty with the enterprise. It is the process of starting a business, a startup company or other organization. The entrepreneur develops a business plan, acquires the human and other required resources, and is fully responsible for its success or failure. Entrepreneurship operates within an entrepreneurship ecosystem.

Definitions

According to A.H.Cole

Entrepreneurship is the purposeful activity of an individual or a group of associated individual, undertaken to initiate, maintain or aggrandize profit by production or distribution of economic goods and services.

According to J.A. Timmons

Entrepreneurship is the ability to create and build something from practically nothing.

According to Musselman and Jackson

“Entrepreneurship is the investing and risking of time, money and effort to start a business and make it successful.

Characteristics of Entrepreneurship

1. Economic and dynamic activity

Entrepreneurship is an economic activity because it involves the creation and operation of an enterprise with a view to creating value or wealth by ensuring optimum utilization of scarce resources. Since this value creation activity is performed continuously in the midst of uncertain business environment, therefore, entrepreneurship is regarded as a dynamic force.

2. Related to Innovation

Entrepreneurship involves a continuous search for new ideas. Entrepreneurship compels an individual to continuously evaluate the existing modes of business operations so that more efficient and effective systems can be evolved and adopted. In other words, entrepreneurship is a continuous effort for synergy (optimization of performance) in organizations.

3. Profit Potential

“Profit potential is the likely level of return or compensation to the entrepreneur for taking on the risk of developing an idea into an actual business venture.” Without profit potential, the efforts of entrepreneurs would remain only an abstract and a theoretical leisure activity.

4. Risk Bearing

The essence of entrepreneurship is the ‘willingness to assume risk’ arising out of the creation and implementation of new ideas. New ideas are always tentative and their results may not be instantaneous and positive. An entrepreneur has to have patience to see his efforts bear fruit. In the intervening period (time gap between the conception and implementation of an idea and its results), an entrepreneur has to assume risk. If an entrepreneur does not have the willingness to assume risk, entrepreneurship would never succeed.

5. Skillful Management

Entrepreneurship involves skillful management. The basic managerial skill is the most important characteristic feature of entrepreneurship. For effective management of an enterprise, the role of an entrepreneur is to initiate and supervise design of organization improvement projects in relation to upcoming opportunities is very much important.

6. Accepting Challenges

Entrepreneurship means accepting challenges amidst risk and uncertainty. While accepting entrepreneurship as a career the entrepreneur accepts the challenges of all odds and puts his efforts to convert the odds into viable business opportunities by pooling together the resources of building and running the enterprise.

7. Goal-Oriented Activity

The entrepreneur who creates and operates enterprises seeks to earn profits through satisfaction of needs of consumers; hence, entrepreneurship is a goal-oriented activity. Entrepreneurship emphasizes results, achievements and targets achieved. It is work done not imaginary plans or paper decisions. Hence entrepreneurship is a goal-oriented activity.

8. Value Creation

Next, we find that the process of creating value is a characteristic in describing entrepreneurship. Through entrepreneurship, new products, services, transactions, approaches, resources, technologies, and markets are created that contribute some value to a community or marketplace. We can also see value created when, through entrepreneurship; resources are transformed into outputs such as products or services. During this transformation process, value is created because the entrepreneur is fashioning something worthwhile and useful. Drucker says, “Until entrepreneurial act, every plant is a seed and every mineral just another rock.

9. Dynamic Process

Entrepreneurship is a dynamic function. Entrepreneur thrives on changes in the environment, which bring useful opportunities for business. An entrepreneur deals proactively with changing markets ­and environment. He looks at the changes as the source of market advantages, not as a problem. Uncertainties are market opportunities for him. He capitalizes on fleeting market anomalies.

10. Uniqueness

Other characteristic found in entrepreneurship is that of uniqueness. Entrepreneurship involves new combinations and new approaches with which entrepreneurs are willing to experiment. Through Entrepreneurship unique products are created and unique approaches are tried. Entrepreneurship isn’t merely imitating what others have done. It’s doing something new, something untested and untried – something unique.

11. Interest and Vision

The first factor for entrepreneurial success is interest. Since entrepreneurship pays off according to performance rather than time spent on a particular effort, an entrepreneur must work in an area that interests her. Otherwise, she will not be able to maintain a high level of work ethic, and she will most likely fail. This interest must also translate into a vision for the company’s growth. Even if the day-to-day activities of a business are interesting to an entrepreneur, this is not enough for success unless she can turn this interest into a vision of growth and expansion. This vision must be strong enough that she can communicate it to investors and employees.

12. Risk and Rewards

Entrepreneurship requires risk. The measurement of this risk equates to the amount of time and money you invest into your business. However, this risk also tends to relate directly to the rewards involved. An entrepreneur who invests in a franchise pays for someone else’s business plan and receives a respectable income, while an entrepreneur who undertakes ground breaking innovations risks everything on an assumption that something revolutionary will work in the market. If such a revolutionary is wrong, she can lose everything. However, if she is right, she can suddenly become extremely wealthy.

Entrepreneurship development is the process of improving the skills and knowledge of entrepreneurs through various training and classroom programs. The whole point of entrepreneurship development is to increase the number of entrepreneurs.

By doing this, the pace at which new businesses or ventures are made gets better. On a wider level, this makes room for employment and improves the economy of a business or country. The steps below will explain how to create an effective entrepreneurship development program and how to go about enhancing it.

1. Outline the objectives of the program and focus on the venture development

Entrepreneurship development aims at individuals who want to start or possibly expand a business. Entrepreneurship development also focuses a lot on enhancing the ideas and potential of an entrepreneur.

The aims of a program have to be clearly explained otherwise the program will never reach its full potential. The development of a venture also has to be outlined in the program. Without these two, there will be no clear goal.

2. Select educated people who have high entrepreneurial potential

An entrepreneurship development program requires that various people be selected. However, most programs tend to look for a specific group of educated people rather than target everyone. Ideally, you have to look at the education and traits that you are looking for, in an entrepreneur, and match them with the people who have applied for the program.

Most people say that public funds should be spent on people who need the most help. The resources of an entrepreneurship development program are usually (and unfortunately) limited. It is hence better to choose people who will prove to be really useful and benefit the entire community.

3. Select uneducated people who have high entrepreneurial potential

A development project on women’s entrepreneurship in Nepal was recently conducted. It was found that women who couldn’t meet the essential needs of their family or themselves were usually more eager to learn about different ways to earn money as compared to women who were better off. However, such women usually face many problems.

Even though such women are not educated, they have great entrepreneurship potential because they have the right motivation. Such people need to be aided by assistance packages where training can be given on entrepreneurship. This will instill confidence and teach them the skills they need in order to provide for their family.

4. Identify the local market and search for people who have potential in it

Entrepreneurship development programs should first identify the local market and aid potential entrepreneurs who know a lot about it. These people need to be able analyze and then design unique ideas based off the needs of their surroundings.

By concentrating on select local entrepreneurs, the effects of the program can be easily and quickly seen within the community. Later on, programs can help improve their knowledge in their sector. In fact, it is creativity and the thirst for innovation that truly matters rather than the market’s size. In later programs, the introduction of new products and product features can be added. This will add value and increase the size of the market

5. Provide support through private sector-based organizations

Support should be obtained from private organizations that are both financial and knowledge-based. This helps reduce the cost of the entrepreneurship development program and increases its effectiveness.

Private organizations that could support entrepreneurship development programs include universities, consulting companies and various NGOs. Large enterprises are also encouraged to support entrepreneurship development programs as this their sponsorship that will help reduce unemployment.

6. Provide an easy yet detailed methodology that will help entrepreneurs improve in the short and long-run

Entrepreneurial development programs aim at being simple to understand and teach skills that entrepreneurs can use after the program. It also contains courses that aim at developing their skills and ideas. These are required if entrepreneurs wish to successfully exploit the local market.

They also need to be taught how to gather the required resources in order to meet the goals of their venture. The program also needs to have outlined methods through which entrepreneurs can improve the performance of their business in the long run.

Entrepreneur development training proves to be highly effective when finance, quality assurance, marketing and productivity are linked to the training program. As an example, when development banks are involved earlier in the process of training, an entrepreneur will easily understand credit processes and the also praises the bank’s business plan.

7. Implement special measures to improve the usefulness of trainers and facilitators

The Success of an entrepreneurship development program also relies on the commitment and quality of the many facilitators and trainers. Any trainer or facilitator in the program needs to understand the culture and lifestyle of the group in order to better integrate themselves and serve the group.

The selection of proper trainers is based on the amount of business experience they have and the how much knowledge they have about their local business environment. Training facilitators can significantly improve their usefulness in tackling the needs of entrepreneurs.

8. The selection of areas for pilot programs must be right

Entrepreneurship development programs are usually too restricted in terms of where it is done and what people are involved in the program. Selecting pilot target areas will usually depend on the ease at which support institutions are available.

It will also depend on the interest people take in entrepreneurial development programs. These facts can never be the same for any two geographical locations and hence must be considered carefully.

9. Launch pilot ED programs and develop as needed

Analyzing pilot feasibility is an effective way of launching a major entrepreneurship development program. If the program shows signs of high promise, it can be launched on a national level. By relying on the sponsors for support rather than donor support, the program will be able to expand past local development while maintaining high quality. This is especially important when the support of donors starts to fade.

10. A successful entrepreneurship development program requires government policies

Entrepreneurship helps the economy of a country grow and creates new jobs. Government policies usually have a substantial impact on the number of entrepreneurs in a country.

While there are many governments that say they do support entrepreneurial businesses, they usually do not have many specific policies and programs that effectively support entrepreneurial development.

Socio-Cultural

Social factors can go a long way in encouraging entrepreneurship. In fact it was the highly helpful society that made the industrial revolution a glorious success in Europe. Strongly affect the entrepreneurial behavior, which contribute to entrepreneurial growth. The social setting in which the people grow, shapes their basic beliefs, values and norms.

The main components of social environment are as follows:

1. Caste Factor

There are certain cultural practices and values in every society which influence the’ actions of individuals. These practices and value have evolved over hundred of years. For instance, consider the caste system (the varna system) among the Hindus in India. It has divided the population on the basis of caste into four division. The Brahmana (priest), the Kshatriya (warrior), the Vaishya (trade) and the Shudra (artisan): It has also defined limits to the social mobility of individuals.

By social mobility’ we mean the freedom to move from one caste to another. The caste system does not permit an individual who is born a Shridra to move to a higher caste. Thus, commercial activities were the monopoly of the Vaishyas. Members of the three other Hindu Varnas did not become interested in trade and commence, even when India had extensive commercial inter-relations with many foreign countries. Dominance of certain ethnical groups in entrepreneurship is a global phenomenon

2. Family Background

This factor includes size of family, type of family and economic status of family. In a study by Hadimani, it has been revealed that Zamindar family helped to gain access to political power and exhibit higher level of entrepreneurship.

Background of a family in manufacturing provided a source of industrial entrepreneurship. Occupational and social status of the family influenced mobility. There are certain circumstances where very few people would have to be venturesome. For example in a society where the joint family system is in vogue, those members of joint family who gain wealth by their hard work denied the opportunity to enjoy the fruits of their labor because they have to share their wealth with the other members of the family.

3. Education

Education enables one to understand the outside world and equips him with the basic knowledge and skills to deal with day-to-day problems. In any society, the system of education has a significant role to play in inculcating entrepreneurial values.

In India, the system of education prior to the 20th century was based on religion. In this rigid system, critical and questioning attitudes towards society were discouraged. The caste system and the resultant occupational structure were reinforced by such education. It promoted the idea that business is not a respectable occupation. Later, when the British came to our country, they introduced an education system, just to produce clerks and accountants for the East India Company, The base of such a system, as you can well see, is very anti-entrepreneurial.

Our educational methods have not changed much even today. The emphasis is till on preparing students for standard jobs, rather than marking them capable enough to stand on their feet.

4. Attitude of the Society

A related aspect to these is the attitude of the society towards entrepreneurship. Certain societies encourage innovations and novelties, and thus approve entrepreneurs’ actions and rewards like profits. Certain others do not tolerate changes and in such circumstances, entrepreneurship cannot take root and grow. Similarly, some societies have an inherent dislike for any money-making activity. It is said, that in Russia, in the nineteenth century, the upper classes did not like entrepreneurs. For them, cultivating the land meant a good life. They believed that rand belongs to God and the produce of the land was nothing but god’s blessing. Russian folk-tales, proverbs and songs during this period carried the message that making wealth through business was not right.

5. Cultural Value

Motives impel men to action. Entrepreneurial growth requires proper motives like profit-making, acquisition of prestige and attainment of social status. Ambitious and talented men would take risks and innovate if these motives are strong. The strength of these motives depends upon the culture of the society. If the culture is economically or monetarily oriented, entrepreneurship would be applauded and praised; wealth accumulation as a way of life would be appreciated. In the less developed countries, people are not economically motivated. Monetary incentives have relatively less attraction. People have ample opportunities of attaining social distinction by non-economic pursuits. Men with organizational abilities are, therefore, not dragged into business. They use their talents for non-economic end.

Political

Political factors play a huge role in the development of entrepreneurship in a given geographical area. This is because politicians decide the type of market that is in place. The market could be capitalistic, communist or some countries have adopted a mixed economy. Each of these three markets has very different implications for the way in which entrepreneurs are required to function. Capitalism requires breakthrough innovation whereas communism requires entrepreneurs to be well connected with the political class. Therefore, it has been observed that the more capitalistic any country is, the more entrepreneurship flourishes in the region.

Economic

Economic environment exercises the most direct and immediate influence on entrepreneurship. This is likely because people become entrepreneurs due to necessity when there are no other jobs or because of opportunity.

The economic factors that affect the growth of entrepreneurship are the following:

1. Capital

Capital is one of the most important factors of production for the establishment of an enterprise. Increase in capital investment in viable projects results in increase in profits which help in accelerating the process of capital formation. Entrepreneurship activity too gets a boost with the easy availability of funds for investment.

Availability of capital facilitates for the entrepreneur to bring together the land of one, machine of another and raw material of yet another to combine them to produce goods. Capital is therefore, regarded as lubricant to the process of production.

France and Russia exemplify how the lack of capital for industrial pursuits impeded the process of entrepreneurship and an adequate supply of capital promoted it.

2. Labor

Easy availability of right type of workers also effect entrepreneurship. The quality rather than quantity of labor influences the emergence and growth of entrepreneurship. The problem of labor immobility can be solved by providing infrastructural facilities including efficient transportation.

The quality rather quantity of labor is another factor which influences the emergence of entrepreneurship. Most less developed countries are labor rich nations owing to a dense and even increasing population. But entrepreneurship is encouraged if there is a mobile and flexible labor force. And, the potential advantages of low-cost labor are regulated by the deleterious effects of labor immobility. The considerations of economic and emotional security inhibit labor mobility. Entrepreneurs, therefore, often find difficulty to secure sufficient labor.

3. Raw Materials

The necessity of raw materials hardly needs any emphasis for establishing any industrial activity and its influence in the emergence of entrepreneurship. In the absence of raw materials, neither any enterprise can be established nor can an entrepreneur be emerged

It is one of the basic ingredients required for production. Shortage of raw material can adversely affect entrepreneurial environment. Without adequate supply of raw materials, no industry can function properly and emergence of entrepreneurship to is adversely affected.

In fact, the supply of raw materials is not influenced by themselves but becomes influential depending upon other opportunity conditions. The more favorable these conditions are, the more likely is the raw material to have its influence of entrepreneurial emergence.

4. Market

The role and importance of market and marketing is very important for the growth of entrepreneurship. In modern competitive world no entrepreneur can think of surviving in the absence of latest knowledge about market and various marketing techniques.

The fact remains that the potential of the market constitutes the major determinant of probable rewards from entrepreneurial function. Frankly speaking, if the proof of pudding lies in eating, the proof of all production lies in consumption, i.e., marketing.

The size and composition of market both influence entrepreneurship in their own ways. Practically, monopoly in a particular product in a market becomes more influential for entrepreneurship than a competitive market. However, the disadvantage of a competitive market can be cancelled to some extent by improvement in transportation system facilitating the movement of raw material and finished goods, and increasing the demand for producer goods.

5. Infrastructure

Expansion of entrepreneurship presupposes properly developed communication and transportation facilities. It not only helps to enlarge the market, but expand the horizons of business too. Take for instance, the establishment of post and telegraph system and construction of roads and highways in India. It helped considerable entrepreneurial activities which took place in the 1850s.

Apart from the above factors, institutions like trade/ business associations, business schools, libraries, etc. also make valuable contribution towards promoting and sustaining entrepreneurship’ in the economy. You can gather all the information you want from these bodies. They also act as a forum for communication and joint action.

Personal

The man behind the entrepreneurship is an action-oriented and highly motivated individual who is ready to achieve goals.

Kirzner (1973) observes entrepreneurs as; “one who perceives what others have not seen and acts upon that perception”. Thus, entrepreneurs take the economy and the society that is the whole civilization to the state of progress and prosperity. Taking this into consideration we can describe the significance or importance of entrepreneurship which is stated below.

9 importance of entrepreneurship are:

• Growth of Entrepreneurship.
• Creation of job opportunities.
• Impact on community development.
• The consequence of business failure.
• Political and economic integration of outsiders.
• Spawns entrepreneurship.
• Enhances the standard of living.
• Promotes research and development.

1. Growth of Entrepreneurship

Entrepreneurship the advent of new venture particularly small ventures to materialize the innovative ideas of the entrepreneurs.

Thus, the growth or establishment of small enterprises ii the specific contribution of entrepreneurship in every economy of the world.

The statistics reveal that in USA economy nearly half a million small enterprise is established every year. Our country is not an exception in this regard.

2. Creation of job opportunities

Entrepreneurship firms contributed a large share of new jobs. It provides entry-level jobs so necessary fur training or gaining experience for unskilled workers.

The small enterprises are the only sector that generates a large portion of total employment every year.

Moreover, entrepreneurial ventures prepare and supply experienced labor to large industries.

3. Innovation

Entrepreneurship is the incubator of innovation. Innovation creates disequilibria in the present state of order.

It goes beyond discovery and does implementation and commercialization, of innovations.

“Leapfrog” innovation, research, and development are being contributed by entrepreneurship.

Thus, entrepreneurship nurses innovation that provides new ventures, products, technology, market, quality of good, etc. to the economy that increases Gross Domestic Products and standard of living of the people.

4. Impact on community development

A community is better off if its employment base is diversified among many small entrepreneurial firms.

It promotes abundant retail facilities, a higher level of homeownership, fewer slums, better, sanitation standards and higher expenditure on education, recreation, and religious activities.

Thus, entrepreneurship leads to more stability and a higher quality of community life.

5. The consequence of business failure

The collapse of the large industry almost has irresistible damage to the development of the state and the state of the economy and the financial condition of the relevant persons.

The incumbents lost their jobs: suppliers and financial institutions face a crisis of recovery.

Customers are deprived of goods, services, and government losses taxes. This could not happen in the case of failure of entrepreneurship.

There shall be no measurable effect upon the economy and no political repercussions too.

6. Political and economic integration of outsiders

Entrepreneurship is the most effective way of integrating those who feel disposed of and alienated into the economy.

Minorities, migrants, and women are safely integrated into entrepreneurship that will help to develop a well-composed plural society.

7. Spawns entrepreneurship

Entrepreneurship is the nursing ground for new inexperienced adventurists.

It is the field where a person can start his/her idea of the venture, which may be ended up in a giant enterprise. All the large industrial ventures started as a small entrepreneurial enterprise.

Therefore, entrepreneurship provides a wide spectrum of ventures and entrepreneurs in every economy. The vast open arena of entrepreneurship thus acts as an incubator to entrepreneurs.

8. Enhances the standard of living

The standard of living is a concept built on an increase in the amount of consumption of a variety of goods and services over a particular period by a household.

So it depends on the availability of diversified products in the market. Entrepreneurship provides enormous kinds of a product of various natures by their innovation.

Besides, it increases the income of the people who are employed in entrepreneurial enterprises.

That also capable employed persons to consume more goods and services. In effect, entrepreneurship enhances the standard of living of the people of a country.

9. Promotes research and development

Entrepreneurship is innovation and hence the innovated ideas of goods and services have to be tested by experimentation.

Therefore, entrepreneurship provides funds for research and development with universities and research institutions. This promotes the general development, research, and development in the economy.

Entrepreneurship is the pioneering zeal that provides events in our civilization.

The role and significance of an entrepreneur are explained below :

1. Bringing Economic Growth and Prosperity: Entrepreneur bring economic growth and prosperity in the country through generation of employment opportunities, capital and wealth creation, increasing per capita income and GDP, improvement in quality of life by raising the standard of living, growth of infrastructural facilities, forward and backward linkages in society, development of backward regions, economic independence. George gilder observes, “The ‘heroic creativity of entrepreneur came to seem essential to our economic well-being in a global economy”. Baumback and Mancuso write, “In underdeveloped nations, entrepreneurs often hold the key to economic growth for a whole society. So entrepreneur is not a dirty word or a fast buck opportunist, but, rather the backbone of the capitalist system”.
2. Brining Social Stability and Balanced Regional Development: Entrepreneurs play a crucial and unique role in bringing about social stability and balanced regional development through absorption of workforce in industries, removal of poverty, improving health and education facilities, creating fair competition, equitable distribution of income, creation of social infrastructures, empowering women and weaker sections of the society and supply of qualitative goods and services Although entrepreneurs are criticized as self interested exploiters, Adam Smith, while recognizing that they do some good for society, partly reflected this view when he wrote in The Wealth of Nations: “In spite of their natural selfishness and rapacity, though they mean only their convenience, though the sole end which they propose from the labours of all the thousands they employ be the gratification of their own vain and insatiable desires they are led by a hidden hand, and without intending it, without knowing it, advance the interest of society”.
3. Innovator in Economic Growth: by bringing new ideas, combinations, products techniques, organizations, new markets, making full use of technical knowledge, balanced growth, systematic innovation, technological advancement, implementation of mechanical skills, an entrepreneur play very crucial role in encouraging entrepreneurship and economic development. Peter Drucker writes, “Just as management has become the specific organ of all contemporary institutions and the integrating organ of our society of organizations, so innovation and entrepreneurship have to become an integral life-sustaining activity in our organizations, our economy, and our society”. He further says that the emergence of a truly entrepreneurial economy is the most significant and hopeful event that have occurred in recent economic and social history.
4. Creation of Employment Opportunities: Entrepreneurs play a significant role in generation of employment opportunities by establishing new units in manufacturing, trading and service sectors, laying emphasis on small scale industries, utilizing the surplus labour force in varied industrial and/or service activities, upholding self-employment as a core objective. Entrepreneur integrates resources and technologies into profitable business ventures and creates job opportunities.
5. Increase Productivity with Modern Production System: Play an important role in raising productivity. John Keudrick writes, “Higher productivity is chiefly a matter of improving production techniques, and this task is the entrepreneurial function par excellence”. Two keys to higher productivity are research and development and investment in new plant and machinery. But there is a close link between R & D and investment programmes, with a higher entrepreneurial input into both”. George Gilder in The Spirit of Enterprise said that: “Entrepreneurs are innovators who evoke demand’. They are makers of markets, creators of capital, and developers of opportunity and producers of new technology. They seek the unique product, the marketing breakthrough, the startling new, feature or the novel design. They change technical frontiers and reshape public desires. They create wealth and employment. They take exception to the received view that companies should be market led. They lead the market”.

6. Export Promotion and Import Substitution: Liberalization, privatization and globalization [LPG] has opened the arena of export promotion and import substitution to entrepreneurs by establishing industries producing import substitution goods, establish new industries, especially for export, products, exploration of new global markets, earning foreign exchange reserves, utilizing the available productive resources, achieving self-reliance in production of as many goods as possible, entrepreneur, are playing a pivot role in export promotion and import substitution.
7. Entrepreneur Plays a Role of Catalytic Agent: As Joseph Schumpeter says, entrepreneur’s task is “creative destruction”. He destroys to create new things. He changes and transmutes values. He searches change and responds to it. He is a change creator. Ralph Harwitz writes in his book Realities of Profitability’, “The entrepreneur makes a happening, wants piece of action, is the growth man. Without him there is no happening, no action, and no growth”.
8. Augmenting and Meeting Local Demands: Entrepreneurs also play a significant role in augmenting local demands and meeting them satisfactorily. Towards this entrepreneurs focus their attention to manufacture service through indigenous technology, skill, resources and experiences.

Joseph Schumpeter propounded the well-known innovative theory of entrepreneurship. Schumpeter takes the case of a capitalist closed economy which is in stationary equilibrium. He believed that entrepreneurs disturb the stationary circular flow of the economy by introducing an innovation and takes the economy to a new level of development. The activities of the entrepreneurs represent a situation of disequilibrium as their activities break the routine circular flow.

Innovations of entrepreneurs are responsible for the rapid economic development of any country.

Talking about innovation, he referred to new combinations of the factors of production, Schumpeter had assigned the role of innovator to the entrepreneur, who is not a man of ordinary managerial ability, but one who introduces something entirely new.

The Innovation Theory of Profit was proposed by Joseph. A. Schumpeter, who believed that an entrepreneur can earn economic profits by introducing successful innovations.

In other words, innovation theory of profit posits that the main function of an entrepreneur is to introduce innovations and the profit in the form of reward is given for his performance. According to Schumpeter, innovation refers to any new policy that an entrepreneur undertakes to reduce the overall cost of production or increase the demand for his products.

Thus, innovation can be classified into two categories; The first category includes all those activities which reduce the overall cost of production such as the introduction of a new method or technique of production, the introduction of new machinery, innovative methods of organizing the industry, etc.

The second category of innovation includes all such activities which increase the demand for a product. Such as the introduction of a new commodity or new quality goods, the emergence or opening of a new market, finding new sources of raw material, a new variety or a design of the product, etc.

The innovation theory of profit posits that the entrepreneur gains profit if his innovation is successful either in reducing the overall cost of production or increasing the demand for his product. Often, the profits earned are for a shorter duration as the competitors imitate the innovation, thereby ceasing the innovation to be new or novice. Earlier, the entrepreneur was enjoying a monopoly position in the market as innovation was confined to himself and was earning larger profits. But after some time, with the others imitating the innovation, the profits started disappearing.

An entrepreneur can earn larger profits for a longer duration if the law allows him to patent his innovation. Such as a design of a product is patented to discourage others to imitate it. Over the time, the supply of factors remaining the same, the factor prices tend to rise as a result of which the cost of production also increases. On the other hand, with the firms adopting innovations the supply of good sand services increases and their prices fall. Thus, on one hand the output per unit cost increases while on the other hand the per unit revenue decreases.

There is a point of time when the difference between the costs and receipts gets disappear. Thus, the profit in excess of the normal profit disappears. This innovation process continues and also the profits continue to appear or disappear.

Innovation could involve any of the following:

1. Innovation of new products.
2. Innovation in novel methods or processes of production.
3. The opening up of a new market.
4. Entrepreneurs might find new source of supply of raw materials
5. Innovation in management. This means reorganization of an industry.

Let us try to understand the meaning of different facets of the term innovation.

The introduction of new product means the product which the consumers have not seen and is of a new and better quality and utility. A new method of production refers to a novel process not yet been used in manufacturing and commercial production. This may increase the productivity and lower cost of production.

The discovery of a new market means a new market which may have existed before but was not entered by the enterprise for commercial purposes. A new source of raw material similarly refers to a source or a place which has not been commercially exploited by the enterprises before. Innovation in management refers to reorganization and reconciliation of the position of the enterprise in the industry by building a monopoly like control or dismantling existing monopoly of others in the industry.

Schumpeter was very explicit about the economic function of the entrepreneur, whom he considered as the prime mover in economic development and the entrepreneur’s task is to innovate or carry out new combinations.

Schumpeter had differentiated between invention and innovation. We should understand that invention refers to creation of new materials and innovation refers to application of new materials into practical use in industry. Similarly, there is a distinction between an innovator and an inventor. The inventor is the one who invents new materials and new methods. On the other hand, the innovator is the one who utilizes these inventions and discoveries in order to make new combinations.

Bringing about innovations is the main task of the entrepreneur and not the maintenance of the enterprise. Entrepreneurs dream and have a willingness to establish a private kingdom. They enjoy creating and getting things done. These “innovating entrepreneur” has played an important role in the rise of modem capitalism.

Criticisms:

Schumpeter’s theory has been subjected to the following criticisms:

1. Critics feel that the theory over emphasized on innovative functions of the entrepreneur. It ignored the organizing aspects of entrepreneurship.
2. Schumpeter had completely ignored the risk-taking function of the entrepreneur, which cannot be ignored. Whenever an entrepreneur develops a new combination of factors of production, there is enough risk involved.
3. The theory is more applicable in developed countries only. In developing countries there is a paucity of innovative entrepreneurs.
4. The theory does not provide the explanation as to why few countries have more entrepreneurship talent than others.

Despite of all the above criticisms Schumpeter’s theory is considered as a landmark in the expansion of entrepreneurship theories.

An Entrepreneurial Culture Assessment

Openness: A willingness to share information and lessons learned widely

• Do you share lessons learned from success as well as failure?
• Is it a norm for individuals to share constructive criticism to push thinking and minimize risk?
• Do employees at every level understand “the big picture”?

Adaptability: A commitment to monitoring your organization’s internal environment through measurement and your external environment through research and using the results to identify possibilities for change and improvement

• Are you monitoring customer (e.g., client, donors, volunteers) feedback — quantitative and qualitative — to detect shifts in needs and/or behaviors?
• Do you regularly seek feedback from external stakeholders about your performance and what more you could be doing to serve your mission?
• Do you question the status quo (a.k.a., “We have always done it this way.”) to ensure that it is still the best way?

Results and Rewards: A dedication to tracking outcomes and impact, but also rewarding the right behaviors, including organizational citizenship

• Do you push decisions downward to those on the front line and with the most information?
• Do you reward the right behavior more than you reprimand negative behavior?
• How does your organization handle failure? Do you learn from it and share lessons learned?

Learning Organization: A promise to employees to support a learning organization that will encourage them to grow and learn without fear

• Do all employees have goals for personal improvement that are regularly discussed and nurtured?
• When something goes wrong, does everyone pitch in without playing the blame game?
• Do you share best practices and newsworthy trends with everyone for feedback and possible implementation within the organization?

Role

1. Create a culture of experimentation

Articles, books, and other resources give the same account: Failure is a precursor to success. When you accept failure as a part of the learning process that helps you achieve your goals, you get more comfortable with this concept.

The key to making failure work for you is conducting experiments that are small enough you won’t be left shirtless if things go south. Creating a company culture that experiments on a regular basis thrives only when you’ve also developed a consistent feedback loop. This crucial communication tool ensures you’ll have the clues needed to iterate and produce something remarkable. 

2. Make idea generation a habit

Innovation begins with an idea. And to exponentially increase the odds of producing a winning idea for your business, quantity trumps quality. Of course, not every idea will be a great one. But a large arsenal of thoughts from which to choose makes it easier to refine your understanding of what your customers want from you. 

Work to make idea generation a habit in your business. Encourage team members to bring forth their own suggestions, and create a system to catalog what is presented.

3. Diversify your experiences

When it comes to innovation, realize that homogeneity is a liability. Steve Jobs knew this to be true. It’s why he encouraged others to branch out to take the road less traveled. “If you’re gonna make connections which are innovative … you have to not have the same bag of experiences as everyone else does,” Jobs said in 1982, as he accepted the “Golden Plate” award from the Academy of Achievement in Washington, D.C. He was 26.

Make it a point to step outside your comfort zone. Accumulate new experiences for yourself both professionally and personally. As you look to build a rockstar team, be intentional about seeking talent that brings to the table diverse backgrounds, experiences and ways of thinking.

The observations, skills and expanded frame of reference you obtain as a result will prevent you from being satisfied with the status quo.

4. Encourage dissent

Want to improve the quality of your ideas? Encourage others to tear them down. A capable team of people whose opinions you value will generate constructive criticism to help make your idea better. You’ll produce a much better product or offering than you ever could have done alone. 

Research backs up this principle. Data from UC Berkeley demonstrates that conflict improves the ideation process. A team whose members cosign everything you say can’t help you or your company become more innovative.

5. Obsess over your customers.

Your business exists to serve your customers. The more value you provide, the more they will reward you with their loyalty. When you focus your efforts on knowing your customers intimately, you’ll gain a tremendous amount of insight into how to solve their problems like none other.

Talk to your customers every chance you get. Take the opportunity to walk a mile in their shoes so you can develop a deeper empathy for their issues. Seek out pain points at every step of their customer journey and brainstorm ways to improve the experience for them.

McClelland’s theory of needs is one such theory that explains this process of motivation by breaking down what and how needs are and how they have to be approached. David McClelland was an American Psychologist who developed his theory of needs or Achievement Theory of Motivation which revolves around three important aspects, namely, Achievement, Power and Affiliation.

This theory was developed in the 1960s and McClelland points out that regardless of our age, sex, race or culture, all of us possess one of these needs and are driven by it. This theory is also known as the Acquired Needs as McClelland put forth that the specific needs of an individual are acquired and shaped over time through the experiences he has had in life.

Psychologist David McClelland advocated Need theory, also popular as Three Needs Theory. This motivational theory states that the needs for achievement, power, and affiliation significantly influence the behavior of an individual, which is useful to understand from a managerial context.

This theory can be considered an extension of Maslow’s hierarchy of needs. Per McClelland, every individual has these three types of motivational needs irrespective of their demography, culture or wealth. These motivation types are driven from real-life experiences and the views of their ethos.

Need for Achievement

The need for achievement as the name itself suggests is the urge to achieve something in what you do. If you are a lawyer it is the need to win cases and be recognized, if you are a painter it is the need to paint a famous painting. It is the need that drives a person to work and even struggle for the objective that he wants to achieve. People who possess high achievement needs are people who always work to excel by particularly avoiding low reward low-risk situations and difficult to achieve high-risk situations.

Such people avoid low-risk situations because of the lack of a real challenge and their understanding that such achievement is not genuine. They also avoid high-risk situations because they perceive and understand it to be more about luck and chance and not about one’s own effort. The more the achievements they make the higher their performance because of higher levels of motivation.

These people find innovative clever ways to achieve goals and consider their achievement a better reward than financial ones. They take calculated decision and always appreciate feedback and usually works alone.

The individuals motivated by needs for achievement usually have a strong desire of setting up difficult objectives and accomplishing them. Their preference is to work in a results-oriented work environment and always appreciate any feedback on their work. Achievement based individuals take calculated risks to reach their goals and may circumvent both high-risk and low-risk situations.

They often prefer working alone. This personality type believes in a hierarchical structure derived primarily by work-based achievements.

Need for Power

The need for power is the desire within a person to hold control and authority over another person and influence and change their decision in accordance with his own needs or desires. The need to enhance their self-esteem and reputation drives these people and they desire their views and ideas to be accepted and implemented over the views and ideas over others.

These people are strong leaders and can be best suited to leading positions. They either belong to Personal or Institutional power motivator groups. If they are a personal power motivator, they would have the need to control others and an institutional power motivator seeks to lead and coordinate a team towards an end.

The individuals motivated by the need for power have a desire to control and influence others. Competition motivates them and they enjoy winning arguments. Status and recognition are something they aspire for and do not like being on the losing side.

They are self-disciplined and expect the same from their peers and teams. They do not mind playing a zero-sum game, where, for one person to win, another must lose and collaboration is not an option. This motivational type is accompanied by needs for personal prestige, and better personal status.

Need for Affiliation

The need for affiliation is the urge of a person to have interpersonal and social relationships with others or a particular set of people. They seek to work in groups by creating friendly and lasting relationships and has the urge to be liked by others. They tend to like collaborating with others to competing with them and usually avoids high-risk situations and uncertainty

The individuals motivated by the need for affiliation prefer being part of a group. They like spending their time socializing and maintaining relationships and possess a strong desire to be loved and accepted. These individuals stick to basics and play by the books without feeling a need to change things, primarily due to a fear of being rejected.

People in this group tend to adhere to the norms of the culture in that workplace and typically do not change the norms of the workplace for fear of rejection. Collaboration is the way to work for the competition remains secondary. They are not risk seekers and are more cautious in their approach. These individuals work effectively in roles based on social interactions, for instance, client service and other customer interaction positions.

Using the Theory

McClelland’s theory can be applied to manage the corporate teams by being identifying and categorizing every team member amongst the three needs. Knowing their attributes may certainly help to manage their expectations and running the team smoothly.

The following two steps process can be used to apply McClelland’s theory:

Step 1: Identify the Motivational Needs of the Team

Examining the team to determine which of the three needs is a motivator for each person. Personality traits and past actions can help in this process.

For example, someone who always takes charge of the team when a project is assigned. The one who speaks up in meetings to encourage people, and delegates responsibilities in order to facilitate achieving the goals of the group. Someone who likes to control the final deliverables. This team member is likely being driven by power.

Another team member who does not speak during meetings, and is happy agreeing with the team thoughts, is good at managing conflicts and may seem uncomfortable while someone talks about undertaking high-risk, high-reward tasks. This team member is likely being driven by affiliation.

Step 2: Approaching Team According to To Their Need type

Based on the motivating needs of the team members, alter your leadership style to assign projects according to the type of the need of each individual team member. Challenging projects would definitely be a part of a work portfolio of someone who enjoys power while relatively simpler projects go to the kitty of someone derived from affiliation.

This information is crucial to influence while setting up relevant goals for the individual, monitoring, providing feedback, recommending the learning plan, etc. If a particular need type does not fit the position of the individual, he/she can be made aware of the same, so that they can either work in the right direction or accept their fate.

The Knight’s Theory of Profit was proposed by Frank. H. Knight, who believed profit as a reward for uncertainty-bearing, not to risk bearing. Simply, profit is the residual return to the entrepreneur for bearing the uncertainty in business.

Knight had made a clear distinction between the risk and uncertainty. The risk can be classified as a calculable and non-calculable risk. The calculable risks are those whose probability of occurrence can be anticipated through a statistical data. Such as risks due to the fire, theft, or accident are calculable and hence can be insured in exchange for a premium. Such amount of premium can be added to the total cost of production.

While the non-calculable risks are those whose probability of occurrence cannot be determined. Such as the strategies of a competitor cannot be accurately assessed as well as the cost of eliminating the completion cannot be precisely calculated. Thus, the risk element of such events is not insurable. This incalculable area of risk is the uncertainty.

Due to the uncertainty of events, the decision-making becomes a crucial function of an entrepreneur or manager. If the decisions prove to be correct by the subsequent events, an entrepreneur makes a profit and vice-versa. Thus, the Knight’s theory of profit is based on the premise that profit arises out of the decisions made under the conditions of uncertainty.

Knight believes that profit might arise out of the decisions made concerning the state of the market, such as decisions with respect to increasing the degree of monopoly in the market, decisions regarding holding stocks that might result in the windfall gains, decisions taken to introduce new product and technique, etc.

The major criticism of the knight’s theory of profit is, the total profit of an entrepreneur cannot be completely attributed to uncertainty alone. There are several functions that also contribute to the total profit such as innovation, bargaining, coordination of business activities, etc.

There are certain risks that are measurable and the probability of such risk can be statistically estimated and hence such risks can be insured. Example of insurable risks include theft of commodities, fire in the enterprise, accidental death etc. On the other hand, there are certain risks which cannot be calculated.

The probability of their occurrence cannot be statistically ascertained. Such risks include risks associated to changes in prices, demand and supply. These risks are non-insurable. Prof. Knight opined that the profit is the reward for bearing the non-insurable risks and uncertainties.

Uncertainty-bearing is one of the most vital functions in a dynamic economy. The entrepreneur bears the uncertainty involved in the enterprise. The expectation of profit is the supply price of the entrepreneurial uncertainty bearing exercise. In a state of economy (competitive) where there is no risk, every entrepreneur will have a minimum supply price.

If the reward allocated to the entrepreneur is below it, the entrepreneurs will abstain from providing their entrepreneurial services. The existence of uncertainty tends to raise the minimum supply price. The entrepreneurs expect a level of profit for bearing the uncertainty.

The salient points of Knight’s theory include:

1. According to the theory, the entrepreneur earns pure profits for bearing the uncertainty.
2. The probability of uncertainty or non-insurable risks cannot be statistically estimated.
3. Entrepreneurs undertake risks of varying degrees according to their ability ad inclination. The theory suggests that the more risky the nature of enterprise, the higher level of profit earned by the entrepreneurs.
4. Profit is the reward of the entrepreneur for bearing uncertainties and risks. Hence, it should be a part of the normal cost.
5. The reward of the entrepreneur is uncertain. Entrepreneur guarantees interest to lender of capital, wages to workers and rent to the landlord.
6. The level of uncertainty in business can be reduced by applying the technique of consolidation. The total level of uncertainty can be reduced by pooling individual instances.

Criticisms:

F.H. Knight’s theory is one of the most sophisticated theories to explain supply of entrepreneurship based on profit. But, the theory suffers from certain drawbacks as pointed by the critics.

1. The role of an entrepreneur has not been elaborately provided by the theory. The entrepreneur’s activity has been restricted to uncertainty bearing. Modern business activities are different. Often, there is a dichotomy between ownership and management. These factors have not been taken into consideration.
2. The uncertainty-bearing theory discussed the concept of profit in a vague way. The exact estimation of profit for the entrepreneur has not been provided in the theory.
3. Profit as a residual income of the entrepreneur has been criticized.
4. Critics feel that uncertainty-bearing should not be treated like other factors of production like land, labour and capital. It is a psychological concept and should be treated in a different manner.