1.5.1 Role of an Entrepreneur

Entrepreneur

A person who has a business idea and takes a financial risk with the aim of generating income for themselves.

Roles played by entrepreneurs

• Innovators via inventions, market research or finding a gap in the market
  • However, people set up a business by copying or adapting what another business does
• Organisers of factors of production – Buy and hire resources such as labour and equipment (capital), then give instructions
• Decision makers (E.G Price, raising finance, design, recruitment, production)
• Risk takers – Risk losing any money put in if business fails
  • Opportunity cost of leaving a well-paid job to become an entrepreneur

Methods of finding a business idea

• Business experience – E.G. Plumbers working in a plumbing company may set up their own business.
  • Lower risk due to knowledge of the market and product
• Personal experience – E.G Using customer experience to spot a gap in the market, turning a hobby into a job
• Skills – E.G Plumber might judge electricians who charge more and subsequently train and set himself up as a self-employed electrician
• Lifestyle choices – E.G Want to retire from a full-time job but have a business as a side job

Stages in setting up a business

• Idea
• Research – Market research to analyse competition and whether the idea is likely to work. Also maybe meeting people to get advice on running a business
• Planning
• Financing – Deciding how much finance and which source to use
• Location – Select location depending on the nature of business (E.G Working from home, online, branches/shops close to customers, factories close to suppliers)
• Resources – E.G Equipment, uniforms, adverts, materials, suppliers
• Launch – May organise opening day or continue with existing jobs alongside the business until it establishes itself

Running and expanding/developing a business

• Financial management – Having enough money to fund operations. May require: Cash flow forecasts, loan arrangements, chasing debts
• Administration – Keeping a record of transactions (E.G Stock records, wage slips) so profit and tax can be calculated
• Marketing – Promoting the business (E.G Website, social media, leaflets, newspaper adverts, developing relations with customers for viral marketing)
• Purchasing – Buying resources (E.G Raw materials from suppliers, using commercial services like accountancy firms). Negotiation and building relations to help lower costs
• Managing people – Managing staff (recruitment, selection, training, motivation)
• Production – Monitoring product quality, efficiency, health and safety, consistency
• Running a business after setting up can be stressful for entrepreneurs
• However over time, with expansion, entrepreneurs tend to spend more time on marketing, finance and administration rather than on production
• Until the point where specialists can be employed to manage the different departments

Intrapreneurship

🔗 Employees in larger businesses that use entrepreneurial skills to find and develop initiatives to financially benefit their company.

Intrapreneurs may potentially create new products, services or systems but without carrying a financial risk. All on the employer. Advantages of intrapreneurs:

• Drive innovation in a business -> Develop unique selling points for business products or innovative production methods -> Competitive advantage over firms -> Increased brand loyalty and market share from retention sales -> Higher profits from higher prices due to price inelastic demand
• Achieves self-actualisation needs of employees -> Creativity helps reach full potential -> Increased motivation -> Higher productivity -> Increased cost competitiveness
• Improves business reputation and brand with prestigious awards -> E.G Queen's Award for Enterprise -> Increases exposure with positive PR -> Increased brand loyalty and market share from retention sales
• Individual benefit of experimenting without cost of failure or risk -> Improves job satisfaction and develops entrepreneurial skills -> Beneficial for business in terms of productivity and efficiency -> Beneficial for individuals with skills helping them set up their own business in the future

Barriers to entrepreneurship

• Lack of finance – (If an individual can't self-fund) providers of finance (E.G Banks) unwilling to provide loans due to risk and high failure rate
• Lack of entrepreneurial capacity – Lack of skills, talents, work ethic and commitment
• Becoming an employer – Responsibility of being an employer (E.G Wages, sick page, health and safety, national insurance contributions and training of employees).
  • Employees can also be unreliable and damage the business' reputation -> Deters entrepreneurs
• Legal barriers – Bureaucratic red tape (E.G Employment, environment, consumer, government and competition legislation) restrict entrepreneurs from maximising profits
• Lack of ideas – No original ideas for entrepreneurs and saturation of markets that limit profits
• Fear of failure/aversion to risk – Not willing to take risks and potentially lose what they put in
• Corrupt and unsupportive environment – E.G Political instability, unclear property laws, regulators/inspectors develop friendly ties with the government to allow them to maximise their own welfare

Anticipating risk and uncertainty in the business environment

Risk – Where the entrepreneur is aware of the potential outcome. Have some control over risk

• Understand the nature of risk immediately (E.G Sacrificing a secure job with good income to start a business, funding the business with your own money)

• Entrepreneurs can take measures to reduce risk:

  • Test out a brand/product in a smaller market before launching it nationally
  • Quantitative techniques (E.G Decision trees) to help make decisions after seeing potential outcomes in terms of quantities

• Taking larger risks may result in greater rewards. However, there is a large chance of failure (E.G Different consumer tastes in different countries may result in the failure of a product that was successful in the home country) Uncertainty – Where the entrepreneur is unaware of the potential outcome. Impossible to predict

• Examples:

  • Outcomes of elections -> Uncertainty over future policies and political stability
  • UK membership in the EU -> Uncertainty over remaining or leaving reduces willingness to invest or begin new projects

• Preparations for uncertain events

  • Contingency funds for freak occurrences (E.G Natural disaster destroys factory)
  • Methods: SWOT and PESTLE analysis, risk assessment, scenario planning -> Reduce uncertainty and increase resilience to unexpected future events
  • Buffer stock for demand spikes, multiple product lines and revenue streams if one market fails