UNIVERSITY OF ABUJA

Centre for Entrepreneurship Development Studies

Course: Entrepreneurship and Innovation

Instructor: Prince ADEFIRANYE, James R. Adeleye f.hcd.; ACMA; mnaa; Dip.; B.Sc.;
M.Sc.; PhD.

Lecture Notes:
Introduction to Entrepreneurship

Definition and Conceptual Clarifications in Entrepreneurship

Though the concept of entrepreneurship has been defined in various ways, we shall look at the
term ‗Entrepreneur‘ as:

―…that individual, who, using the ideology of innovation and creativity, coordinates and
optimizes the other factors of production (land, labour, and capital), towards commercial success
of a product or service‖ (Adefiranye, 2020).

Quick Clarifications…
 Essentially, entrepreneurs coordinates the other factors of production … e.g. Aliko Dangote
as an entrepreneur – Cement; Consumables like sugar, spaghetti, etc and now into refinery…
 Entrepreneurship is more of ideology and not necessarily skills acquisition, although skills
acquisition may enhance the activities of the entrepreneurs, most especially at a cottage or
small/medium scale levels…
 Whereas all entrepreneurs are considered as businessmen, not all businessmen are
entrepreneurs…
 One of the things that differentiate an average businessman from an entrepreneur is the
aspect of physical and direct involvement in the day to day activities and/or the conversion
processes…
 Being entrepreneurial isn't just about starting companies. It is about having a vision and
making it a reality.

a. Entrepreneurial Mindset and Behavioral Traits

What do we mean by the concept “Entrepreneurial Mindset”?
An entrepreneurial mindset is a set of skills that enable people to identify and make the most of
opportunities, overcome and learn from setbacks, and succeed in a variety of settings. Research
shows that an entrepreneurial mindset is valued by employers, boosts educational attainment and
performance, and is crucial for creating new businesses (nfte, 2021). The mindset of the
entrepreneur is especially important because it's necessary for their success. The mindset of an
entrepreneur, also known as an entrepreneurial mindset, is a mindset that says, "I can do it." It
means you believe in yourself and your abilities.

1
Components of the entrepreneurial mindset:
1) Risk.
2) Motivation.
3) Continuous building and development.
4) Being happy about makinig mistakes.
5) Learning quickly.
6) Swift Response to changes.
7) Working smartly.

b. Characteristics of Entrepreneurship and Success Secrets.

Scholars have expressed both convergent and divergent views as to what constitute
charactetrisitcs of entrepreneurs.
For instance, Rockstar (2008) recognized the characteristics of entrepreneurship as:
1. Creative Activity: Entrepreneurship entails innovations. It deals with product innovation,
production techniques innovation while bearing in mind the market;
2. Dynamic Process: Entrepreneurship is a dynamic process that has to bear in mind the
dynamic business environment.
3. Purposeful Activity: Entrepreneurship is an activity embarked upon for a specific purpose.
This could be for profit making purposes, for humanitarian purposes or to bring a difference to
the market.
4. Involves Risk: Entrepreneurship is a very risky venture; entrepreneurial decisions can have
far-reaching impact on the organization, people in the organization and even the economy. These
decisions are critical, enormous and cannot be easily reverted. Rockstar (2008) then identifies the
following characteristics of entrepreneurs as: risk bearing ability, technical knowledge, and
ability to gather financial and motivational resources.

DiMasi (2010), on the other hand, regards the major characteristics of entrepreneurs as: self-
confidence and being multi-skilled, confidence in the face of difficulties and discouraging
circumstances, risk-taking, innovative skills, results-oriented, total commitment. Stephenson
(2010) believes that entrepreneurial characteristics are: seriousness, planning ability, prudence,
and team work. Hadzima and Pilla (2010) conclude that the characteristics of highly effective
entrepreneurs include: ability to deal with risk, being results oriented, enthusiasm and energy,
growth potential, team work, multitasking ability and improvement orientation. Driessen and
Zwart (2010), after carefully studying various researches conducted into the characteristics of
successful entrepreneurs, identified three main characteristics and five secondary characteristics
of successful entrepreneurs.

2
According to them, the main characteristics are: need for achievement (n Ach), internal locus of
control (ILOC) and risk-taking propensity (RTP), while they also stated the five secondary
characteristics as: need for autonomy (n Aut), need for power (n Pow), tolerance of ambiguity
(ToA), need for affiliation (n Aff), and endurance (End). They then concluded that in these
studies, successful entrepreneurs score significantly higher on these characteristics than less
successful entrepreneurs, small business managers, and non-entrepreneurs (Driessen & Zwart,
2010). Other characteristics identified are: discipline, vision or creativity, calmness, risk
tolerance: Focused, balance, (LifeHack, 2008), commitment, perseverance, initiative, versatility,
dynamic, knowledgeable/skilled, emotional or mental strength, and resilience. A careful look at
the characteristics listed above reveals that some of them overlap while most of them are
divergent thereby further fuelling the debate. Some of these characteristics are briefly discussed
below.
The entrepreneur must have the capacity to bear risk. This is because the new venture is created
in an uncertain and risky environment. Di-Masi (2010), however, noted that although risk
bearing is an important element of entrepreneurial behavior, many entrepreneurs have succeeded
by avoiding risk where possible and seeking others to bear the risk. Basically, what he is saying
here is that entrepreneurs bear calculated risks and are more than glad to let others bear their risk
when it is convenient for them. Financial and motivational resources are needed for the creation
of the new business. Sometimes the entrepreneur, as an individual may not have these resources
but he/she/they should have the ability to gather it from those who have it. The entrepreneur
must have self-confidence and believe in him/herself. Self-confidence is an important
characteristic that enables individuals to handle any situation without having inferiority or any
other type of complex. The entrepreneur also has to be a jack of all trade and master of all.
He/she must possess different skills unlike other individuals. For instance, assuming an
entrepreneur is a marketer, the entrepreneur should not only possess marketing skills and
interpersonal skills but also language skills i.e. ability to speak more than one language. This
definitely will be an added advantage! The entrepreneur may not necessarily be an 'inventor' but
the one that can make a difference; he/she should be able to see what others cannot see and be
able to carve out a new niche in the market place. The entrepreneur is one who knows how to get
results under any circumstances either with others or through others. The entrepreneur does this
by setting goals and ensuring that such goals are doggedly pursued by all concerned willingly
and with joy. The business environment is dynamic and filled with uncertainties and risk. In
order to succeed the entrepreneur has to take risk. Successful entrepreneurs take calculated risks
and, in some cases, shift the risks to others. Starting /creating a new business is a serious exercise
that requires a lot of commitment and hard work. It is like bringing a child into the world and
nurturing the child to adulthood. This requires commitment, dedication, hard work, energy and
singlemindedness otherwise the ‗child‘ (i.e. business) may die prematurely (DiMasi, 2010).

Other characteristics of an Entrepreneur are:

3
1. Technical Knowledge: Depending on the kind of venture created, the entrepreneur must have
technical expertise about production techniques and marketing.
2. Calm: Entrepreneurs need to be cool, calm and collected. They have to remain calm even
when exposed to stress, emergency or crisis situations.
3. Focused: In getting things done and starting and maintaining a business attention has to be
paid to a lot of details. Small things when not handled properly or noticed on time may lead to
disastrous outcomes.
4. Tolerance: The entrepreneur has to relate with people. People vary in terms of their
perceptions, personality, motivations and attitudes amongst other things. The entrepreneur needs
to be tolerant while not being weak, in order to get things done.
5. Balance: Though, the entrepreneur is a human being, he/she has to be like a super human
being in order for him to succeed. To this effect, he/she has to be able to balance all emotions
and characteristics and remain focused and objective while having emotional or mental strength
and resilience. Balance is important because too much of everything is bad.
6. Versatility: The entrepreneur has to be versatile and be ready to learn and use information
technology and other technology to the best advantage.
7. Seriousness: The entrepreneur has to believe in him/herself and the business and get things
done with total seriousness. As mentioned earlier, starting a new business is like giving birth to a
child; it is indeed a very serious business.
8. Planning Ability: The entrepreneur must be a planner; he/she must formulate goals and
develop action plans to achieve them. Planning is important for he/she who fails to plan, plans to
fail!
9. Prudence: The entrepreneur must be versatile in financial management. This is because
finance is the life-wire of the business. Also, to achieve the profit objective, the entrepreneur
must engage in efficient and effective financial management, and have sound financial policies
and practices.
10. Customer-Centric: Businesses are created to satisfy unmet needs. A successful
entrepreneur must be able to anticipate customers‘ needs and satisfy them through his/her
product offerings. To do this effectively, the entrepreneur has to adopt a customer-centric or
customer-focused approach.
11. Team Player: Creating a successful business is a one man business but maintaining and
sustaining the business cannot be done by one person. The entrepreneur needs others to work
with him hence he has to have a formidable or winning team. To this effect, the entrepreneur has
to be an effective team manager and recruit the right team members but the entrepreneur‘s most
important team members are the customers for without customers a business cannot survive
(LifeHack, 2008; Rockstar, 2008; Di-Masi, 2010; Driessen & Zwart, 2010; Hadzima & Pilla,
2010 Stephenson, 2010). In order to perform their functions effectively and operate a successful
business, entrepreneurs have to perform certain roles.

Generally however, entrepreneurs are charcterised by the following:

i. Opportunity seeking;

4
 ii. Risk taking;
iii. Being natural and nurtured;
iv. Problem solving;
v. Change Agent;
vi. Innovative and/or creative thinking.

With respect to entrepreneurial mindset, the following are the basic issues and/or characteristics
features of entrepreneurs with respect to entrepreneurial mindset:

Basic Issues in Entrepreneurial Mindset

As observed by McCoskey-Reisert (2021), the main characteristics obtained in entrepreneurial
mindset are:

1. Determination
The refusal to fear failure keeps entrepreneurs going. As setbacks happen, entrepreneurs seek
solutions instead of focusing on the negative. In the first attempt at an ideology, it is possible that
the idea failed along the line. However, the word, FAILURE is taken to mean First Attempt In
Learning; Use Relevant Experience(s) (Adefiranye, 2020).

2. Focus
Entrepreneurs rarely allow distractions to take their minds off matters at hand. As busy students,
for instance, you are required to balance school with the responsibilities of work and family.

3. Drive
Entrepreneurs are driven to make their ideas work, so much so that they develop daily habits in
order to remain on track. ―Setting goals and keeping them in mind, visualizing success, and
exercise is also good to improve thought processes and gain clarity‖.

4. Decisiveness
When you‘re the head of an entrepreneurial venture, everything falls on you. Time is money, so
the ability to make rational decisions quickly can help an entrepreneur avoid wasteful thoughts
and actions.

5. Independence
Though networking plays a big part in sharing ideas and gaining perspective, entrepreneurs are
very comfortable taking matters into their own hands. The need for independence is one of the
reasons why a person who has already enjoyed a long career in business may break from their
company to strike out on their own.

6. Authenticity
There is genuineness to entrepreneurs; they‘re not phonies. Even if people don‘t always believe
in their ideas, you cannot question their passion for what they are hoping to create.

7. Flexibility
9-to-5 is not really an option for entrepreneurs. They‘re thinking about their ideas 24/7, and have
no qualms about getting down to work at any time of the day or night. This author, for instance,

5
made a reference to a trait of Global Campus students who are perfectly comfortable finishing a
paper after the kids have gone to bed, or reading the chapter of a book on their phones during
their lunch breaks.

8. A Thirst for Knowledge

Entrepreneurs have a natural desire to learn, and this is what often drives them to earn their
bachelor‘s degrees. They have ideas, but they recognize that much more information is needed to
bring those ideas to life.

9. Creativity
The ability to think outside the box and improvise when necessary is an essential element of the
entrepreneurial mindset. Entrepreneurs can see how something is done and imagine how it can
be done better.

Gartner (1990) identified attributes that showed up in definitions of entrepreneurs and

entrepreneurship provided by entrepreneurs and other experts in the field.
The following are a few of these attributes:
 Innovation – Does a person need to be innovative to be considered an entrepreneur? Can an
activity be considered to be entrepreneurial if it is not innovative?
 Activities – What activities does a person need to do to be considered an entrepreneur?
 Creation of a new business – Does someone need to start a new business to be considered to
be an entrepreneur, or can someone who buys a business, buys into a franchise, or takes over an
existing family business be considered an entrepreneur?
 Starts an innovative venture within an established organization – Can someone who works
within an existing organization that they don‘t own be considered an entrepreneur if they start an
innovative venture for their organization?
 Creation of a not-for-profit business – Can a venture be considered to be entrepreneurial if it
is a not-for-profit, or should only for-profit businesses be considered entrepreneurial?
After identifying the attributes, Gartner (1990) went back to the entrepreneurs and other experts
for help in clustering the attributes into themes that would help summarize what people
concerned with entrepreneurship thought about the concept. He ended up with the following
eight entrepreneurship themes:
1. The Entrepreneur – The entrepreneur theme is the idea that entrepreneurship involves
individuals with unique personality characteristics and abilities (e.g., risk-taking, locus of
control, autonomy, perseverance, commitment, vision, creativity). Almost 50% of the
respondents rated these characteristics as not important to a definition of entrepreneurship
(Gartner, 1990, p. 21, 24).  ―The question that needs to be addressed is: Does entrepreneurship
involve entrepreneurs (individuals with unique characteristics)?‖ (Gartner, 1990, p. 25).
2. Innovation – The innovation theme is characterized as doing something new as an idea,
product, service, market, or technology in a new or established organization. The innovation
theme suggests that innovation is not limited to new ventures, but recognized as something

6
which older and/or larger organizations may undertake as well (Gartner, 1990, p. 25). Some of
the experts Gartner questioned believed that it was important to include innovation in definitions
of entrepreneurship and others did not think it was as important. ―Does entrepreneurship involve
innovation?‖ (Gartner, 1990, p. 25).
3. Organization Creation – The organization creation theme describes the behaviors involved
in creating organizations. This theme described acquiring GST301 Entrepreneurial Studies and
integrating resource attributes (e.g., Brings resources to bear, integrates opportunities with
resources, mobilizes resources, gathers resources) and attributes that described creating
organizations (new venture development and the creation of a business that adds value).
(Gartner, 1990, p. 25)  ―Does entrepreneurship involve resource acquisition and integration
(new venture creation activities)?‖ (Gartner, 1990, p. 25)
4. Creating Value – This theme articulated the idea that entrepreneurship creates value. The
attributes in this factor indicated that value creation might be represented by transforming a
business, creating a new business growing a business, creating wealth, or destroying the status
quo.  ―Does entrepreneurship involve creating value?‖ (Gartner, 1990, p. 25).
5. Profit or Non-profit  ―Does entrepreneurship involve profit-making organizations only‖
(Gartner, 1990, p. 25)?
6. Growth  Should a focus on growth be a characteristic of entrepreneurship?
7. Uniqueness – This theme suggested that entrepreneurship must involve uniqueness.
Uniqueness was characterized by attributes such as a special way of thinking, a vision of
accomplishment, ability to see situations in terms of unmet needs, and creates a unique
combination.  ―Does entrepreneurship involve uniqueness?‖ (Gartner, 1990, p. 26).
8. The Owner-Manager – Some of the respondents questioned by Gartner (1990) did not
believe that small mom-and-pop types of businesses should be considered to be entrepreneurial.

Some authorities feel that an important element of a definition of entrepreneurship was that a
venture be owner managed. To be entrepreneurial, does a venture need to be owner-managed?

 Cantillon (circa 1730) conceptualized the entrepreneur as: the "agent who buys means of
production at certain prices in order to combine them" into a new product (Schumpeter,
1951). Putari (2006) quoted Say 1816 who asserts that the entrepreneur is the agent "who
unites all means of production and who finds in the value of the products...the
reestablishment of the entire capital he employs, and the value of the wages, the interest,
and rent which he pays, as well as profits belonging to himself." Schumpeter (1934)
conceives the entrepreneur as the innovator who implements change within markets
through the carrying out of new combinations such as introduction of new techniques of
production, reorganization of an industry and innovation. An entrepreneur can be
described as ―one who creates a new business in the face of risk and uncertainty for the
purpose of achieving profit and growth by identifying significant opportunities and

7
 assembling the necessary resources to capitalize on them‖ (Zimmerer & Scarborough,
2008, p. 5).
 An entrepreneur is ―one who organizes, manages, and assumes the risks of a business or
enterprise‖ (Entrepreneur, n.d.). Entrepreneur can be described as a Self-employment of
any sort; the activity that involves identifying opportunities within the economic system;
the creation of new organizations; the willingness and ability of an individual to seek out
investment opportunities in an environment and be able to establish and run an enterprise
successfully based on the identifiable opportunities.
 In Quick MBA (2010), the entrepreneur is defined as one who combines various input
factors in an innovative manner to generate value to the customer with the hope that this
value will exceed the cost of the input factors, thus generating superior returns that result
in the creation of wealth. The entrepreneur is the person who perceives the market
opportunity and then has the motivation, drive and ability to mobilize resources to meet it
(Di-Masi, 2010). An entrepreneur is a person who has possession of a new enterprise,
venture or idea and assumes significant accountability for the inherent risks and the
outcome (Wikipedia, 2010). The entrepreneur is anyone who has the capacity and
willingness to undertake conception, organization, and management of a productive
venture with all attendant risks, while seeking profit as a reward (Business Dictionary,
2010).
 Interestingly, small business experts also have their definitions of the concept
‗entrepreneur‘ (Thinking like, 2010) for instance: Reiss (2010), views the entrepreneur as
the person that recognizes and pursues opportunities without regard to the resources
he/she is currently controlling, with confidence that he/she can succeed, with the
flexibility to change course as necessary, and with the will to rebound from setbacks.
Pinson (2010) visualized the entrepreneur as a person who starts a business to follow a
vision, to make money, to be the master of his/her own soul (both financially and
spiritually) and is an "educated" risk taker. Murphy (2010) conceives an entrepreneur as a
person who is dynamic and continues to seek opportunities and/or different methods of
operation and will do whatever it takes to be successful in business. Given the above
wide range of factors and behaviour which are used to define the concept ‗entrepreneur‘,
we can see the difficulty and impossibility of finding a unified definition of the
‗entrepreneur‘.
 Hence, to Di-Masi (2010), the concept ‗entrepreneur‘ can be best used in the past tense to
describe a successful business person, that is, entrepreneurs are business persons who
identify the existence of business opportunities and based on this they create businesses
thereby creating new products, new production methods, new markets and new forms of
organization to satisfy human needs and wants mostly at a profit. It should be noted that
though most entrepreneurial businesses start small, entrepreneurs are not only small
business owners; they can also be big business owners. This is because successful
entrepreneurs, unlike small business owners, are innovative and, when operating in an

8
 enabling business environment, can rapidly create a large amount of wealth while bearing
very high risk. In fact, innovation is considered to be the strategic tool of entrepreneurs;
this is one of the tools that enable them gain strategic advantage over competitors
(QuickMBA, 2010).
 Entrepreneurs are individuals or groups of individuals who carryout entrepreneurship
activities to build business empires. There are given situations where an entrepreneur is
not able to establish his or her own business and as such has to work in an organization.
In this case they are referred to as ‗Intrepreneurs‘ i.e. entrepreneurs within an
organization. These individuals are entrepreneurs in their own right because they pursue
the exploitation of business opportunities as they emerge and are also visionaries within a
given organization. Thus, once identified, these individuals should be encouraged to
manifest their entrepreneurial abilities to the benefit of the organization otherwise they
will be frustrated and may leave the organization or start their own businesses.
Entrepreneurship is the processes and activities by which corporate organization behave
entrepreneurially. We could also have technopreneur, who is an individual whose
business is in the realm of high technology, who at the same time has the spirit of an
entrepreneur. A technopreneur‘s business involves high technology or to put it more
clearly a technopreneur is a technological innovator and a business man all combined in
one individual (Ogundele, 2007).

There are many definitions of the concept ‘entrepreneurship’:

 Entrepreneurship can be defined as a field of business that seeks to understand how
opportunities to create something new (e.g., new products or services, new markets, new
production processes or raw materials, new ways of organizing existing technologies) arise and
are discovered or created by specific persons, who then use various means to exploit or develop
them, thus producing a wide range of effects (Baron, Shane, & Reuber, 2008, p. 4)
 A concise definition of entrepreneurship ―is that it is the process of pursuing opportunities
without limitation by resources currently in hand‖ (Brooks, 2009, p. 3) and ―the process of doing
something new and something different for the purpose of creating wealth for the individual and
adding value to society‖ (Kao, 1993, p. 70).
 Cantillon (circa 1730) views entrepreneurship as: ―self-employment of any sort‖.
 In 1934, Joseph Schumpeter equated entrepreneurship with the concept of innovation and
applied it to a business context, while emphasizing the combination of resources.
 Penrose (1963) views entrepreneurship as the activity that involves identifying opportunities
within the economic system.
 While Leibenstein (1968, 1979) perceives entrepreneurship as involving "activities necessary
to create or carry on an enterprise where not all markets are well established or clearly defined
and/or in which relevant parts of the production function are not completely known‖.

9
 Okpara (2000) defines entrepreneurship as the willingness and ability of an individual to seek
out investment opportunities in an environment and be able to establish and run an enterprise
successfully based on the identifiable opportunities.
 In addition, Nwachukwu (1990) regards entrepreneurship as a process of seeing and
evaluating business opportunities, gathering the necessary resources to take advantage of them
and initiate appropriate action to ensure success.

Thus, from the definitions above we can see that while defining the concept
‘entrepreneurship’, emphasis is laid on a wide spectrum of activities such as:
1. Self-employment of any sort.
2. Creation of organizations.
3. Innovation applied to a business context.
4. The combination of resources.
5. Identification and exploitation of opportunities within the economic system or market.
6. The bringing together of factors of production under uncertainty. We can therefore conclude
that whatever activity that involves any or all of the above activities can be regarded as
entrepreneurship. Entrepreneurship refers to all the processes and activities involved in
establishing, nurturing, and sustaining a business enterprise. This section includes an overview of
how entrepreneurship has evolved to the present day.

The following timeline shows some of the most influential entrepreneurship scholars and
the schools of thought (French, English, American, German, and Austrian) their
perspectives helped influence and from which their ideas evolved. Schools of thought are
essentially groups of people who might or might not have personally known each other, but
who shared common beliefs or philosophies.

Historical and Evolutionary Entrepreneurship

Thought (Illustration by Lee A. Swanson) The function, if not the name, of the entrepreneur is
probably as old as the institutions of barter and exchange. But only after economic markets
became an intrusive element of society did the concept take on pivotal importance. Many
economists have recognized the pivotal role of the entrepreneur in a market economy. Yet
despite his central importance in economic activity, the entrepreneur has been a shadowy and
elusive figure in the history of economic theory (Hebert & Link, 2009, p. 1). Historically those
who acted similarly to the ways we associate with modern day entrepreneurs – namely those who
strategically assume risks to seek economic (or other) gains – were military leaders, royalty, or
merchants. Military leaders planned their campaigns and battles while assuming significant risks,
but by doing so they also stood to gain economic benefits if their strategies were successful.
Merchants, like Marco Polo who sailed out of Venice in the late 1200s to search for a trade route

10
to the Orient, also assumed substantial risks in the hope of becoming wealthy (Hebert & Link,
2009).

Richard Cantillon (1680-1734) was born in France and belonged to the French School of thought
although he was an Irish economist. He appears to be the person who introduced the term
entrepreneur to the world. ―According to Cantillon, the entrepreneur is a specialist in taking on
risk, ‗insuring‘ workers by buying their output for resale before consumers have indicated how
much they are willing to pay for it‖ (Casson & Godley, 2005p. 26). The workers‘ incomes are
mostly stable, but the entrepreneur risks a loss if market prices fluctuate. Cantillon distinguished
entrepreneurs from two other classes of economic agents; landowners, who were financially
independent, and hirelings (employees) who did not partake in the decision-making in exchange
for relatively stable incomes through employment contracts. He was the first writer to provide a
relatively refined meaning for the term entrepreneurship. Cantillon described entrepreneurs as
individuals who generated profits through exchanges. In the face of uncertainty, particularly over
future prices, they exercise business judgment. They purchase resources at one price and sell
their product at a price that is uncertain, with the difference representing their profit (Chell,
2008; Hebert & Link, 2009).

Farmers were the most prominent entrepreneurs during Cantillon‘s lifetime, and they interacted
with ―arbitrageurs‖ – or middlemen between farmers and the end consumers – who also faced
uncertain incomes, and who were also, therefore, entrepreneurs. These intermediaries facilitated
the movement of products from the farms to the cities where more than half of the farm output
was consumed. Cantillon observed that consumers were willing to pay a higher price per unit to
be able to purchase products in the smaller quantities they wanted, which created the
opportunities for the intermediaries to make profits. Profits were the rewards for assuming the
risks arising from uncertain conditions. The markets in which profits were earned were
characterized by incomplete information (Chell, 2008; Hebert & Link, 2009).

Adolph Reidel (1809-1872), form the German School of thought, picked up on Cantillon‘s
notion of uncertainty and extended it to theorize that entrepreneurs take on uncertainty so others,
namely income earners, do not have to be subject to the same uncertainty. Entrepreneurs provide
a service to risk-averse income earners by assuming risk on their behalf. In exchange,
entrepreneurs are rewarded when they can foresee the impacts of the uncertainty and sell their
products at a price that exceeds their input costs (including the fixed costs of the wages they
commit to paying) (Hebert & Link, 2009).

Frank Knight (1885-1972) founded the Chicago School of Economics and belonged to the
American School of thought. He refined Cantillon‘s perspective on entrepreneurs and risk by
distinguishing insurable risk as something that is separate from uncertainty, which is not
insurable. Some risks can be insurable because they have occurred enough times in the past that

11
the expected loss from such risks can be calculated. Uncertainty, on the other hand, is not subject
to probability calculations. According to Knight, entrepreneurs can‘t share the risk of loss by
insuring themselves against uncertain events, so they bear these kinds of risks themselves, and
profit is the reward that entrepreneurs get from assuming uninsurable risks (Casson & Godley,
2005).

Jean-Baptiste Say (1767-1832), also from the French School, advanced Cantillon‘s work, but
added that entrepreneurship was essentially a form of management. Say ―put the entrepreneur at
the core of the entire process of production and distribution‖ (Hebert & Link, 2009, p. 17). Say‘s
work resulted in something similar to a general theory of entrepreneurship with three distinct
functions; ―scientific knowledge of the product; entrepreneurial industry – the application of
knowledge to useful purpose; and productive industry – the manufacture of the item by manual
labour‖ (Chell, 2008, p. 20). Frank Knight made several contributions to entrepreneurship
theory, but another of note is how he distinguished an entrepreneur from a manager. He
suggested that a manager crosses the line to become an entrepreneur ―when the exercise of
his/her judgment is liable to error and s/he assumes the responsibility for its correctness‖ (Chell,
2008, p. 33).

Knight said that entrepreneurs calculate the risks associated with uncertain business situations
and make informed judgments and decisions with the expectation that – if they assessed the
situation and made the correct decisions – they would be rewarded by earning a profit. Those
who elect to avoid taking these risks choose the relative security of being employees (Chell,
2008).

Alfred Marshall (1842-1924), from the English School of thought, was one of the founders of
neoclassical economics. His research involved distinguishing between the terms capitalist,
entrepreneur, and manager. Marshall saw capitalists as individuals who ―committed themselves
to the capacity and honesty of others, when he by himself had incurred the risks for having
contributed with the capital‖ (Zaratiegui & Rabade, 2005, p. 775). An entrepreneur took control
of money provided by capitalists in an effort to leverage it to create more money; but would lose
less if something went wrong then would the capitalists. An entrepreneur, however, risked his
own reputation and the other gains he could have made by pursuing a different opportunity. Let
us suppose that two men are carrying on smaller businesses, the one working with his own, the
other chiefly with borrowed capital. There is one set of risks which is common to both; which
may be described as the trade risks of the particular business … But there is another set of risks,
the burden of which has to be borne by the man working with borrowed capital, and not by the
other; and we may call them personal risks (Marshall, 1961, p. 590; Zaratiegui & Rabade, 2005,
p. 776).

12
Marshall recognized that the reward capitalists received for contributing capital was interest
income and the reward entrepreneurs earned was profits. Managers received a salary and,
according to Marshall, fulfilled a different function than either capitalists or entrepreneurs –
although in some cases, particularly in smaller firms, one person might be both an entrepreneur
and a manager. Managers ―were more inclined to avoid challenges, innovations and what
Schumpeter called the ‗perennial torment of creative destruction‘ in favour of a more tranquil
life‖ (Zaratiegui & Rabade, 2005, p. 781). The main risks they faced from firm failure were to
their reputations or to their employment status. Managers had little incentive to strive to
maximize profits (Zaratiegui & Rabade, 2005). Amasa Walker (1799-1875) and his son Francis
Walker (1840-1897) were from the American School of thought, and they helped shape an
American perspective of entrepreneurship following the Civil War of 1861-1865. These scholars
claimed that entrepreneurs created wealth, and thus played a different role than capitalists. They
believed that entrepreneurs had the power of foresight and leadership qualities that enabled them
to organize resources and inject energy into activities that create wealth (Chell, 2008).

Adam Smith (1723-1790), from the English School of thought, published An Inquiry into the
Nature and Causes of the Wealth of Nations in 1776. In a departure from the previous thought
into entrepreneurship and economics, Smith did not dwell on a particular class of individual. He
was concerned with studying how all people fit into the economic system. Smith contended that
the economy was driven by self-interest in the marketplace (Chell, 2008). Also from the English
School, David Ricardo (1772-1823) was influenced by Smith, Say, and others. His work focused
on how the capitalist system worked. He explained how manufacturers must invest their capital
in response to the demand for the products they produce. If demand decreases, manufacturers
should borrow less and reduce their workforces. When demand is high, they should do the
reverse (Chell, 2008). Carl Menger (1840-1921), from the Austrian School of thought, ranked
goods according to their causal connections to human satisfaction. Lower order goods include
items like bread that directly satisfy a human want or need like hunger. Higher order goods are
those more removed from satisfying a human need. A second order good is the flour that was
used to make the bread. The grain used to make the flour is an even higher order good.
Entrepreneurs coordinate these factors of production to turn higher order goods into lower order
goods that more directly satisfy human wants and needs (Hebert & Link, 2009).

Menger (1950 [1871], p. 160) established that entrepreneurial activity includes: (a) obtaining
information about the economic situation, (b) economic calculation – all the various
computations that must be made if a production process is to be efficient, (c) the act of will by
which goods of higher order are assigned to a particular production process, and (d) supervising
the execution of the production plan so that it may be carried through as economically as
possible (Hebert & Link, 2009, p. 43). Jeremy Bentham (1748-1832), from the English School of
thought, considered entrepreneurs to be innovators. They ―depart from routine, discover new
markets, find new sources of supply, improve existing products and lower the costs of

13
production‖ (Chell, 2008). Schumpeter saw economic activity as leading to economic
development (Hebert & Link, 2009).

Entrepreneurs play a central role in Schumpeter‘s theory of economic development, and

economic development can occur when the factors of production are assembled in new
combinations. Schumpeter (1934) viewed innovation as arising from new combinations of
materials and forces. He provided the following five cases of new combinations.
1. The introduction of a new good – that is one with which consumers are not yet familiar – or of
a new quality of good.
2. The introduction of a new method of production, that is one not yet tested by experience in the
branch of manufacture concerned, which need by no means be founded upon a discovery
scientifically new, and can also exist in a new way of handling a commodity commercially.
3. The opening of a new market, that is a market into which the particular branch of manufacture
of the country in question has not previously entered, whether or not this market has existed
before.
4. The conquest of a new source of supply of raw materials or half-manufactured goods, again
irrespective of whether this source already exists or whether it has first to be created.
5. The carrying out of the new organisation of any industry, like the creation of a monopoly
position … or the breaking up of a monopoly position (Schumpeter, 1934, p. 66). Another
concept popularized by Schumpeter – in addition to the notion of new combinations – was
creative destruction. This was meant to indicate that the existing ways of doing things need to be
dismantled – to be destroyed – to enable a transformation through innovation to a new way of
doing things. Entrepreneurs use innovation to disrupt how things are done and to establish a
better way of doing those things. Various scholars have written extensively on the origin of
entrepreneurship. What is interesting is that most of the scholars who wrote about the origin of
entrepreneurship are either economists or historians. Basically, the concept entrepreneur is
derived from the French concept ―entreprendre‖ which literarily is equivalent to the English
concept ―to undertake‖. From the business point of view, to undertake simply means to start a
business (QuickMBA, 2010).

Based on the interaction with the business environment, various types of entrepreneurs can
emerge.
To this effect, Rockstar (2008) identifies the four types of entrepreneurs as Innovative, Imitating,
Fabian and Drone. This type of entrepreneur is preoccupied with introducing something new into
the market, organization or nation. They are interested in innovations and invest substantially in
research and development. These are also referred to as ‗copy cats‘. They observe an existing
system and replicate it in a better manner. They could improve on an existing product,
production process, technology and through their vision create something similar but better. This
is the case of the student becoming better than the master! These are entrepreneurs that are very
careful and cautious in adopting any changes. Apart from this, they are lazy and shy away from

14
innovations. These are entrepreneurs that are resistant to change. They are considered as ‗old
school‘. They prefer to stick to their traditional or orthodox methods of production and systems.
Entrepreneurs occupy three roles, namely as agent of (1) economic change (2) social change and
(3) technological change. These are referred to as behavioural roles. The types and roles of
entrepreneur notwithstanding, all entrepreneurs possess certain characteristics and are motivated
to become entrepreneur due to certain factors or circumstances which we shall discuss in this
session.

Roles of Entrepreneurs in Entrepreneurship.

Entrepreneurs play basic managerial roles in entrepreneurship. Some of these roles, as identified
by Henry Mintzberg in 1973 are:

1. Head Role: The entrepreneur has to act as figure head in the organization, as such; he/she has
to perform ceremonial duties. This is done by representing the organization in formal and
informal functions.
2. Leader Role: The entrepreneur has to act as a leader because the entrepreneur is the one who
brings other people together in order to create the business. Thus, he/she has to lead the people in
the organization by hiring, firing, training and motivating them.
3. Liaison Role: The entrepreneur has to act as the link between the business and the parties
outside the business.
4. Monitor Role: The entrepreneur acts as a monitor; he monitors both the internal and the
external environment of the business constantly.
5. Information Disseminator Role: The entrepreneur has to act as the organizational
representative and transmit information both within and outside the business.
6. Spokesman Role: The manager has to act as the spokesman of the business; he/she is the
person for the business both inside and outside.
7. Entrepreneurial Role: This is the basic role of the entrepreneur; he/she launches new ideas
for the business and bears the risk.
8. Disturbance Handler: The entrepreneur also acts as arbitrator in situations of conflict so as to
maintain organizational harmony.
9. Resource Allocator: The entrepreneur decides on how the scarce resources of the business
are allocated among its competing ends so as to achieve organizational goals and objectives.
10. Negotiator Role: The entrepreneur has to negotiate on behalf of the business both with the
other categories of labour and other outside sources.

The specific entrepreneurial roles noted earlier on have a number of activities in each role.
They are specified below: The social roles of an entrepreneur are:
1. Transformation of traditional indigenous industry into a modern enterprise.

15
2. Stimulation of indigenous entrepreneurship.
3. Job or employment creation in the community.
4. Provision of social welfare service of redistributing wealth and income.

Types of Entrepreneur:
1. Innovative
2. Imitating
3. Fabian
4. Drone

Roles of Entrepreneurs:
1. Social Roles of Entrepreneur
2. Economic Roles of Entrepreneur
3. Technological Roles of Entrepreneur

Other things to note about Entrepreneurship:

It is necessary to be able to determine exactly who entrepreneurs are before we can, among other
things, study them, count them, provide special loans for them, and calculate how and how much
they contribute to our economy.
□ Do someone need to start a business from scratch to be called an entrepreneur?
□ Can we call someone an entrepreneur if they bought an ongoing business from someone else or
took over the operations of a family business from their parents?
□ If someone starts a small business and never needs to hire employees, can they be called an
entrepreneur?
□ If someone buys a business but hires professional managers to run it so they don‘t have to be
involved in the operations, are they an entrepreneur?
□ Is someone an entrepreneur if they buy into a franchise so they can follow a well-established
formula for running the operation?
□ Is someone an entrepreneur because of what they do or because of how they think?
□ Can someone be an entrepreneur without owning their own business?
□ Can a person be an entrepreneur because of the nature of the work that they do within a large
corporation?

Study Session 2
Driving Motives for Entrepreneur
16
 In the first study session of this course, we talked about motivation as part of the ingredients of
entrepreneurship. In this study session, we are going to be looking at the things that motivate
people to become entrepreneurs. We will look at both dark and bright side of entrepreneur and
some of its variable. We will also distinguish between creativity and entrepreneurship. Lastly, we
will look at the benefits of innovation. Learning Outcomes
When you have studied this session, you should be able to:
2.1 highlight those things that motivates entrepreneur
2.2 describe the bright and dark side of entrepreneur
2.3 point out entrepreneurship variables
2.4 differentiate between creativity and entrepreneurship
2.5 define innovation

This Study Session requires a one hour of formal study time. You may spend an additional two
hours for revision.

Driving Motives for Entrepreneur

Entrepreneur Motivations
Bright side Need for Achievement
Tolerance for Ambiguity
Locus of Control
Self-efficacy
Desire for Independence
Drive Egoistic Passion
The Dark Side Opportunity Cost Stocks of Financial Capital Social Ties to Investors Career
Experience Life-Path Circumstances Entrepreneurship Variables Individual Ability The
Economic Environment Creativity and Entrepreneurship Stages of Creativity Innovation Forms
of Innovation Phases in Successful Innovation

Driving Motives for Entrepreneur Motivation

Motivation is the driving force within individuals that propel them to action.
2.1 Entrepreneur Motivation
Entrepreneurial motivations are those factors that propel individuals to become entrepreneurs.
Scholars have conducted various researches on entrepreneurial motivations and have come up
with several factors that motivate people to become entrepreneurs. Some scholars have adopted
the trait approach and come up with certain traits and characteristics that they believe
entrepreneurs possess. Some of these characteristics have been discussed earlier on in the
previous study session. However, the problem with this school of thought is that the scholars do
not agree on the special characteristics that the entrepreneur possess; also, it has been discovered
that there are some successful entrepreneurs that do not possess some or all of the special
characteristics identified.

17
Shane, Locke and Collins (2003) discussed the major motivations that prior researchers have
suggested could influence the entrepreneurial process, as well as motivations that are less
commonly studied in this area. They argue that human motivations influence entrepreneurial
decisions. Furthermore, scholars are of the opinion that variance across people in these
motivations will influence who pursues entrepreneurial opportunities, who assembles resources,
and how people undertake the entrepreneurial process. They identify several human motivations
that influence the entrepreneurial process and conclude that entrepreneurship is not solely the
result of human action, (external factors also play a role e.g., the status of the economy, the
availability of venture capital, the actions of competitors, and government regulations).
However, if the environmental factors are held constant, they observe that human motivation
plays a critical role in the entrepreneurial process.
They also stress that motivational differences such as:
1. Need for achievement
2. Risk taking
3. Tolerance for ambiguity and locus of control
4. Self-efficacy and desire for independence
5. Drive and egoistic passion also influence the entrepreneurial process.
They discover that people vary in their willingness and ability to engage in the entrepreneurial
process because of non-motivational individual differences such as their opportunity cost (Amit,
Muller & Cockburn, 2009), their stocks of financial capital (Evans & Leighton, 1989), their
social ties to investors (Aldrich & Zimmer, 1986), and their career experience (Carroll &
Mosakowski, 1987; Cooper, Woo, & Dunkleberg, 1989). Other non-motivational factors that
influence entrepreneurship are lifepath circumstances (such as unsatisfactory work environment,
negative displacement, career transition and positive pull influences) and background
characteristics (such as childhood, family environment, education, age and work history)
(Unilag, 2007). Bhat and McCline (2005) also studied what motivate people to become
entrepreneurs and identified entrepreneurial motivators to be: Desire for Innovation, the desire
for autonomy, wealth and financial independence, the achievement of personal objectives and the
propensity for action ('doing') and excitement of entrepreneurship. Some of these factors are
briefly discussed in the following sections. [ Let‘s now look at some of the Motivational
Influences on Entrepreneurship or Bright Side of Entrepreneurs.

2.2 Bright Side of Entrepreneurs Motivation

By ―Bright side‖ we refer to the positively energizing influence of each of the issues listed
below. Shane et al. (2010) identified the motivational influences on entrepreneurship as:

1. Need for Achievement:

David C. McClelland, a psychologist, the father of the Need for Achievement Theory
posits that individuals who are high in N Ach are more likely than those who are low in N
Ach to become entrepreneurs. This is because such individuals tend to engage in

18
 activities or tasks that have a high degree of individual responsibility for outcomes,
require individual skill and effort, have a moderate degree of risk, and include clear
feedback on performance. In a nutshell, these individuals effectively operate in situations
in which they can achieve results through their own efforts, pursue moderately difficult
goals and receive relatively immediate feedback on the outcomes of their performance
(Unilag, 2007).
2. Risk Taking Propensity:
Risk-taking propensity has been defined in the entrepreneurship literature as the
willingness to take moderate risks (Begley, 1995). This motivational influence on
entrepreneurship is an offshoot of the need for achievement factor, for individuals with a
high need for achievement would have moderate propensities to take risk. This is because
activities with moderate risk are challenging and at the same time appear to be attainable
(Atkinson, 1957).
3. Tolerance for Ambiguity:
According to Budner (1962), an ambiguous situation is "one which cannot be adequately
structured or categorized by an individual because of the lack of sufficient cues while he
defined intolerance of ambiguity as the tendency to perceive ambiguous situations as
sources of threat. And Teoh and Foo (1997) define tolerance of ambiguity as the ability to
respond positively to ambiguous situations. Thus, because the entrepreneur creates a new
business in an uncertain and risky situation, an individual that has intolerance for
ambiguity cannot be an entrepreneur.
4. Locus of Control:
This refers to the extent to which an individual believes in fate and their ability to control
fate. Individuals who have an external locus of control believe that the outcome of an
event is outside their control, and view fate as mainly determined by external forces and
luck. On the other hand, individuals with an internal locus of control believe that their
personal actions directly affect the outcome of an event. Thus, individuals with internal
locus of control are propelled to become entrepreneurs because they believe that they
control their fate (Rotter, 1966; UNILAG GST Module 1, 2007).
5. Self-Efficiency:
This is conceptualized as the belief in one‘s ability to muster and implement the
necessary personal resources, skills, and competencies to attain a certain level of
achievement on a given task. Self-efficacy is basically, task-specific self-confidence
(Bandura, 1997; Shane et al., 2010). An individual with high self-efficacy will take
negative feedback in a more positive manner and use that feedback to improve his/her
performance hence is more likely to become an entrepreneur.
6. Desire for independence:
This could be in terms of financial or job independence. Independence entails taking the
responsibility to use one‘s own judgment as opposed to blindly following the assertions
of others. It also involves taking responsibility for one‘s own life rather than living off the

19
 efforts of others. An entrepreneur is a decision maker and must have a mind of his/her
own. The entrepreneur gives the order, while others follow! Thus, once an individual
desire to be independent and take total control of his/her life, then that person is propelled
to become an entrepreneur.
7. Drive:
Shane et al. (2003) used this concept to refer to the willingness to put forth effort (i.e.
both the effort of thinking and the effort involved in bringing one‘s ideas into reality).
According to them there are four aspects of drive, namely:
(1) ambition;
(2) goals;
(3) energy and stamina; and
(4) persistence.
Thus, once an individual has drive, he will be propelled to become an entrepreneur.
8. Egoistic Passion:
Shane et al. (2003) viewed egoistic passion as a passionate, selfish love of the work.
According to them, the true or rational egoist passionately loves the work; loves the
process of building an organization and making it profitable and is motivated to do what
is actually in his/her own interest. Thus, once an individual has egoistic passion, then
he/she is propelled to become an entrepreneur. Identify and discuss any three
characteristics of a successful entrepreneurs:

1. Need for achievement: individuals who effectively operate in situations in which they can
achieve results through their own efforts, pursue moderately difficult goals and receive relatively
immediate feedback on the outcomes of their performance
2. Desire for independence: This could be in terms of financial or job independence.
Independence entails taking the responsibility to use one‘s own judgment as opposed to blindly
following the assertions of others.
3. Self-efficacy will take negative feedback in a more positive manner and use that feedback to
improve his/her performance hence he/she is more likely to become an entrepreneur.

2.3 The Dark Side of Entrepreneurship Motivation

Non-motivational influences or the dark side is used with reference to the stress producing
tendency of each of the issues discussed below.
1. Opportunity Cost:
According to a study by Amit et al., (2009) entrepreneurs are more likely to undertake
entrepreneurial activities when their opportunity costs are lower. That is paid workers who chose
to become entrepreneurs do so because they have less to lose (i.e. lower opportunity costs) by
leaving their paid work.
2. Stocks of Financial Capital:

20
This refers to the amount of money an individual is able to accumulate or stock. Evans and
Leighton (1989) found that the hazard into self-employment is constant in age. And older
workers tend to have the propensity to become entrepreneurs because they would have had time
to build up the capital needed to start a business unlike younger workers.
3. Social Ties to Investors:
The importance of social embedding in the creation of a new business has been appreciated by
scholars of entrepreneurship. Aldrich and Zimmer (1986) note that entrepreneurs are highly
social actors and they actively embed themselves in social contexts.
4. Career Experience:
For instance, in the course of their entrepreneurship research, they found that immigrant
entrepreneurs in many cases formed ethnic networks to share capital or business in order to
overcome hostility in the host countries. Thus, given these conditions, an individual will be
propelled to become an entrepreneur. This is closely related to unsatisfactory work experience. If
an individual is not happy with his/her job and has acquired a great deal of experience on the job
and possesses entrepreneurial abilities, then there is the tendency for the person to become an
entrepreneur.
5. Life-path Circumstances:
This refers to individual circumstances within the life-path of individuals that propel them to
become entrepreneurs.
These are factors such as:
1. Unsatisfactory Work Environment: When an individual is dissatisfied with his work
environment or finds the work environment unconducive, then in rebellion, he will quit the job
and seek alternative employment. However, if the individual in question is an entrepreneur, then
he is likely going to start his own business.
2. Negative Displacement: This arises when unforeseen circumstances in an individual‘s life-
path causes the person to make major changes in lifestyle. This could be an accident, the loss of
dear ones or sponsors etc. When such occurrences happen, the individual is forced to undergo a
drastic change in the lifestyle and as such may become an entrepreneur.
3. Career Transition: This situation arises when an individual is between one career-related
activity and another. For instance, when an individual who was initially a copy typist goes to
Secretarial School and obtains a certificate, then there is a career transition which can necessitate
the creation of a new business.
4. Positive Pull Influences: This refers to centres of influence within the society. That is,
individuals whom people look up to as mentors encourage a person to become an entrepreneur.
5. Background Characteristics: This has to do with factors such as childhood, family
environment, education, age and work history. It is believed that position in the family, i.e.
whether first born, last born, only child, upbringing, educational level and age influence the
propensity of the individual to become an entrepreneur. For instance, an issue of debate among
scholars is whether entrepreneurs tend to be only child or first-born child of a family. Other
scholars argue that individuals are more likely to become entrepreneurs when they are between

21
the ages of 25 and 40 years, while some other scholars contend that individuals are more likely to
become entrepreneurs when they are between the ages of 22 and 55 years. Another group of
scholars disagree with these positions by stating that individuals could become entrepreneurs
even before the age of 22 years or even after the age of 55years (Unilag GST Module 1, 2007).

2.4 Entrepreneurship Variables

What factors affect the supply of entrepreneurship? Basically, two factors affect the supply of
entrepreneurship: opportunity and willingness to become an entrepreneur. Opportunity is the
possibility to become self-employed if one wants to. The primary factors that affect opportunity
are:
1. Individual Ability:
The individual‘s intrinsic entrepreneurial ability and intuition (Allinson, Chell & Hayes, 2000).
The degree to which the spirit of enterprise exists or can be initiated in the individual is through
the society, by the society and culture in which he is embedded (Morrison, 1998).
2. The Economic Environment:
One of the primary determinants of the supply of entrepreneurship is the willingness of an
individual to become an entrepreneur. Willingness is a personalized activity. It goes beyond
intentions and/or new idea conceptualization. Willingness must lead to the creation of enterprise
from nothing (Timmons, 1989). It also involves the relative evaluation of work in self-
employment compared with one‘s other options for employment (Praag et al, 1995).

2.4 Creativity and Entrepreneurship

The terms creativity and innovation are often used to mean the same thing, but each has a unique
connotation. Creativity is ‗‘ the ability to bring something new into existence. ―This emphasizes
the ―ability,‖ not the ―activity,‖ of bringing something new into existence. A person may
therefore conceive of something new and envision how it will be useful, but not necessarily take
the necessary action to make it a reality. Innovation is the process of doing new things. It is the
conversion of creative ideas into market place reality, which people are prepared to buy. This
distinction is significant. Ideas have little value until they are converted into new products,
services, or processes. Innovation, therefore, is the transformation of creative ideas into useful
applications but creativity is prerequisite to innovation (Holt, 1992;)

2.4.1 Stages of Creativity

The creative processes (Source: Holt (1992)) According to Holt (1992), the creative process
comprises the following five stages:

1. Idea Germination: The seeding stage of a new idea recognition Preparation Conscious search
for knowledge rationalization Incubation unconscious asimilation of information fantasizing
Illumination Recognition of idea as being feasible realization Verification Application or test to
prove idea has value Validation Idea germination: Exactly how an idea is germinated is a

22
mystery; it is not something that can be examined under the microscope. For most entrepreneurs,
ideas begin with interest in a subject or curiosity about finding a solution to a particular problem.
2. Preparation: Once a seed of curiosity has taken form as a focused idea, creative people
embark on a conscious search for answers. If it is a problem they are trying to solve, then they
begin an intellectual journey, seeking information about the problem and how others have tried
to resolve it. Inventors will set up laboratory experiments, designers will begin engineering new
product ideas, and marketers will study consumer buying behaviour.
3. Incubation: The idea, once seeded and given substance through preparation, is put on a back
burner, the subconscious mind is allowed time to assimilate information. Incubation is a stage of
‗mulling it over‘. When an individual has consciously worked to resolve a problem without
success, allowing it to incubate in the subconscious will often lead to a resolution.
4. Illumination: Illumination occurs when the idea surfaces as a realistic creation. This stage is
critical for entrepreneurs because ideas, by themselves, have little meaning. Reaching the
illumination stage separates daydreamers and tinkerers from creative people who find a way to
transmute values.
5. Verification: An idea once illuminated in the mind of an individual still has little meaning
until verified as realistic and useful.

Thus, verification is the development stage of refining knowledge into application. According to
Adams (2005), the following are critical to individual creativity:
1. Knowledge: The T-shape mind with a breadth of understanding across multiple disciplines
and one or two areas of in-depth expertise.
2. Thinking: a strong ability to generate novel ideas by combining previously disparate
elements. This ‗synergistic‘ thinking must be combined with analytical and practical thinking. 3)
Personal motivation: the appropriate levels of intrinsic motivation and passion for one‘s work
combined with appropriate synergistic motivators and self-confidence.
3. Environment: a non-threatening, non-controlling climate conducive to idea combination and
recombination such as ‗intersection‘.
4. An explicit decision to be creative along with a meta-cognitive awareness of the creative
process can go a long way in enhancing long-term creative results. Zimmerer, Scarborough, and
Wilson (2008) define innovation as the specific instrument of entrepreneurs, the means by which
they exploit change as an opportunity for a different business or a different service.

2.5 Innovation and Entrepreneurship

As a dimension of corporate entrepreneurship, innovation is a firm‘s commitment to creating and
introducing products, production processes, and organisational systems (Covin and Slevin, 1991;
Lumpkin and Dess, 1996; Zahra, 1996). Innovation is the process that provides added value and
novelty to the firm and its suppliers and customers through the development of new procedures,
solutions, products and services as well as new methods of commercialisation (Shaw,
O‘Loughlin and McFadzean, 2005). According to Knight (1997) and Kreiser, Marino and

23
Weaver (2002) in Scheepers (2007), innovativeness refers to the capability, capacity and
willingness of an enterprise to support creativity and experimentation to solve recurring customer
problems. Innovativeness entails creativity and experimentation that result in new products, new
services, or improved technological processes (Dess and Lumpkin, 2005). It is arguably the most
essential component of corporate entrepreneurship (Fitzsimmons, Douglas, Antoncic, and
Hisrich (2005). Innovation is the outcome of the firm‘s effective development and use of new
technologies and/or knowledge about market opportunities (Ireland, Hitt, Camp, and Sexton,
2001). For a firm to be innovative, it needs to have a free-wheeling, ―boundary less‖
brainstorming culture to engender creative ideas (Khandwalla and Mehta, 2004). It also requires
that organisations depart from existing technologies and practices and venture beyond the current
state (Dess and Lumpkin, 2005). Its attribute describes a firm‘s imperative to initiate newness
with added value (Aloulou and Fayolle, 2005). Innovation can lead to competitive advantage and
provide a basis for firm growth (Hitt, Hoskisson, and Kim, 1997). Innovative firms develop
strong, positive market reputations. They engage in opportunity exploration which includes
behaviour such as looking for ways to improve current products, services or processes, or trying
to think about current work processes, products or services in alternative ways (De Jong and
Wennekers, 2008). Innovative firms also adapt to market changes and exploit market or
opportunity gaps. Sustained innovation moreover distances entrepreneurial firms from their
industry rivals, and thus increases financial returns (Bhardwaj, Sushil and Momaya, 2007).

2.5.1 Forms of Innovation

According to Hamel (1997) in Dess and Lumpkin (2005), innovations come in different forms: 1.
Technological innovativeness primarily comprises research and engineering efforts aimed at
developing new products and processes.
2. Products-market innovativeness consists of market research, products design, and innovations
in advertising and promotion.
3. Administrative innovativeness is concerned with novelty in management systems, control
techniques, and organisational structure.

Innovation can also be classified in terms of whether it is incremental, modular, architectural or

radical (Henderson and Clark, 1990 in Hager, 2006):
1. Incremental Innovation: This comprises relatively small modifications to preexisting
solutions (Scheepers, 2007). In the view of Henderson and Clark (1990) in Hager (2006), this
type of innovation improves and extends an established design. Improvement takes place in
individual components, but the basic core design concepts and the linkage between them remain
the same. An example is faster spinning hard drives.
2. Modular Innovation: This kind of innovation changes the core design of one or more
components but does not change the entire product architecture. This type of innovation requires
new knowledge for one or more components, but the architectural knowledge remains the same.

24
A good example is the digital phone which replaced the analogue phone, without changing the
phone itself (Henderson and Clark, 1990 in Hager, 2006).
3. Architectural Innovation: The essence of this type of innovation is the reconfiguration of an
established system to link together components and parts in a new way (Henderson and Clark,
1990 in Hager, 2006). According to the authors, architectural innovation does not mean that the
components remain unchanged but they are changed in a manner that there are new ways of
linkage between the components. The change is so small that the core concept behind the
changed component is the same, and the associated scientific and engineering knowledge remain
the same. An example is the technologies where architectural innovations reduced the size of the
hard drives from 14-inches diameter disks to diameter of 3.5-inches, and from 2.5-inches to 1.8-
inches.
4. Radical Innovation: This type of innovation brings about a new dominant design and
consequently, a new set of core design concepts embodied in components that are linked together
in a new architecture (Hager, 2006). Radical innovation leads to new solutions that address
customer needs (Morris and Kuratko, 2002 in Scheepers, 2007). In the view of O‘Connor and
Ayers (2005) in Lassen (2007), radical innovation is the commercialisation of products or
technologies that have a strong impact on the market, in terms of offering wholly new benefits;
and the firms, in terms of generating new business. Moore (2004) also gives the following
taxonomy of innovation:
5. Disruptive Innovation: Gets a great deal of attention, particularly in the press, because
markets appear as if from nowhere, creating massive new sources of wealth. It tends to have its
roots in technological discontinuities, such as the one that enabled Motorola‘s rise to prominence
with the first generation of cell phones.
6. Application Innovation: Takes existing technologies into new markets to serve new
purposes.
7. Product Innovation: Takes established offers in established markets to the next level, as
when Intel releases a new processor or Toyota a new car. The focus can be on performance
increase, cost reduction, usability improvement or any other product enhancement.
8. Process Innovation: Makes processes for established offers in established markets more
effective or efficient. Examples include Dell‘s streamlining of its PC supply chain and order
fulfilment systems.
9. Experiential Innovation: Makes surface modifications that improve customer‘s experience of
established products or processes. These can take the form of delighters (―You‘ve got mail!‖),
satisfiers (superior line management at Disneyland), or reassures (package tracking from FedEx).
10. Marketing Innovation: Improves customer-touching processes be they marketing
communications or consumer transactions
11. Business Model Innovation: Reframes an established value proposition to the customer or a
company‘s established role in the value chain or both. Examples include IBM‘s shift to on-
demand computing, and Apple‘s expansion into consumer retailing.

25
12. Structural Innovation: Capitalizes on disruption to restructure industry relationships.
Innovators like banks, for example, that have used the deregulation of financial services to
consumers under one umbrella.

Desouza, Dombrowski, Awazu, Baloh, Papagari, Kim, and Jha, (2007) identify the following
five essential phases of successful innovation:
1. Idea Generation and Mobilisation: This phase is the starting point for new ideas. Successful
idea generation should be stimulated by the pressure to compete and by the freedom to explore.
Once a new idea is generated, it is conveyed to the mobilization phase, wherein the idea travels
to a different physical or logical location. Because most inventors are not also marketers, a new
idea often needs someone other than its originator to move it along. This phase is crucially
important to the progression of a new idea, and omitting it can delay or even sabotage the
innovation process (Desouza et al., 2007).
2. Advocacy and Screening: According to the authors, this phase is the period for weighing an
idea‘s costs and benefits. Advocacy and screening have to take place simultaneously to weed out
ideas that lack potential without allowing stakeholders to reject ideas impulsively solely on the
basis of their novelty. Firms will have more success when the evaluation process is transparent
and standardized, because employees feel more comfortable contributing when they could
anticipate how their ideas would be judged.
3. Experimentation: The experimentation phase assesses the sustainability of ideas for a
particular firm at a particular time – and in a particular environment. In this phase, it is essential
to determine who the customer will be and what he or she will use the innovation for. With that
in mind, the firm might discover that although someone has a great idea, it is ahead of its time or
just not right for a particular market. However, it is important not to interpret these kinds of
discoveries as failures – they could actually be the catalysts of new and better ideas (Desouza et
al., (2007).
4. Commercialisation: In this phase, the firm should look to its customers to verify that
innovation actually solves their problems and then should analyse the costs and benefits of
rolling out the innovation. According to the Desouza et al (2007), an invention is only considered
an innovation once it has been commercialised. Therefore, the commercialisation phase is a
significant one similar to advocacy in that it takes the right people to progress the idea to the next
developmental phase.
5. Diffusion and Implementation: According to the authors, diffusion is the process of gaining
final, company overall acceptance of an innovation. Implementation is the process of setting up
the structures, maintenance and resources needed to produce it.

According to Loewe and Dominiquini (2006), good innovation processes share the following
characteristics:
1. Allow divergence and exploration at the front end. This helps ensure that the new ideas
generated are not simply a repeat of what has been done before.

26
2. Synthesize individual ideas into bigger platforms before selecting individual ideas to develop
further. This enables the company to avoid "gambling the farm" on one idea without first
learning about the larger opportunities at hand. In this study session, we looked at some of those
factors that motivates an entrepreneur. We looked at both the dark and bright side of an
entrepreneurs‘ motivation. We also highlighted a few entrepreneurship variables. In addition, we
differentiated between creativity and entrepreneurship.

Study Session 3

Business and the Business Environment

In the previous session talked about what motivate people to become entrepreneurs and what
creativity and innovation means. In this session, we will be looking at what business is and the
components of the business environment. The session will also highlight the process of
environmental scanning using the SWOT Analysis.

3.1 Concept of Business

The concept ‗business‘ has been defined in different ways by various authors. It has been viewed
as an economic system in which goods and services are exchanged for one another for money, on
the basis of their perceived worth (BusinessDictionary.com, 2010). A business is also conceived
as a legally recognized organization. It is also referred to as: enterprise, business enterprise,
commercial enterprise, company, firm, profession or trade operated for the purpose of earning a
profit by providing goods or services, or both to consumers, businesses and governmental
entities (Sullivan and Sheffrin, 2003; AllBusiness.com., 2010). Whatever is the definition of
business, it should be known that a business is any undertaking that deals with the production
and distribution of goods and services that satisfy human needs and wants.

Businesses do not exist out of the ‗blues‘! They are created by a special kind of labour called the
entrepreneur. However, once the Business and the Business Environment What is Business?

Outline:
The Concept of Environment Component of the Business Environment Internal Environmental
Factors Intermediate Environmental Factors External Environmental Factors SWOT Analysis
Strength/Weakness Analysis Opportunities and Threats Analysis

Business and the Business Environment businesses have been created the entrepreneur has to
organize all the factors of production to ensure that the business survives. The purpose for which
a business is established varies and by virtue of this we have different types of businesses. For
instance, if a business is established for the purpose of making a profit, it is called a profit-

27
making business, otherwise, it is called a not-for-profit or non-profit making business. Also,
businesses could be classified as legal, when they are established in compliance with the rules of
the land, government or society. Illegal businesses are those that do not follow established laws.
Legal businesses can also be referred to as wholesome businesses because they are beneficial to
the society. On the other hand, unwholesome businesses are illegal businesses that are inimical to
the society. For businesses to survive and achieve their set goals and objectives, they have to
perform the organic business functions.

3.1.1 Basic Business Functions

These are the basic functions every business has to perform:
1. Production
2. Marketing,
3. Finance and
4. Personnel
However, care should be taken in not confusing the organic business functions with the
managerial functions. Once the entrepreneur has established the business, managers have to run
the business. Management is simply getting things done through and with others.

3.1.2 Management Functions

In order to get things done in the business/organization, managers among other things have to
perform the managerial functions which are popularly known with the acronym, POSDCORB.
POSDCORB means:
i. Planning,
ii. Organizing,
iii. Staffing,
iv. Directing,
v. Coordinating,
vi. Reporting and
vii. Budgeting.
Businesses do not exist in isolation; they exist within an environment which is referred to as the
business environment and managers have to manage the affairs of the business taking into
cognizance the dynamic and complex business environment.

3.2 Concept of Environment

The concept ‗environment‘ literally means the surroundings, internal, intermediate and external
objects, influences or circumstances under which someone or something exists (Kazmi, 1999).
The environment within which something exists exhibits certain characteristics which have been
identified by Kazmi (1999) to be: complexity, dynamism, multifaceted and far-reaching impact.
These are apart from the simple and stable environmental conditions. The business environment
is simply the surroundings within which a business exists.

28
3.3 Conditions and Characteristics of Environment
The environment of the business exhibits the following conditions and characteristics. These are:
1. Stable Condition: This environment is highly predictable, thus permitting a great deal of
standardization (work process, skills and output) to take place within the organization.
2. Simple Condition: This environment is one where knowledge can be broken down into easily
comprehended components (Minzberg, 1979).
3. Dynamism: The business environment is not static. It is dynamic and as such changes
continuously. This is because of the interactions of the various factors that make up the business
environment.
4. Complexity: The business environment is not simple; it is complex by virtue of the various
components that comprise it and the interactions and interrelationships among these factors.
5. Multifaceted: The business environment is many-sided. It can be viewed from many angles
by the parties involved. Hence, an occurrence that is viewed as strength to an organization may
be perceived as a weakness by another.
6. Far-reaching impact: The happenings in the business environment can have enormous
impact on the organization. It could have the ripple effect. This is because the business
environment can be conceived as a system, specifically an open system made up of different
components that interact and interrelate with one another. Hence, once there is a problem or
development with one aspect/sector, it could have far-reaching impact on the other
aspects/sectors (Kazmi, 1999). By virtue of the above characteristics, it is important for the
entrepreneur to monitor the business environment constantly.

3.4 Macro and Micro-Environmental Forces

Thus, it is of fundamental importance for the entrepreneur to monitor both the key macro-
environmental force (demographic/economic, technological, political/legal and
social/cultural) and microenvironmental forces (customers, competition, distribution
channels, and suppliers) that will affect their ability to earn profits in the market place (Kotler,
1995). These macroenvironmental forces and micro-environmental forces are the components of
the business environment.

3.5 Components of Business Environment

Scholars have classified the business environment using various basis or criteria. This
notwithstanding, it should be noted that the business environment is made up of the internal and
the external environment and the main macro-environmental forces/factors found in the external
environment and micro-environmental forces/factors/ in the internal environment of the business.
These are discussed briefly below.

3.5.1 Internal Environmental Factors

29
The internal environmental factors refer to those factors over which the entrepreneur has
control, at least in the short run; this is why it is also called the controllable environment of the
business. The internal environment of the business is made up of all those physical and
socials factors within the boundaries of the business, which impart strengths or cause
weaknesses of a strategic nature and are taken directly into consideration in the decision-making
behaviour of the business. Strengths are inherent capacities, which a business can use to gain
strategic advantage over its competitors; they are the internal strong points of the business such
as: its core skills, competencies and expertise. While weaknesses are inherent limitations or
constraints, which create strategic disadvantages, they are the internal factors that are lacking in
the business. A successful entrepreneur will find ways of overcoming the weaknesses and
convert them into strengths (Ifechukwu, 1986; Kazmi, 1999; Business-Plan, 2010).
The internal environment of the business is made up of micro-environmental factors such as:

i. Organizational goals and objectives,

ii. Specific technologies utilized by component units of the organization,
iii. The size,
iv. Types and quality of personnel,
v. Its administrative units, and
vi. The nature of the organization‘s product/service (Ifechukwu, 1986).
The nature of a business‘ internal environment is also determined by the organizational
resources, organizational behaviour, strengths, weaknesses, synergistic relationships and
distinctive competence (Kazmi, 1999). Kazmi‘s (1999) views Organizational resources as the
physical and human resources used as inputs in the organization to create outputs.

 Organizational behaviour is the manifestation of the various forces and influences operating in
the internal environment of an organization.
 Strengths are inherent capabilities that give strategic advantage.
 Weaknesses are inherent limitations or constraints, which create strategic disadvantage.
 Synergy is an idea that the whole is greater than the sum of its parts, i.e. 3+3=7.
 Distinctive competence: The specific ability possessed by a particular organization that
distinguishes it from others.
 Organizational capability: This is the inherent capacity or ability of an organization to use its
strengths, and overcome its weaknesses in order to exploit opportunities and face threats in its
external environment. Intermediate determinants of entrepreneurship ideally represent issues or
factors in the borderlines between strictly internal and external factors affecting
entrepreneurship. Generally, they include the customers and the suppliers who are the links
between the organization and the purely external environmental factors. They also include
various support systems, both private and public e.g. legal firms and public relations agencies.
Some of such support systems include:

30
 1. The National Directorate of Employment (NDE): This was established by the Federal
Government of Nigeria in November, 1986. It was designed to work out strategies for
dealing with mass unemployment in the country especially among the school leavers and
college graduates. The mandate given to NDE is executed within the framework of four
core programmes. These are:
 The Small-Scale Industries and Graduate Employment and Vocational Skills Development. 
Support for Agricultural Programmes.
 National Youth Employment and Vocational Skills Development and
 Special Public Works Programmes. NDE executes its programs by providing financial support
and training and development for existing entrepreneurs and new entrants into entrepreneurship
(Ogundele, 2007). Some Financial Support Systems: These include:  Small Industries Credit
Committee.  National Economic Reconstruction Fund.  Small and Medium Enterprises
Loans Scheme.  Micro Finance Banks.  Nigerian Industrial Development Bank.
2. Extension Services Units: The Federal Government in 1964 established Industrial
Development Centres (ADC) located in Oshogbo, Owerri and Zaria. They were to
provide extension services to small and medium scale enterprises in terms of technical
appraisal of loans application, managerial assistance, product development and
production planning and control. Later more were created to have IDC in each state of the
Federation.
3. Technical and Technological Related Support Systems:
These include:
 The Federal Institute of Industrial Research, Oshodi (FIRO).
 Project Development Institute (PRODA) in Enugu.
 Rural Agro-Industrial Development Council (RMRDC) etc. These were established to
provide technical and technology related support for Nigerian entrepreneurs. These support
systems as intermediate factor have closer links with the entrepreneurs to facilitate their
operations in various ways.

3.5.2 External Environmental Factors

The external environmental factors refer to those factors over which the entrepreneur has
no control but have tremendous impact on the survival of the business; this is why it is
also called the uncontrollable environment of the business. Within the external environment
of the business are all the factors which provide opportunities or pose threats to it.
Opportunities are favourable conditions in the business‘ environment, which enable it to
consolidate and strengthen its position. They are the likely benefits to the business resulting
from changes in the external environment while threats are unfavourable conditions in the
business‘ environment, which create a risk for, or cause damage to, the business; they are the
possible pitfalls or dangers resulting from changes in the external environment. A successful
entrepreneur will grab opportunities as they emerge and avoid threats or even look for ways
of converting threats into opportunities (Kazmi, 1999; BusinessPlan, 2010).

31
The major external environmental factors are:
1. Demographic factors: These include the market i.e. consumer populations. It deals with their
composition in terms of sex, age, income, marital status, educational levels etc. Political/Legal
Factors: this is made up of laws, government agencies and pressure groups that affect the
business.
2. Technological Factors: This deals with knowledge of how to accomplish tasks and goals, and
innovations (Herbert, 1973).
3. Natural Environment: This deals with all the gifts of nature or natural resources of the nation
that serve as input for the business.
4. Socio-Cultural Factors: These deal with the people, their norms, values and beliefs as they
affect the business.
5. Economic Factors: These deal with the Macro level factors relating to means of production
and wealth distribution. It also includes the forces of supply and demand, buying power,
willingness to spend, consumer expenditure levels, and the intensity of competitive behaviour. 6.
Competitive Environment: These are those firms that market products that are similar to, or
can be substituted for, a business‘ product(s) in the same geographical area. The four general
types of competitive structure are monopoly, oligopoly, monopolistic competition, and perfect
competition. Other Factors: The other factors making up the external business environment are:
 Suppliers, which are other firms and individuals that provide the input resources needed by
the organization to produce goods and/or services.
 Intermediaries, who are independent businesses that perform all the activities necessary to
direct the flow of goods and services from manufacturers/marketers to ultimate
consumers/customers. They include wholesalers, retailers, agents and distributors, and 
Customers who constitute a portion of the target market of the business; they are the ones the
business strives to satisfy.

3.6 SWOT Analysis

SWOT entails the objective analysis of a business‘s Strengths and Weaknesses and its
Opportunities and Threats. In order to identify its strengths, weaknesses, opportunities and
threats, an organization has to carry out internal and external evaluation and also
opportunities/threats analysis and strengths/weaknesses analysis.
1. The Internal Evaluation starts with the identification of the profit contribution of each area,
followed by allocation of resource, determination of risks involved, variety reduction, realistic
allocation of costs and the assessment of company resources.
2. External evaluation starts with the determination of market stranding, determination of
competitors‘ strengths and weaknesses, assessment of the vulnerability of the business‘ main
products to substitutes, assessment of the effects of economic changes on the business, inter firm
comparisons and Stock Market Valuation in terms of an assessment of the company‘s
vulnerability to takeover (Dixon-Ogbechi, 2003). This involves scanning the internal

32
environment of the business in order to identify its strengths and weaknesses. The entrepreneur
needs to evaluate the strengths and weaknesses of the business periodically.

Environmental Assessment (Five’s)

Also, the entrepreneur can assess the internal environment of the business by critically looking at
the internal factors in terms of the 5s, namely:
i. Skills,
ii. Strategy,
iii. Staff,
iv. Structure,
v. Systems and Shared Values (Dibb, Simkin, Pride, & Ferrell, 1991; Aluko,
Odugbesan, Gbadamosi & Osuagwu, 1998; Business-Plan, 2010).
To do this effectively the entrepreneur needs to ask him/herself and answer questions pertaining
to the 5s (five ‗s‘) in terms of their strengths and weaknesses by developing questionnaires to
ask questions pertaining to major internal environmental factors such as:
i. Skills  What skills do the organizational members possess?  What are the distinctive
competencies of the organization?
ii. Strategy  Does your business have a clear vision and mission?  Are your business
objectives/goals derived from its mission?  Does your business have plans?  Do you
follow the laid down plans of the business as scheduled?  Does your business have
clear strategies to operationalise its policies?  What skills do the organizational
members possess?  What are the distinctive competencies of the organization?
iii. Staff  Does the business have qualified staff for the relevant positions?  Are the staff
rightly placed?  Does the business have adequate number of personnel to man the
various positions?
iv. Structure  Does the business have an organizational structure or organogram?  What
type of organization structure does your business adopt?  Are there clear lines of
reporting and communication?
v. Systems  Does your organization have a system?  What kind of systems (e.g. MIS,
Accounting, Quality Control, and Inventory) does your business have in place?
(BusinessPlan, 2010). If the answers to these questions are positive/or the factors are
present, then you record them as strengths and if the answers are negative/ the factors
are absent, then you record them as weaknesses.

Scanning the External Environment

After this, each factor is rated as to whether it is a major strength, minor strength, neutral factor,
minor weakness, or major weakness (Business-Plan, 2010). This involves scanning the external
environment of the business in order to identify the Opportunities and Threats. The
entrepreneur can assess the external environment of the business by critically looking at the

33
opportunities and threats emanating from changes in the major external environmental factors.
For instance,
i. Opportunities in the technological environment could be availability of advanced
technology,
ii. Developments in Information Technology like the advent of the GSM;
iii. Opportunities in the Political/Legal environment could be favourable government
policies, tax holidays;
iv. Opportunity in the Demographic environment could be great market demand;
v. Opportunities in the Economic environment could be growing export market
increased consumer spending and growing industry. Positive seasonal influences are
an opportunity in the natural environment; opportunities in the other environment
could be change in consumers taste in favour of your product and Intermediaries‘
cooperation. Examples of threats in some external environmental factors can come
from direct competitors, indirect competitors, consumers, substitute products or
services and suppliers, customers brand switching and innovations by competitors
(DixonOgbechi, 2003; Business-Plan, 2010).
The entrepreneur can classify the overall attractiveness of a business once he/she has
conducted a thorough opportunities and threats analysis. To this effect, threats could be
classified according to their seriousness and probability of occurrence. To evaluate its
opportunities, the business needs to operate a reliable Management Information System
(MIS). The information obtained will enable the entrepreneur know if the business is ideal
(i.e. it is high in major opportunities and low in major threats); is speculative (i.e. it is high in
both major opportunities and threats); mature business (i.e. it is low in major opportunities
and threats) and troubled (i.e. it Business and the Business Environment is low in
opportunities and high in threats). An effective opportunity and threat analysis are
advantageous to the entrepreneur; it will enable the entrepreneur make decisions on whether
the business should limit itself to those opportunities where it now possesses the required
strengths or should consider better opportunities where it might have to acquire or develop
certain strengths (Dibb et al., 1991; Aluko et al, 1998; Dixon-Ogbechi, 2003; Business-Plan,
2010).

Study Session 4

Forms of Business Ownership and Legal Implication

You have to appreciate the fact that there are various forms of business organizations that
exist in the environment. Again, business is a profit-seeking enterprise established for the
purpose of creating goods and services that meet the needs of mankind. Business plays a
major role in the lives of every individual as well as a nation (Oluwafemi, 2000).

34
Business activities are undertaken to improve the financial and the material welfare of the
participants. A major group that plays an active role in business within a capitalist economy
is the entrepreneur, that is, a person who perceives investment opportunities and takes
advantages to exploit them by organizing for the business (Lawal, 1993). Selecting a form of
business ownership is a landmark step in the creation of a venture. Most entrepreneurs
however are not trained in the finer points of business law.

Consequently, it is imperative that an entrepreneur carefully searches for the types of legal
ownership and then consults an attorney (lawyer), and an accountant or both to verify
whether the choice addresses their specific needs (Scarbough Wilsion and Zimmerer, 2009).
One of the main reasons small businesses fail is that they do not seek legal and accounting
help at the beginning.

Nickels, Mchugh and Mchugh (2005) stated that one of the keys to success in starting a new
business is to understand how to get the resources you need. To stay in business, an
entrepreneur may need help from someone with more expertise than he/she has in certain
areas, or may help to raise more money to expand. How you form your business can make
tremendous difference in your long-term success as an entrepreneur. Although an
entrepreneur may change the form of ownership later, this change can be expensive, time
consuming, and complicated. There is no single best form of business ownership. Each form
has its own unique set of advantages and disadvantages. The key to choosing the optimum
form of ownership is the ability to understand the characteristics of each business entity and
how they affect an entrepreneur‘s business and personal circumstances.

Relevant Issues the Entrepreneur Should Consider in the Evaluation Process:

The following, according to Scarborough et al (2009), are relevant issues the entrepreneur
should consider in the evaluation process:
1. Tax consideration: In a graduated tax rates, the government‘s (that is Local, State and
Federal) constant modification of the tax code, and the year-to-year fluctuations in a
company‘s income require an entrepreneur to calculate the firm‘s tax liability under each
ownership option every year.
2. Liability exposure: Certain forms of ownership offer business owners greater protection
from personal liability due to financial problems, faulty products, and a loss of other
difficulties. An entrepreneur must evaluate the potential for legal and financial liabilities and
decide the extent to which they are willing to assume personal responsibility for their
companies‘ obligations.
3. Start–up and future capital requirements: The form of ownership can affect an
entrepreneur‘s ability to raise start-up capital. Also, as a business grows, capital requirements
increase, and some forms of ownership make it easier to attract outside financing.

35
 4. Management ability: Entrepreneurs must assess their own ability to successfully manage
their own companies. Otherwise, they may need to select a form of ownership that allows
them to involve people who possess those needed skills or experience in the company.
5. Business goals: The projected size and profitability of a business influences the form of
ownership chosen. Business often evolves into a different form of ownership as they grow,
but moving from some formats can be complex and expensive. Legislation may change and
make current ownership options less attractive.
6. Management succession plans: Entrepreneurs, in selecting a form of business ownership,
must look ahead to the day when they will pass their companies on to the next generation or
to a buyer. Some forms of business ownership better facilitate this transition. In other cases,
when the owner dies –so does the business. Forms of Business Ownership and Legal
Implication
7. Cost of formation: The cost of formation to create business ownership varies from one
form to the other. Entrepreneurs must weigh the benefits and the costs of the form they
choose.

Types of Business Ownership

Whether small or large, every business fit one of three categories of legal ownership, sole
proprietorships, partnership, and corporations (Brone and Kurtx, 2009).

4.1 Sole Proprietorship

The sole proprietorship is the simplest and most popular form of ownership. This form of
business ownership is designed for a business owned and managed by one individual. Sole
proprietorship is the easiest kind of business for you to explore in your quest for an interesting
career. The sole proprietor is the only owner and ultimate decision maker for the business. The
sole proprietorship has no legal distinction between the sole proprietor status as an individual and
his or her status as a business owner. The simplicity and ease of formation makes the sole
proprietorship the most popular form of ownership in Nigeria.
One approach when naming a business is to visualize the company‘s target customer. What are
they like? What are their ages, gender, lifestyles and location? What makes our company
competitive or unique to those customers? Although sole proprietorships are common in a
variety of industries, they are concentrated primarily among small businesses unit such as repair
shops, small retail outlets, and service providers, for example, such as painters, plumbers, and
barbing saloon.

Advantages of Proprietorship
The following are the advantages of proprietorship
1. Least cost of business ownership to establish
2. Minimum or no special legal restriction
3. Ownership of all profit

36
4. No special taxes since business income and proprietors‘ income are taxed as one.
5. Maximum incentive to succeed
6. Privacy
7. Flexibility of operation
8. Easy to discontinue

On the other hand, the disadvantages of proprietorship are:

1. Unlimited personal liability
2. Limited access to capital for expansion
3. Limited skills and abilities
4. Feelings of isolation /overwhelming time commitment
5. Few fringe benefits
6. Limited growth
7. Lack of continuity for the business that has a limited life span. Another option for organizing a
business is to form a partnership.

4.2 Partnership
A partnership is a legal form of business with two or more owners. The minimum number
required to form a partnership is two (2) while the maximum is twenty (20). Partners legally
share a business assets, liabilities, and profits according to the terms of a partnership agreement.
The law does not require a written partnership agreement, also known as the articles of
partnership, but it is wise to work with an attorney to develop an agreement that documents the
status, rights and responsibilities of each partner. The partnership agreement is a document that
states all of the terms of operating the partnership for the protection of each partner involved.
Banks often want to review the partnership agreement before lending the business money. A
partnership agreement can include any legal terms the partner‘s desire.

The Standard Partnership Agreement

Will likely include the following Information:
1. Name of the partnership
2. Purpose of the business
3. Location of the business
4. Duration of the partnership
5. Names of the partners and their legal addresses
6. Contributions of each partner to the business, at the creation of the partnership and later.
7. Agreement on how the profits or losses will be distributed.
8. Agreement on salaries or drawing rights against people for each partner.
9. Procedure for expansion through the addition of new partners.
10. Distribution of the partnership asset to the partners.

37
11. Sale of the partnership interest
12. Absence or disability of one of the partners
13. Voting rights
14. Decision making authority
15. Financial authority
16. Handling tax matters
17. Alteration or modifications of the partnership agreement.
18. Termination of partnership
19. Distribution of assets upon dissolution of the partnership

A Partnership can be regarded as an improvement on sole proprietorship form of business

organization, the minimum number of people that can form a partnership is two, while the
maximum is twenty, with the exception of partnerships comprising professionals; for example,
lawyers, accountants, doctors, to mention just a few. Notably, most partnerships are usually
formed by professionals and those that engage in service-oriented business concerns.

Types of Partnership
There are basically four types of partnership, on the basis of liability of partners
1. General partnership: This is a partnership in which all owners share in operating the
business and in assuming liability for the business‘ debts.
2. Limited partnership: This is a partnership with one or more general partners and one or more
limited partners. Limited partnership is one in which certain partners are liable only for the
amount of their investment. This is a special kind of partnership governed by partnership Act of
1907. The purpose of a limited partnership is to allow one or more individuals to provide capital
on which a return is expected. In case of liquidation, the limited partners only lose the capital.
3. Master Limited Partnership (MLP): This is a newer form of partnership which looks much
like a corporation in that it acts like a corporation and is traded on the stock exchanges like a
corporation but it is taxed like a partnership and thus avoids the corporate income tax.
4. Limited Liability Partnership (LLP): LLP limited partners risk losing their personal assets
to only their own acts and omissions of people under their supervision. This newer type of
partnership was created to limit the disadvantage of unlimited liability.

Types of partners on the basis of the involvement in partnership: An entrepreneur interested in

being involved in partnership form of business should endeavour to understand the types of
partners that he/she can choose to be in this form of business. Partners may be classified on the
basis of liability, degree of management participation in management share in the profit and so
on.

The following types of partners are organized:

38
 1. General partner: A general partner is an owner (partner) who has unlimited liability and is
active in managing the firm.
2. Limited partner: A limited partner is an owner who invests money in the business but does
not have any management responsibility or liability for losses beyond the investment.
3. Silent partners: These are partners who are known by the public as owners of the business,
but they may take no active role in marketing the business.
4. Secret partners: These are partners who take active role in the management of the company
but they are unknown to the outsiders as partners.
5. Sleeping partners: These are also known as dormant partners, they are neither known as
partners by the public nor do they participate in managing the company. They only share from
the profit /loss of the business to the tune of capital contributed.
6. Nominal partners: These kinds of partners are publicly known that they are partners although
they have no investment in the business and therefore have no rights of management. They
merely lend their names to the enterprise and may be liable for certain debt of the partnership.

Advantages of Partnership
The following are some of the advantages of Partnership:
1. Easy to establish
2. More financial resources
3. Shared management and pooled /complementary skills and knowledge
4. Division of profits
5. Minimum governmental regulation/limited legal restrictions
6. Flexibility
7. Freedom from double taxation
8. Secrecy
9. Longer survival

Disadvantages of Partnership
The disadvantages of Partnership are:
1. Unlimited liability
2. Division of profits
3. Disagreement among partners especially with regard to authority and control
4. Difficult to terminate because partners are bound by the law of agency
5. Restrictions on transfer of ownership
6. Lack of continuity

Dissolution and Termination of Partnership

Partners expect their business relationships are going to last forever. However, most do not.
There are possibilities that problems may occur when the entrepreneur realizes he or she is not in

39
charge of his or her own company. Even when partnerships work, there are always fears that the
partners will develop different business goals.
Partners may dissolve or terminate the partnership. Thus, dissolution occurs when a general
partner ceases to be associated with the business. This may be as a result of: Expiration of a time
period or completion of the project undertaken as delineated in the partnership agreement.
Expressed wish of any general partner to cease operation.
Expulsion of a partner under the provisions of the agreement. Withdrawal, retirement, insanity,
or death of a general partner (except when the partnership agreement provides a method of
continuation).
Bankruptcy of the partnership or of any general partner. Admission of a new partner resulting in
the dissolution of the old partnership and establishment of a new partnership. A judicial decree
that a general partner is insane or permanently incapacitated, making performance or
responsibility under the partnership agreement impossible.
Mounting losses that make it unpractical for the business to continue. Impropriety or improper
behaviour of any general partner that reflects negatively on the business. (Adapted from
Scarborough et al 2009 pg. 87).
Termination on the other hand is the final act of intentionally closing the partnership as a
business. This can occur after the partners have agreed to cease operations and all affairs of the
partnership have been concluded.

4.3 Limited Liability Company

The incorporation of companies differs from one country to the other. Each country has a body
of laws that guide the registration and operations of companies. In Nigeria, the Companies and
Allied Matter Act (CAMA) of 1990 is the major law that guides formation and registration of
companies in Nigeria. Formation of Company and Capacity of Individual According to Section
18 of CAMA 1990, two or more persons may form and incorporate a company by complying
within requirements of the act. It also specifies the category of people that can come together to
form a company.
Section 20 states that anyone in these categories is not qualified:
1. he is less than eighteen years of age;
2. he is of unsound mind and has been so found by a court in Nigeria or elsewhere;
3. he is an un-discharged bankrupt;
4. he is disqualified under
Section 254 – which says a person is convicted by a High Court of any offence in connection
with the promotion formation or management of a company, etc.

4.3 Types of Companies

There are three types of companies that can be identified. They are:
1. Limited by shares
2. Limited by guarantee

40
3. An unlimited company.  A company is said to be limited by shares, if the liability of its
members limited by the memorandum to the amount, if any unpaid on the shares respectively
held by them.  A company is said to be limited by guarantee if the memorandum to such amount
as the members may respectively thereby undertake to contribute to the assets of the company in
the event of its being wound up.  A company is said to be unlimited when the members do not
have any limit on the liability of its members

4.3.1 Private Liability Company

The private liability company can be formed by minimum of two persons and maximum of fifty
persons excluding employees of the company both past and present (according to Section 22
Subsection 3). The total number of members of a private company shall not exceed fifty, not
including persons who are bonafide in the employment of the company or were while in that
employment and have continued after the determination of that employment to be, members of
the company. The articles of the private company must restrict the transfer of its shares, i.e. the
share of the company is not transferable through public offer for subscription. The law also
requires the name of private company to end with the word ―limited‖. The public liability
company is a company where the shareholders are members of the public. The shares are
generally freely transferable. Public companies are large trading concerns with minimum
membership of two but no maximum. The name of a public company is expected to end with
Public Limited Company (PLC).

41
Business: Support and Regulations

7.1 Business Regulatory/Legal Roles

In every society, social and business activities are guided by certain laid down principles.
Such principles emphasis acceptable manners of conduct among the community members.
Similarly, the regulatory/legal environment prescribes acceptable principles and guides in
business relationship such that each party understands the requirement of the business
relationship and that each party will conduct business activities in accordance with the laws
of the land. There are three levels of regulations in Nigeria namely:

1. The Federal Legislation acts

2. The State legislation laws
3. Local Government by laws

The Nigerian constitution distinguishes between the exclusive and concurrent legislative list.
While exclusive list contains areas where only the Federal legislators can make laws, the
concurrent list specifies where both Federal and States can legislate but where there is
conflict that of Federal supersedes. The domestic business falls under the concurrent list,
hence both Federal and States including Local Governments can make laws to regulate
business activities in their domains.
The regulatory roles of government involve the following activities:
1. Ensuring businesses comply with government laws. Every game has rules and regulations
with a referee to ensure compliance. Except every player plays according to the rules there
will be chaos.
2. The governments and their various agents serve as referees to ensure all operators comply
with the rules such as:
 Controlling and monitoring of quality of product through different agencies.
 Free and fair competition among business operators.
 Controlling the disposal of hazardous waste.
 Licensing of organization for production of consumable items.

7.2 Government and Business Regulatory Bodies

There are many aspects of regulatory and monitoring roles of government. In order to
effectively carry out these roles, government has established different agencies/bodies with
the appropriate legislative backings to ensure business operations are conducted in a friendly
business environment. Some of the agencies and their functions include:

7.2.1 The Corporate Affairs Commission (CAC)

The Corporate Affairs Commission was established by the Companies and Allied Matters
Act (CAMA) 1990 as a corporate body with perpetual succession and a common seal; it is

42
capable of suing and being sued in its corporate name. The headquarters of the Commission
was to be based at Abuja the Federal Capital Territory. The functions of the Corporate
Affairs Commission are numerous.

Functions of CAC
The Act that established the Commission specified the following functions:
1. The regulation and supervision of the formation, incorporation, registration, management,
and winding up of companies.
2. Establishing and maintaining companies‘ registry and offices in all the states of the
Federation suitably and adequately equipped to discharge its formations.
3. Arrange or conduct an investigation into the affairs of any company where the interests of
the shareholders and the public so demand.
4. Perform such other functions as may be specified by any act or enactment.
5. Undertake such activities as one necessary or expedient for giving full effect to the
provisions of the Act (CAMA, 1990).

7.2.2 National Agency for Food and Drugs Administration and Control (NAFDAC)
NAFDAC was established under decree No 15 of 1993.The decree vested in it dual
functions.
1. To see to the establishment of food beverages and cream industry
2. As well as regulating and controlling the importation, manufacturing, distribution, sales
and use of processed food, drugs, cosmetics, medical devices, bottled water, chemicals and
advertisements relating to food, beverages and cream products.
3. Ensure that the use of narcotic drugs and psychotropic substances are limited to medical
and scientific purposes.
4. Conduct appropriate tests and ensure compliance with standard specifications to ensure
efficiency and safety of food, drugs, cosmetics, bottled water, medical devices, chemicals
and their raw materials as well as production process in factories and other establishments.
Undertake the registration of processed foods, drugs, cosmetics, medical devices, bottled
water and chemicals.
5. Compile standard specifications and guidelines for production, importation, sales and
distributions of processed foods, drugs, cosmetics, medical devices, bottled water and
chemicals.
6. Inspect all imported and locally made processed foods, drugs, chemicals, cosmetics,
medical devices, bottled water, and establish relevant quality assurance systems.

7.2.3 Standard Organization of Nigeria (SON)

According to Ogundele, (2007), the body was established as Nigerian Standard Organization
Act of 1971, now Standard Organization of Nigeria (SON). The functions of the council
include:

43
 1. To advise government on standards, standard specifications, control and methodology. 2.
Designating, establishing and approving standard in respect of metrology, materials,
commodities, products, processes for the certification of products in commerce and industry
throughout Nigeria.
3. To provide necessary measures for the control of raw materials and products in conformity
with standard specifications.
4. Awarding of certificate marks by the council to the manufacturers whose products meet
Council‘s established standards
5. Sealing up and confiscating of assets of organizations that fail to live up to the standards
set.

Other Agencies include:

Other agencies that are involved in regulatory and supportive roles are listed below:
1. Governing Council of National Office of Industrial Property
2. Productivity Prices and Income Board
3. The Central Bank of Nigeria (CBN)
4. Nigerian Stock Exchange (NSE)
5. Securities and Exchange Commission (SEC)
6. National Insurance Corporation (NICON)
7. Raw Materials Research and Development Council (RMRDC)
8. Nigerian Deposit Insurance Corporation (NDIC)
9. Nigerian Export Credit Guarantee Insurance Corporation
10. Industrial Development Coordination and many others.

7.3 Promotional /Supportive Roles of Government

Without mincing words, in defining the role of government supporting entrepreneurship and
SMEs, it is obvious that apart from designing a comprehensive entrepreneurship and SMEs
strategy, the development of national SME support institutions and networks is one of the key
conditions for success. Although a number of agencies have been established in the past to
strengthen the SMEs, it is generally believed that the government needs to do more. The
following are typical ways by which government promotes and supports entrepreneur:

7.3.1 Tax Holiday

A tax holiday is a temporary reduction or elimination of tax; governments usually create tax
holidays as incentives for business investment. The taxes that are most commonly reduced by
national and local governments are sales taxes, company income tax etc. Tax holiday is a kind of
incentive used to encourage the growth and development of business enterprises.

7.3.1 Financial Incentives

44
These schemes are one form of strategic assistance an organization may be able to access from
the government or agencies. These high-level schemes focus on projects that will achieve real
productivity improvements - particularly those that will assist collaboration among firms in
research, technology diffusion, business transformation and capacity building within the defined
sectors e.g. agricultural sector, manufacturing sector etc.

7.3.3 Infrastructural Development

These are basic facilities that will enhance productivity, reduce cost if they are centrally provided
by the government. These items include constant electric supply, portable water, good road
facilities, efficient communication system etc. The lack of basic infrastructural facilities has been
responsible for low economic activities particularly in the manufacturing sectors in Nigeria.

7.3.4 Subsidies
This is a form of financial assistance granted to economic agents such as business organizations
with the aim of supporting such businesses to generate increased productivity and promote
increased employment and society‘s welfare.
Other ways through which government supports business enterprises are:
1. Credit facilities through government financial agencies.
2. Assistance in the areas of attraction of overseas capital and technical know-how
3. Availability of reliable data from CBN, FOS NDE etc.
4. Stability of system of laws and justice.
5. Preparation and dissemination of weather forecasts.

7.3.5 Export Promotion Activities

The Nigerian Export Promotion Council (NEPC) was established through the promulgation of
the Nigerian Export Promotion Decree No. 26 of 1976 and formally inaugurated in March, 1977.
This Act was amended by Decree No.72 of 1979 and further amended by the Nigerian Export
promotion Decree No. 41 of 1988 and complimented by the Export (Incentives and
Miscellaneous Provisions) Decree No. 18 of 1986. Furthermore, the Nigerian export Promotion
Council Amendment Decree No.64 of 1992 was promulgated to enhance the performance of the
Council by minimizing bureaucratic bottlenecks and increasing autonomy in dealing with
members of the Organized Private sector. The Council has a Governing Board drawn from both
the Public and the private sectors.
The council has the following objectives:
1. To promote the development and diversification of Nigeria‘s export trade;
2. To assist in promoting the development of export-related industries in Nigeria;
3. To spearhead the creation of appropriate export incentives; and,
4. To actively articulate and promote the implementation of export policies of the Nigerian
government. Creation of incubator units providing the space and infrastructure for business

45
beginners and innovative companies, and helping them to solve technological problems, and to
search for know-how and promote innovation.

7.3.6 Objectives for Business Regulation in Nigeria

Ogundele (2007) listed the following as the objectives for business regulation in Nigeria; To
create and maintain a climate of confidence, trust and stimulating the activities of enterprises by
respecting the rules of competition
1. Creating an environment that will allow the enterprise to thrive, grow and maintain stability 2.
Determine clearly the national goals of acceptable global levels, wages, price of other goods and
services, credits and investment
3. Ensuring social progress and maximum justice in consonant with the level of economic
activity
4. To fix and distribute public and social burdens in a fair manner
5. The constitutional rights or sovereign rights of government demand that it should keep close
watch over the activities of business
6. To protect the needs of consumers against the production and sales of inferior goods
7. To control sources of revenue in the form of taxes, customs and excise duties etc.
8. It could also be for keeping international obligations e.g. requirements of International
Monetary Fund (IMF) and World Bank as noted earlier.
9. Ensuring that the economy is not dominated by foreigners.

7.3.7 Other Reasons for Business Regulation

Lawal (1993) included the following as part of government reasons for business regulation:
1. Providing greater employment opportunities
2. Increasing exportation of manufactured goods
3. Achieving dispersion of industries
4. Improving technology
5. Attracting foreign investment
6. Increasing private sector participation and
7. Increasing local content of industrial output.

7.4 Strategic Importance of SMEs in Nigeria

Parallel with ownership reform and privatization, the number of SMEs is increasing. The
strategic importance of SMEs is today acknowledged around the world for the following reasons
according to Sunje, www.unece.org/indust/sme/ece-sme.htm.

7.4.1 Employment Generation

Small and medium sized enterprises are contributing to employment growth at a higher rate than
larger firms. In the EU economy about 99.9 per cent of the enterprises are SMEs, of which 93
per cent are micro enterprises. In 1992, there were 15.7 million SMEs. SMEs in the private non-

46
primary (i.e. non-farming) sector of the Community; the private sector and in particular SMEs
form the backbone of a market economy and for the transition economies in the long-term might
provide most of the employment (as is the case in the EU countries). A World Bank sector policy
paper shows that their labour intensity is from 4-10 times higher for small enterprises.

7.4.2 Efficiency
Support for SMEs will help the restructuring of large enterprises by streamlining manufacturing
complexes as units with no direct relation to the primary activity. And through this process the
efficiency of the remaining enterprise might be increased as well; They curb the monopoly of the
large enterprises and offer them complementary services and absorb the fluctuation of a modern
economy; Through inter-enterprise cooperation, they raise the level of skills with their flexible
and innovative nature. Thus, SMEs can generate important benefits in terms of creating a skilled
industrial base and industries, and developing a well-prepared service sector capable of
contributing to GDP through higher value-added.

7.4.3 New Enterprise

A characteristic of small industrial enterprises is that they produce predominantly for the
domestic market, drawing in general on national resources. The structural shift from the former
large state-owned enterprises to smaller and private SMEs will increase the number of owners, a
group that represents greater responsibility and commitment than in the former centrally planned
economies.

7.4.4 Flexibility
An increased number of SMEs will bring more flexibility to society and the economy and might
facilitate technological innovation, as well as provide significant opportunities for the
development of new ideas and skills; SMEs use and develop predominantly domestic
technologies and skills.

7.4.5 Technology
New business development is a key factor for the success of regional reconversion where
conventional heavy industries will have to be phased out or be reconstructed (especially in the
field of metallurgy, coalmining, heavy military equipment, etc.). In this study session we
deliberated on the roles of government in supporting and regulating business activities in
Nigeria.

Basic principles of e-commerce

The business model

47
A business model is a conceptual structure that supports the viability of the business and explains
who the business serves, what it offers, how it offers it, and how it achieves its goals. According
to Kopp (2020), business model refers to a company's plan for making a profit. It identifies the
products or services the business plans to sell, its identified target market, and any anticipated
expenses. Business model is concerned with the plan for the successful operation of a business,
identifying sources of revenue, the intended customer base, products, and details of financing.

It is a high-level plan for profitably operating a business in a specific marketplace. A primary

component of the business model is the value proposition. This is a description of the goods or
services that a company offers and why they are desirable to customers or clients, ideally stated
in a way that differentiates the product or service from its competitors.

Business models are important for both new and established businesses. They help new;
developing companies attract investment, recruit talent, and motivate management and staff.
Established businesses should regularly update their business plans or they'll fail to anticipate
trends and challenges ahead. Business plans help investors evaluate companies that interest them.

A new enterprise's business model should also cover projected startup costs and financing
sources, the target customer base for the business, marketing strategy, a review of the
competition, and projections of revenues and expenses. The plan may also define opportunities
in which the business can partner with other established companies. For example, the business
model for an advertising business may identify benefits from an arrangement for referrals to and
from a printing company.

An ideal business model usually conveys four key aspects of the business which is presented
using a specialised tool called business model canvas. These key components are customers,
value proposition, operating model, and revenue model. Note that successful businesses have
business models that allow them to fulfill client needs at a competitive price and a sustainable
cost. Over time, many businesses revise their business models from time to time to reflect
changing business environments and market demands.

Key Takeaways
a) A business model is a company's core strategy for profitably doing business.
b) Models generally include information like products or services the business plans to sell,
target markets, and any anticipated expenses.
c) The two levers of a business model are pricing and costs.
d) When evaluating a business model as an investor, ask whether the idea makes sense and
whether the numbers add up.

e-commerce as an example:

48
Four Traditional Types of Ecommerce Business Models

If you‘re starting an ecommerce business, odds are you‘ll fall into at least one of these four
general categories.

1. B2C – Business to consumer.

B2C businesses sell to their end-user. The B2C model is the most common business model, so
there are many unique approaches under this umbrella. Anything you buy in an online store as a
consumer — think wardrobe, household supplies, entertainment — is done as part of a B2C
transaction. The decision-making process for a B2C purchase is much shorter than a business-
to- business (B2B) purchase, especially for items that have a lower value. Think about it: it‘s
much easier for you to decide on a new pair of tennis shoes than for your company to vet and
purchase a new email service provider or food caterer. Because of this shorter sales cycle, B2C
businesses typically spend less marketing dollars to make a sale, but also have a lower average
order value and less recurring orders than their B2B counterparts. B2C doesn‘t only include
products, but services as well. B2C innovators have leveraged technology like mobile apps,
native advertising and remarketing to market directly to their customers and make their lives
easier in the process. For example, using an app like Lawn Guru allows consumers to easily
connect with local lawn mowing services, garden and patio specialists, or snow removal experts.

2. B2B – Business to business.

In a B2B business model, a business sells its product or service to another business. Sometimes
the buyer is the end user, but often the buyer resells to the consumer. B2B transactions generally
have a longer sales cycle, but higher order value and more recurring purchases. Recent B2B
innovators have made a place for themselves by replacing catalogs and order sheets with
ecommerce storefronts and improved targeting in niche markets. In 2020, close to half of B2B
buyers are millennials — nearly double the amount from 2012. As younger generations enter the
age of making business transactions, B2B selling in the online space is becoming more
important.

3. C2B – Consumer to business.

C2B businesses allow individuals to sell goods and services to companies. In this ecommerce
model, a site might allow customers to post the work they want to be completed and have
businesses bid for the opportunity. Affiliate marketing services would also be considered C2B.
Elance (now Upwork) was an early innovator in this model by helping businesses in hiring
freelancers. The C2B ecommerce model‘s competitive edge is in pricing for goods and services.
This approach gives consumers the power to name their price or have businesses directly
compete to meet their needs. Recent innovators have creatively used this model to connect
companies to social media influencers to market their products.

49
4. C2C – Consumer to consumer.

A C2C business — also called an online marketplace — connects consumers to exchange

goods and services and typically make their money by charging transaction or listing fees.
Online businesses like Craigslist and eBay pioneered this model in the early days of the internet.
C2C businesses benefit from self-propelled growth by motivated buyers and sellers, but face a
key challenge in quality control and technology maintenance.

Special Considerations

A common mistake many companies make when they create their business models is to
underestimate the costs of funding the business until it becomes profitable. Counting costs to the
introduction of a product is not enough. A company has to keep the business running until its
revenues exceed its expenses. One way analysts and investors evaluate the success of a business
model is by looking at the company's gross profit. Gross profit is a company's total revenue
minus the cost of goods sold (COGS).

Comparing a company's gross profit to that of its main competitor or its industry sheds light on
the efficiency and effectiveness of its business model. Gross profit alone can be misleading,
however. Analysts also want to see cash flow or net income. That is gross profit minus operating
expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can
raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many
analysts consider gross profit to be more important in evaluating a business plan. A good gross
profit suggests a sound business plan. If expenses are out of control, the management team could
be at fault, and the problems are correctable. As this suggests, many analysts believe that
companies that run on the best business models can run themselves. When evaluating a company
as a possible investment, find out exactly how it makes its money—that's the company's business
model.

50