DS : 2204. 5.0 UNDERSTANDING PRIVATE SECTOR DEVELOPMENT, ENTREPRENEURSHIP, AND THE ROLE AND IMPACT OF GOVERNMENT POLICIES

5.0 UNDERSTANDING PRIVATE SECTOR DEVELOPMENT, ENTREPRENEURSHIP, AND THE ROLE AND IMPACT OF GOVERNMENT POLICIES

Private sector development is essential for long-term economic growth and job creation. Improvements in productivity underlie this development, and a growing body of research from developed countries highlights the roles of entry and entrepreneurship, exit, and reallocation in generating productivity improvements at the macro level. However, far less information on entrepreneurship and firm dynamics is available for developing countries, and it is unclear the extent to which income growth and job creation come from entry of new firms, growth of SMEs, or large enterprises growing even larger.

Government policies can help or hinder this process. Overall government macroeconomic policies and infrastructure investments have wide-ranging effects on all aspects of the economy, including on the private sector. Two main avenues through which more specific government policy affects the process of private sector development are through (i) passive facilitation, whereby regulatory policies affect the ease of doing business; and (ii) active catalyst, whereby the government intervenes more directly to foster industrial development and generate new business growth.

The purpose of this call is to generate new research designed to better understand entrepreneurship and firm dynamics in developing countries, and to learn what works and what doesn’t, and why, in public policy for the private sector.

5.1  Relationship of Entrepreneurship and sustainable development

Introduction        

Current developments  since  the  end of  the 1970s, associated with  the globalization of economies helped  destabilize  the  existing  economic  systems,  causing  socio-economic,  ecological  and environmental  problems,  particularly  in  the  developing  countries.

The  increase  of disparities between nations, the exhaustion of natural resources, the emergence of wicked problems related to poverty, to unemployment, to social exclusion are phenomena developed as a result of the acceleration of the changes induced by the internationalization of the economic activities.  

In  front  of  these  profound  changes,  governments  have made  their  best  to  find  solutions  to  these problems  in  order  to  renew  economic  growth.  Several organizations have therefore applied a defensive  behavior  consisting  of  a  simple  reaction  to  the  pressure  exerted  by  the  environment.

We  conclude  that  social  business models constitute  a  basic  relay  that  allows  social  entrepreneurs  to  contribute  actively  to  sustainable development.  

In  this  study,  our  objective  is  to  highlight  the  actual  contribution  of  a  quite  widespread phenomenon;  the  social  entrepreneurship,  dedicated  to  the  service  of  the  current  socio-economic problems.

5.2  BUSINESS/ACTIVITY MANAGEMENT AND SUSTAINABILITY

5.2.1 Basic functions of management

Management operates through various functions, often classified as planning, organizing, staffing, leading/directing, controlling/monitoring and Motivation.

·   Planning: Deciding what needs to happen in the future (today, next week, next month, next year, over the next 5 years, etc.) and generating plans for action.

·   Organizing: (Implementation) which is the process of making optimum use of the resources required to enable the successful carrying out of plans.

·   Staffing: Job analyzing, recruitment and hiring individuals for appropriate jobs.

·   Leading/Directing: Determining what needs to be done in a situation and getting people to do it.

·   Controlling/Monitoring: Checking progress against plans so as not to deviate the right path.

·   Motivation : Motivation is also a kind of basic function of management, because without motivation, employees cannot work effectively. If motivation doesn't take place in an organization, then employees may not contribute to the other functions (which are usually set by top level management).

5.2.2 Basic roles of an entrepreneur

·   Interpersonal: roles that involve coordination and interaction with employees.

·   Informational: roles that involve handling, sharing, and analyzing information.

·   Decisional: roles that require decision-making.(quick decision makers)

5.2.3 Management skills to have an entrepreneur

·   Technical: used for specialized knowledge required for work.

·   Political: used to build a power base and establish connections.

·   Conceptual: used to analyze complex situations.

·   Interpersonal: used to communicate, motivate, mentor (adviser) and delegate.

·   Diagnostic: ability to visualise most appropriate response to a situation.

5.2.4 Marketing Management:

Definitions of marketing:

Marketing is the management process that identifies, anticipates and satisfies customer requirements profitably.

The Chartered Institute of Marketing

 ‘The right product, in the right place, at the right time, and at the right price’

Marketing is the human activity directed at satisfying human needs and wants through an exchange process’ (Adcock et al.)

‘Marketing is a social and managerial process by which individuals and groups obtain what they want and need through creating, offering and exchanging products of value with others’ (Kotler 1980)

 “Marketing is the process by which demand structure for product/service is anticipated, enlarged and satisfied” (Kotler 1999)

5.2.4.1 The Marketing Mix (The 4 P's of Marketing)

Marketing decisions generally fall into the following four controllable categories:

• Product
• Price
• Place (distribution)
• Promotion

The term "marketing mix" became popularized after Neil H. Borden published his 1964 article, The Concept of the Marketing Mix. Borden began using the term in his teaching in the late 1940's after James Culliton had described the marketing manager as a "mixer of ingredients". The ingredients in Borden's marketing mix included product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, and fact finding and analysis. E. Jerome McCarthy later grouped these ingredients into the four categories that today are known as the 4 P's of marketing, depicted below:

The Marketing Mix

TARGET MARKET

These four P's are the parameters that the marketing manager can control, subject to the internal and external constraints of the marketing environment. The goal is to make decisions that center the four P's on the customers in the target market in order to create perceived value and generate a positive response.

 

5.2.4.2 Product Decisions

The term "product" refers to tangible, physical things as well as services. Here are some examples of the product decisions to be made:

• Brand name
• Functionality
• Styling
• Quality
• Safety
• Packaging
• Repairs and Support
• Warranty
• Accessories and services

5.2.5 Product Decisions

Sources of finance

Introduction

Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business.  However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground.

Raising finance for start-up requires careful planning.  The entrepreneur needs to decide:

• How much finance is required?
• When and how long the finance is needed for?
• What security (if any) can be provided?
• Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment?

The finance needs of a start-up should take account of these key areas:

• Set-up costs (the costs that are incurred before the business starts to trade)
• Starting investment in capacity (the fixed assets that the business needs before it can begin to trade)
• Working capital (the stocks needed by the business –e.g. r raw materials allowance for amounts that will be owed by customers once sales begin)
• Growth and development (e.g. extra investment in capacity)

One way of categorizing the sources of finance for a start-up is to divide them into sources which are from within the business (internal) and from outside providers (external). 

5.2.5.1 Internal sources of capital

The main internal sources of finance for a start-up are as follows:

i.   Personal sources: These are the most important sources of finance for a start-up, and we deal with them in more detail in a later section.

ii.   Retained profits: This is the cash that is generated by the business when it trades profitably – another important source of finance for any business, large or small.
Note that retained profits can generate cash the moment trading has begun.  For example, a start-up sells the first batch of stock for £5,000 cash which it had bought for £2,000.  That means that retained profits are £3,000 which can be used to finance further expansion or to pay for other trading costs and expenses. 

iii. Share capital – invested by the founder: The founding entrepreneur (/s) may decide to invest in the share capital of a company, founded for the purpose of forming the start-up.  This is a common method of financing a start-up.  The founder provides all the share capital of the company, retaining 100% control over the business.

The advantages of investing in share capital are covered in the section on business structure.  The key point to note here is that the entrepreneur may be using a variety of personal sources to invest in the shares.  Once the investment has been made, it is the company that owns the money provided.  The shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold.

A start-up company can also raise finance by selling shares to external investors – this is covered further below:

5.2.5.2 External sources

i. Loan capital: This can take several forms, but the most common are a bank loan or bank overdraft. 

A bank loan provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments.  The bank will usually require that the start-up provide some security for the loan, although this security normally comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets  and are generally at a lower rate of interest that a bank overdraft.  However, they don’t provide much flexibility.

ii. Share capital – outside investors: For a start-up, the main source of outside (external) investor in the share capital of a company is friends and family of the entrepreneur.  Opinions differ on whether friends and family should be encouraged to invest in a start-up company. They may be prepared to invest substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business.  Both of these are positives for the entrepreneur.  However, there are pitfalls.  Almost inevitably, tensions develop with family and friends as fellow shareholders.

iii. Business angels are the other main kind of external investor in a start-up company.  Business angels are professional investors who typically invest £10k - £750k.  They prefer to invest in businesses with high growth prospects.  Angels tend to have made their money by setting up and selling their own business – in other words they have proven entrepreneurial expertise. In addition to their money, Angels often make their own skills, experience and contacts available to the company.  Getting the backing of an Angel can be a significant advantage to a start-up, although the entrepreneur needs to accept a loss of control over the business.

iv. You will also see Venture Capital mentioned as a source of finance for start-ups.  You need to be careful here. Venture capital is a specific kind of share investment that is made by funds managed by professional investors.  Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over £1m, often much more).  They prefer to invest in businesses which have established themselves.  Another term you may here is “private equity” – this is just another term for venture capital.

A start-up is much more likely to receive investment from a business angel than a venture capitalist.

5.2.5.3 Personal sources

As mentioned earlier, most start-ups make use of the personal financial arrangements of the founder. This can be personal savings or other cash balances that have been accumulated.  It can be personal debt facilities which are made available to the business.  It can also simply be the found working for nothing!  The following notes explain these in a little more detail.

i.   Savings and other “nest-eggs”

An entrepreneur will often invest personal cash balances into a start-up.  This is a cheap form of finance and it is readily available. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur – e.g. redundancy or an inheritance.  Investing personal savings maximises the control the entrepreneur keeps over the business.  It is also a strong signal of commitment to outside investors or providers of finance.
Re-mortgaging is the most popular way of raising loan-related capital for a start-up.  The way this works is simple.  The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business.  The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too. 

ii.  Borrowing from friends and family
This is also common.  Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business.  This can be quicker and cheaper to arrange (certainly compared with a standard bank loan) and the interest and repayment terms may be more flexible than a bank loan.  However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties.

iii.  Credit cards
This is a surprisingly popular way of financing a start-up.  In fact, the use of credit cards is the most common source of finance amongst small businesses.  It works like this.  Each month, the entrepreneur pays for various business-related expenses on a credit card.  15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period.  The effect is that the business gets access to a free credit period of around 30-45 days!