ENTREPRENEURSHIP: creating and leading an entrepreneurial organization 9788131765784, 9788131797679, 8131765784

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Entrepreneurship Creating

an

Leading entrepreneuriaL OrganizatiOn and

Arya Kumar Acting Dean Student Welfare Division and Chief Entrepreneurship Development & IPR Unit Birla Institute of Technology & Science, Pilani

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Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd Licensees of Pearson Education in South Asia No part of this eBook may be used or reproduced in any manner whatsoever without the publisher’s prior written consent. This eBook may or may not include all assets that were part of the print version. The publisher reserves the right to remove any material present in this eBook at any time. ISBN 9788131765784 eISBN 9788131797679 Head Office: A-8(A), Sector 62, Knowledge Boulevard, 7th Floor, NOIDA 201 309, India Registered Office: 11 Local Shopping Centre, Panchsheel Park, New Delhi 110 017, India

Dedicated to my elder brother, the late Shri Anand Kumar (19 April 1952 to 6 March 2012), who was a constant source of inspiration and guidance to me

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Contents Preface xv Acknowledgements xvii About the Author xviii

1.  Fundamentals of Entrepreneurship 

Learning Objectives 1 1.1  Introduction  2 1.2  Key to Development  3 1.3  Evolving Concept of Entrepreneurship  6 1.4  What is Entrepreneurship?  9 1.5  Resource Organization and Value Creation  12 1.6  Entrepreneurial Traits  18 1.7  Difference Between Inventors and Entrepreneurs  29 1.8  Inspiration from Role Models and Social Support  30 1.9  Business Model  34 1.10  Entrepreneurship—Mindset  35 1.11  Big Companies Vs Start-ups  38 1.12  Misconceptions and Myths About Entrepreneurship  38 Key Concepts 42 Endnotes 42 References 43 Conceptual Questions 45 Critical Thinking Questions 45 Case 1.1: How I Made My First Million 46 Case 1.2: From Candle Seller to CEO 48

2.   E ntrepreneurship Development  in Emerging Markets 

Learning Objectives 50 2.1  Types of Start-ups  51 2.2  Intrapreneurship  53 2.3  Why Does One Become an Entrepreneur?  55 2.4  Entrepreneurship as a Career Option  57 2.5  Why Youth Is Suited for Entrepreneurship  63 2.6  Female Entrepreneurship  66

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2.7  Small and Medium Business Enterprises  68 2.8  International Entrepreneurship  71 2.9  Entrepreneurship Development—Role of Educational Institutions  72 2.10  Mistakes Start-ups Make  76 2.11  Managing Start-ups During Downturn  80 2.12   Entrepreneurship—Emerging Trends in   the Global Knowledge Economy  81 Key Concepts 85 Endnotes 86 References 86 Conceptual Questions 87 Critical Thinking Questions 88 Case 2.1: Pets.com 88

3.  Entrepreneurial Leadership 

Learning Objectives 91 3.1  Leader Vs Manager  94 3.2  Why Do Ventures Require Dynamic Leaders?  99 3.3  Principle-centred Leaders  102 3.4  Entrepreneurial Leadership  106 3.5  Components of Entrepreneurial Leadership  108 Key Concepts 113 Endnotes 113 References 114 Conceptual Questions 114 Critical Thinking Questions 115 Case 3.1: Link_A_Media Devices 115 Case 3.2: XYZ Transport 116 Case 3.3: Entrepreneurial Profiles 117

4.  Creativity and Business Ideas 

Learning Objectives 121 4.1 Introduction  122 4.2 Creativity and Entrepreneurship  125 4.3 Characteristics of Creative People  129 4.4 Blocks to Creativity  132 4.5 Creativity at Work—A Must for Survival  134 4.6 Sources of New Ideas  137 4.7 Techniques for Generating Ideas  143 4.8 A Good Idea Is Not Enough  160 Key Concepts 161 Endnotes 162

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References 164 Conceptual Questions 164 Critical Thinking Questions 165 Case 4.1: Creativity in Start-ups 166 Case 4.2: Innovation: Creating and Defending New Sources of Value

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167

5.  Idea to Opportunity 

173

6.  Legal Aspects of Business 

214

Learning Objectives 173 5.1 Introduction  174 5.2 Opportunity—Definition  175 5.3 Opportunity Recognition  177 5.4 Opportunity Process  181 5.5 Sources of Opportunity  181 5.6 Indian Economy—Opportunities  187 5.7 Steps Involved in Assessing Business Potential of an Idea  188 5.8 Steps Involved in Tapping Opportunity  196 Key Concepts 202 Endnotes 203 References 204 Conceptual Questions 204 Critical Thinking Questions 205 Case 5.1: Reusable Diaper 205 Case 5.2: Opportunity—Earthmoving Industry 211

Learning Objectives 214 6.1 Introduction  215 6.2 Formation of a Business Entity  215 6.3 Taxation Matters for Different Forms of Ventures  222 6.4 Meaning of Holding Company  225 6.5 Deemed Public Limited Company  225 6.6 Requirements for Incorporation of a Private/Public  Limited Company  226 6.7 Board of Directors—Roles and Responsibilities  234 6.8 Procedure for Setting Up a Business in India  235 6.9 Legal Acts Governing Businesses in India  235 6.10 Winding Up a Registered Company  241 6.11 Need for and Selection of a Lawyer  242 Key Concepts 245 Endnotes 246 References 246 Conceptual Questions 247

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Critical Thinking Questions Case 6.1: Google 248

247

7.   E ntrepreneurship and Intellectual  Property Rights 

251

8.  Business Plan 

288

Learning Objectives 251 7.1 Introduction  252 7.2 University Research Leading to Entrepreneurship  254 7.3 IPRs and Their Importance  255 7.4 Importance of IP for Start-ups  257 7.5 What are IP Rights?  260 7.6 What Is a Patent?  260 7.7 International Patents  265 7.8 Trademarks  266 7.9 Copyright  269 7.10 Geographical Indicators and Biological Diversity  271 7.11 Industrial Design  273 7.12 Layout Design of Integrated Circuits  274 7.13 Plant Varieties  274 Key Concepts 276 Endnotes 277 References 278 Conceptual Questions 278 Critical Thinking Questions 279 Case 7.1: Tata Motors—Nano 279 Case 7.2: Informatica 281 Case 7.3: Ranbaxy Laboratories Ltd—A Case Study 284

Learning Objectives 288 8.1 Introduction  289 8.2  Entrepreneurial Opportunities and Business Plan  290 8.3 What Is a Business Plan?  292 8.4 When and for Whom Is a Business Plan Necessary?  294 8.5 Business Plan Drivers  295 8.6 Things to Remember While Preparing a Business Plan  300 8.7 Business Failures  300 8.8 Perspectives to Be Considered in Business  Plan Preparation  302 8.9 Who Should Prepare a Plan?  306 8.10 Basics of a Business Plan  306 8.11 What Is Most Important in a Plan?  326

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8.12 Pitching a Business Plan  327 8.13 Reasons for Failure of Business Plans  331 Key Concepts 333 Endnotes 334 References 335 Conceptual Questions 335 Critical Thinking Questions 336 Case 8.1: Executive Summary—YuMe Networks 337 Case 8.2: Executive Summaries for Evaluation 339

9.  Marketing Plan 

Learning Objectives 348 9.1 Introduction  349 9.2 Undertaking Marketing Research  350 9.3 Benefits of Undertaking Marketing Research  351 9.4 Factors Affecting the Decision to Undertake  Marketing Research  352 9.5 Scope and Steps Involved in Marketing Research  353 9.6 Categories and Types of Market Research  360 9.7 Marketing Research on the Internet  362 9.8 Industry Analysis  364 9.9 Competitor Analysis  366 9.10 Define Target Market  368 9.11 Market Segmentation  374 9.12 Market Positioning  375 9.13 Building a Marketing Plan  375 9.14 Marketing Mix  377 9.15 Critical Factors for Devising a Market Strategy  381 9.16 Wilson Harrell’s ‘Marketing for the Amateur’  384 Key Concepts 387 Endnotes 389 References 390 Conceptual Questions 390 Critical Thinking Questions 391 Case 9.1: Housekeeping Business—Pricing Decision 392 Case 9.2: Food Industry in India 394 Case 9.3: Mahindra & Mahindra 398

10.  Operation and Production Plan  Learning Objectives 404 10.1 Introduction  405 10.2 Types of Production Systems  407

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10.3 Product Design and Analysis  408 10.4 New Product Development  410 10.5 Location and Layout Decisions  412 10.6 Project Layout  414 10.7 Plant and Technology Choices  414 10.8 Product Specifications and Customer Needs  419 10.9 Production, Planning and Control  423 10.10 Commercializing Technologies  425 Key Concepts 427 Endnotes 428 References 428 Conceptual Questions 429 Critical Thinking Questions 429 Case 10.1: Shoemoney 430 Case 10.2: Ukiah Software, Inc. 435

11.  Venture Team and Organizational Plan 

439

12.  Insight from Financial Statements 

478

Learning Objectives 439 11.1 Introduction  440 11.2 Venture Success—Importance of a Team  441 11.3 Team Building for Venture—Vital Precautions  442 11.4 Building an Effective Venture Team  445 11.5 Venture Team Development  451 11.6 People Management—Key to Venture Success  452 11.7 Organizational Structure and Systems  458 11.8 Designing an Effective Organizational Structure  460 Key Concepts 466 Endnotes 467 References 468 Conceptual Questions 469 Critical Thinking Questions 469 Case 11.1: Subhiksha 470 Case 11.2: Mphasis 473 Case 11.3: Tronix 475

Learning Objectives 478 12.1 Introduction  479 12.2 Issues to Be Sorted in Advance  481 12.3 Meaning and Objectives of Financial Statement  482 12.4 Assumptions Underlying Preparation  of Financial Statements  484

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12.5 Balance Sheet—Concepts and Understanding  486 12.6 Profit and Loss Account/Income Statement  492 12.7 Fund Flow and Cash Flow Statements  498 12.8 Inventory Management  505 12.9 Break-even Analysis  507 12.10 Ratio Analysis—Tool for Analysis  512 12.11 Valuation Ratios and Valuation Approaches  523 Key Concepts 528 Endnotes 530 References 530 Conceptual Questions 530 Critical Thinking Questions 531 Case 12.1: Infosys Technologies Ltd 532 Case 12.2: Jindal Strips Ltd (JSL) 537

13.  Financing Venture 

Learning Objectives 546 13.1  Introduction  547 13.2  Why Does One Need Money?  548 13.3  Different Stages of Financing  555 13.4  Sources of Finance  557 13.5  Seed Funding  562 13.6  Venture Capital Funding  566 13.7  Funding From Banks  571 13.8  Lease Financing  578 13.9  Funding Opportunities for Start-ups in India  581 Key Concepts 595 Endnotes 597 References 598 Conceptual Questions 598 Critical Thinking Questions 599 Case 13.1: Go Gold: How and Where to Approach for Finance? Case 13.2: Deals in Indian Environment 601 Case 13.3: Phyzok 603

14.  Launching a Venture 

546

600

Learning Objectives 608 14.1  Introduction  609 14.2  Steps Involved in Launching a Business  610 14.3  Incorporation and Issuance of Stocks  611 14.4  Execute a Stockholders’ Agreement  611 14.5  Raise Different Resources Including Finance on Time  611

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14.6  Leverage of Intellectual Property  613 14.7  Build a Winning Team  614 14.8  Motivating and Inspiring the Team  615 14.9  Understand Clearly the Technology Trends  618 14.10  Prepare Pilot Testing  618 14.11   Manage Sales by a Clear Understanding—Market,   Marketing Strategies and Positioning  619 14.12  Record Keeping of Expenses  619 14.13  To-do Checklist—Daily, Weekly and Monthly  620 14.14  Managing Cash  620 14.15  Due Diligence  622 14.16  Scheduling—Implementation Plan  623 Key Concepts 624 Endnotes 625 References 625 Conceptual Questions 625 Critical Thinking Questions 626 Case 14.1: Day Care Business 627 Case 14.2: Human Resource Consulting Firm 628 Case 14.3: Kozmo.com 630

15.  Managing Growth 

Learning Objectives 636 15.1  Introduction  637 15.2  Growth Sources  638 15.3  Venture Development Stages  639 15.4  How Fast Can a Venture Grow?  640 15.5  Management—Key Factors for Growth  643 15.6  Managerial Issues—Growth of a Venture  645 15.7  Why Entrepreneurs Do Not Scale Up  651 15.8  Tips for Growth of a Venture  652 15.9  Growth Strategies for Ventures  654 Key Concepts 667 Endnotes 669 References 669 Conceptual Questions 670 Critical Thinking Questions 671 Case 15.1: Pilani Soft Labs Pvt. Ltd (redBus) 671 Case 15.2: Essel Shyam Communication Ltd (ESCL) 676

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16.  Start-up to Going Public 

684

17.  Revival, Exit and End to a Venture 

719

Learning Objectives 684 16.1  Introduction  685 16.2  What Is an IPO?  686 16.3  When to Go for an IPO?  687 16.4  Steps Involved in Issuing an IPO  689 16.5  Selection of Intermediaries to the IPO  693 16.6  Rating of IPOs  696 16.7  Marketing Strategies for IPO  697 16.8  Misconceptions About IPOs  698 Key Concepts 701 Endnotes 702 Conceptual Questions 702 Critical Thinking Questions 703 Case 16.1: Orbit Corporation Ltd (OCL) 703 Case 16.2: Eclerx Services Ltd 711

Learning Objectives 719 17.1  Introduction  720 17.2  Broad Categories into Which Ventures Can Be Classified  721 17.3  Key Strategies for Turning Around a Company  743 17.4  Liquidation  746 17.5  Exit Strategy for Entrepreneurs  749 Key Concepts 761 Endnotes 762 References 762 Conceptual Questions 762 Critical Thinking Questions 763 Case 17.1: Prakash Industries Limited 764 Case 17.2: MakeMyTrip 772

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Preface This book is about creating, managing and leading an entrepreneurial organization. It would help in inculcating an entrepreneurial mindset, developing entrepreneurial skills and equipping the reader with the basic knowledge and skills for launching and managing the growth of a venture. The focus here is on understanding:    

entrepreneurship, its relevance and importance in the 21st century, particularly in emerging economies how to become an entrepreneur the role that entrepreneurial leadership plays in the nurturing and growth of a start-up the art of preparing a business plan; its launching, managing, growth and, if need be, its exit strategy

Attempt has been made to include all the aspects of creating an entrepreneurial venture—right from conceptualizing the idea to the starting and then the growth of the business. This has been interwoven with adequate background information in the areas of finance, project preparation, technology, business plans, legal matters, market surveys, marketing and brand equity. This volume would help readers to understand various concepts of entrepreneurship such as generation of ideas, recognition and evaluation of opportunities, getting started and scaling up. Emphasis has been laid on drawing inspiration from successful entrepreneurs while building and leading an entrepreneurial organization. The prime focus here is on developing an opportunity assessment framework, developing a business plan and inculcating entrepreneurial leadership skills that are essential for the success of a venture. Students interested in taking up entrepreneurship as a career option and young working professionals interested in undertaking entrepreneurial ventures or contributing as intrapreneurs in their professional roles would be benefited much. The purpose of this book is to enable readers to start dreaming big, visualizing and working towards the realization of their dreams. It would encourage readers to think clearly and creatively. Profiles of leading entrepreneurs across the globe and also at national and local levels are shared, so that readers can relate themselves with these personalities and identify certain role models to pursue their journey towards entrepreneurship. The critical role that the leader and the team members of a venture play in its smooth take-off as also in responding effectively to challenges during an entrepreneurial journey to build long-lasting ventures has been highlighted. The importance of creativity and innovation, the core of entrepreneurship, by stretching imagination and thinking about problems and pain points in different areas at global, national or local levels have been duly emphasized. The key characteristic of an entrepreneur—they can see through things where others do not see anything—has been emphasized. The process of evaluation and analysis of ideas to assess their worth as an opportunity has been adequately covered with the help of concrete examples. The art and science of converting a business idea being identified as an opportunity into a business plan would enable readers to appreciate the need, importance and purpose of preparing an effective business plan, keeping in mind fundamental questions such as—Who should prepare it? How should it be prepared and written down? Will it really help in making money? Will the finished product reflect well on them and their investors? Will they really be adding value for all the stakeholders? Concepts relating to finance and financial statements (profit and loss account, balance sheet and fund flow/cash flow statements) have been elaborately explained to enable readers to learn about financial

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modelling, basic elements of finance, budgeting, cash flow analysis and its implications to business growth. It will enable them to appreciate the need for taxation planning and to learn the process of estimating start-up costs—fixed and working capital. Issues of raising finance, covering aspects—such as, Where and when to approach for finance? How to approach? What does it take to raise money? What do the financiers look for while making financial decisions?—have been covered to appreciate which source of funding, at what stage of growth of business would be most desirable and appropriate. The last four chapters (14–17) cover topics on launching a venture, managing growth, going public and strategies to revive or timely decide to exit by calling it an end. The need for inculcating an organizational culture conducive to growth and importance of open communication, building trusting relationships, empowerment of people, delegation of authority, providing feedback and training to equip employees to manage changing demands have been duly emphasized in the text. It is pertinent to mention that conventional learning methods actually develop non-entrepreneurial habits. In general, conventional methods train people to be reactive rather than proactive in taking initiative, focusing on past learning rather than embracing new ideas, accepting status quo rather than focusing on constant and continuing improvement. One fundamental question that is usually posed is whether entrepreneurship can be taught. Usually there are different views on it. However, the fact remains: if mathematics can be taught, if music can be taught, if art can be taught, then entrepreneurship can also be taught. Teaching entrepreneurship is just like teaching any other skill that requires a different pedagogy. As such, each student brings their own natural instincts, upbringing and talents, and can improve with relevant information and experience. Like any other discipline, entrepreneurship has its own vocabulary, tools, techniques, concepts and body of knowledge. The teaching/learning of entrepreneurship requires greater focus on experiential learning. Engagements such as interactive sessions, cases, games, exercises, role plays, films, projects and assignments, and group activities play a vital role in teaching entrepreneurship. It has been well proved that students who have gone through formal education in the area of entrepreneurship have done better in managing their start-ups and gone to greater heights. The book, therefore, extensively emphasizes on experiential learning and a hands-on approach—‘learning by doing’. It has cited a number of examples and presented cases and exercises from Indian as well as global contexts to make learning to be an entrepreneur an enjoyable experience. Arya Kumar

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Acknowledgements I sincerely offer my prayers to the Almighty for giving me inspiration to work on the important theme of entrepreneurship that would play a pivotal role in the economic development of emerging economies during the 21st century. The main thrust of this book has been on relating to the requirements of emerging economies in general and the Indian economy in particular; as also on taking an overview of leading economies and entrepreneurs across the globe. This volume could not have come out without the efforts of many individuals who have contributed towards the improvement of the text directly or indirectly. I express my sincere thanks and gratitude to all of them. I would especially like to extend my pranams (deep regards) to my parents for giving me the courage to undertake this task and for their love and affection. My indebtedness and gratitude to respected Shri Shambhu Dassji, my father, whose labour of love by way of going through the entire manuscript led to the incorporation of valuable suggestions and the use of a clear, lucid, unambiguous language. His suggestions have gone a long way in improving the quality of the manuscript. The idea of writing a book on entrepreneurship germinated after developing and teaching the newly developed course ‘Creating and Leading an Entrepreneurial Organization’ at the Birla Institute of Technology & Science (BITS), Pilani, for over seven years now. Interactions with students in the class, with entrepreneurs invited for the ‘Meet an Entrepreneur’ lecture series and with professionals on various occasions led to the identification of market requirements that need to be met by the development of different kinds of contents and pedagogy to make teaching and learning entrepreneurship an effective and enjoyable experience. My association with the National Entrepreneurship Network (NEN) since its inception in 2003 has given me a distinct advantage and inspiration to come out with this book. The pedagogy learnt after going through the Entrepreneurship Educators’ Course—convened by Stanford Technology Ventures Program, Stanford University; Wadhwani Foundation and NEN; and the Indian Institute of Management, Bangalore had enabled me to focus on a content that could make learning the subject an enjoyable experience. My special thanks to Laura A. Parkin, Co-founder and Chief Executive Officer, NEN, for interacting with me on the project and providing a distinct insight to come out with an unique manuscript. Thanks to the wonderful NEN team, in particular, Sunita Singh, Senior Director; and Arthi Gerald, Associate Director, Product Development, for their support in taking this project through. I am deeply grateful to BITS, Pilani, an outstanding institution of higher learning, where the culture of excellence and intellectual freedom breeds a spirit of enquiry that has provided me with a platform to work on this theme. My colleagues at the institute as also some entrepreneurs across the country have been a source of thought-provoking discussions on the theme that guided me at the different stages of writing the book. I also owe my gratitude to anonymous peer reviewers whose valuable feedback enabled me to improve the text and also the whole team at Pearson Education that facilitated the project to get crystalized into reality. My special gratitude to my wife Kusum and son Rakshit for their encouragement and support. I also extend my gratitude and special thanks to my brother, the late Anand Kumar, and sister Surekha Bhanot, and their families for their support. Arya Kumar

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About the Author Arya Kumar is Dean, Student Welfare Division and Chief Entrepreneurship Development & IPR Unit, Birla Institute of Technology & Science (BITS), Pilani. He also coordinates the activities of Technology Business Incubator and Centre for Entrepreneurial Leadership at BITS, Pilani. He topped the MA (Hons) Economics examination in 1977 and completed his Ph.D. in the area of Financial Management in Higher Education in India in 1982, both from BITS, Pilani. A diversified experience of over 33 years, serving educational institutions, research organizations, banks and other financial institutions, goes to his credit. Professor Kumar is on the Faculty Advisory Board of the National Entrepreneurship Network (NEN), India, which has done pioneering work in promoting entrepreneurship in educational institutions by creating a favourable eco-system over a span of more than seven years. He has contributed to the ‘Expert group consultation on developing a manual on Youth Enterprise Development’ organized by the Commonwealth Youth Programme Asia Centre, along with the Ministry of Youth Affairs and Sports, Government of India. Kumar has successfully completed the Entrepreneurship Educators Course (EEC), jointly organized by Stanford Technology Ventures Program (STVP), Stanford University, Indian Institute of Management (IIM) Bangalore and National Entrepreneurship Network (NEN); Goldman Sach 10,000 Women Programme: Tools for Growing your Business, organized by NEN in collaboration with London Business School; and Accelerated Commercialization of Technology Innovation, organized by Venture Centre, National Chemical Laboratory (NCL), Innovation Park, Pune, in association with Accelerator India, Cambridge University, British High Commission and National Science & Technology Entrepreneurship Development Board (NSTEDB), Government of India. His basic interests lie in the areas of entrepreneurship, strategic management, values in management and financial management. He has co-authored three books on general management, ethics in management and grassroots entrepreneurship, respectively. He has also contributed several research articles in national journals and economic dailies in the areas of entrepreneurship, management and economics. He has been serving as Guest Faculty with a number of leading management institutions and colleges of various banks.

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fundamentals of Entrepreneurship

1

 LEARNING OBJECTIVES   To understand the need for entrepreneurship.  To understand the relationship between entrepreneurship and wealth creation.  To learn about entrepreneurship as a key to development.  To understand different types of innovations and their implications.  To understand how the concept of entrepreneurship has evolved over the years.  To define entrepreneurship and study entrepreneurial traits.

 To understand the difference between inventors and entrepreneurs.  To understand the importance of inspiration from role models and social support in promotion of entrepreneurship.  To understand the concept of business models.  To understand the importance of mindset in entrepreneurship.  To be aware of the misconceptions and myths about entrepreneurship.

Steve Jobs, CEO, Apple Computer Inc. A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets. —Steve Jobs

Steve Jobs was born on 24 February 1955 in San Francisco, California. He was adopted by Paul and Clara Jobs, who named him Steven. He did his schooling at Cupertino, California, and during his high school days, he started visiting the company Hewlett Packard (HP) in Palo Alto to take part in after-school lectures. Jobs was hired by them to serve during summer with Steve Wozniak. He enrolled at Ree