Entrepreneurship and New Venture Creation KSOM notes by Dr. Sneha Semester 3 Notes Module 4 (complete) and module 5 Bangalore University Entrepreneurship and New Venture Creation Q What is Creativity? (2 marks) Creativity In this fiercely competitive, fast-faced, global economy, creativity is not only an important source for building 3 competitive advantages but it is also necessary for survival. Creativity refers to mental orientation and capability of persons to evolve and develop new and superb solutions to problems that are regarded as complex, ambiguous or unclear. Creativity is a mental and social process involving the discovery of new ideas or concepts, or new associations of the creative mind between existing ideas or concepts. Creativity is fueled by the process of either conscious or unconscious insight. An alternative conception of creativeness (based on its etymology) is that it is simply) the act of making something new. Creativity is a sub-set of intelligence, meaning a group of basic relational or elemental functions with a high association of reliability; i.e., a particular sub-set of conditional intelligence. Strictly speaking, this last requirement is essential for intelligence; if the brain's functions responsible for creating logical relations often make mistakes, this would not be intelligence, but rather something else that is intuition, but mistakes we almost always made, this would be called a lack of intelligence. Q. What are the Components of Creativity (2 marks) I) Conceptual Fluency: It is the ability to generate a large number of relevant ideas relatively rapidly with reference to a given problem/ situation/ issue under consideration. 2) Conceptual Flexibility: It is the ability to shift perspectives/viewpoints, to move from one frame of reference to another, and to change or vary the approaches to solutions to problems. 3) Originality: It is the ability of produce unusual, novel, atypical answers to questions, responses to problems, and interpretation of issues, situations, and events. 4) Complexity Orientation: It is the ability to challenge, and find meaning, in complex and ambiguous problems/situations, and to enjoy the efforts to analyze, integrate, clarify, and resolve them. These four elements of creativity are inextricably linked with individuals' knowledge, experience, and imagination on the one hand, and high level of motivation and interest towards problem solving, on the other. Q. What are the attributes of Creative Individuals? (2 marks) Psychological research has in fact identified and highlighted the distinguishing attributes of creative individuals.
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Entrepreneurship and New Venture Creation
KSOM notes by Dr. Sneha
Semester 3
Notes Module 4 (complete) and module 5
Bangalore University
Entrepreneurship and New Venture Creation
Q What is Creativity? (2 marks)
Creativity In this fiercely competitive, fast-faced, global economy, creativity is not only an important
source for building 3 competitive advantages but it is also necessary for survival. Creativity refers to
mental orientation and capability of persons to evolve and develop new and superb solutions to
problems that are regarded as complex, ambiguous or unclear. Creativity is a mental and social process
involving the discovery of new ideas or concepts, or new associations of the creative mind between
existing ideas or concepts. Creativity is fueled by the process of either conscious or unconscious insight.
An alternative conception of creativeness (based on its etymology) is that it is simply) the act of making
something new.
Creativity is a sub-set of intelligence, meaning a group of basic relational or elemental functions with a
high association of reliability; i.e., a particular sub-set of conditional intelligence. Strictly speaking, this
last requirement is essential for intelligence; if the brain's functions responsible for creating logical
relations often make mistakes, this would not be intelligence, but rather something else that is intuition,
but mistakes we almost always made, this would be called a lack of intelligence.
Q. What are the Components of Creativity (2 marks)
I) Conceptual Fluency: It is the ability to generate a large number of relevant ideas relatively rapidly with
reference to a given problem/ situation/ issue under consideration.
2) Conceptual Flexibility: It is the ability to shift perspectives/viewpoints, to move from one frame of
reference to another, and to change or vary the approaches to solutions to problems.
3) Originality: It is the ability of produce unusual, novel, atypical answers to questions, responses to
problems, and interpretation of issues, situations, and events.
4) Complexity Orientation: It is the ability to challenge, and find meaning, in complex and ambiguous
problems/situations, and to enjoy the efforts to analyze, integrate, clarify, and resolve them. These four
elements of creativity are inextricably linked with individuals' knowledge, experience, and imagination
on the one hand, and high level of motivation and interest towards problem solving, on the other.
Q. What are the attributes of Creative Individuals? (2 marks)
Psychological research has in fact identified and highlighted the distinguishing attributes of creative
individuals.
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These are as follows:
I) A strong sense of curiosity.
2) Openness and independence of thinking and judgment.
3) The ability to see things in unusual ways.
4) Accepting and reconciling apparent opposites or paradoxes.
5) Tolerance of ambiguity.
6) Keen sensitivity, fostering intuition.
7) A strong sense of autonomy.
8) Not bound by group standards and control.
9) Persistence and motivation
10) Highly developed imagination and visualization ability.
II) The ability to generate a large number of ideas and viewpoints.
12) Flexibility.
13) Originality.
14) The ability to focus and concentrate.
As a matter of fact, creative individuals are characterized by a Janusian mode of thinking. The latter
refers to "the capacity for conceiving and Utilizing two or more opposite or contradictory ideas,
concepts, or images simultaneously"
Q. Explain the Creative Process (12 marks)
Clearly, action by itself has no meaning; it is of little value to simply "do things" without having
inspiration and direction. Entrepreneurs need ideas to pursue and ideas seldom materialize accidentally.
Ideas usually evolve through a creative process whereby imaginative people germinate ideas, nurture
them, and develop them successfully. Various labels have been applied to stages in the creative process,
but most social scientists agree on five stages, i.e., idea germination, preparation, incubation,
illumination, and verification. In each stage, a creative individual behaves differently to move an idea
from the seed stage of germination to verification; behavior varies greatly among individuals an ideas:
1) Idea Germination: The germination stage is a seeding process. It is not like planting seed as a farmer
does to grow corn, but more like the natural seeding that occurs when pollinated flower seeds,
scattered by the wind, find fertile ground to take root. Exactly how an idea is germinated is a mystery; it
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is not something that can be examined under a microscope. However, most creative ideas can be traced
to an individual's interest in or curiosity about a specific problem or area of study.
2) Preparation: Once a seed of curiosity has taken form as a focused idea, creative Idea people embark
on a conscious search for Germination answers. If it is a problem they are trying the seeding stage to
solve, then they begin an intellectual journey, seeking information about the Recognition problem and
how others have tried to resolve it. If it is an idea for a new product or service, the business equivalent is
market research. Inventors will set up laboratory experiments, - designers will begin engineering new
product ideas, and marketers will study
3) Incubation: Individuals sometimes concentrate intensely on an idea, but, more often, they simply
allow consumer buying habits, ideas time to grow without intentional effort. All have heard about the
brilliant, sudden "flashes" of genius, i but 'few great ideas come from thunderbolts of insight. Most
evolve in the minds of creative people while they go about other activities. The idea, once seeded and
given substance through preparation, is nit on a back burner; the subconscious mind is allowed time to
assimilate information.
4) Illumination: In this stage the idea resurfaces as a realistic creation. The fable of the thunderbolt is
captured in this moment of illumination-even though the often long and frustrating years of preparation
and, incubation has been forgotten. Illumination may be triggered by an opportune incident. The
important point is that post creative people go through many cycles of preparation and incubation
searching for that incident as a catalyst to give their idea full meaning. When a cycle of creative behavior
does not result in a catalytic event, the cycle is repeated until the idea blossoms or dies. This stage is
critical for entrepreneurs because ideas by themselves have little meaning.
5) Verification: An idea once illuminated in the mind of an individual still has little meaning until verified
as realistic and useful. Entrepreneurial effort is essential to translate an illuminated idea into a verified,
realistic and useful application. Verification is the development stage of refining knowledge into
application.
Q. Give an account of creative thinking (12 marks)
In order to develop a creative approach to problems and ways of coping with them innovatively,
organization personnel need to cultivate certain basic thinking skills.
These skills are vital for gaining insights and formulating solutions to a wide spectrum of problems.
These essential skills are:
1) Convergent Thinking: Convergent thinking consists of those abilities which enable one to reach a right
solution to problems which mostly have one right solution. Problems that may potentially have plural
solutions require the exercise of divergent thinking mechanisms. The mechanisms of convergent
thinking may be outlined as follows:
i) Classification and/or Categorization: It involves listing the components/elements of a problem, using
analogies, making comparisons, and displaying the situation through tables, charts, and diagrams.
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ii) Analysis: It involves breaking down or factoring a problem into sub-problems, seeking relationships
among components, establishing relative priorities or importance of elements or relationships, making
cross classifications, identifying methods/procedure(s) or steps to a possible solution, and transforming
the problem into an abstract or symbolic form of a model on which symbolic manipulations may be
performed. The latter may enable exploration and assessment of alternatives as in a computer
simulation model or sensitivity analysis. Analysis also involves identification and definition of issues,
constraints, and variables. It may also impose constraints on a problem by making assumptions and
formulating criteria of evaluation. Analysis also focuses on selecting and evaluating alternatives, and
may involve working backward from a solution.
iii) Synthesis: It is concerned with seeing patterns among components or elements and involves
aggregation and juxtaposition of elements in terms of their similarity, proximity, consistency,
relationships and so on. It also attempts to use a broad conceptual model to organize facts and
information. It may sometimes be facilitated by bringing together or highlighting contradictory or
extreme elements in a problem situation. Such a focus may sensitize a problem-solver to seek a solution
that harmonizes the contradictions and inconsistencies.
iv) Optimization: It is essentially concerned with refining a solution. It may thence involve substitution of
parts, addition of components/elements, deletion of superfluous, items, modification of elements, and
alternation of connecting points or relations in terms of the evaluative criteria for a solution.
2) Divergent Thinking: It involves approaches or perspectives that may be uncommon or unusual,
resulting in novel solutions. The mechanisms of divergent thinking may he outlived as follows:
i) A working definition of the problem is sought to be developed by identifying the key terms, concepts
and their meanings, the requirements of what needs to be done resolve the problem, and by factoring
the problem into sub-problems.
ii) Search for solution(s) begins with the most familiar, and is expanded through associative thinking (A
suggests B, B suggests D, etc.). The latter may bring out different and far-out alternatives for
consideration. Making a list of relevant objects or elements also often serves to activate divergent
thinking.
iii) The problem may be restated or redefined by relaxing and/or reinterpreting the constraints. Such a
redefinition often leads to the emergence of new perspectives or frames of reference.
iv) Imagination and intuition are heavily relied on in search for possible unconventional solutions or
towards evolving new syntheses.
v) Questions like the following stimulate divergent thinking:
a) What is the opposite of the known or conventional approach (es) or solution(s)?
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b) What would happen if the current basic assumptions were changed in part or replaced by another
set? c) What would happen if the given constraints in a problem situation were amplified or reduced or
eliminated in whole or part?
vi) Using analogies from one or more different fields and trying to understand their structure and
functions may produce new and unforeseen insights into the nature of the given problem (examples:
whales and submarines, birds and aircraft, computer and brain, etc.).
3) Making Forced Relationships: A distinctive characteristic of the creative process is the ability to
connect two or more apparently different or disparate ideas, concepts, elements, or entities. This aspect
or characteristic of the creative process is called forcing relationships. Most of our thinking proceeds
automatically along habitual lines. Such an accustomed mode of thinking is natural' for most of us. It is,
however, unproductive in respect of providing us with new and interesting or unconventional ideas. To
get out of our automatic mode of thinking, we must discover, make or seek out non-familiar and non-
habitual linkages among unrelated facts and objects. We make these linkages or relationships by
identifying common or similar elements in uncommon comparisons of dissimilar things. Making forced
relationships stimulates new insights towards problem solving. These insights emerge from comparisons
of the dissimilar objects or entities depending on what the insights are wanted for. Forcing relationships
may often be difficult to start with because people are unaccustomed to thinking in this manner. But it
becomes much easier with practice.
4) Recognizing Positive Potential in a Problem: There are always at least two sides to every problem. The
first and the most obvious side is that which is causing worry and concern. The other side is less obvious
and less often experienced. In every problem which produces tension arid anxiety, there are elements
which need to be found and recognized for their possible positive potential or significance. The ability to
find the positive potential in a problem is a mark of creative openness, receptivity, and flexibility.
Recognition of positive potential may sensitize a person to new opportunities and useful courses of
action which may compensate for the negative aspects, or enable a person to make the best of a bad
situation.
5) Dissecting Ideas: Dissecting an idea implies developing a list of what is useful or relevant, and then
identifying what is missing. The list of what is useful may be prepared by using insights from convergent
and divergent thinking or by making forced relationships. The identification of what is missing is
attempted in terms of "How to ..." statements. These statements may relate to disaggregating, planning,
organizing, managing, carrying forward, conveying, transmitting, or implementing an idea and/or its
implications. They may relate to a whole range of connective issues focusing on the translation of ideas
into practice or their testing and assessment against real world conditions. The gaps brought to light by
"How to ...." statements are sought to be filled by generating new ideas. These new ideas may also lead
to a redefinition of the problem or a revision of its underlying assumptions.
6) Visualizing Future Solution State(s): Creative individuals usually envision solutions to the problems
exercising them. They try to create a vision of what a solution might look like. Such an orientation is also
essential. Visualizing one or more future solution states of a complex problem calls for developing a
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clear and detailed picture of the future with a successful Solution being implemented. This process
enables one to move away from one's normal or usual thinking patterns. It helps one find pathways
leading from the present towards that desired future state. It disregards the exact nature of the solution
in the initial stage, focusing only on what happens as a consequence of the successful solution. If one
can get a rather clear and specific mental picture of what will happen because of a successful solution, it
would be easier for him/her to understand the kinds of changes needed to bring that picture to life.
Q. Explain the Barriers to Creativity (8 marks)
1) Fear of Rejection: An idea is not just a thought; it has a person's feelings attached to it.
2) Fear of Risk: Risks are intimate friends with innovation. Make it safe for responsible risks and the
ideas will flow. Discovery requires risk.
3) No Expectation that Ideas are Everyone's Responsibility: Improvement thinking is a part of everyone's
job. A manager's continuous expectation and demonstration how every problem is a candidate for an
idea, will keep them coming. An idea a month per employee is achievable.
4) Un-Fun: Ideas flow easier on the fun-side of the brain.
5) Too Much Time between Creation and Implementation: Delay in implementation works against the
trust that the system is serious about ideas.
6) Neglect: If the supervisor does not communicate the status, and often to the worker, it infers the
system does not care. And that wounds future idea generation.
7) No Support Structure to Transform the Idea through Implementation: If implementation is always an
upstream swim, it will dry-up the idea flow.
8) Only Left Brains: Right brain (high creation) people are able to generate and left brain (high
organization) people to make it work.
9) Acknowledgement: The best acknowledgement for a worker is to see their manager fighting for the
idea, or it implemented and making a difference in the workplace.
10) Valuing only Big Ideas: Anyone can come-up with a small idea and every idea is a step closer to a
more productive work environment.
1 1) Short Termism: A drive to meet short-term financial goals rather than to invest in the future.
12) Over Allegiance: An over allegiance to past successes, proven experience and tried and tested
methods.
Q. Explain Techniques for Improving the Creative Process (12 marks)
Creativity is the result of creative process which is an important skill of successful entrepreneurs. It
tends to decline with the age, education, time, use etc. So there is a need of technique which improves
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the creativity of entrepreneurs. It is also known as idea generation technique. Some techniques require
groups of two or more people while other techniques can be accomplished alone. These methods
include word games, written exercises and different types of improvisation. Creativity techniques can be
used to develop new materials for artistic purposes or to solve problems. Most creativity techniques use
associations between the goal (or the Problem), the current state (which may be an imperfect solution
to the problem), and some stimulus (possibly selected randomly).
Following are the important techniques which improve the creativity:
1) Idea Box or Matrix Analysis: In matrix analysis, a two-dimensional "idea box" is used to explore new
ideas or alternatives. There are four steps to generating an idea box:
i) Specifying the purpose or what you are trying to accomplish,
ii) Identifying the parameters of the problem,
iii) Listing variations, and
iv) Trying different combinations.
Consider a situation in which the purpose is to gain citizen input and involvement in the city's recreation
department, but one is not sure how to do it and resource limitations are such that they will be limited
in the number of approaches they can use. They could begin by asking themselves what the parameters
of the problem might be.
For example, perhaps consider methods of input, timing/frequency, subjects and target groups as your
parameters. For each of those parameters, there is a need of options. Methods of input might include
citywide open meetings, neighborhood forums, mailed questionnaires and/or suggestion boxes. For
target groups, they might think about seniors, teenagers, pre-school children and businesspeople. The
resulting table might look something like this:
Using the idea box, they would randomly combine one item from each column (for example, a forum
held semi-annually on volunteering for seniors, a questionnaire mailed quarterly on facility construction
to businesspeople).
2) Heuristic: Heuristic is an adjective for experience-based techniques that help in problem solving,
learning and discovery. A heuristic method is particularly used to rapidly come to a solution that is
hoped to be close to the best possible answer, or 'optimal solution'. Heuristics are "rules of thumb",
educated guesses, intuitive judgments or simply common sense. Heuristics as a noun is another name
for heuristic methods. It may be argued that the most fundamental heuristic is "trial and error", which
can be used in everything from matching bolts to bicycles to finding the values of variables in algebra
problem.
3). Mind mapping: Mind mapping is a technique designed to help in thinking visually and spatially about
issues and problems. Mind maps helps through mental explorations in much the same way as ordinary
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maps helps in travels. Mind mapping uses pictures and images to define a vision, a problem, or a
situation. It can be a simple, representation intended to be used as a memory trigger or as a detailed
representation of a situation, process, or "territory". A mind map should begin with a central image in
the middle of the page, then colors, pictures, and symbols should be used to map the situation, using
only one keyword per image. All lines branch from the central image. Mind mapping can be done
individually or in a group. One possibility is to draw individual maps and then pair people-off to explain
their maps to each other and create a shared map. The map can be a depiction of a process, a goal, an
interaction, or the multiple facets of a complex problem.
4) Synectics: Synectics is a technique developed by Gordon for improving creative problem solving. The
word synectics means joining together different and apparently Unconnected or irrelevant elements. In
synectics, problems are defined by "making the strange familiar," ideas are sought by "making the
familiar strange". In the former case, the aim is to understand or define the problem using terms that
are familiar to you. In the latter case, the purpose is to make the familiar strange by purposely
distorting, inverting or transposing the problem to something unfamiliar. This can "transpose both our
usual ways of perceiving and our usual expectations about how we or the world will behave". Synectics
uses four types of metaphors in this process:
i) Personal Analogy: Personal analogy is the use of emotions and feelings to identify an individual with
the subject of a problem.
ii) Direct Analogy: The direct analogy compares the problem with homogenous facts, information or. -
technology. A heating system might be compared with a volcano and from this new ideas may arise.
iii) Symbolic Analogy: Symbolic analogy is the use of objectives and personal images. Symbolic analogy
involves making use of objectives and personal images to describe a problem (for example, like an Indian
rope trick, like a thief in the night, like a pirate).
iv) Fantasy Analogy: This is based on Freud's notion that creative thinking and wish fulfillment are
strongly related.
5) Metaphor: Metaphorical thinking is the ability to link two different things by recognizing that in some
way they share a common trait or shows a common principle; for example, a revolution is compared to a
volcano (a build-up of pressure leading to an explosion) and electricity is compared to water flowing
through pipes. The ability to play with ideas and concepts is basic to problem solving and creativity.
Metaphor allows this type of play to occur. So making comparisons between problems in business and in
biology, science and so on may help to unlock solutions.
6) Brainstorming: Brainstorming is a group creativity technique designed to generate a large number of
ideas for the solution of a problem. The method was first popularized by Alex Faickney Osborn in a book
called Applied Imagination. Osborn proposed that groups could double their creative output with
brainstorming. Because of such problems as distraction, social loafing, evaluation apprehension, and
production blocking, brainstorming groups are little more effective than other types of groups, and they
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are actually less effective than individuals working independently. The four basic rules of brainstorming
are as under: ;
Advantages of the Brainstorming Technique
i) The main advantages of this technique are broader participation, enthusiasm, deferred judgment,
greater task orientation, team work and stimulated thinking.
ii) This technique is very effective when the problem is comparatively specific and can be simply
defined. A complex problem can be broken up into in many parts and each part can be taken up
separately at a time.
Disadvantages of the Brainstorming Technique The process is very time, consuming and it is quite
possible that none of the ideas generated would be optimal. But the wasted time can be minimized if
the members of the group are chosen carefully so that they understand the problem and feel that their
contribution towards idea generation will be substantial.
7) Forced Relationships: If two objects or ideas are combined, what will be the outcome? This technique
may be useful in many, areas including new product development; for example, the combination of a
video cassette recorder with a television for a new type of equipment. Another example might be
combining a desk and a chair which is a common piece of furniture in modern colleges.
8) Parameter Analysis: The three types of activity - within parameter analysis form an iterative loop:
i) Parameter Identification: It consists primarily of the recognition of the dominant parameters or issues
or issues in a problem. The word "parameter" is used to describe in a very general way any issue, factor,
concept, or influence that plays an important part in developing an understanding of the problem and
pointing to potential solutions.
Q. What is Innovation (2 marks)
Creativity is the seed that leads entrepreneurs to innovate. It precedes the innovation. Innovation is the
process of entrepreneurship. Innovation is a key function in the entrepreneurial process. Innovation and
Entrepreneurship
Innovation can be defined as the ability to create something new based on knowledge that has been
attained. In Order for something to be new, it must be radically different from things which are already
in existence. The nature of innovation is important when it comes to problem solving. Often, the goal of
those who use innovation is to solve problems. Innovation plays an important role in virtually every
aspect of life. Though it is usually connected to business, technology, or engineering, and can even be
useful on a personal level.
According to Peter Drucker, "Innovation is the means by which the entrepreneur either creates new
wealth producing resources or endows existing resources with enhanced potential for creating wealth".
Q. Explain the Essential Ingredients of Innovation (2 marks)
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Four essential ingredients to a definition of innovation:
1) Something New: Everyone likes something new. All body wants the latest and greatest products and
ways of doing things. Newness, however, is just the beginning.
2) Better Than What Exists: New for the sake of being new is of little value. It must also be improved.
New and improved toothpaste must have a new thing/feature that increases its perceived value. A new
office procedure must actually do something better than the old way.
3) Economically Viable: Does it make or save money? If it doesn't then it shouldn't be implemented. If
the new and improved toothpaste makes more sales that in turn makes more profits, it is a profitable
addition. If new office procedure improves the efficiency of the work place and therefore saves labor
costs, it makes the organization more profitable.
4) Widespread Appeal: All the first 3 elements are very important and even related to this one.
However, there needs to be a basic appeal to the new innovation. If not it won't sell. If new and
improved toothpaste is licorice flavored, then it might have very limited appeal. It is new and improved.
Licorice may even be a cheaper flavor to implement that any others. If nobody wants it, then it is not a
true inn/ovation.
Q. Explain Types of Innovation (8 marks)
1) Product Innovation: It means new products or improvements on products. The new Mini or the
updated Car, new models of mobile phones, and so on.
2) Process Innovation: Where some part of the process is improved to bring benefit. For example, Just-
in-Time.
3) Paradigm Innovation: Where major Shifts in thinking cause change. During the time of the expensive
mainframe, Bill Gates and others aimed to provide a home computer for everyone.
4) Radical Innovation: It is a major breakthrough as a result of technological invention that offsets
industry as a whole. For example, invention of microchips has changed the face of computer industry
from large-sized punched card based to small-sized chips based computers with more memory and data
processing.
5) Systems Innovation: It creates a new functionality by assembling parts in new ways. For example,
creation of automobile engine was radical innovation and became a system innovation when it was
combined with bicycles to create different types of two-wheelers.
6) Incremental Innovation: It is the technical improvement and extends the application of radical and
system innovations. Incremental innovations force organizations to continuously improve their products
and services and keep abreast or ahead of the competition. The creativity and innovation should be
planned in a strategic context.
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7) Additive Innovation: It is fully exploiting already existing resources, such as product-lines extensions,
can achieve good results. These opportunities should rarely be treated as high priority efforts. The risks
should be small and they should not take resources away from complementary or breakthrough
opportunities.
8) Complementary Innovation: It offers something new and changes the structure of the business.
9) Technology Innovation: The goal of technology innovations is to generate new product with
significant technology advancement.
Q. Explain the Seven Sources of Innovation (2 marks)
The seven sources of innovation are as follows:
1) Unexpected occurrences,
2) Incongruities,
3). Process need,
4) Industry and market changes,
5) Demographic changes,
6) Changes in perception,
7) New knowledge.
Q. Argue Creativity versus Innovation (2 marks)
If creativity is the seed that inspires entrepreneurship, innovation is the process of entrepreneurship.
This was Schumpeter's conclusion when they wrote about the economic foundations of free enterprise
and entrepreneurship.
It can be deduced that innovation cannot take place without creativity, because creativity initiates
innovation. Innovation can define as the commercialization of ideas by changing the existing products,
systems, and resources.
Q. Argue Invention versus Innovation (2 marks)
An important distinction is normally made between invention and innovation. Invention is the first
occurrence of an idea for a new product or process, while innovation is the first attempt to carry it out
into practice. It is useful, when conceptualizing innovation, to consider whether other words suffice.
Invention is the creation of new forms, compositions of matter, or processes and often confused with
innovation. An improvement on an existing form, composition or processes might be an invention, an
innovation, both or neither, if it is not substantial enough. It can be difficult to differentiate change from
innovation.
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According to business literature, an idea, a change or an improvement is only an innovation when it is
put to use and effectively causes a social or commercial re-organization. Innovation occurs when
someone uses an invention or an idea to change how the world works, how people organize themselves,
or how they conduct their lives. In this view innovation occurs whether or not the act of innovating
succeeds in generating value for its champions. Innovation is distinct from improvement in that it
permeates society and can cause reorganization. It is distinct from problem solving and may cause
problems. Thus, in this view, innovation occurs whether it has positive or negative results. Innovation is
the process of doing new things. It is important to recognize that innovation implies action, not just
conceiving new ideas. When people have passed through the illumination and verification stages of
creativity, they may have become inventors, but they are not yet innovators.
Q. Explain the Conditions for Innovation (8 marks)
The ability as an entrepreneur to carry-out innovation strategies is dependent on the existence of
certain conditions in the organization. Most of the following conditions are typical of innovative
organizations. Top management is responsible for the overall innovation strategy and provides the
necessary leadership.
1) Top managers recognize that they cannot build their organizations on a model of top-down direction
and - delegation and are committed to encouraging bottom-up ideas and initiatives.
2) Innovation is not only seen as a priority but the entire organizational culture is based on innovation.
3) Creativity is allowed and fostered.
4) Employees are placed in jobs that fit their cognitive skills and abilities.
5) Those who do not learn to use the innovation are re-assigned to other jobs.
6) Innovative people are identified and recognized and continuity and experimentation are assured.
7) The existence of creative people who initiate innovative processes is ensured by recruiting creative
talents.
8) There is flexibility with regard to the allocation of priorities, patterns of working, and normal control
systems.
9) Innovation is seen as a long-term investment.
10) Disincentives are given for innovation avoidance.
11) Organizational systems that recognize and support viable innovation are created.
12) Attention is paid to integrating the function of innovation with the rest of the organization's
activities, for exam*, through the management information system, by creating cross-functional teams,
or by using some managers in special integrating roles.
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13) The exchange of ideas using intra- or inter-organizational networks is encouraged.
14) Managers at all levels support the implementation of the innovation and have an in-depth
understanding of the innovation. They are also provided with the necessary authority and resources to
create a strong climate for implementation.
15) Innovation is seen as the responsibility of all staff, irrespective of their function. Proposals move
quickly through the approval process.
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Module 5 notes
Introduction
Running a successful business can be very difficult without the right tools. As more and more people
start or consider starting their own business, it is important that they understand the core steps that are
required to launch successful ventures. These steps include spotting, assessing, selecting, and executing
opportunities presented. Business entrepreneurs must also have a thorough knowledge of the laws and
statutes that pertain to the ownership and operation of their business, in order to maintain business
operations in the long-term. Laws affect almost every aspect of the business including, dealings with
employees, customers, suppliers, and governmental bodies. Laws affect where one can set-up their
business and how much of its profit they can keep. Advertising claims regarding the products or services
also are governed by laws. Without this knowledge they are subject to fines, litigation, lawsuits and a
host of other problems concerning employees, clients, vendors, and other associates that can destroy
their daily operations very quickly. As an entrepreneur, they will have to know the legal forms of
business organization, various statutory requirements, intellectual property rights, registrations and
various clearances required for establishing an organization.
Q. Write in brief about various forms of organization (2 marks)
Entrepreneurs have a number of legal forms of business to choose from, such as sole proprietorships,
partnership, co-operative, C-corporations, or Limited Liability Companies (LLCs). Entrepreneurs should
determine which business form is best for them based on their short and long-term needs. Because
there are significant tax and non-tax differences among the forms, entrepreneurs should carefully
consider the results and requirements of each form to ensure that the business form they choose best
meets their requirements. In choosing a form of ownership, entrepreneurs must remember that there is
no single best form, what is best depends on the business's particular circumstances. Ownership can be
classified into two categories Individual and collective ownership.
Q. Explain Sole Trading/Sole Proprietorship (2 marks)
Sole proprietorship is a one-man business. It is the simplest, the oldest, and in some respects the most
natural form of business in the private sector. In this form of business, a single individual is solely
responsible for providing the capital, for bearing the risks, and for the control of the enterprise. It is a
one-man show. Sole proprietorship means a business owned, financed, and controlled by a single
person. The owner, called the proprietor, alone is responsible for the profits and losses of the business.
If entrepreneurs plan to start a business under a name other their own, they must register the name,
called DBA (Doing Business As). If the business has a trade name, a "Certificate of Doing Business under
an Assumed Name" can be obtained from the state in which the business will operate.
Q. Explain Features /Characteristics of Sole Proprietorship (2 marks)
The distinguishing characteristics of sole proprietorship are as follows:
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1) Single Ownership: A sole proprietorship is wholly-owned by one individual. The individual supplies the
total capital from his own wealth or from borrowed funds.
2)One-Man Control: The proprietor alone takes all the decisions pertaining to the business. He is not
required to consult anybody. Ownership and management are vested in the same person. Some persons
may be employed to help the owner but ultimate control lies with him.
3)No Separate Legal Entity: A sole proprietorship has no legal identity separate from that of its owner.
The law makes no distinction between the proprietor and his business. The business and the owner exist
together. If the owner dies or becomes insolvent the business is dissolved. The proprietor and his
business are one and the same.
4) Unlimited Liability: The proprietor is personally liable for all the debts of the business. In case the
assets are insufficient to meet its debts, the personal property of the proprietor can be attached.
5) No-Profit Sharing: The sole proprietor alone is entitled to all the profits and losses of business. He
bears the complete risk and there is nobody to share the profits or losses.
6) Small Size: The scale of operations carried-on by a sole proprietorship is generally small. A sole trader.
can arrange limited funds and managerial ability. Therefore, the area of operations is generally local and
limited.
7) No Legal Formalities: No legal formalities are required to start, manage, and dissolve sole trader
business. Only a license is necessary in certain types of business.
Q. State the advantages of Sole Proprietorship (8 marks)
The system of Sole Proprietorship has the following advantages:
1) Low Cost of Production: Since the business is exclusively his own, the single entrepreneur works day
and night for the success of his enterprise. He allows no wastage of materials and keeps a strict, vigil on
the 'activities of his workers. All this results in very low cost of production.
2) Promptness in Decisions: A single entrepreneur does and holds any consultations with anyone on
important issues facing him. He, therefore, takes decisions promptly on the spur of the moment
3) Personal Contact: As the sole proprietorship is a very small form of business organization, its owner,
entrepreneur, maintain close contact with his customers and attempts to provide maximum satisfaction
to them. Since he comes in contact with his workers daily, there is little possibility of any
misunderstanding arising among them, with the result that the labor management relations remain
quite happy and cordial.
4) Easy to Start and Wind-up: The individual proprietorship is the easiest form of business organization.
For starting it, there are no legal formalities or government sections to be required. If one wants to start
a hotel or a dairy farm, the only formality he as to undergo is to take a license from the Health
Department of the Municipal Board or Corporation.
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5) Incentive for Hard Work: As the individual proprietor is the whole sole owner of his business, he
works very hard and with full interest in order to get the best possible results of his endeavor. He does
not care for the hours of leisure or rest. This kind of hard and sincere work enables him to earn good
results. A shopkeeper or a hotel owner, for example, works very hard to increase his profit.
6) Business Secrecy: In every business, there are certain secrets. They may be regarding the manufacture
of some particular variety of products or regarding the purchase of the equipment or raw material or
the sale of the products. In this form of business organization, as the individual proprietor is the only
man who knows these secrets, he has no risk of their being disclosed to outsiders.
7) Flexibility in Business: This type of occupation can be promptly adjusted to the new circumstances.
The sole proprietor can adjust the quantity and quality of his products promptly and without any delay
according to the changes in demand and supply of goods; it is because there is no one to interfere or
obstruct in his decision.
8) Independence: Since the sole proprietor is the whole sole owner of his business, he enjoys full
independence in his business affairs
Q. Explain the Disadvantages of Sole Proprietorship (8 marks)
The sole proprietorship business is also subject to certain disadvantages. Some of these are as follows:
I) Limited Means of Production: The firm has very limited resources. The single person cannot raise the,
.entire requirement that is needed for expanding his business. As a result of this his business unit can be
expanded only within the limits of his financial standing.
2) Limited Skills: The sole proprietor has only small business, where he uses his own limited managerial
or technical skills. Beside, because of the limited funds, he cannot think of employing highly paid
manager, technical experts, legal adviser and accountants. He also cannot manage for modern methods
of marketing, sales and advertisement.
Thus, the sole trader remains incapable of n.ai, the use of highly specialized and technically advanced
processes in his small business unit.
3) No Economies of Large-scale Production: The sole proprietor has only a small-scale unit where the
land, capital investment, machines, raw materials, etc., are required only in meager quantities.
As such, he is unable to reap the benefits of internal and external economies like that of large-scale
units. Consequently, the costs of production of his products are comparatively much more than those of
the same type of products of the large-scale units. Thus, the sole proprietor cannot compete in the
market, where there are similar products of large-scale units.
4) No Division of Labor: In the sole proprietary business, the production is only of small size, and the
proprietor does everything single-handed or with the help of only a few workers. As such, there is no
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possibility of modern type of complex division of labor. The result is that one-man productive unit does
not get any benefit accruing from the modern system of division of labor.
5) Small Income: With the limited resources at his disposal, the sole trader cannot think of many
profitable large-scale ventures. Consequently, his business remains of small size that brings him only a
small earning.
6) Instability: The sole proprietorship continues till the good health or the life of the proprietor. In the
case of the illness or death of the proprietor, the one-man business comes to an end. Thus, the sole
proprietary business has no stability for its continuance.
7) Unlimited Liability: The sole proprietor has unlimited liability, which checks him from expanding his
business further. In case there is loss in the business, than he has to pay-off all debts and loans of the
business not only from the assets of the business but also from his private property.
8) Keeps a Country Economically Backward: If a country has only such units of business organization,
then she can never advance in economic and industrial fields; she will rather remain backward. Big basic
industries, like iron and steel plants, oil refineries, coal mining, railways, etc. which play a key role in the
economic and industrial development of a country, cannot be started b) the sole proprietor.
Q. Explain the concept of Family Business (2 marks)
A family business is a business in which one or more members of one or more families have a significant
ownership interest and significant commitments toward the business's overall well-being. A firm is said
to be family-owned if a person is the controlling shareholder; that is, a person (rather than a state,
corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the
voting rights and the highest percentage of voting rights in comparison to other shareholders.
Q. Explain the Features /Characteristics of Family Business (8 marks)
1) Clearly separate management and ownership.
2) Have a clearly defined vision.
3) Take time to understand the family's concerns and the needs of individuals.
4) Have a common language of trust inside and outside the family business.
5) Speak with one voice. 6) Live their values as well as espouse them
7) Have defined roles and responsibilities for family members, shareholders, and employees.
8) have high staff loyalty and low staff turnover.
9) Consider appointing non-executive directors to help bring objectivity
10) It always considers the family business members who aren't involved in the business.
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Q. State the Advantages of Family Business (8 marks)
1) Commitment: People who set-up a business can become very passionate about it — it is their
creation, they nurtured it, built it up and for many such entrepreneurs business is their life. This very
deep affection translates naturally into dedication and commitment, which extends to all the family
members who come to have a stake in the success of the business. They feel they have a family
responsibility to pull together and, provided there are no conflicts, everyone is happy to put in far more
time and energy working for the company's success than they would dream of devoting to a normal job.
Family enthusiasm develops added commitment and loyalty from their workforces, people care more
and feel they are part of a team, all contributing to the common purpose.
2) Knowledge: Family businesses often have particular ways of doing things — special technological or
commercial know-how not possessed by their competitors; knowledge that would soon become general
in a normal commercial environment, but which can be coveted and protected within the family. This
idea of knowledge is also relevant in relation to the founder's sons or daughters joining the business.
Children grow-up learning about the business, infected by the founder's enthusiasm, and when the time
comes for them to consider joining they may already have a very deep understanding of what the
business is all about.
3) Flexibility in Work, Time and Money: Essentially, this factor boils-down to put the work and time into
the business that is necessary and taking out money when you can afford to. A further aspect of
commitment is that if work needs to be done and time spent in developing the business, then the family
puts in the time and does the work — there is no negotiating of overtime rates or special bonuses for a
rushed job. The same flexibility applies concerning money, and here lies another important distinction
between entrepreneurial and non-business families. Most families have a set income derived from
wages or salaries paid by an employer, and the only decisions the family take concern how this income is
to be spent. But for families in business, income is not a fixed element in the domestic equation. They
must decide how much money they can safely take from the business for their own needs while at the
same time preserving the firm's financial flexibility and its scope for investment. The privately held
family business is the only entity that can truly build for the long-run.
4) Long-Range Thinking: But although families are good at thinking, long-term, they are not so good at
formalizing their plans, writing them down, analyzing the assumptions they are making, testing past
results against earlier predictions in short, the strength means that-the long-range thinking is there,
while the weakness is that this thinking is undisciplined. If the right environment exists for a family to
build on its vision of the future and to focus on and get behind the type of long-term to focus on and get
behind the type of long-term strategic intent that has characterized Japanese businesses then the
possibilities are immense.
5) Stable Culture: For a variety of reasons, family businesses tend to be stable structures. The Chairman
or Managing Director has usually been around for many years and the key management personnel are
all committed to the success of the business and they too are there for the long-term. Relationships
within the company have usually had ample time to develop and stabilize, as have the company's
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procedural ethics and working practices, everybody knows how things are done. Like some of the other
factors working in favor of family businesses, however, a strong, stable culture can be a two-edged
sword.
6) 'Speedy Decisions: In a family controlled business, responsibilities are usually very clearly defined and
the decision-making process is deliberately restricted to one or two key individuals. In many cases, this
means that if you want the company to do something you go and ask the boss and the boss will either
say 'yes' or 'no'. The contrast with this process is at its most stark if one looks at the example of a public
company deciding to shift its operations into new trading areas. If the decision is likely to change the
shape of the business significantly then it will involve rather more than a 'yes' or 'no' from the boss.
Typically, the process will begin with an 'in principle' board decision to investigate the move, feasibility
studies will be undertaken which will then be examined by specially appointed board committees, the
company's banking, accounting and legal advisers will all become involved in the process, a board
decision will be taken to approve the move, but even then shareholder approval may have to be sought
via a lengthy and elaborately detailed circular designed to summarize the arguments and quantify the
financial impact of the change. Of course, this is not to say that advice from outsiders on important
decisions is a waste of time, or that the consequences of such a major move should not be extremely
carefully evaluated. But speed does have a commercial value and, in this example, if a lot rested on the
speed with which a decision could be taken and implemented, then the family business would definitely
have the edge.
7) Reliability and Pride: Commitment and a stable culture lie behind the fact that family businesses are
generally very solid and reliable structures and are perceived as such in the marketplace. Many
customers prefer doing business with a firm that has been established for a long time, and they will have
tended to build-up relationships with a management and staff that are not constantly changing jobs
within the firm or being replaced by outsiders. Also, the commitment within the family business,
discussed earlier, is not just a hidden force; it reveals itself to customers all the time in the form of a
friendlier, more knowledgeable, more skillful and generally much higher standard of service and
customer care. Closely connected with reliability is the notion of pride; the people who run family
businesses, proud of their achievement in having established and build it and their staff are proud to be
associated with the family and what they are doing. This pride, which in some circumstances can tend to
almost institutionalize the business, is often translated into a powerful marketing tool.
Q. State the Disadvantages of Family Business (8 marks)
1) Rigidity: Walking through the doors of some family businesses can be like g a time tunnel Sentiments
such as, 'Things are done this way because Dad did them this way and 'You cannot teach an old dog new
tricks', reflect the ways in which behavior patterns can become ingrained and family businesses become
tradition-bound and unwilling to change. It is all too easy to find ourselves doing the same thing, in the
same way, for too long, and in a family business it is easier still: change not only carries with it the usual
disruption and an array of commercial ricks, but it can also involve overturning philosophies and
upsetting practices established by relatives.
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2) Business Challenges: The business challenges that particularly affect family firms can be divided into
three categories:
i) Modernizing Outdated Skills: Very often the skills possessed by a family business are a product of
history
ii) Managing Transitions: It represents another major challenge for family businesses; it can often be the
make or break for a family firm. In summary, the challenge to the business is typified by a situation in
many companies where the founder is getting-on in years and his son, the heir apparent, is convinced
that things need to be done differently. The merest hint of this potential conflict can be disruptive,
causing enormous uncertainty among staff, suppliers and customers. In many cases, the damage
becomes even more serious when the son actually begins introducing his program of radical change. So,
managing transitions is a difficult challenge to the business and, because of the added dimension of
possible infra-family upset and conflict, it is a much bigger challenge for a family business than it is for
other kinds.
iii) Raising Capital: In comparison with the wide range of funding alternatives open to publicly held
companies with a diversified shareholder base, family businesses obviously have much more limited
options when it comes to raising capital. But over and above these family businesses commonly have a
problem with the very concept of raising money from outside sources. This tends to occur most
frequently in relation to longer-term capital for significant projects, like opening a new plant or creating
a new division of the business, but it also shows itself in a reluctance to go to outsiders for bank
overdrafts or other short-term funding that would help the firm through quite minor cash flow owned
secret ambitions or succeeding when their father rears; and the father himself is often ambivalent about
succession because he is worried about the ability of his children and how he is to approach favoring
one at the expense of the others.
Q. Explain Partnership (2 marks)
Partnership is a business relation between two or more persons who have agreed to share the profits of
a business carried-out by all or any one of them acting for all. In simple words, when by means of a
contractual agreement several individuals associate with common ownership and management of a
venture, such a business relationship is termed as partnership. A partnership venture can be set-up with
minimum 2 and maximum 10 members in banking business and 20 in other cases.
This restriction on upper limit is due to the provision contained under Section 11 of the Indian
Companies Act 1956, which stipulates that an unregistered company, association or partnership having
more than 20 members (10 in case of banking) must be registered under the said Indian Companies Act.
According to Section 4 of the Indian Partnership Act, 1932, "The relation between persons who have
agreed to share profits of a business carried-on by all or any of them acting for all".
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Q. Explain the Features of Partnership (8 marks)
The following are the main characteristics of a partnership firm:
1) Two or More Persons: There must be at least two persons to form a partnership. A person cannot
enter into partnership with himself. The maximum number of persons is 10 in case of banking business
and 20 in other types of business. If the number of partners exceeds the prescribed maximum, it would
become an illegal association of persons.
2) Contract or Agreement: A partnership firm is an agreement between two or more persons for running
a business and earning profits. The maximum limit of the numbers of partners is twenty, if the business
is of general type and ten partners if it is a banking concern. Generally, there are no legal problems
involved in such a kind of contract or agreement, though mostly partnership agreements are registered
under terms.
3) Lawful Business: The purpose of the partnership agreement must be to run a business, which is legally
allowed by the government to earn profits. A partnership to carry on some charitable or social works or
some unlawful activity, for example, black marketing or smuggling is not included in it.
4) Sharing of Profits: In the partnership organization, the partners share the profits according to the
proportion written in the Agreement. In case the business faces a loss, even then they will share it
proportionately.
5) Control is shared by All the Partners: In a partnership, the decisions are taken unanimously. Some
partners may be dormant or sleeping partners and may not take active part in the management, but
they have the right to control the functioning of the business. The business is carried on by all or any of
them acting for all.
6) Mutual Agency: The relations between the partners are based upon mutual trust, confidence, and
good faith. Mutual agency is an essential characteristic of partnership.
7) Unlimited Liability: In the partnership business, the liability of every partner is unlimited. This means
that every partner is responsible for the acts of all the partners. This can be explained with the help of
an example. Suppose, a partner enters into an agreement with some other firm or the government for
some debt. Then the agreement of that one partner will bind all the partners of that firm. By that each
partner will be responsible to pay-off the debt not only to the extent of his share in the business but to
full extent of even his private resources. If some of the partners are not in a position to meet their share
of loss, then all other partners will have to pay the entire debt.
Q. Explain Types of Partnership (2 marks)
A partnership may be formed as follows:
1) Fixed Partnership: It is constituted for a fixed-term, i.e., for a particular period of time and comes to
an end after the expiry of the fixed period. If the partners decide to continue the business even after the
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expiry of the fixed-term, the mutual rights and obligations of the partners will continue to be the same
as they were before the expiry of the term.
2) Partnership at Will: When the tenure of the partnership is not fixed, it is called partnership at will. It
can be dissolved by any partner at any time by giving a notice of dissolution to other partners.
3) Particular Partnership: It is constituted for a particular work and comes to an end with the
completion of that work. It will become partnership at will, if the partners agree to continue with it even
after the completion of its primary object and the rights and obligations of the partners will continue as
before.
Q. Explain types of Partners (8 marks)
A partnership business organization may have several types of partners. They have been classified as
follows:
1) Active Partners: These are those partners, who take active interest in the various affairs of the firm.
They are well-known to those who deal with the firm.
2) Sleeping Partners: These are those partners who bring in some capital and share the profits, but do
not take active interest in the affairs of the firm. They are not well-known to the persons who deal with
the firm
3) Secret Partners: These partners take active interest in all the affairs of the firm, but they keep their
connections with the firm quite secret. The public and the dealers with the firm know nothing about
them.
4) Nominal Partners: These are those partners who neither contribute capital not take any active
interest in the conduct of the business of the firm. They fist lend their names and reputation for the
benefit of the firm. These partners are not entitled to earn any profits from the firm, but they can be
held liable for all the debts of the firm.
5) Partners by Estoppels: Partners by Estoppels is a person, who, in fact is not a partner of the firm; he
neither contributes any capital nor takes any part in the management of the firm. But he acts or
represents himself in such a way that the outsiders have an impression that he is a partner in the firm.
This type of outsiders has an impression that he is a partner in the firm. This type of partner can be held
liable by any outsider for any losses suffered by the outsider who might have dealt with the firm.
6) Minor Partners: A minor can also be admitted to the benefits of partnership firm with the consent of
all the partners of the firm. A minor partner is entitled to get an agreed share in the profits and property
of the film. He has a right to inspect and get a copy of the accounts of the firm. But the liability of a
minor partner remains limited to the extent of this share in the assets of the firm. Then a minor partner
attains major, he has the option to become a partner or serve his connections with the firm. If he
decides to continue as a partner, then he becomes entitled to all the rights of a partner and his liability
ceases to be limited.
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Q. Explain Advantages of Partnership (8 marks)
The partnership has the following important advantages:
1) Easy to Form: A partnership firm can be started very easily, as there is no need of taking any special
permission from the government. The only thing required is that the partners should draw up the
agreement and get the firm registered. Registration of a partnership firm is not compulsory; it is on the
discretion of the partners to get it registered or not.
2) Commands Larger Resources: Since, in the partnership firm, each partner contributes his share of
capital investment, the financial resources become much larger than in the sole proprietary business.
Moreover, because of its characteristic of unlimited liability, they can easily borrow sufficient money
from banks and other financial institutions. Hence, the partnership firms command larger financial
resources.
3) Prompt and Correct Decisions: As the partners are only few in numbers, they remain in continuous
and intimate touch with one another. As such, any kind of decision regarding the business activity can
be taken promptly. Moreover, as every problem is examined by all the members of the firm, there is less
possibility of wrong decision or judgment. The decisions of the partnership organization are, therefore,
more useful and profitable than those in the sole proprietorship.
4) Use of Diverse Skills and Talents: In a partnership, partners are of diverse talent and skill, and so it
provides opportunity for division of work among partners. One partner can look after the work of
production, another looks after store, the third is in charge of office, the fourth deals with sales and the
fifth supervises the labor and soon. The kind of division of labor increases the total efficiency of the
business organization.
5) Business Secrecy: For a partnership firm there is no need to publish its annual account of investment,
expenditure, profit or loss, etc., as such, its business position can be kept secret.
6) Highly Adaptable to Changes: A partnership firm responds promptly to the changes in business
conditions. In case, there is possibility of losses, a line of business can easily be changed. This kind of
change can be made very conveniently so no legal permission is needed for it.
7) Personal Contacts: Since a partnership concern is only of medium size, it is possible to establish wider
personal contacts with the workers and customers. This helps in supervision of workers and in removing
the problems and difficulties of workers and customers.
8) Personal Interest and Initiative: In a partnership concern, the partners are personally liable to profit or
loss; as such, they show keen interest and initiative to avoid wastage and to make the firm efficient and
successful in its working.
9) Scope of Large-Scale Production: In a partnership firm, because the management is better and more
efficient and there is scope of larger capital resources by admitting more partners, there is possibility of
making it a large-sale unit. Large-scale production helps in reaping all its advantages.
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10) Sharing of the Risks: In the sole proprietary firm, the owner has to bear all the risks of the business
himself. But in the case of partnership concern, since there are several partners, the risks are shared by
all the partners. In case, the firm fails or suffers losses, then the debts and losses will be shared by all the
partners.
11) Benefits of Unlimited Liability: The partnership concern runs on the principal of unlimited liability.
This prevents the partners from the launching of rash and risky enterprises. At the same time, it enables
the partnership firm to borrow sufficient capital very easily from banks and other financial institutions. It
is because the creditors know that they can recover their due even from the private property of the
partners. The above mentioned advantages of partnership indicate clearly that a partnership concern is
definitely superior in many ways to a sole proprietary firm.
Q. Explain the Disadvantages of Partnership (8 marks)
No doubt, partnership is far superior to an individual ownership; still it suffers from many defects.
The following are some of its main disadvantages:
I) Uncertain Existence: The greatest defect of partnership is that its existence is not permanent. In the
event of a partner's retirement, death or insanity of any partner, the partnership has to be dissolved.
There is, thus, no continuity co-existence of partnership firm.
2) Disharmony among Partners: The partnership firm can run successfully only when there is harmony
and cordial co-operation among the partners Sometimes, because of misunderstanding and
disagreements on any issue, a conflict or any clash may develop and may reach a breaking point and
may often lead to the - dissolution of the firm.
3) Not Suitable for very Large-Scale Business: A partnership concern has limited capital resources and
managerial ability; there is limit to the number of partners. As such, it is incapable of undertaking very
large industrial units and businesses like banks, steel plants, shipping, insurance, etc. This is because
these businesses require hundreds of crore of rupees, which cannot be arranged by a partnership firm.
4) Weak Management: Verify often some partners, who also act as in charge of some kind of work in the
- concern, behave in a selfish manner. They want to do the minimum and try to get the maximum out of
the business. This weakens the solidarity of the concern and may lead to serious consequences-it may
even ruin the business, making others liable to risks.
5) Non-Transferability of Partners* Shares: In partnership, a partner cannot transfer or sell his share to
any outsider without the consent of all other partners. Thus, he remains locked-up in the concern for
ever.
6) Unlimited Liability: It is the greatest handicap of partnership. The principle of unlimited liability often
makes all the partners suffer great losses because of the foolish and irresponsible action of anyone of
the partners. Due to unlimited liability, those who have ability but no capital cannot join a partnership
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concern. Besides, it has been formed that, owing to unlimited liability, a partnership follows a "play
safe" policy; the result is that the business progress remains very slow.
Q. Explain Joint Stock Company (2 marks)
The Joint Stock Company is legal business owned by the shareholders having limited, liability, and
managed b) an elected "Board of Directors". The most important type of business organization today is
the joint stock company. In fact, a business on respectable scale can be organized only in this manner. A
company is an artificial person having an independent legal entity and a perpetual succession with
distinctive name and a common seal having a common capital divided into shares of fixed value which
transferable and carry limited liability.
Q. Explain the Features of Joint Stock Company (8 marks)
1) Artificial Person with a Separate Legal Entity: A Joint Stock Company is an artificial person (Since it
has no physical existence) with a separate legal entity. It can own properties, and can purchase and sell
them under its own seal. It can conduct a bank account or any other business, and can enter into
contract with others. It can file a suit in court against other and others can file a suit against it. Thus, it is
just like a distinct individual, though it has no physical existence.
2) Voluntary Association: A Joint Stock Company is totally a voluntary association. It is created and
formed by the people on own. There is no kind of compulsion by the law of the government to form it.
3) Legal Sanction: A Joint Stock Company has to be incorporated with due process of law. In our country,
the Companies Act of 1956 lays down the procedure and basic conditions which have to be fulfilled to
start a company. When these conditions are fulfilled, the company must be registered under the Act.
(The Registration of the Company is done by the Registrar, Joint Stock Companies).
4) Perpetual Character: The existence of a company is of perpetual nature. It goes on forever until it is
wound-up. Shareholders may come and go, and may change hand any number of times, but the
company goes on forever.
5) Shares are Freely Transferable: The shareholders of a Joint Stock Company are free to sell or transfer
their shares. No shareholder is permanently or necessarily tied for life to the fortunes of a company.
6) Common Seal: A company is only an artificial person. It has no physical existence. As such, it cannot
sign any document. A common seal with the name of the company engraved on it, therefore, serves the
purpose of signature. Whenever this seal is affixed or used by the company on any document, as a
substitute for its signature, it has to be witnessed by two directors. The common seal is always kept in
safe custody.
7) Limited Liability: In a company form of organization, the liability of owners (shareholders) is limited up
to the amount of capital they invest in the business individually.
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8) Management by Elected Representatives: Since a company is only an artificial person, and has no
physical existence, it cannot manage its business by itself. So it is managed by g Board of Directors. The
members of this Board are elected by the shareholders. The elected members are generally the men
well-known in business and industrial circles. All the important decisions and day-to'-day working are
carried on by management or the Board of Directors.
9) Business: A company can conduct only such business as stated in its memorandum of association. 10)
Ownership: Ownership of a company is in the hands of a large number of people. Unlike partnership, in
which case, membership of members is limited to 10 in case of banking and 20 in case of other business,
a company can have large number of members. In case of Private Ltd. Company, the upper limit is put to
50, though in actual practice there can be much larger number than this. In case of a Public Ltd.
Company, there is no upper limit to the number of members.
Q. Explain the types of Joint Stock Company (12 marks)
Various types of joint stock companies may be classified as under:
1) On the Basis of Mode of Incorporation
i) Chartered Companies: A chartered company is established by the Royal Charter or special sanction
panted by the head of the state. It is granted certain exclusive privileges and powers. For example, the
British East India Company was created by a Charter of the Queen of England. The Bank of England, the
Hudson's Bay Company, and the Dutch East India Company are other examples of chartered companies.
This type of company is rare now due to the decline of monarchies
ii) Statutory Companies: A statutory company is established by a special Act of the Central or State
legislature. Its objectives, powers, and activities are defined by the special law under which it is created.
The Reserve Bank of India and State Bank of India are some examples of statutory companies in India.
iii) Registered Companies: Company is established by registering (incorporating) it with the Registrar of
Companies under the Companies Act. The formation, working and winding-up of such a company are
governed by the provisions of the Act. Registered companies are the most common type of 'companies
in India. For example, Tata iron and Steel Company, Reliance Industries Ltd., Hindustan Steel Ltd., and
Maruti Udyog Ltd.
2) On the • Basis of Liability
i) Company Limited by Shares: It is a company which is registered with a specific amount of share capital
divided into a specified number of shares. The liability of every member is limited to the amount, if any
unpaid on shares held by him. For example, X Ltd has a share capital of Rs5 lakh divided into 50,000
shares of Rs.10 each X has purchased 5,000 on which he has paid 6 per cent. The, liability of X is, now,
limited to 4 (unpaid amount) per share. Even (the assets of the company are not sufficient to fully Meet
the claims of its creditors, X cannot be called upon to pay anything more than 20,000 (5,000 shares x 4
each). This type of company is most common in actual practice.
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ii) Company Limited by Guarantee: In this type of company, the liability of every member is limited to
the amount which he had undertaken to contribute, if necessary, to the assets of the company at the
time of winding-up. This amount called guarantee is specified in the Memorandum of Association of the
company. The amount of guarantee may differ from member to member. Such a company may or may
not have share capital. If the company has share capital, every member is liable to pay the amount
unpaid on the shares held by him in addition to the amount of guarantee. The guaranteed amount is in
the nature of reserve capital which can be called upon only at the time of winding-up. The Articles of
Association of such company must state the number of members with which the company is registered.
This type of company is generally formed to promote art, literature, sports, education, and other non-
business activities. Members are admitted on payment of admission and subscription fees.
3) Unlimited Company: It is a company in which the liability of members is unlimited like that of partners
in a partnership firm. If the company's assets are insufficient for satisfying the claims of its creditors the
personal property of members can be attached to meet the obligations. However, the creditors of the
company cannot directly sue the members. It is only the liquidator who, at the time of winding-up, can
call upon the members to contribute towards the assets of the company. An unlimited company may or
may not have share capital. The Articles of Association of such a company must state the number of
members with which the company is to be registered. The amount of share capital, if any, must also be
stated in the Articles.
On the Basis of Nationality
i) Indian Company: A company incorporated in India under the Companies Act, 1956 is known as an
Indian company. However, it may have foreign shareholders and it may also carry-on business outside
India
Ii) Foreign Company is any company incorporated outside India which:
a) Had a business in India prior to the commencement of the Companies Act 1956 and continues to have
the same place, or
b) Establishes a place of business in India after the commencement of the Companies Act 1956.
A foreign company must conspicuously exhibit the name of the company and the country in which it is
incorporated on the outside of every office or pi* whore it carries-on business in India. It should be
conveyed in English and in one of the local languages. It must deliver the prescribed documents to the
Registrar of Companies within 30 days of establishing .a place of business in India.
4) On the Basis of Membership
i) Government Company: A government company is a company in which not less than 5 the paid-up
share capital is held by the Central Government, by any, State Government(s) the Central and State
Governments. Steel India Limited (SAIL), Bharat Heavy Electricals Limited (BHEL), etc.
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ii) Public Company: According to the Companies (Amendment) Act, .200, a public company means a
company which:
a) Has a minimum of seven members and puts no limit on the number of members;
b) Does not restrict the light of its members to transfer its shares;
c) Is not prohibited from inviting the general public to subscribe to its bares and debentures;
d) Is not prohibited from inviting the public to subscribe to its deposits;
e) Has a minimum paid-up capital of five lac rupees, higher capital as may be prescribed
iii) Private Company: According to the Companies (Amendment) Act, 2000; a private company means
who
a) Restricts the right of its members to transfer shares, if any;
b) Limits the number of its members to fifty, excluding members who are or were employed by the
company;
c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of the company;
and
d) Prohibits any invitation or acceptance of deposits from the public (persons other than its members,
directors or their relations. A private company must have at least two members. For example, Tata Sons,
Hyundai Motors India, Jet Airways, Citibank and LG Electronics
Q. What are Advantages of Joint Stock Company (8 marks)
In modem times, the company form of business organization has become very popular. It is because it
commands many advantages. Its main advantages are as follows:
I) Perpetual Existence: A Joint Stock Company is permanent *character. It is a legal person, and has an
existence of its own. It is unaffected by` its shareholder with creditors. It can sue, and can be sued in the
court of law
2) Large Funds: A Joint Stock Company can raise plenty of funds by issuing various types of shares or
through the sale of debentures or bonds.
3) Transferability of Shares: A shareholder of a Joint Stock Company can sell his shares whenever he
likes. He can also buy additional shares, if he So wishes; The buying and selling of shares can be done
very conveniently in a special market known as the Stock Exchange, because of this convenience of
transferability of shares, the shareholders are not tied permanently to the fortunes of a company.
4) Limited Liability: Unlike individual proprietorship and partnership organizations, the shareholders of a
Joint Stock Company have limited liability.
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KSOM notes by Dr. Sneha
5) Suitable to all Pockets: The shares of a Joint Stock Company are, generally, of low denominations; so,
even the smallest saver can purchase the shares of many new companies. Thus, this type of organization
'affords opportunities of investment to men of small means. This encourages the habit of thrift and
saving among the people of the country. Further, because of the principle of limited liability, the rich are
also very much interested in buying shares of various companies.
6) Spreading Out of Risk: Since this type of organization enables people to buy shares of different
companies, their risk is spread out. The laws of a company of which a person is a shareholder, does not
make him totally bankrupt. It is because he holds shares of those companies also which are earning
great profits.
7) Democratic Organization: In a company form of organization the directors are elected by the
shareholders. It is, therefore, a democratic organization. If the policies and administration of the
directors are not found beneficial to the company, they can be removed by the shareholders. Such
matters are decided every year in the annual meeting of the General Body.
8) Efficient and Economical Management: The management of a Joint Stock Company is carried on by
the directors, who are elected representatives of the shareholders. The directors are generally, the
persons of wider vision, outstanding administrative ability and business acumen. They are not to be paid
high salaries. Only they get nominal fee for attending the Board's meetings. Thus, the management of a
company form of organization is efficient as well as economical.
9) Suitable for Large Enterprise: A Joint Stock Company can raise plenty of capital by selling shares and
debentures or bonds, and can provide very efficient and economical management. These two things are
very essential for running a large-scale concern. As such, the company form of business organization is
best suited of run large-scale enterprises. Individual proprietorship and partnership firms, which have
limited funds, cannot run large-scale concerns.
10) Effective Control by the Government: A Joint Stock Company is run according to the rules and
regulations of the government. It has to submit — its accounts and balance sheet to the government
every year. Thus, it remains in effective control of the government. If it is found that a company is not
functioning properly, the government may cancel the certificate of corporation of the company, and
may take over its control in her own hands.
Q. Disadvantages of Joint Stock Company (8 marks)
The company form of business organization has no doubt a numbers of advantages, but it has several
defects too. Main defects/disadvantages are as follows:
1) Complication in Formation: The formation of a Joint Stock Company involves several long and
complicated legal formalities. Thus, a considerable cost is to be incurred before the company starts its
business.
2) Democratic only in Theory: The management of a company is democratic only in theory. It is because
only a small group of powerful shareholders get control of the company, and their nominees get
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KSOM notes by Dr. Sneha
themselves re-elected as the directors every time. The ordinary shareholders have little voice at the
time of election. The company management is actually oligarchic and not democratic.
3) Lack of Motivation: In the company form of organization, there is a separation between ownership
and management. The ownership is with the shareholders, who do practically nothing in the
management of the company. The management is in the hands of directors and paid managers, who,
generally, do not watch the interest of the shareholders. Besides, the paid managers may lack, in
motivation, since they have not to get any share in the profits. Nowadays, the bonus facilities have been
implemented in Joint Stock Companies in order to motivate the salaried managers and other employees
to work hard and produce large profits for the company.
4) Limited Liability: The Joint Stock Company is based on the principle of limited liability. Because of the
shareholders may not take as much interest as they should. The directors may become irresponsibly.
They may also be tempted to undertake risky enterprises at the cost of shareholders.
5) Delay in Decision: The company organization is too ponderous and weighty. It cannot take any kind of
quick decision. It is, therefore, fit to a business where changing conditions require constant changes in
the policy of production.
6) No Personal Touch with Employees: In this form of business organization, the owners of the
organization have any personal touch with their employees. The owners, i.e., the shareholders are
concerned only with their profits, and they hardly show any, concern for the welfare of employees. The
paid managers work only to satisfy their directors and express their helplessness in matters relating to
the employees' welfare. Thus, the welfare of the employees is totally neglected. This attitude often
leads to labor troubles.
7) Lack of Secrecy: In the company form of organization all kinds of decisions are taken by the Board of
Directors; as such, it is difficult to maintain any kind of secrecy. A public company publishes its balance
sheet every year, showing the details of its financial position and also the position of profits and losses.
In that way, also the secrecy of a Joint Stock Company cannot be maintained.
8) Concentration of Wealth and Power in Few Hands: The company form of business organization is
responsible for concentration of wealth and power in the hands of a few persons only. This has serious
disadvantages from the point of view of the country's economy as a whole. In this form of organization,
a few rich capitalists, who can afford to purchase a large number of the company's shares, become all in
all. In the U.S.A. and many countries of Western Europe few rich financiers control the majority of the
banks, insurance companies and industrial concerns because of this form of business organization